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.

Budget Series || Government Spending

India is the 3rd largest economy in terms of PPP only after China & USA. India is home to almost 18% of world population. Around 50% of the population in India is less than 35 years of age. The percentage of people below poverty line in India also has reduced tremendously from around 37% to less than 20% in 2019. All these facts paint a rosy picture about the Indian economic scenario. However, the per capita income of India is meager 2000 USD which is much less than most of the emerging and developed nations in the world. As per Oxfam report, 77% of the total wealth in India is owned by 10% of the population and 70% of the wealth created in 2017 belonged to 1% of the population. This brings out a stark inequality existent in the Indian structure and makes a strong pitch itself to Indian government to spend more for the poor people to provide basic amenities like health, education etc.

Not only in India but in most of the countries, government’s spending on various welfare schemes and resource building form a significant proportion in their total GDP. However, in emerging economies like India, it becomes difficult for government to spend beyond a certain level as they always run a fiscal deficit and they try to limit it.

The change of the government in 2014 had brought a shift in policies and the attitude of government in implementation and conceptualising various schemes. Narendra Modi led BJP government has always believed that state should be a facilitator for business and it has no role to be in business. In that line, government has reduced stake in many businesses and divested many loss making business. The boost in infrastructure spending and various welfare schemes like PM Ujwala Yojana, Ayushman Bharat(also known as Modicare) etc have highlighted priorities of the government.

Share of Indian central government as a percentage of GDP has always been in the range of 9-12%. However, in the recent past few quarters, to compensate the slowdown in the economy government spending has increased but within the limits of fiscal deficit. The percentage growth in the government spending YoY has increased at a much higher rate than the GDP growth. The lingering problems of banking sector and most of the banks being state owned has limited the capabilities of the government to spend money in the development sector. After the recent merger of banks from 10 to 4 has brought most of the banks out of the PCA Framework, which restricts the banks to lend freely due to insufficient capital requirements will open the hands of the government to spend in other fields.

In the previous 2 budgets, government has introduced various schemes like PM Matsya Sampada Yojana to improve infrastructure in fisheries sector to address critical value chain issues. In 2018, government announced its target of doubling the farmers income by 2022 by increasing the MSP for various agricultural products. Government allocated 1.38 lakh crores for spending in Health, Education and Social security in 2018-19. To support the daily wage workers who, in general, don’t save for future or not able to save for their retirement are sanctioned under PM Karam Yogi Maandhan Scheme in 2019-20.

At this point, when the rural consumption is falling, savings rates are coming down and economy is slowing, government should take the lead to increase its expenditure on various schemes which can eventually increase the disposable income in the hands of people. At the same time, the focus towards long term targets like improving the quality of life of farmers and workers in other allied agricultural sectors which employs around 50% of the workforce, improving the quality of education, health facilities etc should not be compromised. The spending on the infrastructure facilities for farmers should be improved and availability of credit to business should be made easier by reducing the transaction costs. MSMEs which employ a majority of the workforce should be given platforms to compete and gain scale to increase their businesses. BJP government has been able to maintain the fiscal discipline in a much better way over the past 5-6 years, however, it should let go off the fiscal target for one year and spend to ignite the spark of the economic engine which is passing through a winter morning.

Budget Series || International Trade

The importance of the Union Budget has been diminishing in the recent years, with economists and investors worldwide viewing it as just a macro-economic policy statement, rather than a practical allocation of a country’s resources. However, at times like this when the economy is in shambles, the budget automatically gets greater importance. With the long-awaited budget 2020 coming up, expectations from the government are sky high. This budget is supposed to combat the current slowdown and introduce initiatives to strengthen the economy for the years to come and prove to the world that the slowdown won’t hamper the country from achieving its goal of being a five trillion economy.

                Looking at the expectations for international trade, i.e. exports and imports in the upcoming budget, we need to first look at the current scenario of exports and imports. Escalating trade tensions between countries, along with the global economy slowdown has led to a decrease in exports of not just India, but many other countries across the globe. India’s exports dropped by 1.8% in December 2019. India is mainly dependent on domestic demand, especially recently. With the slowdown hitting the domestic demand hard, and the manufacturing sector, in particular, taking massive hits in growth, it is time for the country to increase exports as a percentage of GDP and depend on international trade for growth a little more. India exports form part of just a hint above 10% of its GDP. For a comparison, China and Japan’s exports form part of 19% of their GDP.

