India - Union Budget F 2017

India Union Budget  F17 – 29^th Feb 2016

·         The budget has been made with an objective to give a boost to the Rural Economy, impetus to infrastructure investments , creation of more employment opportunities and giving a boost to the new ventures.

·         Close to Rs.1 trillion has been allocated for Rural development and Rs.2.2 trillion to give a push to infrastructure. A clear road map for number of KM’s of roads has been specified.

·         There is a stimulus for Real Estate and Infrastructure through making the tax aspects relating to REIT’s and INVIT’s more investor friendly. There is also an incentive for those who are buying houses valued at less than Rs.50 L and avail a loan of less than Rs.35 L. The income earned from Affordable housing projects has been made 100% exempt from tax.

·         The above measures are likely to increase the private consumption levels, create demand for infrastructure driven industries.

·         There is an attempt to reduce the incentives given for various investment schemes by individuals less attractive. Especially, the schemes relating to superannuation , Provident fund and investment in equity. Considering that out of total savings in India, less than 10% is invested in financial instruments, this move could reduce the share of financial instruments further in the investments made from savings.

·         There is a VDS scheme announced and schemes for settlement of Income tax dispute cases and they had factored in more than Rs.25,000 cr of additional tax from these schemes.

·         Considering the above measures and the implementation of 7^th Pay commission will keep the inflation above 5 – 6% levels going forward.

·         The Revised Estimate (RE) for Total receipts is Rs.17.85 trn, which was 0.45% higher than the Budgeted Estiamtes(BE) and it was higher than the previous year by 7.32%. The projection for F 17 is Rs.19.78 trn, a rise of 10.8% over the RE for F 16.

·         The RE for Gross tax revenue for F 16 was at Rs.14.59 trn, higher than the budget by 0.7% and 17.25% higher than the previous year. Considering that Banks and Corporates did not show such an high growth rate, the contribution to growth in tax has come from taxes on petroleum products and increase in Service tax. The projection for F 17 is Rs.16.30 trn, a growth rate of 11.7%. This will result in higher inflation.

·         After the share with the states, the net tax revenues in F 16 was at Rs.9.47 cr , only 3% higher than the budget. It was higher than the previous year by 4.86%. The projection for F 17 is 11.25% . In F 16, the tax shared with the States rose by 49.9% and it is likely to rise by 12.67% at Rs.5.57 trn.

·          Due to poor performance of corporates, the corporate taxes were lower than the budgeted level by 3.75% at Rs.4.53 trn. The assumption is that , it will rise by 9% to Rs.4.93 trn in F 17. Considering the very poor performance of corporates in F 16, if many corporates would be able to turn around the performance, the growth could be even higher at 12 – 15% over the previous year’s level.

·         Taxes on income was at Rs.2.99 trn, 8.7% lower than the budgeted levels in F16. They had assumed an increase of Rs.53,000 cr over the previous year, a growth of 18.1% in F 17. This has assumed a sharp rise , after factoring in the expected inflow on account of VDS and settlement of pending cases.

·         In F 15 , there was a collection of Rs.1086 cr of wealth tax. In F 16 there was no number shown and in F 17 it has been assumed to be nil. Considering the poor compliance on this count, they could consider scrapping the concept of Wealth tax. The administration cost of this tax would be higher than the expected collections under this account.

·         In Customs, the revenue was higher than the budget by 0.56% at Rs.2.10 trn and higher than the previous year 11.4%. Considering that the value of imports were lower than last year, despite the imported value of petroleum products dropped, the customs duties were maintained at the previous years’ levels, which was a positive in revenue generation. The growth projected for F 17 is only 9.8%, lower than the growth witnessed in F 16.

·         On Excise, they were planning to collect only Rs.2.29 trn. But they had collected Rs.2.84 trn, 23.6% higher than the budgeted level and 49.6% higher than the previous year. Whatever savings on import of petroleum products was protected through higher Excise duties on the petroleum products. In F 17, they expect Rs.3.18 trn, a rise of 12.2% increase over F 16.

·         Service tax collection was higher than the budget by 0.11% at Rs.2.1 trn. It was higher than the previous year by 25%. The projection for F 17 is Rs.2.31 trn, 10% higher than the previous year.

·         Interest receipts by the government was lower than the previous year at Rs.2.78% at Rs.23,804 in F 16 and it is likely to rise to Rs.29,620 cr , a rise of 28% over the previous year. Here the Government must have assumed issue of Bonus Debentures by PSU’s to share holders and receipt of Interest on such debentures.

·         In F 16 , they had assumed receipt of dividend of Rs. 1 trn and it was higher at Rs.1.18 trn. This was higher than the budget by 17.51% and higher than the F 15 by 31.7%. In F 17 the assumption is that Rs.1.24 trn, a rise of 4.66% over F 16.

·         Other non tax revenues. This includes Sale of air waves and disinvestments. The plan for F 16 was Rs.0.94 trn and the actual was Rs.1.12 trn, 19.6% higher than the budget and 38.99% higher than the previous year. The budget for F 17 is Rs.1.65 trn, Rs.53,000 cr higher than the previous year, 46.4% higher than the previous year.

·         They had assumed Miscellaneous capital receipts of Rs.56,500 cr, a rise of 123% over the F 16 level.

·         The strategy for  Market loans is to keep this at previous year’s levels. In F 16, it was lower than  F 15 by 2.75%. In F 17, it is assumed to be even lower by 3.5% at Rs.4.25 trn.

·         Short term borrowings in F 16 was higher than F 15 by 648 % at Rs.68,665 cr. It was higher than the budget also by 128.40%. The plan for F 17 is a reduction of 75% and the plan is to mobilise Rs.16,649 cr . Hence, the Government will not compete in short term funds market and the liquidity for others in the short term market should improve.

·         The amount raised through small savings in F 16 was higher than F 15 by 65.6% and budget by 138.39% at Rs.53,418 cr. There is a plan to reduce this to Rs.22108 cr , 58.6% lower than F 16.

