The article which was published in the 15th November Edition of Free Press Journal in India

Updated on : Thursday, November 14, 2019, 10:44 PM IST

Emulate TARP of US to revive economy

By R Kannan

Prime Minister Narendra Modi addresses during the Dialogue with BRICS Business Council and New Development Bank in Brasilia.

ANI Photo

Indian Economy had the potential to grow at 10% per annum few years ago, which dropped to 8% per annum before the NBFC crisis, and now after the NBFC crisis is at 7 to 7.5% per annum, due to global trade issues and lack of demand for products in India.

The Prime Minister has set an ambitious goal of $ 5 trn GDP. The government is very serious about achieving the growth very fast and many stimulus measures were introduced by the government to stimulate the economic growth. Further, sector wise revival plans are being taken up by the government and many more stimulus measures are in the offing.

The measures taken so far will certainly help to boost the economic growth. There is a need to boost the confidence level of customers, businesses and investors. The government, RBI and leading institutions in the world and research analysts have downgraded the GDP growth projection, including IMF.

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The main reason for slowdown is competitiveness of industries that was affected in a big way by disruption in the form of changing consumer behaviour, impact of digital technologies (e-commerce), increasing regulation and regulatory agencies and emergence of hyper competition in many industries. There is deflation in many of the product prices and services due to e-commerce and hyper competition. This has reduced the demand, margins and affected the competitiveness of companies, with many industries in India today having become uncompetitive. Companies are not investing in capex because of reduced margins and uncertain demand. This was also leading to incremental NPAs in the banking system.

When demonetisation and GST were introduced, the assumptions made were very bullish and in reality, their introduction did not work out as expected. The government is taking course correction actions and series of new initiatives are being introduced at regular intervals to revive the economic growth. There is a need for tax collection to go.

The NBFC crisis contributed in a big way to bring down the competitiveness of industries. This had a cascading effect on entire Financial services sector which had spill over effects in other sectors. After the 2008 crisis, US with a view to revive the economy, formulated a plan to repair the Financial services sector. They introduced a programme called Troubled Asset Relief Programme (TARP).

The programme’s objective was: Treasury to purchase illiquid, difficult-to-value assets from banks and other financial institutions. The targeted assets can be collateralised debt obligations, which were sold in a booming market until 2007, when they were hit by widespread foreclosures on the underlying loans. TARP was intended to improve the liquidity of these assets by purchasing them using secondary market mechanisms, thus allowing participating institutions to stabilise their balance sheets and avoid further losses.

TARP was a programme to purchase toxic assets and equity from financial institutions to strengthen its financial sector. The Dodd–Frank Wall Street Reform and Consumer Protection Act was signed into law in 2010 and set the amount for this programme to $ 475 billion. When the programme was introduced the authorised budget for the programme was $ 700 billion. The total disbursements were estimated to be $ 426.4 billion. On December 19, 2014, the US Treasury sold its investments ending the program. TARP recovered funds totalling $ 441.7 billion from $426.4 billion invested, earning a $ 15.3 billion profit or an annualized rate of return of 0.6%. This was a very good programme, where the government recovered all the funds it committed to this programme.

In India, we have a similar situation in the Financial sector which has a spill over effect on other sectors, affecting the overall competitiveness of the economy and different sectors. The government could consider introducing a similar programme with a budget of Rs 200,000 cr to be inducted into investment in various financial instruments focussed on banks, NBFCs and other financial intermediaries. A strategy similar to TARP could be formulated, which will help to recover the investment of Rs 2,00,000 cr in four to five years and the government’s investment in the programme could be fully recovered when the value of investments rise.

The writer is Head, Corporate Performance Management, Hinduja Group.

Views are personal.

Blue Economy’s Role in Economic Development

The Article written for Littoral Communications , which appeared on their web site in November 2019

Blue Economy’s Role in Economic Development

The blue economy is the, sustainable use of ocean resources for economic growth, improved livelihoods, and jobs while preserving the health of ocean ecosystem. It is a Concept which encourages better management  of our ocean and blue resources. Blue economy also includes  benefits , such as carbon storage, coastal protection, cultural values and biodiversity.

