Digital Speculation & Economy

Let us understand the entire volume of money in transaction and try to ask a few questions? What is the Global GDP? How much is the world’s richest person’s share as compared to the total wealth?

A huge corpus of the money is floated around from person to person everyday – people buying at a price just to sell off to another person offering a higher price. A comparison with All Money in the bubble gives us an understanding how big a part – Digital Speculation of Financial Market is!

Ever wondered how stock price fluctuate? And what exactly is demand and supply affecting the market price to move up and down by the second?

It’s basically the bid and offer price. At any random given time, we have a number of buyers willing to buy a stock and a number of sellers willing to sell the stock at any given price. The exchange puts these ‘limit orders’ in a tabular form and decreasing order of “Buy Price” and increasing order of “Sell Price”. Bid price is the highest price (highest auction price) one is willing to pay to buy a stock. Offer Price is the least price (lowest sell price) one is willing to sell for this stock.

This is what we call the market depth. Generally, this bid price and offer price are very close to one another and offer price is slightly above bid price at any given time. This is called the Current Market Price (CMP): Offer Price for a buyer (because he will buy from the lowest seller) and Bid Price for the seller (because he will sell to the highest auction bidder).

How markets move? It’s generally BUY and SELL power. Huge buying will clear off all levels of Sell Price at the exchange and fresh bid will come thereby taking the CMP higher (higher demand). Sharp selloff can make the price come down as it will clear off Bid Price levels and fresh offers will come to settle.

Market Depth and how the Bid & Offer Prices move by the second

Now understand this. What if my intention of buying is just to sell off to the next buyer? Or in simple terms, my buying decision is simply based on the interest of the next buyer. Yes, this can happen when there’s a panic buying or selling – driven by emotions and this over a few trading sessions can end up to crazy valuations. In the stock market, some stocks to be intrinsically valued at 5rs sell at 50rs and some for 50rs sell at 5rs only.

Okay, at least for an asset class that produces something (like a farmland or a company share) – you have an entry point. A PE ratio – at what multiple of its present earnings you must pay to enter the business’ ownership! What about Gold or other metals? Or Cryptocurrency?

“BTC is an asset class that produces nothing” – Buffet

The concept of cryptocurrency is unique with hashing methodologies which can prevent time, infrastructure & cost of a conventional banking system. Though the idea has some challenges and markets do see the maximum future it can – should an idea be valued at $1 trillion with a single bitcoin trading at $57,000+?

The Power of Social Media Influence

Many of these price speculations are done not only by panic buying or insider trading – it can be as simple as a tweet or post. Provided the tweet comes a personality like Elon Musk. A stock price surging 1000% or BTC gaining a hundred billion dollars’ worth of valuation over a single tweet on a single day proves a ton on how emotions are linked with the current market price we see.

A single tweet increasing valuation of hundreds of billions of dollars is what the Power of Influence is

Will the Speculative Price Bubble Burst?

We all remember the US real estate bubble of 2007. Did AIG or Lehman Brothers see it coming 2 years in future? Super high rents on super expensive houses in New York City and thousands of defaulters and collateralized debt obligations (CDOs) finally resulted in the burst of bubble and bankruptcy of a some of the world’s biggest financial institutions in Wall Street.

Can this happen to BTC? Again, forget human emotions over a brilliant idea, tweets by richest people of the planet – isn’t it too highly valued over just an idea being speculated over each trading session?

Let’s understand what a crash is.

Consider February-March downfall in world markets over Covid pandemic. Investors of the world thought it to be a disaster and since markets see as much as they can see in the future – retail investors to corporate MFs started sharp selloffs. Somewhere along the line it feels “This is the End” and slowly it persuades others to escape. The prices slowly start to be driven by emotions than fundamentals and logical possible outcomes and thereby “Panic Selling” and huge decline happens!

Similarly a bubble burst (E.g. 2008 US Housing Bubble Burst, 2000 dot-com bubble burst) happens when there is a huge rally and overvaluation of an asset driven by emotions and speculations (“People buying betting on the excitement of the next buyer”). And then suddenly the balloon bursts due to the nature of the unhealthy growth beyond logical fundamentals.

Finance amalgamated in evolving modern technology is where the world is heading towards. Maybe cryptocurrency is the universally accepted alternative for the conventional banking across the world – and maybe from 2040 to look today in 2021 BTC is still very cheap in valuation!

AGRICULTURE SECTOR

The budget presented on 1st February 2021 was an important one for Indian agriculture. It was the 1st budget in the COVID era thus it had the ownership to bring back growth in a sector that employs 60% of India’s population. Also, in 2015, the government made a promise to double farmers’ income by 2022, thus it had the onus of one final push to fulfill this promise. In addition to that, this budget has been presented in the background of the ongoing Farm Law protests and could have been used to mollify the situation by increasing budgeted allocation for the agriculture sector.

This year, the government allocated Rs.1,23,018 crore to the Dept. of Agriculture, Cooperation and Farmers’ Welfare (DACFW) which is 8% less compared to Budgeted Expenditure (BE) in FY21. This department is responsible for the implementation of schemes such as Pradhan Mantri Fasal Bima Yojana, which provides interest subsidy for short-term credit to farmers and promotes up-gradation of skills to enhance the adoption of technology in this sector. Due to this decline in budget allocation towards DACFW, the PM- Kisan Scheme, which provided direct cash support to farmers of Rs. 6000, has seen a decline of Rs. 10,000 crores to Rs. 65,000 crores in FY22. This is a surprising move considering the current political and economic situation of the country as it was expected that agriculture and allied sectors will not see a decrease in budgetary allocation. Although, due to COVID-19, the government had introduced a revised budget in 2020, thus the current allocation is 5% more than the revised estimates of FY21.

In this budget, the government has ensured its commitment to the APMC system, a point of contention in the recent farm protests. Now, APMC’s will become eligible to utilize Rs. 1 lakh crore financing under the Agriculture Infrastructure Fund (AIF) which will lead to enhancement of infrastructures of the mandis. In addition to this, 1,000 APMCs will be connected to the e-National Agriculture Market (e-NAM). An additional source of funding for the agriculture sector has been made through the introduction of an Agriculture Infrastructure and Development Cess (AIDC). Through this cess, the government hopes to raise Rs. 30,000 crores to build infrastructure facilities for post-harvest produce in the mandis. According to a study conducted by NABARD, there have been infrastructural gaps ranging from 10% in case of cold storage (bulk & hub) to 99.6% in the case of packhouses. In India, food worth Rs. 92,651 crores are lost in post-harvest processes. [1]Insufficient private investment in such infrastructure and logistics is one of the principal reasons for such gaps. [2]Thus, creating a cess fund for this purpose is a move in the correct direction.

In addition to the existing 6,000 Farmer Producer Organisations (FPOs), the government has budgeted Rs. 700 crores to the development of 10,000 new FPOs. Almost 86% of Indian farmers have small and marginal land holding sizes i.e. 0.58 hectares of land only. These small land sizes make it impossible for them to achieve economies of scale which come from increasing production thus leading to low costs. However, when farmers join FPOs, they get shared access to markets, schemes, and credit. For example, Maharashtra based Rushiwat Farmer Producer Company Ltd. (RFPCL) with 1270 farmer shareholders, now owns a seed and turmeric processing plant and a warehouse where the product is sorted and graded. In 2019-20, the FPCL made Rs. 1.32 crore and received a premium for the turmeric they grew. [3]

Although the FY22 budget does not make provisions for any immediate relief to the agriculture community, it has made necessary allocations that will make this highly inefficient sector self-reliant and resourceful.

Author: Ambika Shevade
Editor, TJEF

[1] https://medium.com/@IamDineshN/post-harvest-losses-in-india-fa7e3e8981fe

[2] https://pib.gov.in/newsite/PrintRelease.aspx?relid=199102

[3] https://www.livemint.com/news/india/how-farmer-led-firms-are-hedging-inflation-11600094280389.html

BFSI and Disinvestment in Budget 2021

The banking and Financial Services Industry is an integral part of the spine of the finances of our country. With a contribution of Rs.107.83 lakh crore just by the public sector banks in FY20 itself the segment is moving at an accelerated growth rate of 3.57% compounded annually. There has been a major influx in newer technologies into banking services with the internet boom and the higher acceptance of digital payments across the channels ever since the demonetization move in 2016. Private players like WhatsApp bringing in UPI payments facility and the setup of NPCI (National Payments Corporation of India) have also promoted the growth of BFSI and its overall infrastructure over time. These facts alone are good enough to justify the importance of the sector in our economy. A small dent in the variables or a minor positive plush may turn things around. The annual budget of each year has a similar impact. The trial continued with the budget of FY-21 with the proposal of new policies and plans, the highlights of which we try to closely analyze and assess with a forward-looking approach for the overall economy.

