http://budget-opinion.blogspot.com/2011/02/rkannan.html
Tuesday, February 22, 2011R.Kannan
India is in a best position to do very well in the world economy today. The growth momentum in the last two years need to be continued. This is the time Indian Industries and Services require the continued boost for development. There is a need to continue the stimulus in the budget this year and increase the planned and non planned expenditure by at least 15% this year. The schemes relating to Rural and Urban poor should be continued . A minimum GDP growth of 9% could be set as the minimum target for growth. To meet the increased expenditure, there will be a need to mobilize more resources. The borrowing by government could be kept at last years’ level and interest rate expectations on the borrowing should be kept at the present levels which would help to moderate the inflationary expectations. To bridge the funding gap, innovative methods for mobilizing funds from non conventional sources including Capitalisation of land bank ( which US government has identified as one of the sources of funding in this budget ), additional collection from Telecom operators and mining licenses. Sectors like Agriculture including milk production have become profitable now and there is a need to review the subsidy to this sector and target the subsidies. A specific fund could be created for removing the bottlenecks in Infrastructure sector to use the available capacities in a optimal manner. A specific fund could be created for developing an organisation, systems and procedures to remove the mismatch in Demand and Supply of Agricultural commodities. Commercial Banks could be allowed to raise Infrastructure bonds and interest from these bonds could be exempt from tax.
Monday, March 7, 2011
Tuesday, March 1, 2011
Union Budget – F 12
Union Budget – F 12
The budget was much better than the expectations of various stake holders in the Economy. There was a concern that the Stimulus given would be withdrawn by the government.
Government had seen the benefits of reducing the excise duty which has resulted in above average growth in the industries where the stimulus was very effective. The stimulus has been continued which should help to maintain the industry growth at high levels. The higher growth rates in the industry would compensate the lower excise duty.
In terms of revenue, the collection on account of taxes is likely to go up by Rs.1 trillion and the same level of reduction has been assumed in non tax revenues. Higher taxes would come from higher level of industrial , services growth, higher average crude price during the fiscal 2012 compared to fiscal 2011 and additional duties on mining. It is quite possible, the government would be able to raise additional Rs.50000 cr to Rs.75000 cr on account of non tax revenues which is possible through various sources.
The government has kept the overall expenditure growth rate target at 3.4%. This would be possible since there is no effect of sixth pay commission and there is an apparent strategy to control costs including the subsidy through better targeting of beneficiaries, the government should be able to control costs. The oil prices could play spoilsport in achieving the targets. The oil price is not likely to go below $ 70 this year and in the short term it might reach the historical peaks and will subside to reasonable levels during F 12.
Increasing the limits for investments from abroad in Corproate bonds , Infrastructure bonds and Mutual funds is likely to attract more investments from abroad and give a good impetus for Industrial and Infrastructure growth and there will be a multiplier effect on the Economy as well as the stock markets. Higher capitalization of Public Sector Banks would increase the lending capacity of these institutions. Inflow of funds into India will also help to mobilize the large untapped domestic savings for Infrastructure and Capex of corporate.
Government borrowing has been kept at the low levels which has removed the fears of crowding of government papers in the market and the inflationary expectations are lessened on account of this budgeted target.
Agriculture has been given a good boost. The credit target for agriculture has been enhanced. Several schemes were announced which would help to optimally utilize the agricultural inputs and resources. This should also help to reduce the bottlenecks in the supply chain of Agri products and should result in reasonable prices of agri commodities. With a good management, it should be possible to achieve a growth of more than 6% agriculture since our productivity levels of crops are still much below the best yields in the world.
Strategy documents have been prepared for various ministries and systematic approach to managing the economy has been put in place. This will result in improvement of systems and procedures adopted by various ministries and help to achieve the desired expense targets.
The outlay for Rural development has been kept at the same level and 22 lakh Anganwadi workers has been given a good increase in wages. Coupled with the stimulus for agriculture this should help to increase the growth of the rural economy.
There is an increased allotment for Urban development and JNNURM which should help to accelerate the growth in the urban areas.
Apart from the specific measures in the budget, there was a mention about the various bills to be passed in parliament. By taking into confidence the opposition parties, the government would be in a position to pass these bills which will provide further opportunities for increasing the economic growth rate and revenue streams for the government.
Overall, considering the present global economic scenario this is an attractive budget which should interest the investors from India, NRI’s and MNC’s from abroad.
The budget was much better than the expectations of various stake holders in the Economy. There was a concern that the Stimulus given would be withdrawn by the government.
Government had seen the benefits of reducing the excise duty which has resulted in above average growth in the industries where the stimulus was very effective. The stimulus has been continued which should help to maintain the industry growth at high levels. The higher growth rates in the industry would compensate the lower excise duty.
In terms of revenue, the collection on account of taxes is likely to go up by Rs.1 trillion and the same level of reduction has been assumed in non tax revenues. Higher taxes would come from higher level of industrial , services growth, higher average crude price during the fiscal 2012 compared to fiscal 2011 and additional duties on mining. It is quite possible, the government would be able to raise additional Rs.50000 cr to Rs.75000 cr on account of non tax revenues which is possible through various sources.
The government has kept the overall expenditure growth rate target at 3.4%. This would be possible since there is no effect of sixth pay commission and there is an apparent strategy to control costs including the subsidy through better targeting of beneficiaries, the government should be able to control costs. The oil prices could play spoilsport in achieving the targets. The oil price is not likely to go below $ 70 this year and in the short term it might reach the historical peaks and will subside to reasonable levels during F 12.
Increasing the limits for investments from abroad in Corproate bonds , Infrastructure bonds and Mutual funds is likely to attract more investments from abroad and give a good impetus for Industrial and Infrastructure growth and there will be a multiplier effect on the Economy as well as the stock markets. Higher capitalization of Public Sector Banks would increase the lending capacity of these institutions. Inflow of funds into India will also help to mobilize the large untapped domestic savings for Infrastructure and Capex of corporate.
Government borrowing has been kept at the low levels which has removed the fears of crowding of government papers in the market and the inflationary expectations are lessened on account of this budgeted target.
Agriculture has been given a good boost. The credit target for agriculture has been enhanced. Several schemes were announced which would help to optimally utilize the agricultural inputs and resources. This should also help to reduce the bottlenecks in the supply chain of Agri products and should result in reasonable prices of agri commodities. With a good management, it should be possible to achieve a growth of more than 6% agriculture since our productivity levels of crops are still much below the best yields in the world.
Strategy documents have been prepared for various ministries and systematic approach to managing the economy has been put in place. This will result in improvement of systems and procedures adopted by various ministries and help to achieve the desired expense targets.
The outlay for Rural development has been kept at the same level and 22 lakh Anganwadi workers has been given a good increase in wages. Coupled with the stimulus for agriculture this should help to increase the growth of the rural economy.