The concept of Blue Economy covers, Port development, Port based Industrial Development, City development, Cluster development, Fisheries, Education and Research, Shipping, Oil and Gas Extraction, Aquaculture, Coastal Development, Tourism, Marine bio tech, Renewable energy, waste disposal, environment protection and maritime security, Ship building , Ship breaking and Ship repairing.

Blue Economy plays a major role in economic development of a country. When we discuss the development of blue Economy , it becomes very relevant in the Indian Context. Prime Minister set a vision of achieving $ 5 trillion  GDP within a short period of time. Blue Economy can contribute to $ 1 trillion of GDP . We can have Blue Economy Vision of $ 1 tillion. Lot of initiatives are being taken to develop the blue Economy . The focus is on using the water resources for Transportation, Port Based Economy Development, Port based industrial development. The initiatives like Sagar Mala is part of the overall development of blue Economy.

The logistics cost in India is more than 14% of the GDP and it is one of the highest in the world. The government has set an objective to bring this down to less than 10%. With this in view, the inland waterways will be developed across the country for the transportation and 20,000 KMs are likely to be developed and already few National waterways were opened for transportation of cargo. The focus of Inland waterways will be transport of bulk items like Steel, Coal, cement, Iron ore, Agricultural commodities.

The Sagarmala Programme covers  investment of ₹8.5 trillion to set up new mega ports, modernizing India's existing ports, developing of 14 Coastal Economic Zones (CEZs) and Coastal Employment Units, enhancing port connectivity via road, rail, multi-modal logistics parks, pipelines & waterways and promoting coastal community development, with the aim of boosting merchandise exports by US$110 billion and generating around 10,000,000 direct and indirect jobs.

Sagarmala aims to modernize India's Ports so that port-led development can be augmented and coastlines can be developed to contribute to India's growth. It also aims at "transforming the existing Ports into modern world-class Ports and integrate the development of the Ports, the Industrial clusters and hinterland and efficient evacuation systems through road, rail, inland and coastal waterways resulting in Ports becoming the drivers of economic activity in coastal areas.

To increase the pace of growth through Blue Economy, plans could be drawn up to create Ports with city and Industrial development similar to Singapore and four ports in India could be identified to replicate the  model and success of Singapore.

One of the challenges for achieving this growth will be arranging finance for such large projects. The options for raising the required financial resources could include,  lease of operating Port assets to generate revenue for new projects, issue of Blue Bonds ( already issued by Seychelles ), attracting FDI from leading players in Blue Economy in the world,  issuing special bonds focussed on port based projects apart from the traditional sources of funding. 

Considering the new found thrust on this concept, we will have opportunities arising in the developing the areas of Automobiles, Engines, Inland water Transportation Vessels, Renewable energy, Security, Infrastructure Development , River based projects, Water based projects, Lubricants and Marine oil, Banking and Financial Services.

We should use the long coast line and rivers in India to achieve the desired target of $ 1 trillion through and the government initiatives in place will go a long way in achieving the target and all the stake holders should be geared to achieve this target. The government can create a programme to propagate the vision of $ 1 trillion to all the stake holders which will help to achieve the target very fast.   

Growth to be the Economic Driver

The Article Published in the Editorial Page of Free Press Journal on 20th July 2019

By FPJ Bureau

Financial systems in a country play the role of an anchor in the overall development and any problems in their stability will have a bearing on the overall performance of an economy.

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Global economic scenario today determines the economic strategies to be adopted by countries. The scenario is so unpredictable and gloomy, countries should focus on economic growth and job creation to maintain balance in the economy and ensure the stability of the economic and financial systems. India has the potential to grow at 8% and all action plans to be adopted by the government could be derived from setting it as the objective.

Financial systems in a country play the role of an anchor in the overall development and any problems in their stability will have a bearing on the overall performance of an economy. The developments in the financial services sector in the last few months was a setback to the Indian economy and the economic growth.

The budget by the Central government is addressing the needs of accelerating the economic growth and bringing back the stability and vibrancy to the financial services industry, which will help to kick-start the process of balanced economic growth. Increasing the liquidity in the economy across the sectors will also help the cause.

The Government has proposed a number of reforms with a strong focus on investment in infrastructure development, digital economy and employment generation in medium and small enterprises by stimulating growth, promoting digitisation, transparency and simplifying tax administration.