Overview

A retrospective view of the past few years has brought the banking sector and PSUs into the mainstream to a higher degree than before. As per the budget of 2021, Finance Minister Nirmala Sitharaman unveiled the plans of divesting in all sectors barring four strategic areas. The government announced a budget of Rs. 1.75 lakh crore from the stake sale in public sector companies and financial institutions including 2 PSU (Public Sector Unit) banks and one insurance company in the next fiscal year. The move comes under the new PSE (Public Sector Enterprise) Policy unveiled in the current budget in the next fiscal year.  The policy would entail the strategic sale of IDBI Bank, BPCL, Shipping Corp, Container Corporation, Neelachal Ispat Nigam Ltd. being the inclusions up for sales by the end of the year beginning on April 1. The disinvestment target is lower than the last year’s target of 2.1 lakh crore.

Pros and Cons: A Brief View

The annual budget like any other aspect has its pros and cons. While there are moves that can be called for a positive catalyst for the economy, there are some areas that have still scope for the rework to be done.

The Pros

  • Constitution of ARC/AMC- Through the annual budget the government plans to work on the constitution of an Asset Reconstruction Company/ Asset Management Company. NPAs have been a burden on the economy, especially in the past few years. With a plan to subdue this burden to a different entity while the focus is kept on their reconstruction, the assets would be transferred and dealt with separately by a specially set up ARC/AMC done by an existing company in the business of ARC.
  • Deposit Linked Insurance Scheme- With an aim to restore the confidence of retail depositors in the banking industry an implementation framework would be in place whereby the depositors would be able to withdraw amounts up to 5 lakhs against their deposits. The success of this initiative would be directed by the seamlessness with which the deposit and withdrawal process continues.
  • Increase in FDI limits- With an increase in FDI limits, up to 74% in the insurance industry, the move is a welcome change as the control can rest between foreign JV partners with a dominance of specific safeguards such as the majority directors being Indian residents and 50% of the board comprising of Independent Directors.
  • Capital outlay for PSB revitalization- The budget entails an outlay of Rs.2000 crore to improve the financial health of the PSBs which would help in the further easy provision of capital during difficult times on the capital adequacy front. The privatization of banks would enable the other PSBs to gain an impetus for better performance and reflect a level of open-mindedness.
  • LIC (Life Insurance Company) IPO- The major move of the current budget is the disinvestment of the LIC and the decision of an IPO. The move would enable a significant cash inflow as well. The disinvestment being budgeted at Rs. 1,75,000 crores as per the budget. A discussion is also on the cards for the consolidation of the SEBI Act, 1992, the Depositories Act 1996, The Securities Contract (Regulations) Act, 1956, and Government Securities Act, 2007 into a rationalized single market code to streamline the multiple laws. The process would also lead to ease in implementation of the statute being easy from an administrative viewpoint.
  • Tax-related benefits-
    • Exemption of royalty income received from non-resident on account of the lease of aircraft paid by a unit in IFSC would be exempted from income tax in India
    • Investments in Unit Linked Insurance Plans (ULIP) would be taxable on maturity applicable on all policies taken on or after February 1, 2021. The move will create parity in terms of how mutual funds and ULIPs are taxed in the hands of the end consumer as an investment product.

The Cons

  • GST reduction on medical insurance premium- An area missed out in the budget would be not reducing the GST on the medical insurance premium, which was a major expectation of the industry. Given the fact that the budget gives maximum importance to Healthcare and wellbeing, a reduction of tax from 18% to 12% could have further benefited the insurance industry making the premiums more affordable
  • Rationalization in the tax rate for Indian branches of foreign branches- The foreign banks looked forward to a rationalization in the tax rates from the current levels. The taxes currently levied at 40%, if reduced to lower a level as applicable on the domestic banks in India could have been a major tax reform in the banking sector.

Editor’s Note- A verdict

A narrowed assessment of all the positives and negatives affecting the BFSI sector, and an aggregate analysis helps us understand some key points coming into the picture.

  • Catch up with the change- Privatization and disinvestments being some of the key components of the budgets indicate the need for the PSBs to accept the changes and also gain pace to function stronger than before. The decision will bring in more competition in the environment.
  • Insurance will be the key game changer- On being compared to other developed nations and the emerging economies like Thailand and the Philippines, India has lagged in the insurance industry. The penetration level and density of insurance are far lower when compared to other Asian countries. This will gain good momentum with a proposed increase in FDI limits at 74% and proposed IPO of for LIC. An additional focus on health and well-being may also drive more capital inflow into the sector.
  • Increased spending levels- The RBI has worked through the repo rates by reducing them and hence making a subtle nudge for the banks to increase the spending of the consumers. With a greater and more definitive role, the Banks will act in the direction of giving cheaper and more attractive loans than before hence acting as an incentive to spend more.
  • Close watch on the NPAs- With an agenda to strengthen the core of banks and their functionality, the budget aims to scrutinize closely the balance sheets through its move to implement a special body to watch the NPAs and work towards their reconstruction. This in turn would provide value to customers and shareholders of the banks

The budget can be an easy charter for the BFSI sector to the growth and development which can be a positive variable in the overall function of the growth of the economy.

Author: Mohd.Yusuf (Editor, TJEF)

Healthcare Sector

There are a lot of things that people wait for with baited breaths, but nothing in that list impacts their lives as much as the Union budget. There are generally always key focus areas that the budget presents every year and this year was no different, yet was historic. A sector that had never garnered enough focus was at the center-stage this year around- Healthcare has been at the center of all policy decisions due to the unprecedented medical crisis brought about by the ongoing pandemic. Dr. Prathap C Reddy, Chairman of the Apollo Hospitals Group, hailed this new outlook by the Government as “ground-breaking” and is optimistic that it will “fuel job creation and boost economic momentum”.

India has always been among countries that have the lowest healthcare budgets in the world. GDP percentages of Healthcare systems in India have consistently been below average and below recommended international guidelines by enormous margins. India’s healthcare sector only contributes to 1.3% of its GDP while the OECD countries have an average of 7.6% and even BRICS countries average of 3.6%. Even though the per capita government spending has almost doubled from Rs 1008 per person in FY15 to Rs.1944 in FY20 it’s a still low CAGR of 15%. Globally, Indians have the highest Out of Pocket Expenditure on healthcare.  

This year however there have been a shift in the outlook albeit triggered by the prolonged pandemic. There have been a few hits along with a few misses:

  • The Government has announced a total outlay of Rs.2,23,846 Cr for health and wellbeing which amounts to a 137% rise from the previous year. Budget conveyed that healthcare is a priority for the government.
  • Several schemes like the PM Atmanirbhar Swasth Bharath Yojana scheme has been announced, and they have an outlay of Rs 64180 crore that will be run along with the National Health Mission.
  • The PM Jan Arogya Yojana (AB-PMJAY) are also a part of the increased healthcare budget. Every year close to 5 crore families are pushed below the poverty line just to bear healthcare expenses. This Yojana aims at providing healthcare cover of up to 5 Lakhs per family per year.
  • A sum of 2.23 lakh crore is set to be spent on health care, of which 35000 crores is to be spent on COVID-19 vaccines alone.
  • The budget aims at boosting primary healthcare as well. The focus this time is not limited to rural development but it also looks at urban areas with plans of 17000 and 11000 health and wellness centers in the rural and urban areas respectively. Integrated public health laboratories and public health units are in plans of set up.

Amongst all the upsides and promises for a better tomorrow, there have been a few questions and expectations unanswered and unaddressed.

  • The primary need of the hour, the reason the pandemic caught us all off guard is the fact that R&D is not focused on enough. No schemes have been announced to increase R&D in government institutes, neither has R&D spending in private pharmaceuticals been incentivized in any way.
  • Advanced medicals devices are primarily imported into the country, no reduction in import duties have been announced.
  • The GST on Active Pharmaceutical Ingredient (API) is at the higher slab of 18%. This results in higher prices of the final product. Even though the reduction to 12% was anticipated and expected, the budget however did not reflect the same.

Nevertheless, despite all the shortcomings, the budget has been revolutionary in many ways. It reflects the changing mindset of the country where healthcare is steadily coming to the forefront. The COVID 19 provided the necessary impetus to focus on public health and the overall healthcare system. While it is evident that the steps are not enough to meet the colossal demand of healthcare and also meet the necessary OECD guidelines and other global standards, we still do have a long way to go.  This is year’s Budget comes as a welcome change in the right direction, in a country where healthcare has always taken the backseat. The pandemic seems to have caused a paradigm shift in  not only India but all over the globe.