There is an increased allotment for Urban development and JNNURM which should help to accelerate the growth in the urban areas.
Apart from the specific measures in the budget, there was a mention about the various bills to be passed in parliament. By taking into confidence the opposition parties, the government would be in a position to pass these bills which will provide further opportunities for increasing the economic growth rate and revenue streams for the government.
Overall, considering the present global economic scenario this is an attractive budget which should interest the investors from India, NRI’s and MNC’s from abroad.
Tuesday, January 4, 2011
India 2011 – Outlook
India 2011 – Outlook
I am happy that the following predictions of mine had come true.
1. Continued stimulus measures by Developed countries in the world.
2. My prediction for India's Economic growth last year and this year.
3. Adoption of a concept of Permanent Crisis Management Mechanism by Euro Region based on my concept of Permanent Stimulus for Economic Growth as in my blog.
4. Higher mobilization of funds through non conventional sources by Government.
5. Capitalisation of land bank in the case of sick PSU’s.
Positives :
• US, Europe will take some more time to go back to the old robust balanced growth in the economies.
• The countries from Asia will continue to support the global economic growth in the next few years.
• Economy is likely to grow at a rate of more than 9% and the growth can go up to 9.5%. If we factor in the rise in Agri commodity prices in the last two years, this sector of the Economy must have grown at much more than 8 / 10 per cent and our Actual GDP growth must have crossed already 10 per cent. Some how , this is not reflected in the GDP growth statistics so far.
• Growth will be driven by consumption increasing among the Government employees and Rural Population ( aided by increase in food prices).
• Infrastructure will continue to grow fast since many large groups have planned to implement large power projects and Road projects.
• Indian rates of interest are very attractive. There is likely to be a big level of carry trade and further FII investments. There will be a pressure on the rupee.
• Many of the corporates have restructured their operations during the crisis and have become nimble and flexible in their operations.
• Most of the corporates have repriced their products services in this inflationary scenario, which has helped to achieve much higher profit during the year. The main beneficiaries are in FMCG sector.
• Most of the large corporates have big plans for growth , diversification and cross border acquisitions. Apart from the funds available locally, they are raising, planning to raise funds from other sources.
Risks to the Growth
• Risks to individual fast growing Industrial and services sectors on account of latest developments in relation to the regulation and competition in these sectors.
• Rupee appreciating making our exports uncompetitive.
• Oil Price climbing above $ 100 a barrel. Fanning the inflationary trends. Since we meet more than 80% of our oil requirements through imports.
• Food price inflation and inflation in all other products .
• Increase in Interest rates
• FII withdrawals from the Indian market.
• Political uncertainities
Sectors which can give a good growth and profit Potential
• Commodities trading
• Investment Banking.
• Mining
• Agriculture
Sectors with good growth potential
• Banking and Financial Services
• Pharma and Healthcare
• Realty
• Power and Unconventional Power
• Auto and Auto components
• Road Development
• Education
• Media and Communication
• IT and ITES
• Venture capital
Sectors with good growth potential but not assured profits.
• Positions in Commodities and Currencies.
• Telecom
• Retail
• Airlines
• DTH
• Microfinance
• Life Insurance.
• Mutual Funds.
I am happy that the following predictions of mine had come true.
1. Continued stimulus measures by Developed countries in the world.
2. My prediction for India's Economic growth last year and this year.
3. Adoption of a concept of Permanent Crisis Management Mechanism by Euro Region based on my concept of Permanent Stimulus for Economic Growth as in my blog.
4. Higher mobilization of funds through non conventional sources by Government.
5. Capitalisation of land bank in the case of sick PSU’s.
Positives :
• US, Europe will take some more time to go back to the old robust balanced growth in the economies.
• The countries from Asia will continue to support the global economic growth in the next few years.
• Economy is likely to grow at a rate of more than 9% and the growth can go up to 9.5%. If we factor in the rise in Agri commodity prices in the last two years, this sector of the Economy must have grown at much more than 8 / 10 per cent and our Actual GDP growth must have crossed already 10 per cent. Some how , this is not reflected in the GDP growth statistics so far.
• Growth will be driven by consumption increasing among the Government employees and Rural Population ( aided by increase in food prices).
• Infrastructure will continue to grow fast since many large groups have planned to implement large power projects and Road projects.
• Indian rates of interest are very attractive. There is likely to be a big level of carry trade and further FII investments. There will be a pressure on the rupee.
• Many of the corporates have restructured their operations during the crisis and have become nimble and flexible in their operations.
• Most of the corporates have repriced their products services in this inflationary scenario, which has helped to achieve much higher profit during the year. The main beneficiaries are in FMCG sector.
• Most of the large corporates have big plans for growth , diversification and cross border acquisitions. Apart from the funds available locally, they are raising, planning to raise funds from other sources.
Risks to the Growth
• Risks to individual fast growing Industrial and services sectors on account of latest developments in relation to the regulation and competition in these sectors.
• Rupee appreciating making our exports uncompetitive.
• Oil Price climbing above $ 100 a barrel. Fanning the inflationary trends. Since we meet more than 80% of our oil requirements through imports.
• Food price inflation and inflation in all other products .
• Increase in Interest rates
• FII withdrawals from the Indian market.
• Political uncertainities
Sectors which can give a good growth and profit Potential
• Commodities trading
• Investment Banking.
• Mining
• Agriculture
Sectors with good growth potential
• Banking and Financial Services
• Pharma and Healthcare
• Realty
• Power and Unconventional Power
• Auto and Auto components
• Road Development
• Education
• Media and Communication
• IT and ITES
• Venture capital
Sectors with good growth potential but not assured profits.
• Positions in Commodities and Currencies.
• Telecom
• Retail
• Airlines
• DTH
• Microfinance
• Life Insurance.
• Mutual Funds.
Wednesday, September 15, 2010
Telecom Sector in India
1. Business Models had undergone a big transformation in the last 10 years.
2. Initially, the model was capital intensive. Now the model is asset light.
3. The players who have higher level of variable costs in their operations are able to achieve higher operating margins. The need for high capital is less on account of very high levels of outsourcing.
4. Higher variable cost provide a high level of flexibility in operations and helps in faster ramping up with minimum risk.
5. Now almost most of the operations relating to Telecom services are outsourced.
6. India had the highest tariffs in the world . Today India has the lowest tariffs in the world.
7. More than 95% of business was post paid and now about 95% of subscribers are pre paid ( where the risk of not collecting the dues is very less ).
8. Initially, the price competition in the sector was very low and operating margins were very high. Now the price competition is very high and operating margins are coming down.
9. The core business of Telecom services is not profitable. But services related to Telecom are profitable and players in the Eco system are operating profitably. Phone manufacturers, Content Providers, Tower owners, Networking managers, Telecom Retail, BPO providers and IT services providers are part of the Eco System today. The core business of voice is not profitable any more and it has to be supported by Data and other value added services.