·         Other Capital receipts in F 16 was negative at Rs.28,000 cr . In F 17 , it is likely to be higher by Rs.53,000 cr at Rs.25,677 cr.

·         In the expense category, Interest payments are likely to rise by 11.3% to Rs.4.92 trn.

·         Defence services will rise by 13.63% to Rs.1.43 trn.

·         Subsidies in F 16 was marginally than the previous year at Rs.2.58 trn. There is an assumption of a marginal reduction and this is expected at Rs.2.50 trn in F  17. They do not expect a big benefit from DBT and direct transfer scheme as the reduction is not substantial.

·         Pension payments rose by 2.26% in F 16 and it is expected to increase by 28.87% in F 17 and it is expected to be Rs. 1.23 trn, Rs.27,000 cr higher than the previous year.

Despite , the Economic growth coming below 8% , the collection by the government was very robust in F 16 and the projections for F 17 also assumes, significant improvement in revenue from many of the revenue sources.

In a crisis situation like this, the role of government in kick starting the higher economic growth is very critical. Some of the issues which are attracting the attention of investors are the Non Performing Assets in the Banking System and the poor performance of many PSU’s.

The PSU’s and PSB’s have hidden assets in terms of real estate assets and Capitalising them would help to bolster the balance sheets of the PSU’s and PSB’s.

Globally, the banking system is in bad shape and if they have to declare their real NPA’s, then the banking system will collapse. In a growing Economy like ours, there is a good scope for our banking system to recover. If they have to aggressively provide for NPA’s within a short period, then the health of banking system will deteriorate within a short period and the rating of the entities will go down thereby making the capital raising a difficult exercise. Hence we can look at experience of China, which at one time had NPA’s of more than 45% and the experience of other countries where NPA’s were very high. A window of 5 years could be given to provide for NPA’s.

Considering the various initiatives by the Government , it should be possible to achieve the desired growth levels and if there is any slippage in collection on account of any extra ordinary sources of income as assumed , it could put strain on the Fiscal deficit. Hence it is essential to prepare special action plans to generate revenue at regular intervals under the Other income categories.  Under the present assumptions, the deficit will be down to 3.5% , which would help to achieve a good country rating and enable the mobilisation of funds from foreign sources.

Like in F 16, For the next one year, the commodity prices are likely to be soft and this should facilitate the achievement of various objectives of the Budget for F17.

Hidden Strengths of Indian Economy

Hidden Strengths of  India – 7^th Feb 2016

R.Kannan

India continues to do well in the Global Economy despite there is a big scope for reforms in the various sectors of the Economy. The proposed reforms are work in progress  Once they are implemented India will continue to grow at higher than the present levels.

India has many hidden strengths which are not reflected in the reports , statistics and surveys carried out by experts. By capitalising the strengths, India would be able to realise its full potential of Economic growth.

1. Largest number of entrepreneurs in the world. India has the largest number of entrepreneurs in the world. Most of these entrepreneurs are in the services sectors , especially , trading. Tier 2, 3, 4 cities and villages have entrepreneurs in the areas of trade and related activities. There are more than 20 million entrepreneurs in India and assuming an average house hold size of 5, 100 million people depend on these activities in India.
2. Largest number of small start ups in the world. Traditionally, in India, lot of new start ups, especially in Trading are being created by small entrepreneurs. This is mainly in the areas of retailing and trade. The phenomenon is witnessed not only in Urban areas but also in rural areas.
3. It is very easy to start a business in India, where only the local licenses are required. The businesses which require license from  local body is easy to start. It does not require licenses from District , State and Central government levels.
4. Profitable businesses at high interest rates.  In India, interest rates vary from 0% to 4000% p.a . The small vendors borrow funds at 10% day and they generate 30% returns per day. Despite the rates of interest are very high, the loans are still affordable. Many of the small businesses generate very high margins and they have the best asset and working capital turnover.
5. Availability of funding from various sources. Since the savings rate is very high, there are many sources from which funding for business could be raised. Starting from friends to small money lenders , funding is available from Micro Finance Institutions,  State funding agencies, central government agencies, banks, financial institutions, corporates, Primary market, secondary market , Private equity, FDI, FII’, foreign Hedge Funds and provident funds are available. 
6. High generation of employment in small scale sector. Most of the employees in India are in the unorganised sectors and especially in small scale. Lot of new jobs are being created in the small scale. After the advent of mobile phones and their penetration in the rural areas , lot of employment is generated in the related fields even in rural areas.
7. Very high savings rate. India has a very high savings rate of 30%. This is equivalent to $ 600 bn a year. In a five years, the savings generated will be equivalent to $ 3 trillion. This is three times the requirement of investments required for investment in Infrastructure. If attractive financial instruments are created , it would be possible to meet funding for the infrastructure investment within India.
8. High money multiplier. Since most of the transactions in India are carried out by Cash, the money multiplier is much higher than the statistics on the Indian economy. Since the multiplier is higher, this helps to generate value addition at different levels in the Economy.
9. Very high assets holdings by Government, Government agencies, PSU’s,Banks , Corporates, Religious bodies, NGO’s and Individuals. There are big land holdings, gold holdings in the economy and if the market value of these assets are valued , the debt equity ratio for the above would be much lower than the Economic Statistics. There is a need to capitalise hidden assets by various entities in the economy.

Overnight, the PSU’s can be turned around. Since they hold land in Prime areas. Public Sector Banks hold lots of real estate assets and the market value of investments by LIC is much higher than the cost of investments. Gold is held by many religious institutions and Individuals. Most of the assets are in illiquid form and strategies have to be developed for making them liquid and performing.