The projection for growth of tax collections and the target for growth is one of the highest in the recent times. There is a need to mobilise resources from new non-conventional sources of funding.

The proposal to examine suggestions on opening foreign direct investment (FDI) in several sectors, including aviation, media, animation and insurance sectors will go a long way in bringing long-term funds to the Indian economy from other parts of the world.

There is a Proposal to merge NRI-Portfolio Investment Scheme Route with the Foreign Portfolio Investment (FPI) Route to provide NRIs with seamless access to Indian equities.

This is a great proposal and by bringing in policies for effective implementation of this scheme, we should be able to keep the interest of FPIs and NRIs in the Indian market and action plans have to be identified for tapping the funds from these sources.

In the railways sector, the proposal is to focus on Public-Private Partnership (PPP) for faster development and completion of tracks, rolling stock manufacturing and delivery of passenger freight service. Indian Railways is one of the largest land owners in India.

Large part of the funds required for development of railways can come from capitalisation of the land bank as well as investment from private partners.

The proposal that Securities and Exchange Board of India (SEBI) will consider increasing the minimum public shareholding in the listed companies from 25% to 35% will force existing companies that are doing well to go to the market for dilution and take away funds required by enterprises which need the funds most. This proposal could be reviewed. As and when the financial system and economic system stabilise, this proposal could be introduced.

Few of the proposals in the budget also resulted in investors turning positive towards investment in debt and negative in investing in equity. A survey could be done on investor sentiments and required amendments could be made in the proposals so that their sentiment in stocks and stock markets come back to normal levels. When we are planning to increase the level of financial intermediation, there is a need to make investments in financial instruments attractive.

To continue the policy of disinvestment in non-financial public sector undertakings and consider holding less than 51% stake in such undertakings on a case-to-case basis is a brilliant proposal. Most of the PSUs hold valuable property. Companies like MTNL have assets which are highly valuable compared to the debt they have.

Before such dilution, the scope for capitalising the assets through REIT/InviT Structure could be looked at apart from sale of some of the prime properties in the large cities.

In many cases, capitalising the prime property will make sick companies very healthy. The Government plans to invest INR 100 trillion on infrastructure in the next five years.

An expert committee is to be set up to study the current situation relating to long-term finance and India’s past experience with Development Finance Institutions (DFIs), and recommend the structure and required flow of funds through DFIs.

Another promising proposal is to launch a scheme to invite global companies to set up mega-manufacturing plants in advanced technology and provide them investment linked income tax exemptions under section 35AD of the Income Tax Act, 1961, and other indirect tax benefits.

In the last few years, the capital investment in the economy witnessed a sharp decline and especially in the private sector, there was very less capital investment. In the last few months, the capacity utilisation has come down below 70% after crossing 75% a few months back.

This was also partly due to consumer expenditure declining in sectors like auto and housing, which were mainly relying on external funds. The banking credit flow to many sectors are also affected.

There is a need to boost the consumer sentiment which will help to shore up the demand for many products. This will help to increase the capex in several sectors.

The policies proposed in the budget will go a long way in boosting the sentiment of investors, consumers and corporates. To realise the full potential, effective implementation, continuous monitoring of the impact of implementing the policies and bringing fast course corrective actions during implementation will go a long way achieving the objectives set by the government.

R Kannan is Head, Corporate Performance Management, Hinduja Group. The views are personal.

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Schemes to facilitate MSME growth in India

Considering the importance of MSMEs in the Economic growth and Employment Generation, during Diwali , government announced 12 schemes ,which can facilitate the growth of MSME sector. The salient  one was to approve loans up to Rs.1 cr in 59 minutes. The loan amount will be between Rs. 10 lakh and Rs.1 cr. The rate of interest  starts from 8%. After the approval  of the application, the loan amount will be disbursed within a week. There is no mandatory requirement for collateral as the online portal is directly connected to the Credit Guarantee Fund Trust for Micro and Small Enterprises scheme. While registering, the borrower need not make any payment. Once the applicant’s proposal matches the bank’s minimum criteria for lending, the borrower will have to be submit a fee of Rs, 1,000 plus taxes.