Power and Renewable Energy Sector

We are doing our best every day, sitting on the same spot for hours, reading as much as we can, and gaining as much knowledge as possible to become valuable and be a solution provider to the world’s problems. Why are we doing this and what do we want to achieve by being valuable? Your answer can be anything from buying yourself a Tesla or a Bentley, or a sea-facing bungalow, or making the world tour dream come true or anything else. Now imagine a scenario where you do not have enough infrastructure to charge your Tesla or secure enough fuel for your Bentley, or enough power to light up your beautiful sea-facing bungalow. You might wish to work for the welfare of the poor and underdeveloped rural regions but that is impossible without securing enough electricity to light up their homes and empower their small businesses. I hope these few lines will be enough to make us understand the direct impact of power and energy sector on our lives. Also, the growth of the economy and its global competitiveness heavily depends on the availability of reliable and quality power at competitive rates to all consumers at all places.

In the previous year, the government focused its budget allocation towards reforming the distribution networks by introducing large scale smart metering and an expansion of the National gas grid. However, the allocation of INR 22,000 crore wasn’t just enough to quench this thirst and address the proposed reforms of the country. Also, as the pandemic hit the country, the need for power suffered a huge blow. There were not enough cashflows available with the distribution companies and therefore they were not able to fulfill their obligations to the power generation companies. Therefore, this year, the government had to focus a major expenditure of INR 1,20,000 crore on increasing the liquidity to support this supply chain and was forced to compromise on the structural reforms it wanted to introduce. 

The union budget of FY 2021-22 focused not only on bringing in structural reforms to step up on the ladder of development but also on providing aid to the distressed power sector. Therefore, the government allocated INR 3,06,000 crore to the distribution companies to support this important link of the entire power sector value chain. In addition to this, the Rural Electrification Corporation Ltd. will also raise about 69 % higher funds through the internal and extra-budgetary resources against what it raised previously. This is done to strengthen the sub-transmission and distribution networks in the rural areas, metering of distribution transformers/feeders/consumers in the rural area, and rural electrification.

Previously the government had discussed reducing aggregated technical and commercial losses which are currently at 26.31% (as per the Ministry of Power, Government of India) to below 15%. The present budget also has included this agenda to reduce technical losses with contemporary equipment for last-mile distribution. There is a proposal for pre-paid smart-metering which is a very expensive venture and still needs to be made clear with the kind of roll-out mechanism that will be put in place for its implementation.

As of now, we understand that in the previous year government could not contribute much to power generation companies, therefore this year a higher expenditure of INR 61,555 crore will be done, which is 22% higher than the revised estimates of the fiscal year 2021. This allocation will be made to increase the coal-based power generation capacity and build several hydroelectric power projects in Himachal Pradesh and Jammu and Kashmir. In addition to increasing power generation, this will improve the transmission and distribution infrastructure under the Integrated Power Development Scheme by the Ministry of Power. IPDS also aims at strengthening the sub-transmission network, and also be involved in metering, IT application, customer care Services, provisioning of solar panels, and the completion of the ongoing works of Restructured Accelerated Power Development and completion of the Reforms Programme (RAPDRP). The government is also determined to set up a separate central transmission utility for easing the planning and execution division of Power Grid Corporation of India Ltd.


Indian Renewable Energy Development Agency Ltd has been sanctioned INR 12,696 crore, approximately half of which is towards the development of renewable sources of energy and the rest half is towards the maintenance and expansion of the current resources. The government wants to establish a renewable energy capacity of 500 GW by 2030. It plans to install 175 GW of renewable capacity, including 100 GW of solar capacity by the year 2022. Presently we only have about 90GW of energy being produced by renewable sources and still require 85 GW to be installed to achieve this year’s target. The allocation to the solar energy corporation of India which will be funded by IEBR is set to boost the pace of the underdevelopment projects which will increase the power capacity by 32 GW using solar energy and 8 GW using wind energy.

Government expenditure in form of subsidies was seen under the KUSUM Scheme under the ministry of power and new & renewable energy. With the help of this scheme. the government is planning to update the irrigation system of India and as well as promoting solar power production by changing more than 3 crore diesel and petrol-driven pumps by solar-powered pumps. In addition to this scheme, the budget [DT1] also focused on increasing the subsidies for the development of grid-connected solar infrastructure under the solar rooftop program designed to expand access to solar savings for qualified residential customers who otherwise may not be able to use solar because of the high cost of installing panels. 

The government also put yet another strong step forward for an Atmanirbhar Bharat by increasing the import duty on solar modules/cells and inverters up to 20% for 2021 from 5%. This increase in taxes is supposed to push the local manufacturing capabilities in India which in turn will reap its benefits towards increasing the solar power capacities in near future. These measures come with a backdrop to reduce India’s import dependence on Chinese products, as almost 80% of the imports of solar cells, modules, and inverters were from China.

Energy is an important input for economic development and the power sector is an indispensable part of the infrastructure in [DT2] any economy. Providing adequate and affordable electric power is essential for economic development, human welfare, and a better standard of living. The demand for power in a developing country like India is enormous and is growing steadily. Thus it is very clear that the government wishes to achieve a growth-centric, investor-friendly, and environment-conscious energy sector for the country. It is evident that the government is ambitiously putting in efforts to push towards a gas-based economy, developing infrastructure to enable cleaner use of fossil fuels and reliance on renewable sources to meet COP21 commitments as it also believes in The nation that leads in renewable energy will be the nation that leads the world”.


 

INFRASTRUCTURE SECTOR

India spends over 4 per cent of GDP on infrastructure, according to Oxford economics, as opposed to China, which spends about 6 per cent of GDP. To achieve UN sustainable development targets, India needs to invest at least 1.5 trillion more annually. Disputes between the government and vendors over infrastructure contracts often result in delivery delays and cost escalations.

On 1st February 2021 the Union Budget of India for 2020-21 was presented. It was led by Indian FM Nirmala Sitaraman and is the first one to be paperless due to the Covid Pandemic situation!

Let us look at the government budget’s exclusive Infra reports:

  • The Government has extended its ₹ 111 lakh crore ($1.5 trillion) national infrastructure pipeline so that by 2025 it can cover more projects to shore up economic growth as the nation recovers from the pandemic caused recession.
  • The National Infrastructure Pipeline, with 6,835 projects initiated, has now grown to 7,400 projects. Under some main infrastructure ministries, approximately 217 projects worth Rs 1.10 lakh crore have been completed.
  • The programme would need an increase in both government and finance sector support, she added. The government is planning to take three concrete measures for this purpose:
    • Creating structural framework Great traction on asset monetization Rising the proportion of capital expenditures in central and state budgets
    • Large thrust on asset monetisation
    • Increase in federal and state budget allocation in capital spending
  • To draw investment and make India a $5 trillion economy, building new highways, rail links and other social and economic infrastructure is crucial. The NIP, collectively sponsored by the central government (39%), the state government (40%) and the private sector (21%), aims to invest in projects across sectors such as electricity, social and business infrastructure, connectivity, water and sanitation.
  • In addition, a new construction financing institution named the National Bank for Infrastructure and Growth Finance will be set up by the government. This will be set up on a Rs 20,000 crore capital base and in three years it will have a Rs 5 lakh crore lending target.
  • The FM said, ““Infrastructure needs long-term debt financing. A professionally managed development financial institution is necessary to act as provider, enabler and catalyst for infrastructure financing”

Some of the other key announcements that the government announced with regards to the Infra-Sector:

  • It will launch a nationwide monetisation pipeline of future brownfield infrastructure properties.
  • To track progress and to provide investors with visibility, an asset monetisation dashboard will be developed.
  • NHAI and PGCIL to build confidence in infrastructure investment to draw worldwide funds. Five operating roads are being moved to NHAI InvIT with an approximate enterprise value of Rs 5,000 crore.
  • Transmission reserves to be transferred to PGCIL InvIT to the amount of Rs 7,000 crore
  • Rs 5.54 lakh crore for 2021-22 – a sharp rise in capital spending, which is 34.5 percent higher than the 2020-21 budget forecast.
  • To have more than Rs 2 lakh crore for the capital spending of states and autonomous bodies.

    Gross budget funding for capital spending was substantially increased to Rs 5,54 lakh crore in 2021-22 BE (up 34% from 2020-21 BE and 26% from 2020-21 RE), with a higher allocation to the infrastructure market (roads, railways, etc).
Capital Outlay (₹ Crore)2020-21 BUDGET ESTIMATES2020-21 REVISED ESTIMATES2021-22 BUDGET ESTIMATESGrowth over BEGrowth over RE
Railways₹ 1,60,792₹ 2,40,840₹ 2,14,85834%-11%
Road Transport & Highways₹ 1,46,975₹ 1,57,053₹ 1,98,23035%26%
MRTS and Metrorail₹ 20,471₹ 9,437₹ 24,58220%160%
Ports, Shipping and Waterways₹ 3,715₹ 3,129₹ 4,91732%57%

The Union Budget has declared the creation of a new DFI with a capital of Rs.20,000 crore to increase the funding availability for the infrastructure sector. The goal of this organization is to finance and provide the infrastructure sector with debt more than Rs 5 lakh crore over the next three years, thus helping to bridge the infrastructure funding gap. The funding of infrastructure projects in India is primarily from the banking sector and a few NBFCs for infrastructure.

