OP-ED

Consolidated vol. 10
 Maggubhai Op-ed bulletin

Date – 01/07/2019

Economic Survey calls for 'sunset' clause on policy incentives to MSMEs

Business Standard, July 04, 2019

The Economic Survey 2019 recommended for a ‘sunset clause’ on policy

incentives to MSMEs. While describing this the CEA used two terms –“infant”
and “dwarfs’. These terms coined by former CEA denote a new firm and the
firm that never grow beyond their small size.
Job creation in India suffers from policies that foster dwarfs, that is small
firms that never grow, instead of infant firms that have the potential to grow
and become
giants rapidly.
Analysing the
Annual Survey
of Industries
(ASI) data, the
survey said
dwarfs
accounted for
more than half
of all organised
firms in the manufacturing sector, but contribute only 14 per cent in
employment generation and a “mere” 8 per cent to productivity. While large
firms create permanent jobs in large numbers, according to the survey, young
firms create more jobs at an increasing rate than older firms. As a possible
solution, the survey called for a “sunset” clause for a period of five-seven years
for policy incentives beyond which a small firm “should be able to sustain
itself”. It further suggested re-orienting the priority sector lending norms to
focus more on start-ups and “infants” in high employment elastic sectors

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dealing with rubber and plastic products, electrical and transport equipment,
textiles, among others.
Read further

How Can India Gauge Vulnerability Of Its Agricultural Productivity To Climate

Change?
The Firstpost, May 29, 2019

India is a country with climate variability as well variability in crop

production. To understand the relation between these a measurement or
metric is needed.
Economics offers a metric that is ideal for measuring the aggregate
agricultural productivity and its sensitivity to climate. It's what's called the
Total Factor Productivity (TFP), which considers all necessary inputs and
outputs. An inclusive measure like this is necessary since partial productivity
doesn't add up like a mathematic formula to give total productivity.
Regional differences in climate and its impact on TFP must be
understood to get the full-picture on where climate sensitivity comes from and
how it can be mitigated in a warming world with more climate extremes. A
close look at the history of TFP offers better guidance for the future in terms of
minimizing climate sensitivity of TFP by distributing risks with appropriate
regional choices of crops, livestock, and speciality products
Read further

How India's Water Ends Up Everywhere But India?

Bloomberg, July 6, 2019

India’s current drought isn’t happening so much because of an absolute

shortage of water, as its misallocation and mispricing.

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 1. Dry Land - India exports more water-intensive goods than any other
country. Most of that comes down to the fact that India’s largest agricultural
exports are rice and cotton, which both require thousands of liters of water for
every kilogram of product. Putting so much water into fattening rice grains and
swelling cotton bolls seems a criminal waste of a precious resource that urban
areas are crying out for. If India wants to grow the economies of these cities, it
needs to provide the basic resources necessary to make them function. Yet
while urbanites are having to watch every sip they consume, farmers are living
high on the hog.

2. Farm Bill - India's farm sector takes up a disproportionate share of

water usage given the size of the rural population. One view is that this uneven
allocation is simply the price India pays to support its rural poor. That’s not
quite right. The farmers who have access to pumped groundwater aren’t
typically low-income smallholders, but larger-scale rural business owners with
the collateral to finance purchases of pumping equipment.

Read further

Government borrowing abroad is too risky, drop the idea

Financial Express, July 8, 2019

In its recent Economic Survey the chief economic advisor had suggested
India should tap the global markets because money was abundant and,
therefore, cheap; and on Friday, the finance minister announced this in the
Budget.
However, former RBI deputy governor Rakesh Mohan was quick to
denounce the suggestion, saying it would be an imprudent and dangerous
move. Forex markets are choppy, especially now, with US-China trade tensions
so high, so any adverse movement can throw off all calculations and make
overseas borrowing even more costly than that from local markets. More
important, a sovereign India bond means foreign investors will be in a position
to influence interest rates in India. The volatility in interest rates can be worse

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than it is in currency trading, and the last thing we need is for investors to be
indulging in arbitrage.
Read further

Government’s focus on growth is strong, but the fiscal arithmetic is weak

The Mint, July 07, 2019

Apparently it seems the budget of this year is has no difference with the
interim budget presented on February this year. However, where it differs
majorly, and rightly so, was focusing on medium-term growth target of
achieving $5 trillion by 2024-25.
The budget proposes many measures that could help in what the
Economic Survey suggested of ‘virtuous cycle’ of investments. It proposes to
bring down debt to 48% of GDP in 2019-20 and further down to 44.4% in
20121-22 (inclusive of extra-budgetary receipts). One crucial assumption for
this is about the budget’s assumption of nominal GDP growth. While the
Macroeconomic Framework Statement and the Medium Term Fiscal Policy cum
Fiscal Policy Strategy Statement suggest an assumption of 11%, from the fiscal
deficit and other numbers one can estimate that the budget is assuming 12%
growth.
On expenditure side, while the budget highlights that it is the interest
payments that takes major part of revenue receipts (of about 33.7%), what is
not clear is the statement that says ‘The interest payments are expected to
come down in the medium term as global uncertainties relating to trade wars
and higher oil prices are expected to ease the pressure on the currency".
Intrinsically, the budget appears to rely more on private investments to
revive growth. What was needed right now was counter-cyclical fiscal measures
and the government appear to have shied away from that.
Read further

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Economic revival could take longer than expected?