10. Self supporting local communities.  Since India is very large and dominance of rural areas, many rural communities are still immune to what is happening globally and they can sustain their performance irrespective of the global economic developments . The small economies can be protected from high volatility.
11. Higher competition between states. Now each state government behaves like an entrepreneur and there are initiatives in each state to attract more investments and each state has set up a target to grow the economy at a faster rate than the Indian economic growth. The initiatives in three to four states alone can lead to higher economic growth levels in India , when the programmes are implemented .
12. The real GDP. Since there is a big parallel economy  in India, the real GDP is much higher than the GDP reported . Most of the risk funding, where returns are not certain, comes from funding sources from Parallel Economy. Parallel economy is also helping to sustain the higher level of economic activities in India.
13. Indian Diaspora. Their asset holdings in other parts of the world are very high. Now, many of the economies in the Globe are becoming unattractive, many of them are looking at the investment in opportunities in India. As and when , the conditions become favourable for their investment, more funds would come to India from Diaspora.
14. India’s consumers. In India, as per the Income classification, we have the maximum number of customer segments in India. There is a constant movement of consumers moving from lower category to next higher category. This creates demand for all types of goods. For e.g., there is a demand for the cheapest car to the costliest car in the world. 
15. Attractiveness of Investment. The reports released by various agencies in the world does not reflect the reality. The ranking is given on small data of variables and it does not represent the reality. The situation is not as bad as reported. As per the survey done by World Economic Forum this year, India ranks top amongst all the countries in the world for the attractiveness of investments.

India has all the strengths, as outlined above and we have to develop strategies and action plans to capitalise the hidden potential. The action plans developed should not disturb the existing eco system which is favouring creation of entrepreneurs. The action plans should add to the present strengths. In 1700’s and before, India was one of the leading economies in the world contribution to a significant portion of Global GDP. This will add 2% to our GDP ,India can regain its status of the leading country in the world.      

www.indiaat10.blogspot.com

Quantitative Easing – 25th October 2015

                                              Quantitative Easing – 25^th October 2015        

This has become the topic of the Debate in the last few weeks, in the global financial arena . There were different views expressed on whether US should withdraw the stimulus and when. Whether other countries like EU, Japan and China should adopt quantitative easing or not. There are views that IMF should advise countries to shun the Unconventional Monetary policies.

When we look at the History of the world, at any point in History , only few countries in the world achieve high rates of Economic growth and many countries in the world report low rates of growth. This is a cycle lasting for a few hundred years. In 1700’s India and China were the fastest growing economies. After 300 years , we witness such a phenomenon today.

History clearly shows us that it would be impossible to achieve high growths in all the countries at the same time. Whatever measures adopted to stimulate economic growth can stimulate economy only up to an extent and countries have to wait for the cycle to come again to achieve high rates of growth.

Today, high growth is witnessed only in countries like China, India, Asean, few of the African countries and Middle Eastern countries. In the developed world , except US, all other countries are finding it difficult to grow even at 1% p.a . Japan with stimulus is expected to grow at 1.5%.

The crisis witnessed from 2008, was unique and for the first time, there was a synchronised slow down across the world. Of course, countries like India and China were able to weather the storm. The developed countries used all the conventional Monetary and Economic Policies and since there was no end in sight for the trouble, they had to resort to Unconventional Monetary policies. The governments have played a major role in bringing some stability to the economies. IMF also acted in concert and trying to find a feasible solution to end the troubles. But so far, the efforts taken by all the authorities did not meet the expectations when these policies were introduced. One benefit was that governments were able to borrow money cheap and the addition to their debt was limited to mainly the principle amount and addition to the debt in the form of interest was limited.

The low interest rates on capital did not find use in the local markets where funds were raised but found places where they can earn more interest. That is the fast growing , emerging markets today which are short of domestic capital for growth. Some of these markets also have twin deficits, that is budget deficit and trade deficit which was putting more pressure whenever cross border flows take place . But the low cost capital from Developed countries helped the fast growing economies to keep their pace of growth.

Looking at the history, going forward , the immediate economic growth prospects look good in China, India, US, Asean, Africa and Mena countries. There is temporary set back in Economies depending on commodity exports, Russia, Brazil , South Africa, but they should be back to normal within two to three years.

Europe and several other developed countries including Japan, the immediate prospects for growth at least in the next five years is below 2%. The main reason is many of the product categories, there is a saturation in demand and the demand for replacement rate of durables is coming down and people are using the equipments for more time compared to earlier. There is also a tendency to save money. This is a structural factor and these economies will take more than 10 years to get back to higher levels of growth and it should be stimulated through Job creation, manufacturing revival and liberal immigration policies. Even with all stimulus measures, they will grow at less than 2%.

Last time, when Fed announced in 2013 that they were planning to withdraw stimulus in phases, it created a knee-jerk reaction in the global financial markets. The countries which had twin deficit, saw their currencies depreciating very sharply within a few weeks. Only when Fed communicated to the world that what was their thinking, the markets stabilised. Similar trend was observed, when analysts expected Fed to raise interest rates from Sep 2015. But Fed communicated saying that despite conditions were ripe for US to raise interest rates, in the interest of the global economy and financial markets, the decision was being postponed.

The unconventional monetary policies cannot last for a long time. They have to be withdrawn. But considering the high volatility in the Financial markets , it is advisable that the withdrawal process has to be smooth and orderly. The road map for withdrawal should be clearly laid out. The role of governments in this volatile world is to bring certainty to policies and procedures.

While the governments which withdraw stimulus should clearly spell out the road map including the expected date for stimulus, the countries which will witness the outflow of funds should formulate strategies to attract funds from other sources to subside the effect of stimulus withdrawal.

Every economic expert says that if US raises the interest rate, it will affect the world. There was also monetary easing in Europe, Japan and now in China. Despite all , these, every one gives more importance to the policy action from US.

The markets have become again volatile, this year expecting , US to raise interest rates.

Since US is the global leader and wishes an orderly growth in the Economy which is also good for US, US can play a major role in bringing stability to the financial markets world wide.

Raising interest rates by US is also going to make the borrowing costs higher for the US government.

The Fed could come with a statement that this year, the interest rates will not be raised and they would consider raising interest rates by March 2016. In every quarter, they can increase interest rates by 10 bps till they reach 50 bps. Afterwards depending upon the Economic growth and prospects, next course of action could be drawn up.

This will give room for countries to prepare themselves for March 2016. These could be  firm dates for raising the interest rate and this will bring the required stability in the financial markets.