10. Only a few companies in the world have most of the above services and those who have the above could look at synergies and leverage of synergies available within a group.
11. Going forward, only the leading players in the field and those who consolidate their operations will survive in the market.
12. The government's proposal to allow easy exit of players should facilitate the mergers and acquisitions and optimal use of spectrum.
13. To develop a robust business model, the companies have to develop host of Products , Services based on Telecom which will add lot of value to the Product portfolio and increase the revenue . The services could include TV on Mobile, Banking on Mobile, Mobile Data Services, use of cloud computing for operations, High speed wireless, High speed Broadband and whole host of data services through mobile.
14. Going forward, Telecom industry players will be competing with Banks, DTH, Cable Services in providing Banking and Entertainment services.
15. The companies in the sector have to tailor strategies in line with the developments in the Eco system, which would ensure a development of a competitive Strategy.
2. Initially, the model was capital intensive. Now the model is asset light.
3. The players who have higher level of variable costs in their operations are able to achieve higher operating margins. The need for high capital is less on account of very high levels of outsourcing.
4. Higher variable cost provide a high level of flexibility in operations and helps in faster ramping up with minimum risk.
5. Now almost most of the operations relating to Telecom services are outsourced.
6. India had the highest tariffs in the world . Today India has the lowest tariffs in the world.
7. More than 95% of business was post paid and now about 95% of subscribers are pre paid ( where the risk of not collecting the dues is very less ).
8. Initially, the price competition in the sector was very low and operating margins were very high. Now the price competition is very high and operating margins are coming down.
9. The core business of Telecom services is not profitable. But services related to Telecom are profitable and players in the Eco system are operating profitably. Phone manufacturers, Content Providers, Tower owners, Networking managers, Telecom Retail, BPO providers and IT services providers are part of the Eco System today. The core business of voice is not profitable any more and it has to be supported by Data and other value added services.
10. Only a few companies in the world have most of the above services and those who have the above could look at synergies and leverage of synergies available within a group.
11. Going forward, only the leading players in the field and those who consolidate their operations will survive in the market.
12. The government's proposal to allow easy exit of players should facilitate the mergers and acquisitions and optimal use of spectrum.
13. To develop a robust business model, the companies have to develop host of Products , Services based on Telecom which will add lot of value to the Product portfolio and increase the revenue . The services could include TV on Mobile, Banking on Mobile, Mobile Data Services, use of cloud computing for operations, High speed wireless, High speed Broadband and whole host of data services through mobile.
14. Going forward, Telecom industry players will be competing with Banks, DTH, Cable Services in providing Banking and Entertainment services.
15. The companies in the sector have to tailor strategies in line with the developments in the Eco system, which would ensure a development of a competitive Strategy.
Wednesday, September 1, 2010
GDP Growth Q1F11
GDP Growth - 1 September 2010
I am happy that I was the first one to predict after the last year’s Union Budget that our GDP would grow close to 7.5%. We ended the year with a growth of 7.4%. At that point the best prediction of GDP was at 6.1% by the Economists in the world. Last year, the growth momentum came from various sources including a large government stimulus programme, Sixth pay commission Effect and vibrant rural Economy.
This quarter’s growth of 8.8% is encouraging and since the rainfall is good , this year agricultural growth rate is likely to be good and the year could end with a GDP growth of around 9.5%. The momentum in the private Sector has picked up in the last few months and organizations in private sector had announced plans for expansion. The Sixth pay commission effect is likely to last for another year. Rural Economy continues to do well.
The inflow of funds to government coffers were much better than the expected level mainly aided by a high collection on account of spectrum fee collected by Telecom Ministry. The government is also planning to capitalize the land bank and it is happening at both Central and state levels which should ease the pressure on Government Finances.
FDI so far was lower than last year but inflows on account of FII’s so far accounted for $ 13 bn and the year is likely to end with an inflow ranging from $ 16 – 20 bn. Since the Indian Growth Story is intact and most of the companies have shown a good Sales and Profit growth and potential for growth in the next few years is good, the Investors from abroad are likely to increase their focus on India. This will also be strengthened by the increased presence of Multinationals in various sectors in India including Auto, IT, ITES, Pharma and others. Government could liberalise few more sectors including Life insurance, which would help to attract more FDI into India.
Inflation rate is likely to soften in the light of better agricultural production which should ease the pressure on RBI to increase the interest rates. Keeping interest rates at present levels will reduce the pressure on Government finances and make easy availability of credit to the Corporates and Individuals.
Going forward, the following areas require focus to support the growth momentum
• Bottlenecks in distribution of power to be reduced on a fast track basis and achieve higher level of productivity in the existing power plants. The best practices adopted by private transmitting companies could be transferred to state owned utilities. Transmission and Distribution Loss could be reduced by increasing the monitoring of consumption of power at a transformer level covering each locality. More manufacturing capacity could be created for manufacturing power equipments. Hurdles for implementing new projects to be cleared on a fast track basis.
• In many varieties of agri produce, the productivity levels per acre of land compares very poorly with the other countries in the world. Objectives could be set to achieve the best levels of productivity in five years from now and action plans could be identified for achieving the same. So far, many new initiatives were taken by government to address the productivity. But there is a need for an institutional reform to achieve the desired productivity levels. Like what has happened in the case of Milk, the concept of Agri co-operatives can be created in all parts of India on the similar lines of NDDB and State Milk Co-operatives.
• Infrastructure. Requires a big investment. At present mega projects are awarded which requires large organizations with large financial resources. Only few organizations, have the capability to execute very large projects. To expedite the Infrastructure development, to fill the projected gap, large projects could be broken up into small projects and awarded to more companies. This will help to expedite the infrastructure development. The projects in rural and semi urban areas could be integrated with the social development schemes implemented by the government.
• The capital markets could be made more vibrant by allowing Corporate Bonds, Municipal Bonds and other securities to be listed on the exchanges. Any instrument carrying a issue value of more than Rs.10 cr could be listed on the stock exchanges. This will help to create a vibrant market for Debt and other instruments.
• The government could continue to tap the non conventional sources of funding thereby easing the pressure on Government finances and from time to time identify support measures to be provided to Export led industries so that the external balance is maintained and will be within control.
I am happy that I was the first one to predict after the last year’s Union Budget that our GDP would grow close to 7.5%. We ended the year with a growth of 7.4%. At that point the best prediction of GDP was at 6.1% by the Economists in the world. Last year, the growth momentum came from various sources including a large government stimulus programme, Sixth pay commission Effect and vibrant rural Economy.
This quarter’s growth of 8.8% is encouraging and since the rainfall is good , this year agricultural growth rate is likely to be good and the year could end with a GDP growth of around 9.5%. The momentum in the private Sector has picked up in the last few months and organizations in private sector had announced plans for expansion. The Sixth pay commission effect is likely to last for another year. Rural Economy continues to do well.