Economic Times, July 07, 2019

Despite the calls for privatisation of public sector banks, the Budget
actually tries to strengthen them by substantially increasing allocation for
recapitalization. This, if it is implemented quickly, could enable a significant
revival in credit offtake. The Budget also talks about increasing investments in
infrastructure through PPP mode and has set a huge target of Rs 100 lakh crore.
However, as the Economic Survey pointed out, in order to increase investments
there is a need to augment savings too. In fact, the Survey argues that the
savings rate should be higher than the investment rate in order to achieve 8%
growth for the next five years. But the Budget ignores this issue with no specific
proposal for savings.
On the fiscal side, the finance minister has said that the deficit for the
year 2019-20 would be 3.3% against 3.4% in 2018-19. This suggests that if the
government continues to follow the fiscal consolidation roadmap, it would
eventually lead to achieving a public debt target of 40% by 2024-25, from the
current level of 48.4%. This seems to be a hard task, especially when the quality
of fiscal adjustment that the Centre follows is not likely to be expansionary. As
shown on the expenditure side, it is the huge interest payments due to
increasing public debt, which are reducing fiscal space for the government
Read further

Its private investment, stupid

Economic Times, July 04, 2019

For India to grow: it must hugely step up private investments. The

Economic Survey makes this compelling case, recognising the high positive
correlation between private investment and growth that drives exports and
creates more jobs. If India aspires to become a $5 trillion economy by 2024-25,
it needs to sustain a real GDP growth rate of 8%.
Just a week ago, the RBI in its financial stability report sounded a note of
caution saying that reviving private investment demand remained a key
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challenge. The biggest challenge to private investment is bad loans in the
banking system. The bankruptcy code is working, but has to work far better for
banks to be nursed back to health and start lending again. The government
must pay urgent attention to bringing the bond market to life to make lending
for long term projects such building highways viable. This will lower the risk of
bad loans, kick-start infrastructure projects and revive animal spirits in the
economy.
Read further

Policy uncertainty down, need more predictability

The Hindu Business Line, July 01, 2019

If there is one thing that businesses dread, it’s policy uncertainty and lack
of predictability. And, the government also recognised this and suggested that
an increase in economic policy uncertainty dampens investment growth for at
least five quarters.
The survey suggested that lower uncertainty has started to show an
improvement in the investment rate. At the same time, it recognised that
uncertainty is not the only factor impacting investment decisions, with interest
rates, borrowing cost, price rise and capacity utilisation being the other
parameters. While the going may be better compared to the past, frequent
policy changes and trust deficit are major concerns for businesses even now. To
address this the survey has outlined several steps, including providing a
forward guidance, apart from reducing ambiguity and arbitrariness in policy
implementation.
Read further

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Is the world economy spiralling towards another debt crisis?

The Hindu Business Line, July 1, 2019

As governments across the globe struggle to restore their growth rates,

a new spectre has come to haunt many of them: Unsustainable debt. The
reliance on unconventional monetary policies involved the infusion of large
volumes of cheap money into the system, to engineer recovery. This has led to
the return of private debt to levels reminiscent of the years before the global
financial crisis. Initially, as governments borrowed to recapitalise banks and
rescue financial firms, as well as to finance a stimulus in the form of increased
spending or large tax cuts, the expectation was that the resolution of the
private debt crisis would result in a mountain of public debt. The developed
world is where the debt problem due to corporate borrowing is particularly
acute.
In sum, the specific way in which the global financial crisis was sought to
be addressed keeping in mind the interests of finance, has delivered a debt
spiral, without imparting much dynamism to the world economy. There is a
real possibility of another debt meltdown
Read further

No bank has power to employ bouncers to recover loans: Anurag Thakur

Financial Express, July 01, 2019

No bank has the power to employ bouncers for forceful recovery of

loans from customers, Union Minister of State for Finance Anurag Thakur said
in the Lok Sabha. The minister said with regard to complaints, the RBI has
informed that complaints received by it regarding violation of the said
guidelines and abusive practices followed by banks’ recovery agents are
viewed seriously. “In such cases, the RBI can consider banning the bank
concerned from engaging recovery agents in a particular area for a specified
period. “In case of persistent breach of above guidelines, the RBI can also
consider extending the period or the area where the bank concerned is barred
from engaging recovery agents,” he said.

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Read further

NBFC crisis has bottomed out; government, RBI will closely monitor situation:
Nirmala Sitharaman

New India Express, Jul 06, 2019

Finance Minister Nirmala Sitharaman Saturday said the NBFC crisis seems
to have bottomed out and the government along with the RBI will closely
monitor the situation to ensure that the sector comes out of the wood. In a bid
to address the stress in the sector, the government proposed that public sector
banks would purchase high-rated pooled assets of financially sound NBFCs,
amounting to a total of Rs 1 lakh crore during the current financial year.For this,
the government will provide one time six months' partial credit guarantee to
PSBs for first loss of up to 10 per cent. Among others, Sitharaman had said the
government will allow NBFCs to raise funds in public issues, and the
requirement of creating a debenture redemption reserve (DRR), which is
currently applicable for only public issues as private placements are exempt,
will be done away with
Read further

How RBI has made it easier for one and all to hedge interest rate risks

Economic Times, Jul 06, 2019

The fixed income market in India is experiencing an unprecedented

transition. The central bank, RBI, has announced a policy for rupee interest rate
derivatives (IRD) to promote more activity in this segment, which is being
welcomed by both SMEs and stock exchanges.

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 RBI has directed market makers to offer IRD products, which include FRA
(forward rate agreement), IRS (interest rate swap) and interest rate option to
retail users to hedge interest rate risk. RBI is also trying to benchmark floating
interest and IRD products in OTC segment, as published by FBA (Financial
Benchmark Administrator) or approved by FIMMDA, which will bring more
transparency to the repo market.

Most importantly, RBI’s revolutionary step will increase trading volumes

on exchanges in interest rate derivatives, which has been otherwise a highly
illiquid market as exchanges provide standardised contracts, which are not
always useful in managing duration risks. Structured contracts will not only
boost exchange volumes but also create a competitive market where
participants will get another alternative over OTC platforms

Read further

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