 

R.Kannan

 

Indian Economy - Future prospects

Indian Economy – Future Prospects – 31^st July 2014

R.Kannan – Hinduja Group

Write Up in the Global Economic Summit Held on 11- 13 , September - Mumbai

India’s potential for economic growth is between 7 – 8% in the immediate future and 8% - 9% in the medium term.  It should be possible to achieve a growth of 7% within one year from now and it could be taken above 8% in the next three years. In the long term we could aim for a growth of 9% p.a  going forward for at least ten years.

Indian Economy is in the take off stage again. After achieving a growth of more than 8% for a few years, the growth decelerated on account of developments in the global economy and the domestic issues. After  a reasonable growth, the kind of deceleration of growth was not expected. Due to increased social activism and the issues relating to coalition management at the central government level, led to impasse in decision making and many of the sectors which were attractive for doing business became unattractive during the last three years. After a successful working of Coalition model for several years, the model failed to sustain the momentum going forward. The objectives of various coalition partners were in conflict with each other and the working arrangement failed in delivering the desired results.

After several years, a government with a majority has come to power at the centre and  the government  will not be required to  waste its time on management of coalition and coalition issues and it would be able to concentrate on issues relating to  Social , Economy , Technology development and other pressing issues. The issues relating to Global Economic Melt down are also being addressed and the global economic environment is improving but not at a pace which is desired by the global leaders. India with other fast growing countries in the world can contribute to the overall increase in global economic growth in the coming years.

The experience of the Prime Minister in achieving a good growth in Gujarat in Industrial and Agricultural development is likely to go a big way in replicating this model in several other parts of India. The policies announced by the government are forward looking and they had set an objective to increase the rank on doing business and the World Bank President was of the opinion that in the immediate future, India could move  up fifty ranks from the present level, if appropriate response is developed by the government to kick start the economic growth again. The sentiments of investors  including the  foreign investors are also very favourable  today in kick starting the investment process in the Indian Economy.

Indian Economy is inherently very strong and the Economic growth is well supported by all the segments of the economy including the development in rural areas. After the increased penetration of mobile phones in rural areas, the services business in rural areas has started gaining momentum. India has the largest number of entrepreneurs in the world and there are lot of small entrepreneurs and traders in the unorganised sectors which help to sustain the economic momentum.

To attain the full potential of Economic growth , proactive policies have to be formulated and implemented in various areas of the Economy.

Agriculture. India is one of the largest producers of agricultural produce in the world and it is ranked Number one and two in many products. Agriculture is also contributing to exports in a big way. The productivity in agriculture in many of the commodities are less than half of the best in the world and there is a lot of scope for improving the agricultural productivity. The government is targeting a growth of 4% in Agriculture per annum and if we  consider the present productivity levels, we could look at a stretch target of 8% growth in Agriculture and 6% under normal circumstances. Even achieving a growth of 4% p.a. was found to be difficult and there were shortfalls in achieving the target in many years. Few of the states in India, had shown that  it was possible to achieve a growth of 8% in agriculture . This growth could be achieved by creating cooperative structures for agricultural produce in all the states, ensuring remunerative price for farmers without any government subsidy and consolidation of land holdings for adoption of automation ( under cooperative structure ) and adopting the best practices . This could be achieved through creating new organisation structures for agricultural management, contract farming, remunerative price to farmers, knowledge sharing and extensive training.  By adopting these strategies, we can also ensure that the year on year sharp decline in Agriculture’s share in the overall GDP could be arrested.

Industrial Policy. The government has already prepared plans for increasing the contribution of manufacturing from 15% of GDP to 25% of GDP. The government has  allowed 100% FDI in Many sectors of the economy and there is an increased liberalisation in limits being effected in various sectors of the economy, year on year by the government. Recently the FDI caps in Defence and Insurance were increased and many more such announcements are expected to be made in  the near future.

One of the reasons for high growth in any sector or industry world over is  ensuring the development of a viable  Eco system for an industry and  availability of inputs ( Land, Labour, Capital and Machinery ) at affordable and low cost rates. The government’s initiative in developing  specific industry focussed industrial clusters will ensure the development of a suitable eco system. But for a secular growth for the industry, there is a need to ensure other factors of production are also available at competitive rates.  The government is already trying to address the issues of Land and Labour. The government had announced a  few policies relating to labour, which should provide flexibility to corporates, optimum utilisation of labour. The government is in process of formulating policies to acquire land at competitive rates for industrial and Infrastructure development.  There is already an enabling environment for adoption of best technologies from across the world in various sectors of the economy. The IT hardware sector is being given a boost to grow in line with the growth in IT services sector, There is a need to reduce the cost of capital for the investors and also make sure long term funds are available for high capital intensive projects.

The mechanism created in the Cabinet secretariat to speed up large projects through Project Monitoring group has started yielding results. Many of the pending projects were cleared by this group and companies have started taking initiatives to speed up the implementation of the cleared projects. Similar mechanism is being contemplated to be set up in various state levels to speech up projects which have capex of less than Rs.1000 cr. There is an enabling environment now to revive the plans for capital projects and capital expenditure. The new push should goad companies to plan for new large projects for expansion of capacity.

Fiscal Policy. India is reporting fiscal deficit every year and this trend is likely to continue for several years to come. India has got one of the lowest Tax / GDP ratios in the world. Considering the increasing contribution of services to the Indian Economic growth , more and more services are being brought under the service tax net. In this budget, it is projected that the revenue from service tax will exceed the collections from Customs duties and Excise duties. The subsidies given by government is one of the major issues of concern and it was showing a rising trend. The revenue earned by government falls short of the collections on Revenue account and the deficit has to be met by raising resources on capital account. The fiscal deficit was showing a rising trend and drastic measures had to be taken to reduce the fiscal deficit. Now that  the deficit is coming under control , the expectations are that this could be improved further. In the immediate future, the objective is to  maintain the present credit rating of India. The new government is planning to undertake measures to improve this rating.  Improvement of country rating will help Indian companies to raise foreign funds at attractive rates. Since our rating is low today, Indian companies have to pay premium on the funds borrowed from abroad.