The inflow of funds to government coffers were much better than the expected level mainly aided by a high collection on account of spectrum fee collected by Telecom Ministry. The government is also planning to capitalize the land bank and it is happening at both Central and state levels which should ease the pressure on Government Finances.
FDI so far was lower than last year but inflows on account of FII’s so far accounted for $ 13 bn and the year is likely to end with an inflow ranging from $ 16 – 20 bn. Since the Indian Growth Story is intact and most of the companies have shown a good Sales and Profit growth and potential for growth in the next few years is good, the Investors from abroad are likely to increase their focus on India. This will also be strengthened by the increased presence of Multinationals in various sectors in India including Auto, IT, ITES, Pharma and others. Government could liberalise few more sectors including Life insurance, which would help to attract more FDI into India.
Inflation rate is likely to soften in the light of better agricultural production which should ease the pressure on RBI to increase the interest rates. Keeping interest rates at present levels will reduce the pressure on Government finances and make easy availability of credit to the Corporates and Individuals.
Going forward, the following areas require focus to support the growth momentum
• Bottlenecks in distribution of power to be reduced on a fast track basis and achieve higher level of productivity in the existing power plants. The best practices adopted by private transmitting companies could be transferred to state owned utilities. Transmission and Distribution Loss could be reduced by increasing the monitoring of consumption of power at a transformer level covering each locality. More manufacturing capacity could be created for manufacturing power equipments. Hurdles for implementing new projects to be cleared on a fast track basis.
• In many varieties of agri produce, the productivity levels per acre of land compares very poorly with the other countries in the world. Objectives could be set to achieve the best levels of productivity in five years from now and action plans could be identified for achieving the same. So far, many new initiatives were taken by government to address the productivity. But there is a need for an institutional reform to achieve the desired productivity levels. Like what has happened in the case of Milk, the concept of Agri co-operatives can be created in all parts of India on the similar lines of NDDB and State Milk Co-operatives.
• Infrastructure. Requires a big investment. At present mega projects are awarded which requires large organizations with large financial resources. Only few organizations, have the capability to execute very large projects. To expedite the Infrastructure development, to fill the projected gap, large projects could be broken up into small projects and awarded to more companies. This will help to expedite the infrastructure development. The projects in rural and semi urban areas could be integrated with the social development schemes implemented by the government.
• The capital markets could be made more vibrant by allowing Corporate Bonds, Municipal Bonds and other securities to be listed on the exchanges. Any instrument carrying a issue value of more than Rs.10 cr could be listed on the stock exchanges. This will help to create a vibrant market for Debt and other instruments.
• The government could continue to tap the non conventional sources of funding thereby easing the pressure on Government finances and from time to time identify support measures to be provided to Export led industries so that the external balance is maintained and will be within control.
Tuesday, April 13, 2010
Permanent Stimulus For Economic Growth
Permanent Stimulus For Economic Growth
The countries which had shown a good growth rate , growing for long periods of time, provided stimulus to the Economic growth through well defined / planned economic policies which are in contravention of the prescribed economic Policies for Growth. Two examples today are China and USA. In USA, the government went ahead providing stimulus in the form of Moral Support to Industries, Benign Policies, Low interest rates and heavy borrowing from the other countries to Sustain the Economic Growth. This was mainly supported by Dollar which is the most accepted currency in the world coupled with the fact that a robust capital market which provided avenue for raising funds through various instruments not only domestically but also from outside US . The stimulus in US was given at the cost of general health of the Economy, which is very fragile, even today.
Whereas in the case of China, the stimulus for the Economy was provided through many ways and till today, the stimulus continues for a long period of time which is helping the Economy to show continuous good rate of growth. The following factors helped the Chinese Economy to sustain the growth rate even today.
1. Grand Vision. The Political Leadership decided that China should become an Industrial power and in line with the Population rank, they should develop their industries and take them to number one in the field they were operating. With that in Mind, the plans drawn for Economic Development and Infrastructure Development were in line with the objectives of reaching number one position in many segments of the industry.
2. Export Led Strategy. The policy makers identified that to become an industrial power they had to go for cost leadership strategy which would help to achieve a very high level of exports, since the strategy would create a competitive position which would be difficult for other countries to challenge. The cost leadership was pursued with great vigour and the country achieved the cost leadership position in the areas where they became leaders in exports. This helped to increase the size of manufacturing in the overall economy as well as earn Forex in a big way. The exports were subsidized at every level of value chain in the production system.
3. Risky Lending practices. Since most of the enterprises in China belonged to Government and earlier government owned enterprises, the loans were disbursed violating the prudent practices on lending. At one point in time, in this century, the NPA in Chinese Banking system was close to 50%. Since there was no pressure for the enterprises to worry about financial management, they pursued the production targets with increased focus. The focus of corporates were on production than on any other function.
4. Low Interest Rates. The government has a full control on the banking system and ensured that the loans are available at very competitive rates. The interest constituted a very small portion of the overall cost of products. The competitive interest rates in the economy helped Large, Medium and Small Enterprises to avail loans at attractive rates. This has substituted the minimal participation of stock markets in the Chinese Economy. Only in the last few years, the stock markets have become vibrant and Investment in equity by retail investors is showing signs of promise.
5. Inflation. Since there was a good control on Interest rates and the domestic economy was under the full control of the government, Inflation levels were at reasonable levels. The government had taken concerted efforts to control inflation .At CPI level , only in 2007, the it was above 4 at 4.8 and at 5.9 in 2008 but it came down to – 0.7% in 2009.
6. Fixed Exchange rate. For a long period of time, the government pegged its currency to the dollar and even after deciding that they should move towards realistic rates, the currency was allowed to appreciate marginally, only for a few months and again a strategy of pegging the currency to the dollar policy was pursued. This helped the country to retain its competitiveness in exports.
7. Large inflow of funds. Since the economy had shown a good promise for growth and the currency fluctuation was minimized, the country was able to attract large amount of foreign funds. Despite, large inflow of foreign funds, the enterprises were certain about exchange rates and its minimal impact on financial performance . Hence they concentrated more on the core business than on managing finance.
8. Control on Cost of other resources. There is a system of permission for workers to work in one city , thereby restricting the free movement of labour across the cities/towns. Further, the workers are made to work long hours with clearly defined targets for production. Since government transferred the companies to private sector, in most cases, the transfer price of enterprises to private sector was at very low rates which resulted in lower Depreciation and other infrastructure costs.
9. Good Implementation. After planning large projects, the best practices in project implementation was adopted and mammoth projects were completed as per the plans and achievement of physical targets took precedence over the financial aspects.