The Union Budget also provided the NIIF with Rs 5,000 crore, which would enable it to acquire infrastructure properties. Apart from this, the NIIF Infrastructure Debt Financing Mechanism was provided with another Rs 1,000 crore funding, which could be leveraged to provide the sector with substantial debt financing. The NIIF debt platform plans to develop a Rs 1 lakh crore debt portfolio by 2025 with the government’s funding of equity capital and the NIIF Strategic Opportunities Fund and future private sector equity involvement.

TDS on distributions were also removed from the budget by the InvIT, which would reduce the enforcement conditions of unit holders/investors. InvITs have a great ability to draw long-term capital to invest in secure assets for operating facilities and have a constant supply of longer-term cash flows.

FISCAL POSITION

Union Budget 2021, the first budget of the decade, also the first digital budget, presented in the backdrop of COVID-19 crisis, estimates total expenditure for 2021-22 at Rs 34.8 lakh crores. Expenditure in 2021-22 has increased at an annual rate of 14% over 2019-20. Revenue expenditure (expenditure for the normal running of government departments, interest charges on debt) is estimated to be Rs 29.3 lakh crores and capital expenditure (government spending that goes into the creation of assets like schools, hospitals, roads, etc.) is estimated to be Rs. 5.5 lakh crores.

Government Receipts (income of the government) are estimated at 19.7 lakh crores (an increase of 6% over 2019-20) leaving deficit of 15 lakh crores to be covered by borrowings (27% annual increase over 2019-20). Fiscal deficit (difference between the total income of the government and its total expenditure) is estimated to be 6.8% of GDP. Government borrowing from the market is planned around Rs 12 lakh crores. The rest is to be funded through multilateral borrowings, Small Saving funds and short-term borrowings. The nominal GDP is estimated to grow at a rate of 14.4% in 2021-22.

Last Year’s Fiscal Position

Budget 2020-21 estimated total expenditure at Rs 30.4 lakh crores, but the actual expenditure came out to be Rs 34.5 lakh crores. Revenue receipts which were estimated to give the government 20 lakh crores were revised to Rs 15.5 lakh crores. Fiscal deficit estimated at 3.5 % of the GDP was pegged at 9.5 % of the GDP.

Break Up of Government Receipts

SourceEstimates (in lakh crore)
A. Tax Receipts 
i) Indirect Taxes11.2 (6.3 from GST)
ii) Income Tax5.61
iii) Corporation Tax5.47
iv) Excise Duty3.35
B. Non-Tax receipts2.43
C. Disinvestments1.75

Non-tax revenue consists of interest receipts on loans given by the centre, dividends and profits, external grants and receipts from general, economic, and social services, among others.

Gross Tax revenue is estimated at Rs 22.1 lakh crores, of which the central government’s share is Rs 15.45 lakh crore. Devolution to states, estimated at 6.65 lakh crores, is marginally higher than last year’s devolution.

DIRECT TAX PROPOSALS

  • Exemption from filing tax returns for senior citizens over 75 years of age and having only pension and interest income
  • National Faceless Income Tax Appellate Tribunal Centre to be established
  • Eligibility for tax holiday claim for start-ups extended by one more year
  • Capital gains exemption for investment in start-ups extended till 31 March,2022

INDIRECT TAX PROPOSALS

  • Reduction in Custom Duty: On certain Iron and steel products, Textile products, Gold and Silver, Chemicals.
  • MSME- To incentivise exports of garments, leather and handicraft items, exemption on import of duty-free items rationalised.
  • Agriculture- Customs duty on cotton set at 10% and increase on duty on raw silk and silk yarn from 10% to 15%.

What’s cheaper, What’s costlier

Costlier

  • Cars
  • Electronic appliances
  • Leather Items
  • Shoes
  • Mobiles and Home Appliances

Cheaper

  • Gold, silver and other precious metals like platinum and palladium
  • Medical devices imported by international organisation and diplomatic missions
  • Nylon Clothes

BUDGET SERIES || CONSUMPTION

The solution to every problem can be found only if the problem is first decoded till the first principle. India’s economic slowdown should be treated and decoded the same way. The first thing that needs to be identified is whether the current slowdown in the economy is a cyclical slowdown or a structural slowdown. Cyclical slowdown is one that is characterized as a part of the business cycle, going through a trough which will eventually be followed by a recovery and peak. In gist, it is a short-term problem which can be solved through government’s fiscal and monetary policy. However, what the country is witnessing today is a structural slowdown and in order to garner a remedy for the situation, there needs to be a better understanding of the problem and there after damage control.

India’s growth story has always been driven by consumption. In terms of the components of GDP- government expenditure has been whooping for the economy, however government expenditure forms only around 10% of the GDP. Additionally, the fiscal deficit of the government raises concerns about what extent can the government afford to stretch the deficit to, especially with staggering tax collections. The current fiscal deficit stands at 7.5%, which is a notch higher than all the developing countries, barring Pakistan. Investments have been stalling, even after the corporate tax rate cuts. The reason is that if there is a weak consumption demand, why will the businesses invest even despite the incentives? The consumption demand, which is the most worrying concern, ironically forms around 60% or more of the GDP today. In such a situation, any policies, incentives or break throughs will not revive the economy until and unless there is a boost or rather revival of the consumption story of India. The current situation is worse than the 1991 fiasco, as during that time even though the government lacked the forex reserves, the consumption demand was strong. Today the government has ample forex reserves, but the main growth driver of the country has taken a backseat.

The demand can be broken down into urban demand and rural demand. FMCG sector of India, which is generally known for being the resilient and safe sector for the economy has been under trouble, which clearly highlights the gravity of the situation. There were times when the rural segment used to contribute 1.5times the urban segment for this sector. However, during the past few quarters the rural contribution has fallen to the level of urban contribution, and has dipped even more. Currently, the rural FMCG sales is growing by 5.2% and the urban sales is growing by 7.4%

One of the reasons for the above being, India is divided into an organized and unorganized sector. While the organized sector contributes two-third of the GDP, the unorganized sector contributes the rest, and certainly cannot be avoided. The informal sector is responsible for more than 80% of the job creation in the country, according to economists. The implementation of GST was done with the intent of formalizing the country. There has been interestingly a pattern observed, big firms in the industry that competed with a large portion of informal firms benefitted immediately after implementation of GST. The informal firms bore the compliance costs, many informal firms either shut down or witnessed a large drop in market share. The same firms which benefitted post GST, have now witnessed a decline in sales-reasons being slump in demand arising out of losses of job and high level of unemployment in the informal sector. For instance, biggies like Britannia, Marico first witnessed a plunge post demonetization. They again picked up post GST, due to the lessening of rivalry by their informal counterparts and now again a slowdown, due to their stressed counterparts.  

Additionally, there is an anomaly in the consumption behaviour of Indian consumers. According to the Consumption Expenditure Survey (CES), the expenditure compared between FY 12 and FY 19 indicates that the spending on durables, clothing, footwear, health, travel, entertainment and other miscellaneous good & services has actually increased. However, sectors like automobile and housing have witnessed a haunting slowdown. The anomaly is due to the lack of customer confidence. Customers do not want to spend on items requiring long term commitment in terms of maintenance and payments as they are not confident about their future income and revival of the economy. Hence, segments especially like travel and entertainment have seen robust growth figures as they are one-time expenditures for the customers. Additionally, events like big billion days witnessed e-tailors booking revenues worth $ 3 billion, plus 50% increase in terms of new customers for giants like Flipkart (mainly tier 2 and tier 3 cities). Major retail lending retail products, such as personal loans and credit cards continue to witness strong growth, though the pace may have decelerated. This brings us to the fact that slowdown does not necessarily showcase the lack of disposable income in the hands of urban middle class. These indicators highlight that there is sentiment issue, customers are still spending a robust amount of income in certain segments-segments which require one-time short-term low-ticket size expenditure, however not on those segments which are required to boost the economy.  RBI’s consumer confidence survey for November booked the lowest figure since its implementation back in 2010. The index stood at 85.7, which is even lower than the number observed in September 2013, where the country faced a BOP crisis. A reading below 100 denotes pessimism in the economy.