To shore up the revenues and exercise control on expense, the government has to ensure improved compliance of the tax  policies, targeting the subsidies and substantially reducing them; generate resources from under performing / non performing assets of the government including shares in PSU’s and land holding of the government. There is a need to manage the fiscal deficit by exploring  all the available options and one major criterion could be considered , i.e., how the options being considered would affect the performance of the Industry and Economy. Before deciding on options, including the change in tax policies and incentives, the socio economic benefits of the new planned policies should be reviewed.

In the light of new developments across the world, now countries are adopting Macro prudential policies, whereby the policies implemented by government are in synch with the policies implemented by central banks and there is a focus on systemic risk. There is an increased focus on Inflation, Unemployment , Economic and Industrial growth. In this light, the Fiscal policies being formulated should take care of the interest of all the stake holder’s in the economy.

Monetary policy. The recent crisis in the world has increased the role of Central banks in ensuring the stability of an economy and the financial services systems. Central banks around the world had played a major role in bringing in the required stability to financial systems and taken the role of close monitoring of economic variables to develop appropriate response. The banks have adopted easy monetary policies, ensured liquidity in the system and brought in appropriate responses from time to time . The central banks focus on key monetary variables and one of their main focus is inflation targeting. Indian Central bank has played a pioneering role in weathering the global economic storm and brought in policies which ensured the stability of the financial system in India. Going forward, the monetary policies should ensure easy availability of credit for good projects at affordable rates . The monetary policy has to take care of economic growth, employment levels and inflation. There is a need to increase the availability of credit to good projects and reduce the interest rates.

Trade Policy. India  has a large deficit today and this is likely to increase considering the fact that the reliance on imported energy is likely to increase going forward. One of the recent initiatives taken by the government is to encourage exports from India to various other countries in the world. Now the Indian embassies based abroad are helping Indian companies to  identify the opportunities for exports. Over the years, India also has become globally competitive in many sectors. India today has emerged as the Global Hub for IT/ITES, Auto and Auto components, Pharma and Bio tech, R& D services and in several others areas. There is a good eco system available in the above sectors to achieve globally competitive standards by Indian companies. Going forward, the government has to draw up a list of countries with whom India runs a trade deficit and prepare action plans for reducing the deficit with the countries, where the deficit is very high. The emerging industries, the emerging entrepreneurs and SME’s should be encouraged to look at the export opportunities and we have to identify few more areas for development including Health, Education , Defence production and others. Achieving higher growth in Manufacturing and Agriculture would help the country to increase the global  competitiveness in many more products. By increasing the global competitiveness, it should be possible to reduce the trade deficit, which is one of the main concerns for Economic stability.

Trade policy of India today enables the foreign companies to invest though  FDI in many sectors of the economy. But the FDI received every year by India is still miniscule compared to the FDI received by other countries in the World . There is an increased interest by investors around the world to invest in Indian manufacturing and the government is in the process of making investments in India easier and there will be new announcements regarding Trade facilitation. The requirement of large funds for infrastructure including the plan to develop 100 smart cities is already attracting the interest of investors around the world. The recent budget allowing infrastructure and investment trusts and allowing  banks to issue infrastructure bonds will attract more foreign investments.

Implementation of Policies. In many sectors of the Indian economy, there are policies which encourage the growth and development. There are issues regarding how they are being implemented. The investors find issues, during project implementation stage. The government has identified , this as one of the major areas of focus and attention is being given to simplifying the procedures in project approval and implementation stage.

Future of the Indian Economy is really good. There is a confidence prevailing among both domestic and international investors on the Indian Economy today and these sentiments have to be converted into investments going forward. Considering the interest from investors from all over the world, Indian Economy is poised to realise its growth potential and the Stake holders from various parts of the economy have to  play a constructive role in realising the full potential.

Role of India and China in the Global Economy

Role of India and China in the Global Economy

By R.Kannan

International Conference on Asia - 14^th March 2014

The Asia’s role in Global Economic Development is becoming significant after the recent economic and banking crisis in the world. The global crisis had an impact on the economic performance of all the economies in the world but the countries from Asia were still able to report growth rates which were higher than the growth rates reported in other parts of the world. Asia contributes to more than 50% of incremental economic growth in the world.

Within Asia, India and China continue to have a major contribution to the economic growth. The sheer size of the population of both countries and the continued demand for products and services in two countries continue to sustain the economic growth today and this will be the trend in future.

India and China were playing a major role in the Global Economy before the rise of UK. After the dominance of UK, USA Started playing a major role in the global economic development. After the World War II, Japan was growing very fast and then we saw the rise of countries from ASEAN. From 1980 onwards, the economic growth in China started gaining momentum and the country is still able to sustain the high growth today. From 2001, we heard the concept of BRIC and terms like VISTA, CIVET, MENA and MINT and how they can contribute to the global growth.

India and China are in the process of regaining their prominence in the world and China is already leading the world in terms of Forex reserves with a forex reserves of more than 3.8 trillion dollars. The road to regaining the competitiveness is strewn with both opportunities and risks. To achieve the potential today, both countries have to carefully calibrate their movements in the Economic, Political, Social, Cultural, Technological, Security and Environmental aspects.

India and China have to work very closely in all these areas to realise the full potential of Asia.

Economy. Indian Economy after reporting a good growth for few years saw the rate of growth decline due to both internal and external factors. The potential for growth is still at 8% and the solutions are available to achieve  8% growth. What is required is the consensus building among the various stake holders in adoption of the policies for achieving the growth. The sectors like manufacturing and agriculture have to be given more importance, going forward. The proposed Industrial corridor projects in India will provide a momentum to the growth and there is an increased interest from various countries in the world to participate in these projects and FDI is likely to come through this route to support these projects. It should be possible to increase the contribution of industry to country’s GDP to 25% from the present level of 15% by increasing the alliances with countries like Japan, US, China, UK, etc in the world.

There were concerns regarding the fiscal deficit and current account deficit and it has been proven in the recent past that by adopting innovative policies it should be possible to bring down the deficit. India is inherently strong due to its large informal sector which was one of the main reasons for India weathering the storm during the crisis. This sector can play a major role in sustaining the growth rate and creating employment opportunities in the Indian Economy.