Rebate in interest rate. When the GST was introduced. Many MSMEs started paying GST for the first time. Paying GST creates a credit profile for the MSMEs and it is possible to assess their credit rating based on the financial profile of the firm. On the new loans to be availed,  GST-registered MSMEs will get 2% subvention or rebate on incremental new loans of up to Rs 1 crore. Interest subvention on pre- and post-shipment credit for exports by MSMEs has also been increased from 3% to 5%. Assuming their average cost of funds of 10%, the 2% subvention will reduce their interest cost .

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Cash flow certainty. Companies with a turnover of more than Rs 500 crore to join Trade Receivables e- Discounting System (TReDS) and it has become mandatory. This will help  MSMEs  to discount their bills and improve the  cash flow, to ensure a smooth operation.

Procurement by PSUs. Public Sector units in Several sectors are the market leaders and their purchase budget in a year is a very large. Now, PSUs have to procure, at least a quarter of their requirement (25%) from MSMEs. Earlier, it was at 20%. This will give a big boost to MSMEs and their integration into the industry value chain will increase . This will also help to create more jobs due to higher demand.

Women entrepreneurs. The participation of women in various sectors is rising and the government also has created several special schemes to promote women’s participation in the society. With a view to encourage , more women to pursue entrepreneurship, out of the 25% procurement mandated from MSMEs from PSUs, 3% has been reserved for women entrepreneurs.

Government e-Marketplace (GeM). Government has created a grand programme on Digitiation of the Economy. One of the initiatives under digitisation is creating  E- marketplaces, where MSMEs can participate easily. Now it is mandatory for all Central PSUs to take membership of the Government e-Marketplace (GeM) and they will put their purchase requirements in the market place,  which MSMEs can identify easily and participate in the process.

Technological upgradation. MSMEs have money only to run their business and they are constrained to invest  in upgrading their technology, products and R&D related to their business. With a view to assist MSMEs in upgrading the Technology, Government has created a budget of Rs 6,000 crore and it will be used for 20 hubs and 100 tool rooms for technology upgradation.

Pharma companies. India has gained competitiveness in Pharma business and has emerged as the Generic pharma product hub  in the world. There are more than 10,000 companies producing pharma products in India and with a view to encourage setting up more Pharma units government has created a scheme for  forming  MSME pharma clusters. 70% cost of establishing these clusters will be borne by the government.

One annual return. At present MSMEs are filing several reports in a year relating to Labour laws and Central rules.  This consumes lot of times of the entrepreneurs and taking away their attention from the core business. To make this process simple, now, MSMEs will have to file just one annual return on eight labour laws and 10 central rules.

Inspections. At present, Inspectors visit the factories and many a times, entrepreneurs are harassed and this has become one of the irritants for MSMEs and they are finding it difficult to manage this process. The process of inspection from the discretion of the inspector has been changed to selection of a company  through a computerised random allotment and inspectors will have to upload reports on the portal within 48 hours of their visit. This has brought lot of transparency to the process.

Air and Water Pollution Laws. Now  MSMEs can file returns with self certification and only 10% of the units will be inspected. Further, they need a single air and water clearance and just one consent to establish a factory. The process has been made simple and become a single window clearance.

Minor Violations under Companies Act. An ordinance has been promulgated to simplify the levy of penalties for minor offences under the Companies Act. Now MSMEs no longer have to approach courts which is a time consuming process but they can correct them through simple procedures.

The twelve initiatives, will go a long way in boosting the growth of MSMEs in India to create robust business models  and pave the way for faster integration of MSMEs into the Indian Economy. The awareness has to be created about these schemes to all the MSMEs in India

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By R . Kannan

Automobile Sales in India - FY 2019

Automobile Industry in FY 2019

Indian manufacturing sector  continue to report a slow growth in the Fiscal but Automobile industry in Fiscal FY 19 reported a growth of 6.3% in manufacturing of vehicles. For the first time more than 3 crore vehicles were manufactured in India and the production in FY 19 was at 3.09 crore vehicles. 

The performance of the Industry is based on overall Economic Growth , Industry growth, Infrastructure growth and availability of finance . Monsoons also a play a role in influencing the demand of the industry.  The new concept of sharing economy and ride hailing services created a demand for  vehicles. The fast growth of E commerce is also creating lot of opportunities in the Logistics sector and the Ecommerce Retailing companies are planning to place large orders for vehicles going forward.