Budget 2020. The budget 2020 is imperative to bring the country out of a turmoil. There is a consensus view that the budget is likely to bring reforms which will stimulate demand and confidence of revival in the mind of Indian consumers:

With the corporate tax down to 25%, the next expected move of the government is a reduction in the income tax slab to leave more money in the hands of consumer. The current exemption of no tax for income up Rs. 2.5 lakh is expected to be increased to Rs. 5 lakhs. Slab of 5-10 lakh subject to a tax rate of 10% (20% currently), 10-20 lakh subject to a tax rate of 20% (30% currently) and above 20 lakhs subject to a tax rate of 30%. Next is increasing the deduction limit under section 80C from current Rs. 150000 to Rs. 250000. In order to revive investment and promote the housing sector, deduction for housing loan interest for self-occupied property is expected to increase from current Rs. 2,00,000 to Rs. 3,00,000. The rural economy needs to be given a priority; hence the budget should be focusing on bolstering the NREGA programme and funding rural road construction.

While all this may or may not work for the country, certain imperative deep-rooted measures need to be addressed to bring a long-term solution the country. One of the main forces believed to be positively linked to the consumption in an economy is the demographic dividend. India is believed to be the fastest growing country and unanimously agreed that it will reap the benefits of a “large working-class population” in the coming years. While there is no doubt of authenticity in the statement, what we fail to realize is that the above statement will materialize only when the current young population is provided with an environment of quality education and up scaling of skills. India is much behind this aim. Reforms in education and healthcare will pave the path for economic development in India. Successful Asian economies like China, Japan, South Korea, first focused on bringing reforms in the agriculture sector by promoting full-scale efficiency. Similarly, India should focus on reforms in agriculture in terms of access to seeds, technology, power and finance. They should look for ways to improve connectivity and facilitate easier leasing of land. Focus on such areas would not only solve the current problems but also cater to the problems the country has been facing for years but have been left unaddressed.

Biggest Economic Risks of 2022

Economists tried hard to predict and prepare for the risks due to the pandemic in 2021. But their predictions didn’t work out. They are again trying hard to predict what 2022 has in store for economies across the world, amid new variants of COVID-19, inflations, hard Brexit, a fresh euro crisis, rising food prices, energy crunches, and peak oil prices. Let us now look at some of these potential risks that can pose global economic threats in the year of 2022.

Omicron and Lockdowns

Though it is early to predict how deadly the new variant of COVID-19, the Omicron can be, though, more contagious than the earlier variants, it may also prove to be less deadly. This can help the world get back to the pre-covid levels of spending, thus increasing the demand and supply of goods. A rebalancing of these spending levels can help and boost global growth upto 5.1%

On the other hand, all of this can be proven to be our wishful thinking. A more contagious and deadly variant can loom on economies across the world, pushing countries into the toughest 2021 restrictions and making economic growth sluggish in 2022.

In such a scenario, demand and supply will fall, workers will be kept out of labor markets leading to worse supply chain and logistic problems. Such scenarios are already evident in the Chinese city of Ningbo which is home to one of the world’s busiest airports, now seeing fresh lockdowns. A new wave of COVID-19 can push the already hit traveling industry into a reel of losses.

Inflation

With post-COVID-19 recovery and supply chain bottlenecks, the widespread surge in power and energy sectors, the costs have been rising, leading to global inflation. The inflation of the US is currently at around 7% contrary to the forecast of 2% by the end of the year 2021. Such major misses in controlling the inflation rates are very much possible with potential causes like Omicron, wage rates which are already rising at a rapid pace in the US. Tensions between Russia and Ukraine can lead to a surge in gas prices.

Similarly, in India though RBI expects the inflation to ease in 2022, the inflation might rebound to 6% in early 2022 due to unexpected higher prices of food, core commodities and services. RBI has been doing a great work in inflation targeting which is evident from the fact that the inflation stayed within the RBI’s target range of 2%-6% for a fifth straight month. But how well inflation in India can be targeted and curtailed in 2022 remains to be seen.

Disruptive weather conditions due to climate change may continue to rise food prices increasing the Wholesale Price Index, worsening the Global Hunger Index of developing countries. India stands at 101st out of 116 countries with a score of 27.5 which depicts a level of hunger that is serious.

Source: Website of globalhungerindex.org

Source: Website of globalhungerindex.org

Uncertain Federal Reserve Policies

Uncertain Federal Reserve Policies concerning managing inflation rates is one of the biggest risks global economies are facing. While the causes are driven by complex factors beyond disrupted supply chains and increased consumer spending, there is no doubt that the solution lies with the Federal Reserve and its Chairman Jerome Powell. The White House might raise taxes to control inflation since other programs to control inflation have not been showing impressive results.

Adding to the risks are already-elevated asset prices. The S&P 500 Index is near bubble territory, and surging home prices suggests that the housing-market risks are bigger than during the sub-prime crisis back in 2007 which might lead to a recession at the start of 2023.[SJ2] 

Federal Reserve policies also influence the RBI. Increase in Fed interest rates narrows the spread between US and Indian government bonds leading to pulling out of money by foreign investors from Indian Government Securities. This might push RBI to increase interest rates in the country to prevent outflow of Foreign Portfolio Investments (FPI) from Indian Bond Market which will weaken the rupee further leading to inflation.

Once the US dollar strengthens further as interest rates of dollar denominated securities might begin to move higher. This will lead to decline in rupee.

Impact of Fed Lift-off on Emerging Markets

To curtail repercussions of COVID-19, USA has been buying bonds and securities in large scale, a process called as Quantitative Easing, which helps in inducing liquidity in its economy. This increased liquidity in the economy helps lower the interest rates, encourages businesses to invest more and consumers to spend more, thereby increasing the aggregate demand. However, this might lead to the central bank running into the risk of higher inflation and hence in September 2021, US Fed Reserve hinted at starting to reduce its large-scale asset purchases, a process known as ‘tapering’ which may lead to higher interest rates in 2022. The tapering process would affect the supply and demand dynamics which can lead to short-term volatility in certain market segments and raise the interest rates. This would mean a global risk aversion as global investors pulls out their money from emerging markets and invest in ‘safe-haven’ assets like gold and US treasury instruments, bringing back the memories of the “taper tantrum” episode of 2013.

Countries like India, the emerging markets, might take the brunt of such taper tantrums due to reduction in funds infused by Fed and increases fed fund rate which will impact the availability and cost of overseas finance of Indian companies. After signals of hike in interest rates in June, the benchmark Sensex fell 461 points or 0.87% The rupee also lost 0.75 paisa or 1% against the dollar during the time.

China’s Great Wall of Debt

In the third quarter of 2021, China’s economy has slowed down due to the weight of the Evergrande (a real estate company that bears $300 billion in liabilities), repeated COVID lockdowns, and energy shortages. This slowed down the economic growth to 0.8% on contrary to the world accustomed economic growth pace of 6%

While the energy crunch caused by high coal costs and inflexibility in electricity prices might show signs of easing in 2022, the ‘Zero-COVID strategy’ of Beijing might call for more lockdowns. According to some government statements, the plan of Chinese government to curtail the Evergrande real estate slump is to manage a controlled implosion by selling off some of Evergrande assets while limiting the damage to homebuyers, businesses and without bringing down the epic property boom of China. But with the dire situation in real estate, the sector which contributes to a quarter of China’s GDP and worth $52 trillion, China’s economy might have to fall further.

On the flip side of the coin, what can go right in 2022?

Amid lockdowns due to new variants of COVID-19, tapering process of US and other developed countries, higher inflation rates and uncertain monetary policies to curtail it, what can go right in 2022?

Globally, households are sitting on trillions of dollars of excess money saved from cutting down on spending during the pandemic during lockdowns. If the world is back to pre-covid times and that money gets spent, boosting the consumer spending, demand, and supply and hence the growth would accelerate.

In China, investments in green energy and affordable housing which is already stated in the country’s 14th Five Year Plan could increase investments. Asia’s Regional Comprehensive Economic Partnership – which includes 2.3 billion people and 30% of global GDP can boost exports in the region.

Countries have been recovering surprisingly rapidly, proving economists wrong in their predictions of sluggish recoveries. This can be true next year, too like in 2021.

Author

Niharika Jayanthi

Editor, TJEF

Peak Oil – Its Economic Impacts and the Future

There hasn’t been any industry that COVID-19 hasn’t impacted and one of the most impacted sectors in the economy was the Oil and Gas Industry. The Oil Price fell to an all-time low of negative $37.63 on the WTI (West Texas Intermediate) index in April 2020, there was an excess of supply and for that time, there was no need to produce any more oil. All OPEC and OPEC+ countries together decided to reduce their production of Oil and Gas by about 10 million barrels per day. This decrease in production revisited a question in the minds of many in the energy sector… Have we reached Peak Oil?

What is Peak Oil?

Peak Oil is defined as the moment at which the global oil production will reach its maximum rate after which it will gradually decline. This happens as the rate of extracting new reserves becomes more expensive. This puts a strain on the existing resources which are being rapidly exploited and will be depleted if new sources are not found faster than the rate of depletion of current resources. So, the fear of Oil getting completely depleted was genuine, thus sparking a deluge of multiple experts trying to predict. This was a major concern till new technologies were developed and there was a strong need to develop renewable sources of energy due to the rise in the realization of the Global Warming phenomenon in the late 1970s.