10. Political System. All the above was possible , since the entire country is run like a Corporate Enterprise. Those who reach the central leadership should have demonstrated their skills at lower levels of administration ,where they were able to demonstrate their competence and management skills. When investment takes place at a provincial level, the provincial authority has the full powers to give licenses and the levels of decision making was less and the uncertainity in implementation of projects was minimized. This will be very difficult in a democratic and plural society where the views of all the stakeholders are to be taken before making decisions.
There are concerns that the Chinese growth will come to a stop and the bubble will burst. This is not likely to happen, since China is a large country and still many regions are in the process of development and many people are under poverty line. The growth in China would be sustained through the increase in Domestic consumption even if the Trade position deteriorates with developed countries but likely to be off set by trade with developing countries ( where China has started increasing the engagement with these countries in a big way). China is likely to continue the Stimulus it is providing for many more years and it has developed the required resources to support this growth. But the extent and nature of stimulus provided will vary from what was observed in the past.
It will be a challenge for Democratic countries and countries with higher level of transparency to adopt all the practices like in China but at least the aspects relating to Management of the Economy including Management of Interest rates, Inflation, Currency Management and Project Planning and Management could be strengthened to achieve higher levels of Economic Growth.
The countries which had shown a good growth rate , growing for long periods of time, provided stimulus to the Economic growth through well defined / planned economic policies which are in contravention of the prescribed economic Policies for Growth. Two examples today are China and USA. In USA, the government went ahead providing stimulus in the form of Moral Support to Industries, Benign Policies, Low interest rates and heavy borrowing from the other countries to Sustain the Economic Growth. This was mainly supported by Dollar which is the most accepted currency in the world coupled with the fact that a robust capital market which provided avenue for raising funds through various instruments not only domestically but also from outside US . The stimulus in US was given at the cost of general health of the Economy, which is very fragile, even today.
Whereas in the case of China, the stimulus for the Economy was provided through many ways and till today, the stimulus continues for a long period of time which is helping the Economy to show continuous good rate of growth. The following factors helped the Chinese Economy to sustain the growth rate even today.
1. Grand Vision. The Political Leadership decided that China should become an Industrial power and in line with the Population rank, they should develop their industries and take them to number one in the field they were operating. With that in Mind, the plans drawn for Economic Development and Infrastructure Development were in line with the objectives of reaching number one position in many segments of the industry.
2. Export Led Strategy. The policy makers identified that to become an industrial power they had to go for cost leadership strategy which would help to achieve a very high level of exports, since the strategy would create a competitive position which would be difficult for other countries to challenge. The cost leadership was pursued with great vigour and the country achieved the cost leadership position in the areas where they became leaders in exports. This helped to increase the size of manufacturing in the overall economy as well as earn Forex in a big way. The exports were subsidized at every level of value chain in the production system.
3. Risky Lending practices. Since most of the enterprises in China belonged to Government and earlier government owned enterprises, the loans were disbursed violating the prudent practices on lending. At one point in time, in this century, the NPA in Chinese Banking system was close to 50%. Since there was no pressure for the enterprises to worry about financial management, they pursued the production targets with increased focus. The focus of corporates were on production than on any other function.
4. Low Interest Rates. The government has a full control on the banking system and ensured that the loans are available at very competitive rates. The interest constituted a very small portion of the overall cost of products. The competitive interest rates in the economy helped Large, Medium and Small Enterprises to avail loans at attractive rates. This has substituted the minimal participation of stock markets in the Chinese Economy. Only in the last few years, the stock markets have become vibrant and Investment in equity by retail investors is showing signs of promise.
5. Inflation. Since there was a good control on Interest rates and the domestic economy was under the full control of the government, Inflation levels were at reasonable levels. The government had taken concerted efforts to control inflation .At CPI level , only in 2007, the it was above 4 at 4.8 and at 5.9 in 2008 but it came down to – 0.7% in 2009.
6. Fixed Exchange rate. For a long period of time, the government pegged its currency to the dollar and even after deciding that they should move towards realistic rates, the currency was allowed to appreciate marginally, only for a few months and again a strategy of pegging the currency to the dollar policy was pursued. This helped the country to retain its competitiveness in exports.
7. Large inflow of funds. Since the economy had shown a good promise for growth and the currency fluctuation was minimized, the country was able to attract large amount of foreign funds. Despite, large inflow of foreign funds, the enterprises were certain about exchange rates and its minimal impact on financial performance . Hence they concentrated more on the core business than on managing finance.
8. Control on Cost of other resources. There is a system of permission for workers to work in one city , thereby restricting the free movement of labour across the cities/towns. Further, the workers are made to work long hours with clearly defined targets for production. Since government transferred the companies to private sector, in most cases, the transfer price of enterprises to private sector was at very low rates which resulted in lower Depreciation and other infrastructure costs.
9. Good Implementation. After planning large projects, the best practices in project implementation was adopted and mammoth projects were completed as per the plans and achievement of physical targets took precedence over the financial aspects.
10. Political System. All the above was possible , since the entire country is run like a Corporate Enterprise. Those who reach the central leadership should have demonstrated their skills at lower levels of administration ,where they were able to demonstrate their competence and management skills. When investment takes place at a provincial level, the provincial authority has the full powers to give licenses and the levels of decision making was less and the uncertainity in implementation of projects was minimized. This will be very difficult in a democratic and plural society where the views of all the stakeholders are to be taken before making decisions.
There are concerns that the Chinese growth will come to a stop and the bubble will burst. This is not likely to happen, since China is a large country and still many regions are in the process of development and many people are under poverty line. The growth in China would be sustained through the increase in Domestic consumption even if the Trade position deteriorates with developed countries but likely to be off set by trade with developing countries ( where China has started increasing the engagement with these countries in a big way). China is likely to continue the Stimulus it is providing for many more years and it has developed the required resources to support this growth. But the extent and nature of stimulus provided will vary from what was observed in the past.
It will be a challenge for Democratic countries and countries with higher level of transparency to adopt all the practices like in China but at least the aspects relating to Management of the Economy including Management of Interest rates, Inflation, Currency Management and Project Planning and Management could be strengthened to achieve higher levels of Economic Growth.
Saturday, February 27, 2010
Views on the Budget F11
Budget – F11
The budget is a well balanced one and was much better than the expectations of Various stake holders from the society. Under the circumstances, when the government has to play a major role in sustaining the growth rate of the economy and need to manage its finances to ensure the stability of the economy, steps need to be taken to shore up the finances of the government. The budget has targeted an increase of 18% in tax revenue after registering a maringal growth over 2008 – 2009. The major contributor to the increase in revenue is customs duties Rs.30,000 cr after a loss of Rs.11400 cr in the previous year , Excise duties Rs.30,000 cr after a loss of Rs.6613 cr last year , increase in service tax of Rs.10000 cr and an increase in corporation tax Rs.46,000 cr with an assumption that the corporation tax will grow by 18%. The budget plans for reduction in Income tax of Rs.4400 cr over the previous year. Total tax revenue is expected to increase by Rs.113,000 cr.