                The FICCI pre-budget report advocated that at least 20 percent of India’s GDP needed to come from exports in order to reach the target of a 5 trillion economy. However, with the current level of performance, it may only be a pipe dream. However, there is a silver lining in this situation. Amidst the different trade wars, the decreased efficiency of China’s exports which was a result of the Hong Kong protests and rising price levels, global importers may be looking at India to fulfill their demand. However, it is up to India to grasp that opportunity.

                The government has announced various measures in the previous year, including additional export incentives, financing and credit for exporters to boost exports. However, it is time to make a bigger splash with the upcoming budget. One of the main instruments to promote exports is the duty drawback scheme which offers a rebate on duties and tax on materials used in manufacturing goods to be exported. It is done to ensure that exporters can offer competitive prices in global markets. However, the main drawback of this scheme is that it has a cap which disincentivizes exporters using high-quality material.

 The other scheme which helps exporters is the EPCG (Export Promotion Capital Goods), which seems to be running out of steam, given the latest numbers. The EPCG allows duty-free import of capital goods, given that the person exports a certain quantity of goods in a specified time period. The revenue foregone to the EPCG has dropped by almost 70% which basically means that manufacturers are spending less and less on procuring capital goods to manufacture high-quality export products. This duty structure should be rationalized in order to increase exports. Although the WTO doesn’t usually approve of high-government intervention through subsidies to exporters, there are some ways for the government to increase exports through spending. There have to massive upgrades in government spending in the following areas allocated in the budget to have hope of increasing exports.

  1. Access to credit: Small exporters who form a huge chunk of total exports absolutely need to have access to credit. Making the access easy is a huge step in boosting exports. The importance of fintech comes up in this area too.
  2. Skill development: Although India has an advantage over other countries in the number of people available, it has largely been unskilled labor. Developing the skills of labor can massively increase production, and hence, exports. The government can allocate a portion of the budget for skill development under its existing schemes.
  3. Technology upgrades: This is perhaps the most important thing to do in the current world. Indian exporters need to be able to compete in the markets, which are now digitally driven. Access to cutting-edge technology is costly and this is where the budget comes in. Access to funds can smoothen the process of technology acquisition. The budget is expected to increase funding to increase technology infusion and help exports go up.
  4. Infrastructure improvement for manufacturers: This is a no-brainer. Allocation of funds toward improvement of infrastructure directly increases the number of products available for export.
  5. Intellectual property: The IPR policy (Intellectual Property Rights) shows the path to bring all intellectual property rights under one umbrella. The geographical indication tag which is used on goods having a geographical origin and having attributes or qualities that can be traced to that particular geography, is an important section of IPR. GI tagged goods have been given the status of intellectual property and they assume greater value than generic goods. Allocating funds towards this in the budget will help exporters greatly.

While all these can help boost exports, there is also an obstacle looming in the distance. The Federation of Export Organizations (FIEO) has stated that further escalations in the US-Iran tensions may have a severe negative impact on India’s exports to Iran. And since Iran is a major importer of Indian goods to the tune of almost rupees 24,956 crore in the previous year, this would severely impact the balance of payments of the country. Advocating the need for research and development in India, the Engineering Exports Promotion Council of India said that the budget should do away with any duties on imports made for R&D, since it is a backbone for any industry and would help compete with international players.

                Looking at the imports side of the picture, things aren’t much better. The high domestic demand leaks out to impact the imports in our country since domestic production has dipped in the previous year due to the manufacturing sector’s slowdown. The imports of our country have increased, especially in the ‘Others’ category. According to Commerce and Industry minister Piyush Goyal, one out of four products being imported form part of that category. To provide a little more context and clarity, Mr. Goyal stated that the government would start a process of refining the HSN codes and bring more clarity to the category of ‘Others’.