India has been recognized today as an IT Hub, Pharma Hub, R&D Hub, Automotive Hub, Diamond and Jewellery Hub, Leather Hub and global companies in these areas have increased their interest in India and new units are being set up in these areas. Global sourcing companies also have established their offices in India other than China. These sectors in India will continue to do well  going forward. 

China’s continued Economic growth has helped to gain the global leadership role today and the country has trade balance with many of the countries in the world.  The focus on creating large industries with government and bank financing support enabled Chinese companies to emerge as the largest companies in the world in the sectors , they operate today. So far the economic growth was driven by the strategy of exports as well as inflow of FDI . After the recent crisis and reduced demand for exports, there was a need for rebalancing the economy. The need to focus on creating internal demand had become paramount. In the recent past, there were also concerns about the rising inflation and interest rates.

China has to continue the engagement with other counties in the world and apart from focussing on exports , there is also a need to look at reducing the trade balance with other countries in the world. If Yuan , continues to rise, it will erode the competitiveness of exports. The Yuan level could be maintained only by reducing the trade balance with other countries. To ensure the continued availability of resources, the country already has acquired mines and industrial  production facilities  in many parts of the world. China is the largest foreign investor in US treasury bonds today and because of this reason, there is a need to ensure the stability and strength of the dollar. China’s efforts to make Yuan as one of the major currencies for trading will take shape in a few years and Dollar will continue to have its dominance for many more years to come.

China’s economic growth was mainly driven by focus on Industrial growth and it has emerged as the power house for manufacturing in the world today. Starting from a strategy of producing low cost goods , there is now a movement towards manufacturing of high quality , high value goods in the manufacturing sector. The country has to liberalise FDI and strengthen the Trade and Patent laws to ensure a benign environment for foreign investors. Going forward, there should be an increased focus on developing the domestic market and increasing the purchasing power of workers  in the country.

Society . India is a multicultural society and there is a lot of diversity in Customs, habits and Income levels. In the past few years, the society had gone through a big transformation and the consumers are able to exercise their choice for the products ,they prefer. The liberalisation of economy has created hyper competition in many industries. As per the latest classification, the Indian consumer is categorised into twelve income groups and there is a constant upward movement of people from one level to other level. There is a free movement of labour from one city to another city and there is a lot of internal migration whereby people from rural areas move to urban areas. The mobile technology revolution in the country has helped even Semi urban and rural areas to look at aspects relating to urbanisation and the government’s schemes on providing employment for minimum number of days work in rural areas have created employment opportunities for people. The services as a sector is  also developing well in rural areas . There is a movement away from Joint family system to nuclear family system. These trends create a huge demand for consumer products of various categories at different price points. This has attracted the attention of global marketers to India.

In China, the demand for high end products had seen a big rise in demand over the years. The purchasing power of people in urban areas has gone up significantly.  System of providing work  permits to workers to work in a city has restricted the movement of labour and depressed the wages in the manufacturing sector. Many of the workers at the lower level come to work from far away distances. But the recent trend in increase in wage levels, if it continues,  will create different income segments and create new class of customer segments for the products. This will also result in consumer boom, which would partly offset the reduced demand for products from exports. The government has taken measures to increase the population and now people are allowed to have more than one child in a family.

The trends witnessed above , will help to create new products for the local markets , which could be exported at a later stage. 

Political and Security issues. India being the largest democracy in the world, the decisions at the government level have to be  taken after taking the consensus of various stake holders in the Economy. There are forces which act against the pro economic growth policies because of which the economic momentum slows down. The country has an approach to keep  very cordial relations with others and by itself does not take initiatives which challenges the sovereignty of other nations. India is part of various Economic Alliance forums in the world and considering its contribution , there is an effort to  obtain a permanent  seat in the UN Security Council .

The country helps the adjacent countries in aspects relating to technology and training aspects. In the last few years, there were lot of internal issues relating to terrorism in various pockets of the country which are creating concerns on maintaining a peaceful atmosphere. There is an increased interest from most of the countries in the world to partner with India in all the growth initiatives and there is a foreign business delegation  visiting India every week to identify business  opportunities for doing business. India has moved  ahead in various reforms including passing of RTI act and empowering the Panchayat Institutions in the country. In line with the increase in economic prosperity, the country has also increased the defence budget. Multilateral institutions are also supportive of India’s growth initiatives and after the recent geo political issues in the Asian region, Japan and US had shown increased interest in enhancing the tie up with India. India has joined the nuclear club now and this should help to increase the power generation from this source. China has emerged as the leading partner for India in trade and  runs a huge trade surplus with India today.

The present government in China will last for 10 years and they had already drawn a plan to maintain the economic growth of China. Since China has gained leading economic status in the world today  , in line with the economic status, it is trying to match the political status by increasing its influence on many countries in the world. In terms of  its growth ambitions, it is trying to achieve this by acquiring the natural resources from regions like Africa and has allowed its leading companies to take over the ailing MNC’s from the developed world. Its economic engagement with many countries are helping China to maintain the growth rate. Since its objective is to increase its political influence, it is facing opposition from the entrenched players in the world. The present form of merit based Government system is likely to continue in China which is good to maintain its economic growth. To gain political influence, China is also giving military aid to countries, low interest loans for equipment purchase from China and various other incentives to obtain political support. But the recent moves on Territorial disputes , have created concerns among US and neighbouring countries.

Going forward, both the countries should use the political dispensation to increase the economic engagement with other countries in Asia including Myanmar , Vietnam, Malaysia , Singapore, etc. The disputes with the neighbouring countries  should be brought to an end by announcing ceasefire .  Both countries in alliance with Japan should engage in consultation on the matters to be addressed relating to  multilateral institutions as well as developing the Asia as the Economic Hub of the world. The political influence over other countries should be exercised through increased economic engagement rather than seeking territorial advances. The recent past indicates that as countries grow in economic might, the number of wars saw a decline. Most of the time, the countries take a posture to threaten other countries without intention to go for a war. Instead of this strategy, the best to way to achieve the political influence is through adopting a strategy of win win and identify action plans for mutual cooperation. There should also be consultations on addressing the internal  terrorism issues and sharing the best practices between the countries in addressing this issue.