Fig 1: Hubbert’s Peak Oil Model

Peak Oil Demand

It was always assumed that the ‘supply’ of oil would eventually come to an end. Due to scarcity, the oil prices would increase, making Oil Expensive. In the past 40 years or so for every 1 barrel of oil consumed, 2 new were discovered and could be recovered at an economic rate. In recent research by Industry experts, it was found that the oil required for the world till the year 2050 was available twice over and due to abundance in technology, this value will increase multifold. This tells us that the world will not fall short on Oil any time soon and there might never be a shortage of oil as earlier predicted. It also means that most of the identified recoverable sources of oil may never be recovered.  Due to the world moving towards renewable sources of energy, the dependence on conventional sources like oil, gas, and coal is reducing as you read this.

The world is still dependent on conventional sources like Oil, Gas, and Coal to achieve its energy requirements, however, there is now a shift towards more renewable sources of energy and now it is evident that the demand for Oil will gradually decrease. The moment in time when the demand for oil reaches its maximum and then starts reducing, it is called Peak Oil Demand.

Fig 2: Projections for Peak Oil Demand

The next question which comes to mind is When will Peak Oil supply occur?

Analysis has been done and potential dates ranging from 2028-2040 have been estimated. The range is very large and there are many factors that are responsible for the determination of Peak Oil Demand. Due to the new Environmental Protocols and with the proper observance of these regulations and promises, this date can take place even earlier. The world is already preparing for peak oil demand in terms of energy, but we are yet to understand the economic impacts of this phenomenon.

Impact on the Oil Market

With this shift in recognition from apparent scarcity to proven abundance, the behavior of oil-producing economies will change. It will cause the Oil market to become even more competitive than it is now. The Oil market hasn’t been behaving normally over the past decade as high-cost producers are able to compete with low-cost producers even if the high-cost oil has a multifold price difference as compared to low-cost oil. By the law of competitive markets, these high-cost producers should have been shut down or should have been driven out of the market.

This has not happened as the low-cost producers have rationed their resources to be able to produce over the next 100 years. This made sense in a scarce market, however, since the market has now shifted to being abundant this method of rationing will not work. In an abundant market, the low-cost producers will now try to force out the high-cost producers from the market. In such a market, the money in the bank is more valuable than the oil in the ground. This means that the low-cost producers would have to utilize the “high-volume, lower price” model to stay relevant in the market, this model heavily benefits the consumers. For the high cost to somehow survive in this highly competitive market they would have to give very lucrative contracts so that they can continue this business.

Both these models have problems, for the low-cost model, there is an operational problem as it becomes difficult for any producer to suddenly up their production even by 50%. Whereas for the high-cost producers there is a risk of their resources being depreciated in exchange for their contracts due to the lower price of oil.

Economic forces and dynamics take a lot of time to take effect, so for this situation to become a market norm it will take some time to become more competitive and will face significant challenges before these forces have their full effect.

Conclusion

Peak Oil Demand is a huge rage in the energy sector. The fact that the demand for oil will eventually reduce is not going to change. Rather than finding the date of the peak, the shift in paradigm needs to be shown more concern. The world will still need large quantities of oil at least for the next few decades.

The shift from an era of perceived scarcity to an age of abundance will result in a highly competitive market environment. This will result in oil-producing countries starting diversifying in order to survive in a world without Oil. The rate of this diversification as well as how much it is diversified will impact the oil prices in the coming few decades. However, it is unlikely that these changes will ever cause the major oil producing economies to have heavy fiscal deficits and the average price of oil will depend more on the social cost rather than the technical cost of production

.Peak Oil Demand is an interesting phenomenon and will result in the change of the energy sector in the coming few years. The decrease in the demand for oil will not only change the way energy is consumed but also be a factor for change for the better.

Author
Abishek Jeremy Lobo
Editor, TJEF

The Last Decade of Indian Private Equity & Venture Capital

Historically the Indian Financial Markets have had certain hot investments that everyone wants to invest in. For the longest time, it was Gold, then came Real-Estate and Cryptocurrency. But the last decade was dominated by Private Equity and Venture Capital Investments. These investments have flooded the markets with billions of dollars, funding innovative ideas, honing entrepreneurial skills and creating a multitude of wealth for those brave enough to make these risky investments.

History of PE/VC in India

Preceding 1997, the Indian private value market was tiny and generally dependent on official financing from the Government and multilateral organizations like World Bank, IFC, CDC and DFID. The growth was seen during beginning of the dotcom boom with the entry of foreign institutional financial backers (FIIs) VC financing was first introduced in India during the year 1975 with the setting up of Industrial Finance Corporation of India (IFCI) supported Risk Capital Foundation (presently known as IFCI Venture capital Fund

Limited). In 1976, a seed capital plan was presented by The Industrial Development Bank of India (IDBI). In March 1987, IDBI introduced a venture capital fund scheme for financing ventures seeking development of indigenous technologies/adaptation of foreign technology to wider domestic applications. Similarly, ICICI in association with UTI formed a venture capital subsidiary Technology Development and Information Company of India (TDICI) for financing technology oriented innovative companies. In mid-80’s all the three Indian financial institutions viz IDBI, ICICI, IFCI started investing equity in small technological companies.

Let’s breakdown the growth on PE/VC into multiple Phases:

 Phase -I Pre – 1995Phase – II 1995-1997Phase – III 1998-2001Phase – IV 2002-2009Current 2010-2021
Number of Active PE Funds82050753000 +
Total Investments (US$ Mil)~30~125~3,000~7,000~240,000
Stages & SectorsSeed, early stage and development – diversifiedDevelopment – diversifiedEarly stage and Development – telecom and ITGrowth/ Maturity – tech, financial services, infra and industrialsGrowth/ Maturity/ Credit/ Distress/ Buyout/ Platform – financial services, infra, RE, tech, healthcare, consumer
Primary Sources of FundsWorld Bank, GovernmentGovernmentOverseas InstitutionalOverseas InstitutionalOverseas Institutional/ Domestic
No. of Transactions~20~65~548~1,500~7,000

The Last Decade (2010 – 2020)

This decade saw PE/VC investments develop at a CAGR of 19% from a base of US$ 8.4 billion out of 2010 to US$ 47.6 billion every 2020 and spread its wings across all venture classes. The combined worth of PE/VC investments between 2011-2020 added up to US$ 232.4 billion, which is over two times the worth recorded in the previous decade. This decade saw numerous changes in the Indian PE/VC industry concerning the deal type, deal size, and industries.

Top Large PE/VC Deals between 2010-2020

Brief Analysis of Sectoral Performance (2010-2020)

The PE/VC investment activity in India has been dominated by four-five sectors that accounted for 2/3rd of all investments by volume and value. Some of the key trends were as follows:

  • Technology has been the most preferred sector over the years.
  • While e-commerce sector was among the preferred sectors throughout the decade, the deals were much smaller in the initial years.
  • Financial services and real estate have consistently been among the top five preferred sectors for PE/VC investments.
  • Infrastructure sector has received a disproportionate share of capital despite very few deals over the decade.
  • Media and entertainment sector has seen an uptick in deal activity in recent years, though the deal sizes are rather small.
  • Healthcare was among the preferred sectors in the initial years but fell behind in the latter half of the decade. This is expected to change after the Government’s focus on increasing healthcare investments and renewed interest from PE/VC funds in the healthcare sector post the pandemic.

Outlook for the Next Decade

  • Technology enabled businesses will see disproportionate share of investments: 

As technology takes over all parts of business and life, it has turned into a significant tool for disturbing the status quo. Considering recent patterns, early movers in technology-empowered organizations are relied upon to get a disproportionate share of the market. Accordingly, organizations that are at the cutting edge of innovation will doubtlessly have an upper hand, and PE/VC reserves are understanding that. The previous year has shown us the sort of valuations techempowered business can order, and their capacity to be stronger to financial shocks.

  • Environmental, Social, and Corporate Governance (ESG) focused investing:

Investors are using these non-monetary variables as a component of their analysis to distinguish risks and opportunities. The Covid pandemic, specifically, has escalated conversations about the interconnectedness of sustainability and the financial system. Many funds have already

incorporated ESG policies in their investment decisions, a trend which will grow stronger in the next decade. Indian PE/VC investors will in time, be expected to make ESG an integrated part of a company’s DNA and its operations.

  • New sectors to emerge as frontrunners for PE/VC investments: 

Most conventional areas are being upset by innovation and new business models have arisen. The most conspicuous among them for the following decade appear to be edtech, fin-tech, health tech, EVs, independent transportation and customised media and amusement. These sectors will play an instrumental role in the upcoming decade.