                The government is likely to increase the import duties on said items and impose restrictions on certain goods in that category. The budget will most likely contain a large increase in import duties to curb the excessive imports on more than 50 items, targeting about $56 billion worth of imports. The hike in import duties would help the local manufacturers by providing a level playing field. According to the IMF, the hike would be on items relating to chemicals, jewelry, handicrafts and electronic goods, among others. However, this move might impact smartphone manufacturers who import accessories for their products. It would also significantly impact the plans of companies like IKEA, who had previously stated that the existing custom duty structure was a challenge. The trade ministry has also asked the government to consider imposing a Border Adjustment Tax which would be levied on top of all existing duties to help level the playing field in the local market. The dire shape of the Indian economy is something which every person in the entire world has been noticing. The Union Budget is a fantastic opportunity for the government to show the world that India is on top of things and is doing everything she can to quash the situation. Budget is not a kill switch which can change our economic fortunes, but it is certainly a stand made by the government to show the intention of the government to turn the tides.

Negative Interest Rates

“It’s not how much money you make, but how much money you keep.” – Robert Kiyosaki

Saving is a dominant factor when it comes to policy-making decisions. We all do save money for unforeseen circumstances in different forms. The worth of money demanded today is not the same as that in the future. It is comparatively lesser due to inflationary pressure and other factors. Therefore, people expect a positive return on their investments or savings. 

But, imagine a bank paying negative interest. Crazy as it sounds, the world of banking is experiencing a revision with the central banks of some major economies offering zero or negative interest rates. Unlike the traditional approach where the lenders were being paid for lending money, the reverse is seen into effect. This trend got the ball rolling with Nationalbanken, the central bank of Denmark, which has been charging negative interest rates since 2012. The same was followed by the European Central Bank two years hence. Soon, Switzerland, Sweden, Japan and Hungary also adopted the same policy.

Back in the nineteenth century, Silvio Gesell proposed the theory of negative interest rates for situations of an economic slump. Severe downturns require ample monetary policy accommodation through interest rate cuts. In times of deflation, people tend to hoard cash instead of looking out for avenues to invest. This steers poor demand, lower production, fall in price and a rise in unemployment. To combat this situation, quantitative easing and negative interest rates are followed to stimulate growth. But, breaking the zero lower bound comes at a cost, mostly inflation. In the middle of mixed opinions around the globe, penalizing the investors for parking funds with negative interest rates has been regarded as the last option to boost the economy. It reduces the cost of borrowing in the market, incentivizes risk-taking and boosts the spending in the economy.

On the contrary, apart from inflation, negative interest rates also reduce the margin between the borrowing and the lending rate, thereby reducing the profit earning capacity of the banks. Since borrowing becomes cheap, companies may resort to buying back of shares, making fewer shares available in the market and creating pressure on the share prices which in the future may lead to lesser investments in projects. Given the increase in the risk-taking capacity of the borrowers, it creates a pneuma of borrowing more than what one can repay. Such rate cuts for a long period creates confusion in the market for valuation of assets and liabilities. Finally, it may lead to instability in the country. 

Negative interest rates are a draconian measure which shows that the policymakers are afraid of the economy falling into a deflationary spiral. What’s crucial is that the negative rates on short-term debt spread on to longer-term bonds that have a larger effect on consumer and business borrowing. At present, there are roughly $16 trillion of negative-yielding bonds out in the global bond market.

If negative interest rates have so many flaws, why all the controversy? The answer, of course, is that the case isn’t that strong. Some technical and political factors may hinder success. In some countries, zero-interest policies seem to have sparked some additional lending, but quite slowly. The fear of the possibility that the banks would attempt to liquidate their inactive assets and purchase positions in more liquid assets to avoid the penalty interest rates on their reserves has so far been muted. This would weaken banks’ profitability without necessarily spurring economic growth. What ultimately matters most is the public reaction which may be out of the ordinary. Banks are scared of triggering public-relations disaster. But if the negative rates aren’t passed along to depositors, their effectiveness in stimulating spending may be minimal.

Possibility of Negative Interest Rates in India: Among all the countries with negative interest rates, Hungary is the only emerging country to adopt it. The success of Denmark and Sweden cannot be replicated in other parts. Authorities in Denmark and Sweden were clear on the outcome since they did not leave any scope for the people to escape. The central banks of Japan, Sweden, and Denmark charged the deposits instead of rewarding only for a proportion of deposits held by commercial banks, unlike what ECB followed.