The Indian auto industry reported a 6.5%  increase in overall vehicle sales in 2018-19, witnessing lower sales growth compared to a growth of  14.5% in FY18. The sales growth in the last few months was affected by the unexpected crisis in the NBFC sector,  liquidity crunch, uneven monsoon, increase insurance cost over the previous year , higher fuel cost and the move towards shared mobility in Cities and towns of India.

Indian has emerged as a hub for manufacturing of exports of vehicles. Exports constituted 15% of sale of vehicles in FY 19. More than 46.29 Lakh vehicles were exported in the year FY 2019 and the growth in exports over the previous year was at healthy 14.5%. The passenger vehicles witnessed a decline of 9.6% in exports but India has become the preferred destination for small car manufacturing in the world. More than 6.76 Lakh cars were exported from India last year. The export of commercial vehicles were closer to 1 lakh and the growth was at 3%. The one segment , which grew very fast in exports was three wheelers. It grew by more than 49% and more than 5.6 Lakh three wheelers were exported. India exported 32.8 Lakh two wheelers in FY 19 and the growth in exports of this segment was at 16.5%.

Domestic sales of vehicles rose by 5.15% YoY to 2.62 croroe units .

Segment	2017-18	2018-19	%change	%of Total
Passenger Vehicles	40,36,947	40,53,629	0.41	13.12
Medium and Heavy commercial Vehicles	3,84,874	4,39,414	14.17	1.42
Light Commercial Vehicles	5,68,907	6,67,836	17.39	2.16
Total  Commercial Vehicles	9,53,781	11,07,250	16.09	3.58
Total Three Wheelers	10,16,700	12,68,700	24.79	4.11
Total Two wheelers	2,30,15,120	2,44,62,231	6.29	79.17
Quadricycle	1,605	5,027	213.21	0.02
Total	2,90,24,153	3,08,96,837	6.45	100.00

Passenger Vehicles. Total production  in FY19 was won by 1.33%  and it was at  40.26  Lakh units. The domestic sale had a slow growth and it was 33.77 Lakh units in FY19 ,grew by 2.7%. within Passenger vehicles exports were not affected much like in the case of Passenger cars. The decline in export of Utility vehicle was only 4.8% compared to the decline in export of Passenger cars by 11.42%

Commercial Vehicles. Total production  in FY19 was up by 24.20%  and it was at  11.1 Lakh units. The domestic sale of CVs was up by 17.55% YoY to 10Lakh units in FY19. In Medium and Heavy Commercial Vehicle Category, Sales in FY 19  grew by 14.66% YoY to 3.9 Lakh units. Domestic sales of LCV segment rose by 19.46% YOY to 6.16 Lakh units .

Three Wheelers. Sales of three wheelers witnessed a healthy growth of  24.79% YoY to 12.68 Lakh units in FY19. Total production  in FY19 matched up with the sales requirements. The domestic sale had a high growth of 24% and and it was 12.68 Lakh units in FY19 . Exports were very healthy and India as a country has become very competitive for three wheelers in the world today. More countries were added to the export destinations in the year FY 19.

Two wheelers sales grew by 6.29 % YoY in FY19 to 2.45 crore vehicles. An average of more than 20 Lakh vehicles per month. But by the end of the year, the growth rate was less.  Total production  in FY19 was increased by 5.82%  and it was at  2.45 crore units marginally higher than the overall sales.   The domestic sale had a low growth of 4.86%  and it was at 2.11 crore units. The exports grew at a healthy growth rate.

Industry outlook for  FY 20. From FY 21 , BS – VI will be implemented. This will increase the cost of the vehicles. To avoid paying a higher price, customers will buy for the requirements in FY 21 in the year FY 20 only. Even after factoring this , according to SIAM , the leading Industry body for Automobiles in India,  passenger vehicle sales is projected to grow between 3 to 5 per cent and commercial vehicle will grow between 10 to 12 per cent. The two-wheeler segment is expected to grow between 5 to 7 percent and three wheeler segment is will grow between 7-9 percent. On large volumes, still the Sales increase will be significant and Automobile Industry will continue to contribute to manufacturing growth in a big way.