Technology. The recent developments in communication and mobile technologies had a significant impact on most of the economies and how the business is being done. Both India and China have benefited a lot from the mobile technologies and the social / financial inclusion  could be achieved through adopting more applications of these technologies.

In  other areas, there is still  lot of gap in availability of technologies which is being bridged through creating strategic alliances with the leading players in the world. The leading companies in the world from various sectors are already present in both countries and all of them want to increase their engagement.

India has been  successful in many of the space initiatives and is in the process of developing a robust domestic Defence manufacturing base. China is already advanced in the technologies relating to warfare and it is in the process of manufacturing its own Air craft for  commercial purposes.  Both countries  have their own home grown labour intensive technologies which are in  use across both the countries. There is an increased need felt for creating patents for the local products and systems are being  put in place to create more patents.

The low cost labour intensive  technologies in both countries could be transferred to countries where there is a strategy to promote SME’s.

Environmental issues. There is a pressure on both countries to reduce the pollution levels but on  per capita basis, the levels are still low. Considering the need for further economic growth and increased level of manufacturing , it would be impossible to meet the global standards in the immediate future. Few more years are required for China and India to move towards to the global standards. In the meanwhile, we have to build a consensus on the need for pursuing the manufacturing strategy and this could be done with the help of emerging  environment friendly technologies.

In the coming years, opportunities and Challenges are many for the countries from Asia. India and China are well poised to capitalise on these opportunities. India and China have  to co-operate in all the endeavours as partners in progress and the focus of partnership should be based on economic fundamentals and the influence of political considerations should become secondary, while realising the opportunities. India, China and Japan can take a joint leadership in realising the full potential of Asia’s Economic Growth  and let us hope Economic collaboration will take precedence over all other collaborations between these countries.

Thank you.

Sectoral Developments in Indian Economy

National Research Seminar on

Sectoral  Developments  and their Impact on Indian Economy

UGC / K.P.B. Hinduja College of Commerce / Kirti M.Doongusree College of  Arts,Science and Commerce

Speech by R.Kannan

22^nd February 2014

I would like to thank the organisers for inviting me and   I have great pleasure in participating in the National Conference on Indian Economy , sharing some thoughts on the future options available for achieving a high economic growth going forward.

The topic taken for the two national conference is very appropriate at this moment and  I am happy to note that the deliberations in the last two days covered all the important sectors in the economy and the various issues relating to these important sectors and how they impact the growth rate of the Indian Economy.  I learnt that lot of new perspectives had emerged from the deliberations so far which will be useful for the  economic policy making in India.

The recent economic performance in India caused many concerns among various stake holders and the general sentiments toward new investments and growth moved towards a moderation.  After holding steady  for two years after the Economic crisis, the growth in the Economy had shown signs of tapering and reached  its decade low of 4.9% . Inflation in the recent past had shown a secular rising trend and recently started receding.  The lower economic growth in India was due to developments in the Global economy as well as issues relating to Regulation, Environment , increased competition  between political parties , increased social / Judicial activism and sensational reporting by media. In 2008, the potential for economic growth was at 10%. The conditions for higher economic growth were very favourable including  ; low interest rates, robust capital markets, good corporate performance,  consensus on national issues between political parties . Due to recent developments and the fast rise in inflation, the potential for economic growth is moderated to 8% now and there is a big gap between potential and the actual performance.

By taking a concerted actions in collaboration with various stake holder groups in the economy, it should be possible to achieve 8% growth within a year. The solutions for accelerating the economic growth are in place and what is required is cooperation of various stake holder groups in achieving this target. In India , even today many of the sectors are growing at more than 10% p.a. But before the economic slow down, many more sectors in the economy were growing at more than 10%. By adopting and implementing sector wise action plans the desired growth could be achieved.

Finance Sector. This is the sector which acts as a catalyst  to stimulate the economic growth since all the segments of the economy depend on external source of funding to pursue the growth objectives. Banking and Capital markets play a major role in the development of an economy. In India the value of Capital markets and bank credit are comparable but the number of IPO’s had seen a decline. Bank finance continues to play a major role. The issue of NCD’s by corporates is  likely to rise and private equity capital is available for investments in several sectors. The pension sector had been opened to new players and growth in this sector will generate long term funds which could be deployed in the infrastructure sectors

The issue of new licenses for banking will result in higher growth and penetration of banking . Adopting of new technologies including the mobile phone based technologies  will help in meeting the objectives of financial inclusion. Through these technologies , the availability of credit  could be increased in the rural areas.

The share of FII’s in total market capitalisation of the companies is at a high level.  The behaviour of FII investors , despite their investment is only through secondary markets, determine the stock market and index performance. As and when FII’s increase the investments, the boom in stock markets is witnessed and when there is a significant withdrawal, the markets take a beating. Considering the growth potential of India and the  future capital requirements in the economy ,  continued flow of funds through this route would enable corporates to meet a part of their requirement through this source ( through divestments and sale of shares through secondary market). Hence it is necessary to keep the sentiments of this investor class favourable and action plans could be drawn up to  sustain  the interest of this investor class through favourable conditions for investment.

FDI. After the Economic Crisis, only a few markets in the world continue to show a healthy growth. Despite India’s growth decelerating , the growth achieved this financial year was still one of the highest economic growth  in the world. There is an increased interest  from investors from all over the world to be associated with Indian market. Japanese companies are very bullish on India especially after the stellar performance by companies like Maruti, Honda.  Most of the companies from Japan had drawn up plans to increase their presence in India. The companies from US, Europe and Korea  have also shown keen interest to increase the investments in India. Last week, China expressed the desire to take a share of  30% in future infrastructure investments . The opening up of computer hardware industry for manufacturing including chip manufacturing augurs well for increasing the foreign investments in India. The creation of Industrial corridors will see more foreign collaborations in India and in future,  the FDI  inflows are likely to show a good rise from the present levels.