They had factored in better compliance in assuming increase in taxes. They are establishing two more tax processing centres apart from Bangalore. IT is planned to be used effectively. A target has to be set to increase the number of non salaried individual assesses by 5% from the present levels.
The growth is expected to continue and the thrust for growth will come from the increased purchasing power of individuals since the tax rates were reduced, continued focus on rural development through NRGEA, increased emphasis on infrastructure , institutional strengthening efforts in the agricultural sector, increased ability of the PSU banks / RRBs to disburse more finance through recapitalization of banks supported by new licenses for Banks and Bank Branch Linceses. The stimulus for exports were continued , small and medium sector were given increased focus and housing development was given its place in the growth momentum.
Rs.1,48,118 cr is expected to be raised from non tax sources, an increase of Rs.35000 cr(3G) over the previous year. Rs.40,000 cr from privatization, Rs.35,000 cr from 3 G auction. It was assumed that dividends received would be lower by Rs.600 cr over FY 10 at Rs.51309 cr. A target increase of 18% could be looked at from Dividends. There was no mention about the use of land bank . Adopting a strategy of capitalizing the land bank with government / government undertakings and PSU’s can provide additional revenue. There has to be an increased focus on raising resources from non conventional sources and a target of at least Rs.25000 cr could be looked at for revenue from Land, in the form of sale/lease/dividends. The revenue from Non tax sources could be increased substantially , if a decision is taken to dilute stake in more profit making PSU’s coupled with sale of land in sick PSUs and declaring dividends. This would help to meet the fiscal deficit targets without much pressure on government finances. The expenditure was planned to be managed well and there should a continuous monitoring of expenses by the government in relation to the budget.
The main contributor to the increase in excise and customs duty are duties on petrol and diesel. Since fuel constitutes about 15% weightage in the index,. Inflation will increase immediately by about 0.5% from the present levels. This will have a cascading effect on all the industries. Hence the cooperation with state governments to bring down the prices of food items should be given increased focus and the infation rate has to be brought down closer to 5% level.
The budget is a well balanced one and was much better than the expectations of Various stake holders from the society. Under the circumstances, when the government has to play a major role in sustaining the growth rate of the economy and need to manage its finances to ensure the stability of the economy, steps need to be taken to shore up the finances of the government. The budget has targeted an increase of 18% in tax revenue after registering a maringal growth over 2008 – 2009. The major contributor to the increase in revenue is customs duties Rs.30,000 cr after a loss of Rs.11400 cr in the previous year , Excise duties Rs.30,000 cr after a loss of Rs.6613 cr last year , increase in service tax of Rs.10000 cr and an increase in corporation tax Rs.46,000 cr with an assumption that the corporation tax will grow by 18%. The budget plans for reduction in Income tax of Rs.4400 cr over the previous year. Total tax revenue is expected to increase by Rs.113,000 cr.
They had factored in better compliance in assuming increase in taxes. They are establishing two more tax processing centres apart from Bangalore. IT is planned to be used effectively. A target has to be set to increase the number of non salaried individual assesses by 5% from the present levels.
The growth is expected to continue and the thrust for growth will come from the increased purchasing power of individuals since the tax rates were reduced, continued focus on rural development through NRGEA, increased emphasis on infrastructure , institutional strengthening efforts in the agricultural sector, increased ability of the PSU banks / RRBs to disburse more finance through recapitalization of banks supported by new licenses for Banks and Bank Branch Linceses. The stimulus for exports were continued , small and medium sector were given increased focus and housing development was given its place in the growth momentum.
Rs.1,48,118 cr is expected to be raised from non tax sources, an increase of Rs.35000 cr(3G) over the previous year. Rs.40,000 cr from privatization, Rs.35,000 cr from 3 G auction. It was assumed that dividends received would be lower by Rs.600 cr over FY 10 at Rs.51309 cr. A target increase of 18% could be looked at from Dividends. There was no mention about the use of land bank . Adopting a strategy of capitalizing the land bank with government / government undertakings and PSU’s can provide additional revenue. There has to be an increased focus on raising resources from non conventional sources and a target of at least Rs.25000 cr could be looked at for revenue from Land, in the form of sale/lease/dividends. The revenue from Non tax sources could be increased substantially , if a decision is taken to dilute stake in more profit making PSU’s coupled with sale of land in sick PSUs and declaring dividends. This would help to meet the fiscal deficit targets without much pressure on government finances. The expenditure was planned to be managed well and there should a continuous monitoring of expenses by the government in relation to the budget.
The main contributor to the increase in excise and customs duty are duties on petrol and diesel. Since fuel constitutes about 15% weightage in the index,. Inflation will increase immediately by about 0.5% from the present levels. This will have a cascading effect on all the industries. Hence the cooperation with state governments to bring down the prices of food items should be given increased focus and the infation rate has to be brought down closer to 5% level.
Sunday, February 7, 2010
Union Budget – F11
Union Budget – F11
The Stimulus by the government has helped to a achieve higher level of economic growth. But inflation could have been kept at a lower level by better demand supply management. The recent initiative by the Central government to co-orindate with the state governments to bring balance in the demand supply is in the right direction.
GDP growth in the first quarter this year was at 6.1%, second quarter was at 7.9% and in third it is likely to be in the range of 8.2 – 8.5%. If we can end the year with a quarter growth of 8.5 – 9.5%, the overall growth for the year could be closer to 8% for the whole year.
Despite greenshoots emerging, there are sporadic reporting of failures of economic systems in a few countries which have an impact on the world Economy. Since India’s economy is more integrated with the global economy than in the past , withdrawal of stimulus has to be handled with caution.
The Budget should focus on growth and there is a need to continue the stimulus and the government should continue the stimulus in sectors which have a greater impact on consumption, investment and higher multiplier effect on the Economy.
The withdrawal should be gradual and we have to prepare a phased plan for withdrawal. We have to identify economic indicators with the target for key indicators and once the target is reached then the corresponding stimulus could be withdrawn. The targets will have corresponding action plans for Finance ministry, Commerce Ministry, RBI and SEBI. A road map could be drawn up for withdrawal of stimulus on the above lines.
The concern regarding the budget deficit could be addressed through raising funds through unconventional measures including Capitalising the land bank of the government and government enterprises in a big way. China had resorted to this strategy in a big way at the State and Central levels in the last year which helped the government to provide a very big stimulus.
The Stimulus by the government has helped to a achieve higher level of economic growth. But inflation could have been kept at a lower level by better demand supply management. The recent initiative by the Central government to co-orindate with the state governments to bring balance in the demand supply is in the right direction.