Author

Udit Bagdi

Editor-TJEF

Gati Shakti

Prime Minister Narendra Modi launched the PM Gati Shakti Master Plan, a project worth one hundred lakh crore rupees, on the auspicious day of India’s 75th Independence Day. Our government has drawn out a comprehensive infrastructure development strategy that includes a multimodal connectivity plan with the goal of coordinating the planning and execution of infrastructure projects to decrease logistics costs and accelerate growth.

I’ll use a popular example to try to convey the essence of this initiative. We’ve all witnessed how our local corporation or government maintains and develops roads. After completing the road, it is dug up again within some days for the installation of a plumbing system or maintenance work, among other things. This occurs not only on a small scale in a town or city, but also in huge undertakings, causing delays in both time and budget. Because our work is done in silos, there is a large gap between our planning and implementation. Gati Shakti is attempting to address these and other challenges by developing a unified platform that will allow for the easy planning and management of all infrastructure projects.Let’s take a closer look at why this project is important, what Gati Shakti is, and how it will impact the entire DNA of government administration & what are the implementation difficulties?

The relevance of infrastructure development, according to the RBI, is that it not only improves capital’s marginal productivity, which increases return on investment, but it also has a multiplier effect on the entire GDP. It helps to drive industries including cement, metal, auto, and electrical by increasing labor demand, construction equipment, and supplies. It improves commodities transit, lowering overall logistics costs and improving service. History demonstrates how countries, such as the United States and China, have transformed themselves through infrastructure development and become economic superpowers. India is now taking moves in the same direction, which will provide opportunities for growth.

Second, Gati Shakti is a GIS (geographic information system)-based platform that will connect all our country’s commercial and industrial clusters. Roads, railways, communication cable networks, oil and gas pipelines, water supplies, and other infrastructure will be connected to the platform. A fully integrated system that will serve as a project design and management platform that will aid in both planning and monitoring. The lacking links between several ministries that implement projects without consulting their related components would be fully removed. If a project is being rolled out, it will now have a well-rounded system of approvals thanks to the Gati Shakti platform, which will not affect any other project in the future. This platform will be taught to ministries and government officials. A national planning group coordinated by the Ministry of Commerce and BISAG (Bhaskaracharya National Institute for Space Applications and Geoinformatics) will bring expert officers to represent the ministries and assist them with efficient platform usage. No solo project will be sanctioned without proper funneling after the adoption of this platform, and NPG will be involved in every clearance.

Third, the Ministry of Infrastructure encompasses a total of 15 ministries, all of which have a significant impact on every part of our economy. The government will be able to efficiently control all these departments by leveraging the power of growing technology. This improvement will not only result in a more efficient system, but it will also revolutionize the way government functions. The entire administration could have a good impact since a transparent system will steer growth, potentially giving more power to those working on the ground.

Finally, the issue is to combine the massive amounts of data generated by all these ministries, as well as to train individuals on how to use and execute the system. The goal of developing a digital system for project management is to provide transparency, and in order to do so, everyone will have to work together to develop the system.

This initiative by our government, in my opinion, has the potential to transform India into a manufacturing powerhouse and is one of the most important stages toward our objective of becoming a $5 trillion economy. This can become a foundation for future development & if correctly implemented, a system of this magnitude can attract more companies to our country and put us on the path to growth.

Gati Shakti Master Plan

Author
Pranav Dorle
Editor-TJEF

FRAUDS IN BANKING SECTOR

Banking post-nationalization has progressed unexpectedly. With new reforms in the banking sector, more emphasis was given on lending so that economy of the nation can be improved.   But it also exposed banking to risks and frauds. Banks are the backbone of the economy. Any disruption in banking poses threat to the economy and therefore citizens.

“Reserve Bank of India defines banking fraud as an act of commission /abatement, which is intended to cause illicit gain to one person(s), entity and wrongful loss to the other, either by way of concealment of facts by deceit or by playing a confidence risk.”

The numbers and values of frauds keep on accelerating with every financial year. In the financial year 2019-20, the bank frauds (value Rs. 1.85 trillion) were more than double of the bank frauds that were reported in 2018-2019. The number of frauds was increased by 28%. The top 50 credit-related frauds constituted 76% of the total amount reported as frauds during 2019-20. Public sector banks accounted for 80% of the total value of frauds in this fiscal year. The private bank followed it by 18% and foreign banks with 2%. Although the total frauds reduced in the financial year 2020-21, frauds in private banks increased up to 21%. (Refer Table)

These frauds are spread over several years and are accounted for in the financial year they are reported. On average, banks took two years to detect fraud after it had occurred. The delay was even greater for frauds greater than Rs. 100 Crore with a time of 5 years. There have been instances in the past where banks were found not following the protocols needed while sanctioning any kind of loan. Harshad Mehta Scam was one where he got hand-in-glove with bank employees to get fake bank receipts. Satyam companies manipulated the financial statements and issued fake bank statements to purchase more land for their projects. Vijay Mallya borrowed money from 13 banks and did not pay in time. The discrepancy happened due to a lack of diligence in the process of consortium lending. The recent one is Nirav Modi PNB Scam. The bank manager sanctioned the loan without following the process.

The fraud reasons are not limited. Any mishandling of data and manipulation in process at any step can lead to the formation of higher Non-Performing Assets. Many of those take place due to the interference of corrupted third parties like auditors, controllers, and chartered accountants. Poor Internal Management also factors these frauds. When banks and employees do not follow the proper identification method and regulated assessment, it results in fraud. Due to a weaker selection process in banks, employees are not well qualified for loan assessment. RBI recently has given detailed guidelines for recruitment of employees for recovery of loans. The recruited ones will be given 100-hours training to deal with these going to be “bad debt”. Such initiatives are needed even while recruiting employees who are responsible to process the loan. In many cases, the purpose of the loan is manipulated. The loan amount received by the borrowers was not utilized for the approved project. In cases like Nirav Modi and Harshad Mehta Scam, collusion with bank officials resulted in big frauds. Weakened Business Model: Sometimes banks lend money for a project without calculating the potential of the project. Bank’s official lack in their analysis of the project. Due to this, an enterprise might go into losses and would not be in a position to pay to back its creditors. Banks at times, do not make these frauds public to prevent their goodwill in the market. In those circumstances, the amount of loan increases with negligence. When added up to a huge amount, the case is held over to Apex Court which further increases the cost on banks. With the emergence of digital banking, banks as well as the public are more at risk. RBI regularly updates customers with advertisements and guidelines to avoid these crimes. Banks have also switched to online sanctioning of the loan, so they are required to verify every document closely.

The impact of these frauds hits the financial statement of the bank first and then the economy as a whole. When an account is declared fraud, banks need to provision 100% of the outstanding loans. The provisioning is generally done in one time or four quarters. The profitability and credibility of a bank are impacted adversely. When banks face the issue of liquidity, a limit is imposed on the withdrawal of depositors. As frauds are not new in the banking context, RBI and the government has formulated many laws and acts to avoid fraud. Banks have an option to securitize the assets of the company that committed the fraud. The Debt Recovery Tribunal (DRT) was formed under “The Recovery of Debts and Bankruptcy Act,1993 to deal with loans related to the agriculture sector if the loan amount is 10 Lakhs. Banks also have Corporate Debt Restructuring framework in place to ensure a timely and transparent mechanism for restructuring the corporate debts above 20 Crore. Some of the laws against fraud are mentioned below.

  1. The Indian penal code,1860
  2. The Negotiable Instruments Act,1881
  3. The Reserve Bank of India Act,1934
  4. The Banking Regulation Act,1949
  5. Criminal procedure code,1973
  6. SARFESI Act,2002
  7. Insolvency and Bankrupt Code,2016
  8. Fugitive Economic Offenders Act,2018

RBI has taken several measures to avoid fraud and deal with fraud. Banks are required to categorize accounts for better risk assessment and to implement provisioning norms. Accounts can be classified as Special Mention Accounts (SMA), standard Accounts, substandard Accounts, doubtful accounts, and Non-Performing Accounts. Constant review of the transactions, identifying and tracking the patterns of transactions should be constantly done. RBI regularly comes up with updated frameworks that are to be followed to prevent, detect and mitigate frauds gravity.

As per RBI’s latest report, there is a list of 42 early warning signals. The presence of any of these, in any case, will mark that account as a Red Flag account. This will trigger the detailed investigation of an account which can save the bank from fraud.RBI has also put in place the three stages of the loan life cycle which should be followed for early detection. The three stages are pre-sanction Order, disbursement, and annual review

  • Pre-sanction Order  
  • – Banks should follow and track Anti Money Laundering Norms, accurate CIBIL Credit Scores, involvement in a legal dispute, due diligence on the borrower’s antecedents, set margins as per MCLR, and check whether the loan is recoverable.
  • Disbursement: While disbursement of the loan amount, banks are required to mention terms and conditions to the borrower. Borrowers and Banks should adhere to these norms so that the core purpose of the loan could not be diluted.
  • Annual Review: Monitoring EWS and reassessing the value of prime and collateral underlying.