While addressing the economic growth issues, the foreign exchange movements had become one of the main issues and the robust risk management had become very important.  The imported products had contributed to higher inflation levels due to exchange depreciation. In the recent past, many new initiatives were taken by government to control both fiscal and current account deficit and there is a relief in the short term. For the long term, solutions are available to ensure a good fiscal position for the country and by strengthening the financial position, it should be possible to keep the exchange rates at competitive levels . Since the oil imports are increasing , there is a need to keep the currency at the present levels.

The increased Inflation in India in the last few years was due to both demand and supply factors and the supply factors had a major influence on the way the inflation behaved. The latest reported level of inflation had shown a favourable trend and we have to ensure inflation remains within 5% levels going forward to keep the economy growing at 8% growth. The government has to continuously monitor the developments in the economy and develop appropriate responses from time to time to ensure the inflation remains at healthy levels.

    Agriculture sector in India continues to employ the maximum number of people in India today and year on year, the share of agriculture in our GDP is showing a declining trend. As per the predictions, in the next few years, agriculture will add the maximum number of employees among all the sectors in India, despite its Share in GDP will fall further , year on year basis.  The issues in agriculture include, the low productivity levels of crops compared to best in the world, the wastages at the farm / during transportation / storage , the reduced interest in Agriculture as a profession. Considering the recent developments, especially, the inflation fuelled by agri commodities at the retail level, this sector will become attractive and more corporate and individuals will look at this sector favourably to fulfil the growth ambitions. There is an immediate need to increase the crop productivity without losing much time . The reforms in distribution of agricultural commodities through amending the APMC act would help the farmers to obtain remunerative price for their produce and generate enough surplus to buy inputs at much higher prices ( without availing any subsidies )  and  invest in new technology to achieve the best productivity levels witnessed in other countries.

Services Sector. The loss of share of agriculture in GDP is taken by Services sector. Indian IT sector helped to create the India brand in the minds of investors from across the world and this sector continues to grow at a fast rate  , creating lot of employment opportunities. The prediction going forward for this sector is also very encouraging. This  sector’s contribution in GDP growth is very high , since value addition in this sector is one of the highest among all the sectors in the economy.  India has one of the  large education systems in the world producing large number of Engineers, Doctors and Graduates. Despite most of them are not job ready, the companies which recruit them give a good training. The government has drawn up a skill development plan with a target to train more than 500 mn by 2020 in various sectors / skills, where the demand supply gap is high and  likely to become higher. Government is taking steps to increase the enrolment ratio at higher education level and various action plans were in place to develop skilled personnel.

The future projections for media sector indicate that this sector would continue to grow at more than 10% and the technological developments in this sector will lead to many changes in the way we consume media offerings. The business models will undergo a major change. The health , tourism, aviation , banking and financial services will continue to grow at more than 10% going forward. The penetration of mobile communication in rural areas is going to change the customer preferences in rural areas and even in rural areas, the growth in services will be higher than the growth in other sectors. This sector will continue to support the higher economic growth going forward.

Manufacturing contribution to GDP is India is very low and the government has set a target to take this to 25% of GDP from the present level of 15%. This will happen through liberalisation of more sectors and entry of several MNC’s in India to set up their manufacturing operations. Achieving this target requires the basic condition of simplified procedures to do business and moving up the rank in ease of doing business.

To achieve higher economic growth, the continued investment in infrastructure is necessary.  Despite savings level is very high in India, not all savings is invested in financial assets . There is big demand supply gap in financing infrastructure and from the present resources available within India, it would not be possible to create an infrastructure which will support an economic growth of 8% p.a. There is a need to create new sources of funding and tap the foreign funds. Government has already created enabling conditions to attract funds and increased the limits of foreign investors to invest in various financial instruments. New instruments are being introduced to address this need. But in the last few years, the attractiveness of this sector reduced due to environmental concerns , profitability of projects and availability of funds. Apart from Traditional funding sources like multi lateral financial institutions and LOC, the scope for raising funds from Pension funds and  Sovereign Wealth funds is being explored. By increasing the investment in financial instruments from the domestic savings through innovative financial instruments, the required funds could be raised.

The present issues constraining our economic growth are short term. The solutions are available to achieve a higher growth. The starting point could be revival of mining in India through creating a mechanism to  sort out the issues which resulted in closing of many mines in India. Only through mining of Iron ore, Coal and other resources, the industrial growth could be revived. This has to be taken up on a priority basis and it is possible to bring solutions which is acceptable to all the stake holders.

Government procedures. Over the years, the procedures have become cumbersome, resulting in a huge delay in approval of projects. The creation of CCI at Centre and project monitoring group has helped to address the needs of projects having investments of above Rs.1000 cr. Similar system is being introduced in states to fast track projects. There is an immediate need to simplify the approval procedures and time bound targets for various procedures to be declared by government and they have to stick to this schedule for all the projects.

Capital  is one of the major inputs to doing business  and since the main source of funding in India today is bank funding, there is a need to reduce the interest rates.  This will help all segments including government, corporates and individuals and increase the purchasing power.

Land. After the recent high economic growth , the land has become scarce in both urban and rural areas. The cost has become prohibitive. There is a need to evolve policies, procedures by which land is made available for businesses at affordable rates.

Increased co-operation between all the stake holders. This is the need of the hour today. Part of the poor performance was due to increased activism by all the stake holders without realising the impact it has on the Economic Growth, Inflation, Interest rates and Unemployment. All the stake holders need to work towards the common target of 8% Economic growth.

Finally, it is very important for every sector to contribute to the economic growth of the nation. Despite , the potential for growth is different for different sectors, in India , there is still a huge gap between the potential and actual growth. Many more sectors in India can grow at more than 10% in the years to come. To achieve the desired growth, sector wise , policies and systems are to be introduced and implemented very effectively by the government and support of all the stake holders is necessary. Let us all strive towards achieving this growth potential through our initiatives and actions.

Thank you.