GDP growth in the first quarter this year was at 6.1%, second quarter was at 7.9% and in third it is likely to be in the range of 8.2 – 8.5%. If we can end the year with a quarter growth of 8.5 – 9.5%, the overall growth for the year could be closer to 8% for the whole year.
Despite greenshoots emerging, there are sporadic reporting of failures of economic systems in a few countries which have an impact on the world Economy. Since India’s economy is more integrated with the global economy than in the past , withdrawal of stimulus has to be handled with caution.
The Budget should focus on growth and there is a need to continue the stimulus and the government should continue the stimulus in sectors which have a greater impact on consumption, investment and higher multiplier effect on the Economy.
The withdrawal should be gradual and we have to prepare a phased plan for withdrawal. We have to identify economic indicators with the target for key indicators and once the target is reached then the corresponding stimulus could be withdrawn. The targets will have corresponding action plans for Finance ministry, Commerce Ministry, RBI and SEBI. A road map could be drawn up for withdrawal of stimulus on the above lines.
The concern regarding the budget deficit could be addressed through raising funds through unconventional measures including Capitalising the land bank of the government and government enterprises in a big way. China had resorted to this strategy in a big way at the State and Central levels in the last year which helped the government to provide a very big stimulus.
Thursday, December 31, 2009
States in India and their Competitiveness
States in India and their Competitiveness
India is the largest democracy in the world and it has one of the most elaborate federal system of Governance. The Hierarchy of Governance is really deep compared to other parts of the world. The Governance system starts with The Central Government and then it is divided further into States, Districts, Corporations / Municipalities and Panchayats.
In terms of division of responsibility, the powers are available to those governing even at the Panchayat level. The Division of States is for administrative convenience. The states in India typically have a large City around which the entire states’ fortune revolves. The other Cities in the State after the large city are generally smaller compared to the large city and their contribution to the Economy is not very significant. In fact, the leading cities in states act as hubs around which all other cities and towns operate. The hub city provides the competitive advantage for others places in the State.
The states in India are already well divided and they have a system of Governance in all the levels as mentioned above. The initiatives taken by the Central government in the past have catalysed the management capacity of the governing systems at local levels and best management practices are being followed even at Panchayat levels in most of the states. In a few states, the governance systems at local levels are yet to be improved. But the efforts are on by the government to improve the capacity of these institutions across India. The evolution of IT in India is going to make the governance of these systems much easier going forward.
India is the only country where, people from different parties can represent the same population. People have the choice to choose a candidate from a party for the Lok Sabha. They can choose another candidate from the Second party from the same area for the Legislature. Third party can govern the Corporation/Municipality or Panchayat. Three parties can be chosen by people from the same area for Parliament, Legislature and the Local Body. The parties have the full freedom to compete for all the three and they have a chance to get elected for all the three.
The parties can create an environment whereby they can persuasively convince the electorate to vote for them based on the past performance as well as the Agenda being put forward to the Electorate. Since we have one of the best functioning democracies in the world, parties should give importance to the verdict of the people and if the mandate is for the party , then whatever promises made could be fulfilled.
Since we already have a well defined functioning governance system , what needs to be done is improving the existing systems to achieve higher levels of performance. Division of states further will lead to higher costs of governance and affecting the viability of the states. Further , the new states would require support from government which would put lot of financial burden on the Central Government and affect its finances.
The division of States should be based mainly on Economic considerations and the criterion to divide states based on any other consideration should be mainly avoided. Before dividing the state, an hub city has to be identified which can provide the competitiveness and the required resources for the divided states operations. There has to be a detailed cost benefit analysis for dividing the states and only if benefits outweigh the costs, then the division should happen. As mentioned earlier, since there is various levels of governance, there is an opportunity for parties to campaign and win elections which would help them to achieve the desired objectives.
The parties wanting the division should try and get the mandate at the various levels of governance and try and implement the ideas. In the recent past, various state governments in India had taken initiatives addressing the needs of masses. This has helped many states to increase their competitiveness in the past.
Going forward, the parties wanting division of states, should clearly define their objectives for the division of states and once the objectives are stated, then they should try and achieve those objectives through the existing systems of governance instead of disturbing the viable economic systems in the states/county. It is possible to achieve those objectives with the deep governance system we have and this could be achieved through concerted efforts and ways and means could be identified to achieve using the present systems.
The Indian advantage today is that the best practices in Economics and Commerce are gainfully applied to the management of the Economy which has resulted in one of the enviable economic growth rates in the world. This augurs well for making our states more competitive which will provide the resilience to the Entire Economy.
India is the largest democracy in the world and it has one of the most elaborate federal system of Governance. The Hierarchy of Governance is really deep compared to other parts of the world. The Governance system starts with The Central Government and then it is divided further into States, Districts, Corporations / Municipalities and Panchayats.
In terms of division of responsibility, the powers are available to those governing even at the Panchayat level. The Division of States is for administrative convenience. The states in India typically have a large City around which the entire states’ fortune revolves. The other Cities in the State after the large city are generally smaller compared to the large city and their contribution to the Economy is not very significant. In fact, the leading cities in states act as hubs around which all other cities and towns operate. The hub city provides the competitive advantage for others places in the State.
The states in India are already well divided and they have a system of Governance in all the levels as mentioned above. The initiatives taken by the Central government in the past have catalysed the management capacity of the governing systems at local levels and best management practices are being followed even at Panchayat levels in most of the states. In a few states, the governance systems at local levels are yet to be improved. But the efforts are on by the government to improve the capacity of these institutions across India. The evolution of IT in India is going to make the governance of these systems much easier going forward.
India is the only country where, people from different parties can represent the same population. People have the choice to choose a candidate from a party for the Lok Sabha. They can choose another candidate from the Second party from the same area for the Legislature. Third party can govern the Corporation/Municipality or Panchayat. Three parties can be chosen by people from the same area for Parliament, Legislature and the Local Body. The parties have the full freedom to compete for all the three and they have a chance to get elected for all the three.
The parties can create an environment whereby they can persuasively convince the electorate to vote for them based on the past performance as well as the Agenda being put forward to the Electorate. Since we have one of the best functioning democracies in the world, parties should give importance to the verdict of the people and if the mandate is for the party , then whatever promises made could be fulfilled.
Since we already have a well defined functioning governance system , what needs to be done is improving the existing systems to achieve higher levels of performance. Division of states further will lead to higher costs of governance and affecting the viability of the states. Further , the new states would require support from government which would put lot of financial burden on the Central Government and affect its finances.
The division of States should be based mainly on Economic considerations and the criterion to divide states based on any other consideration should be mainly avoided. Before dividing the state, an hub city has to be identified which can provide the competitiveness and the required resources for the divided states operations. There has to be a detailed cost benefit analysis for dividing the states and only if benefits outweigh the costs, then the division should happen. As mentioned earlier, since there is various levels of governance, there is an opportunity for parties to campaign and win elections which would help them to achieve the desired objectives.