RBI has also imposed penal measures on Fraudulent Borrowers-. In case of willful default that accounts for the high value of Frauds, RBI with CBI and Supreme Court can impose these penal provisions. Under Securitization, Banks can acquire the assets borrowers want to securitize. Banks can trade on that asset (via pass-through certificate) and recover the loan amount. Banks have also an option to repossess the asset. Banks can take control over the prime and collateral for the recovery of loans. Banks can give time to borrowers for repayment of loans. If it is not done in time, Banks can auction it to recover the loan and repay the excess amount from the auction sale to the borrower.

Although RBI updates frameworks as per the demand in banking loopholes, it has still not served the purpose to solve cases of fraud due to lack of diligence in bank employees, less transparency, less accountability, and ineffective implementation of this framework. The proof of this is the increase in the percentage of frauds associated with private sector banks. The repo rate (4 % currently) for the bank and the interest rate for the loan takers are comparatively low. This makes it attractive for people to borrow money. Banks should be cautious enough in these circumstances because some people or entities can manipulate their documents to get a loan at a cheaper rate. 

Despite the annual review, the banks should collect interim reports of the financial status of high credited accounts to get a clear picture. Credit scores need to be considered while giving any loan. Actions against Early Warning Signals should be taken strictly. The reporting of fraud cases should be done proactively so that it does not accumulate to huge losses for banks as well as the economy. Most importantly, RBI has to ensure that the guidelines issues are implemented and followed. That is where the complete banking system is lagging. Those rules and regulations have to come out from documents in action in reality.

Editor
Swati Shubham

Balance of Payments Crisis 1991: An Eventful History

The Balance of Payment crisis in 1991 is undoubtedly, one of the most critical events to take place in the history of Indian economy and politics. The valiant effort in managing the crisis by the then incumbent government, steered India onto the path of economic liberalisation and prosperity. 

In hindsight, this watershed event can be viewed as a blessing in disguise for India. The confluence of bureaucracy, academia, institutions worked so well to pull India out of the crisis trench. Simplistically, one can understand that India went into the pitfall of the BoP crisis as it was unable to pay off its debts. But sometimes, it is fascinating to delve into the ‘why’ part of such an even happened. Why did India descend into such a situation? What were the warning signs? Did the policy was adequate enough to prevent the systemic risk, etc?

These were some pertinent questions that led me to delve deeper into the reasons and get a better understanding of it. Let us traverse through the series of the following activities that led to the creation of the crisis.

India had been significantly under pervasive administration control and its economy policy exhibited a strong inward orientation until early 1980s. The first half of 1980 saw a large increase in the central government’s deficit, primarily on account of high expenditure levels especially on agricultural subsidies, defence, and interest payments. On external account, higher imports dominated over exports. The Current Account Deficit (CAD) widened extensively due to higher import bill. The dependence on commercial financing increased significantly. The debt service ratio reached almost 30% (i.e. India had already used 30% of the total borrowed funds) in the late 1980s. The fiscal deficit as a percentage of GDP escalated to 9.4% in 1990-91 as against the average of 6.3% in the first half of 1980s. The increase in the money supply contributed to rise in the inflation and exerted pressure on the BoPs. The bulk of the outflow of funds amounted to nearly US$ 1 billion during April-June 1991. During 1988-1990, external commercial borrowings rose. The reliance on non-resident deposits continued with interest rates rising above the international levels. The perception towards external financing to be a stable source of funds resulted to be a whammy.  India faced large external and internal financial imbalances and was vulnerable to external shocks around 1990.

India’s tendency to extensive reliance on external financing and resorting to financing on commercial terms during 1980s resulted in relatively high debt at the end of the decade. The official reserves were drawn from 5 months of imports in the mid-1980s to a little over 2 months of imports at the end of 1989-90. Reserves declined by 71.2% from Aug 1990 to Jan 1991 (US$ 3 billion to US$ 896 million). The gross official reserves stood at US$ 5.8 billion (1.3 months of imports) by March 1991 despite purchase of US$ 1.8 billion from IMF in January 1991. Inflation rose to 12% while CAD widened to 3%. 

The situation exacerbated further due to sudden outbreak of the gulf war, annexation of Kuwait, higher oil prices, loss of workers’ remittances, policy slippage, domestic political unrest, postponement of the general elections followed by the resignation of the government in power in March 1991. The withdrawal of NRI deposits intensified during

1991-92. Exports stagnated largely due to slack in demand in key markets in Eastern Europe and the Middle East industrial nations. India’s sovereign credit rating was seriously downgraded. The burden fell mainly on monetary adjustments and direct import compression measures. 

By the mid-1991, the BoP crisis turned into a crisis of confidence and India’s default on its debt obligations seemed as a certain possibility in June 1991. India’s external liabilities stood at US$ 68.8 billion at end March 1992.

Management of the crisis and its resolve

The crisis presented the policymakers with the opportunity to pursue liberalization. The then Prime Minister P.V. Narasimha Rao roped in Dr Manmohan Singh as the Finance Minister to undertake economic reforms and embarked upon a historic economic transition of India along with their administration by abolishing License Raj and introducing liberalisation. 

Here are the key highlights of the reforms-

  • Industrial licensing was abolished (except for 18 industries). 80% of the industry was taken out of the clutches of the licensing framework.
  • Reforms in capital market, trade, infrastructure, and financial sector took place.
  • Automatic approval of FDI was done up to 51%. 
  • Public sector units were given more autonomy. Disinvestments in many PSU units were initiated.
  • Investment caps on large industrial houses were removed. MRTP act was revoked to foster capacity expansion and diversification.
  • Exporters were permitted to open Foreign Currency Accounts.
  • Access to foreign technology was liberalized.
  • Import licensing was abolished. 
  • Import duties were sharply reduced.

In October 1990, RBI imposed higher cash margins of 50% on imports, other than capital goods, for those against foreign sources of credit. In 1991, the cash margins increased further to 133% and 200% in March and April respectively. The government imposed surcharges of 25% on prices of petroleum products and also raised customs duties. RBI imposed 25% surcharge on interest on bank credit for imports. The measures undertaken resulted in significant import compression. Though it proved to be counterproductive as it affected exports. 

The Rupee (₹) was devalued by 18% in 2 phases- on July 1st and July 3rd ,1991. The dual exchange rate system was introduced in 1992 to contain the exchange rate volatility. The large outflow of funds was recouped to a large extent by subscription to India Development Bonds (IDBs) aggregating US$ 1.62 billion with bonds having elongated maturities. India received financing from World Bank, ADB and Japan aggregating US$ 1billion. Aid-India consortium committed aid during 1991-92 amounting to US$ 6.7 billion for India. The value of the gold holdings with RBI was at US$ 3.5 billion during 1991-92. The RBI in consultation with the government evaluated the value of the gold reserves to raise foreign exchange resources. The arrangement to utilise gold was done with the intention to be temporary as well as reversible.  As means of raising resources, RBI in 1991 pledged 47 tons of gold with Bank of Japan (BoJ) and Bank of England (BoE) to raise a loan of US$ 405.0 million. United bank of Switzerland (UBS) purchased approximately 20 tons of gold and paid a consideration of US$ 200 million to the government. Finally, the IMF approved credit tranche amounting to US$ 2.2 billion to be availed in instalments over 20 months under the 1991-93 stand by arrangement subject to the conditionality imposed by IMF. 

The successful management of the BoP crisis succinctly shows the vigour of the government under the leadership of P.V. Narasimha Rao that India was in no way to default on its debt obligations. The government was adamant to rebuild the sovereign rating of India and restore the market confidence on the Indian economy. The measures were taken prudently to weed out the crisis gradually. The co-ordinated financial aid received by India from global financial institutions was the result of strategic negotiations and collegial relationship nurtured between Indian administration and the institutions over the period of crisis. The incipient impact of the reforms undertaken was evident as the foreign exchange reserves had climbed to US$ 9.8 billion by the end of 1992-93 and economic growth had recovered to 4.0 percent. The fiscal deficit reduced from 8.4% in 1990-91 to 5% of GDP in 1993-94. In 2003, India successfully repaid its debt that it received from the IMF under the 1991-93 stand by arrangement. Through the end of the decade, India didn’t have to borrow. 

As the times have progressed, India has become a favourable destination for the FPIs, FDIs. The world is converging in India. It currently ranks 5th on the list of the world’s biggest economies. It has gained the precious tag of the” fastest growing economy” among the major economies in the world. So much for an economy that once faced the risk of defaulting on its debt commitment, gaining the title of the  fastest growing economy in 2018-19 is a feat unprecedented and a matter of pride for us fellow Indians.