The parties wanting the division should try and get the mandate at the various levels of governance and try and implement the ideas. In the recent past, various state governments in India had taken initiatives addressing the needs of masses. This has helped many states to increase their competitiveness in the past.
Going forward, the parties wanting division of states, should clearly define their objectives for the division of states and once the objectives are stated, then they should try and achieve those objectives through the existing systems of governance instead of disturbing the viable economic systems in the states/county. It is possible to achieve those objectives with the deep governance system we have and this could be achieved through concerted efforts and ways and means could be identified to achieve using the present systems.
The Indian advantage today is that the best practices in Economics and Commerce are gainfully applied to the management of the Economy which has resulted in one of the enviable economic growth rates in the world. This augurs well for making our states more competitive which will provide the resilience to the Entire Economy.
Friday, October 30, 2009
Interest Rates and Competitiveness
Interest rates prevailing in an Economy determines the competitiveness of a Country, Companies and the purchasing power of Individuals. Low interest rates in an Economy provides a conducive climate for the growth of an Economy.
In India , lowest interest on any product or service is the Current account offered by banks , where there is no interest. On the other extreme, the people who borrow small sums on a daily basis pay up to Rs.10 on Rs.90 borrowed, which works out to more than 4000% interest per annum. The interest rate in the Economy ranges from 0 % to 4000%.
The rate of interest by itself does not decide the competitiveness of different customer segments in the society but it is the particular segments’ affordability to pay the interest charged determines the competitiveness.
The starting point of high Economic growth was the steps taken by government in liberalizing the economy but this gained momentum when a private bank started offering low interest rates to various segments of its customers. When the loans became affordable, various customer segments started availing the loans for investment and consumption needs. This gave a big fillip to the economic growth. Then we witnessed a very low interest rate environment in the Economy as a whole which has also stimulated the consumer boom in the country.
The IT has enabled the banks in the country to penetrate the rural areas and offer affordable interest rates to the rural population. In many areas, where the banking penetration has improved the quality of life has improved for many people they were able to start and run viable rural enterprises. This is one of the main reasons why demand in rural areas continue to be strong. When we visit our villages today, we witnessed a sea change.
There is a need to keep the interest rates at a low level in the Economy so that the potential for higher growth can be realized to the full extent. The low interest rates increases the affordability and purchasing power resulting in higher economic growth.\
Benefits to the Government :
Government is the largest borrower in the Economy. The low interest rates help to reduce the interest expenditure for the government . This results in lowering the fiscal deficit and the need for additional borrowing and increasing the sources of other revenue. Low interest rates help the government to manage the fiscal position of the economy better and keep the tax levels in the Economy lower. Lower taxes in the Economy also helps to improve the competitiveness of enterprises.
Benefits to the Corporates :
Corporates in Government/Private sector borrow for Working capital and projects. The interest component for corporates on the total income today stands at more than 10% of the income . Any further increase from the present levels will affect the viability of enterprises in a big way. The impact will be more in project related activities of corporates , especially when they implement long gestation projects. In such cases, they have to capitalise the interest which increases the overall cost of the projects , thereby affecting the overall project viability.
Benefits to the individual customers :
The low interest rates and the concept of EMI has changed the customer behaviour in the Indian Economy in the last few year. Most of the individual customers buy homes, cars and consumer durables on EMI basis. A small change in interest rate , makes a big difference in EMIs as well as the tenure of repayment. This in turn affects the affordability of individual consumers. If interest rates are at a high level many of the individuals lose an opportunity to buy many of these products which in turn affects the demand for these products.
By keeping the interest rates low, all the sections of the society benefit immensely and there is a strong case for keeping the interest rates at a very low level in the Economy. The concerns regarding inflation are well justified but by managing the demand supply situation for products and services inflation can be kept at manageable levels in the Economy. By focusing on demand , supply and reducing the mismatch in demand supply, we can have low interest rates, moderate inflation and higher economic growth.
In India , lowest interest on any product or service is the Current account offered by banks , where there is no interest. On the other extreme, the people who borrow small sums on a daily basis pay up to Rs.10 on Rs.90 borrowed, which works out to more than 4000% interest per annum. The interest rate in the Economy ranges from 0 % to 4000%.
The rate of interest by itself does not decide the competitiveness of different customer segments in the society but it is the particular segments’ affordability to pay the interest charged determines the competitiveness.
The starting point of high Economic growth was the steps taken by government in liberalizing the economy but this gained momentum when a private bank started offering low interest rates to various segments of its customers. When the loans became affordable, various customer segments started availing the loans for investment and consumption needs. This gave a big fillip to the economic growth. Then we witnessed a very low interest rate environment in the Economy as a whole which has also stimulated the consumer boom in the country.
The IT has enabled the banks in the country to penetrate the rural areas and offer affordable interest rates to the rural population. In many areas, where the banking penetration has improved the quality of life has improved for many people they were able to start and run viable rural enterprises. This is one of the main reasons why demand in rural areas continue to be strong. When we visit our villages today, we witnessed a sea change.
There is a need to keep the interest rates at a low level in the Economy so that the potential for higher growth can be realized to the full extent. The low interest rates increases the affordability and purchasing power resulting in higher economic growth.\
Benefits to the Government :
Government is the largest borrower in the Economy. The low interest rates help to reduce the interest expenditure for the government . This results in lowering the fiscal deficit and the need for additional borrowing and increasing the sources of other revenue. Low interest rates help the government to manage the fiscal position of the economy better and keep the tax levels in the Economy lower. Lower taxes in the Economy also helps to improve the competitiveness of enterprises.
Benefits to the Corporates :
Corporates in Government/Private sector borrow for Working capital and projects. The interest component for corporates on the total income today stands at more than 10% of the income . Any further increase from the present levels will affect the viability of enterprises in a big way. The impact will be more in project related activities of corporates , especially when they implement long gestation projects. In such cases, they have to capitalise the interest which increases the overall cost of the projects , thereby affecting the overall project viability.
Benefits to the individual customers :
The low interest rates and the concept of EMI has changed the customer behaviour in the Indian Economy in the last few year. Most of the individual customers buy homes, cars and consumer durables on EMI basis. A small change in interest rate , makes a big difference in EMIs as well as the tenure of repayment. This in turn affects the affordability of individual consumers. If interest rates are at a high level many of the individuals lose an opportunity to buy many of these products which in turn affects the demand for these products.
By keeping the interest rates low, all the sections of the society benefit immensely and there is a strong case for keeping the interest rates at a very low level in the Economy. The concerns regarding inflation are well justified but by managing the demand supply situation for products and services inflation can be kept at manageable levels in the Economy. By focusing on demand , supply and reducing the mismatch in demand supply, we can have low interest rates, moderate inflation and higher economic growth.
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