Focusing on our country, RBI had cut its small savings deposit rate, which was an obstacle in lowering the lending rate before. The report presented by State Bank Ecowrap showcased that most banks were unwilling to lend, provided the already adverse scenario of loans in India. From the analysis of 26 banks, the deposits have grown by a meager 1.6%. The credit growth in the country has suffered a decline, even when the RBI has constantly been reducing their lending rate. For a country like India, where inflation rates are already nearing 4% and global oil prices have dropped almost $60 per barrel, the policy of negative interest rates may not stimulate growth and development. Learning from the adverse results of Japan’s Abenomics policy and ECB, the rate cuts will only lower the profits of the banks which they will try to recover by charging the depositors, sooner or later. Below zero rates, when passed on to the retail depositors, might trigger withdrawal from the accounts and hoardings of cash. Various analysts and economists opine that slashing of rates below zero will not be fruitful in the long run, especially in countries that are highly dependent on cash.

Written by – Harsh Goyal (Section 6, PGP1)

The doldrums of political revenge

Two articles of impeachment were approved by the House Judiciary Committee: One for abuse of power and one for obstruction of Congress. On 18th December, 2019 the House voted 230-197 in favour of abuse of power and 229-198 in favour of obstruction of Congress. The House has 435 members and a majority of 218 was needed to impeach Mr. Trump.

Now that he has been impeached, becoming the only third president in the history of the US politics, after Andrew Johnson and Bill Clinton, the process will now head to Senate where the Democrats have to establish a two-third majority to remove Trump from office. This seems highly unlikely as out of the 100 Senators; they would require 67 votes in order to do so. The Democrats are 45 in numbers, Republicans are 53 and there are 2 independent Senators. Even with counting 45 Democrats and the two independents, the Dems will need 20 Republicans to shift camp, which is not an easy task.

Something big is being brewed by his adversaries. The democrats, led by House Speaker Nancy Pelosi, are on his throat. They have started a campaign to impeach the POTUS (President Of The United States) which he terms as ‘fake’, ‘witch-hunt’ and ‘kangaroo court’.

This impeachment process has been termed by political experts to be a ‘political suicide’ for Nancy Pelosi.

Let’s delve deeper.

What’s an impeachment?
Impeachment in simple terms mean accusing a government official of a certain wrong doing that is ‘unconstitutional’. Impeachment, in most countries, itself never removes someone from the office. An impeachment is followed by a vote of removal/conviction. However, in some countries, like India, a government official can’t remain in office while the impeachment process ensues.

What does the US constitution say?
US constitution, under Article One, gives the right to the House of Representatives (House) to impeach and the Senate to conduct a trial on a successful vote for impeachment. The government official is not removed from office. The second stage begins where a vote is held for the removal of the official in the Senate. This process requires a supra-majority or two-thirds majority. For president it says that one can be impeached for ‘treason, bribery or high crimes and misdemeanours’. It doesn’t define what falls under ‘high crimes and misdemeanours’.

The history, please!!
Oh yes. Till date, the House has begun impeachment process 62 times and out of that nineteen federal officials have been impeached including two presidents, one senator and fourteen federal judges. The last impeachment of an official was during 2010 against a federal judge for accepting bribe which he was duly convicted of. While, the last impeachment of a president was in 1999 when Bill Clinton was charged with lying to jury and obstruction of justice, both of which he got cleared of.

Okay! Why Donald Trump? What has he done now?
It’s a long story. A story of two political rivals trying to outdo each other. It all started with an allegation by a whistle-blower that POTUS withheld military aid to Ukraine in a bid to investigate his political rival and Democratic presidential candidate Joe Biden and his son Hunter Biden for wrongdoings on a phone call.

Who were on the phone call?
American Side: Donald Trump
Mike Pompeo, Secretary of State
Robert Blair, Senior Adviser to Chief of Staff Mick Mulvaney
Keith Kellogg, National Security Adviser
Jennifer Williams, Adviser for Europe and Russia
Charles Kupperman, Deputy National Security Adviser
Timothy Morrison, Senior Director for European Affairs
Alexander Vindman, Top Ukraine expert

Ukrainian Side: Volodymyr Zelenskiy, Ukraine president
May include Other officials and translators

What are the wrongdoings and why Mr. Biden?
In early 2014, Mr. Biden, the then vice-president, was appointed as an emissary to Ukraine by President Obama after Russia invaded Ukraine. He did what most VPs do – persuaded Ukrainian leaders to improve financial condition of Ukraine and gave ultimatum to get rid of rampant corruption. This was as his son Hunter got inducted into the Board of Directors in a Ukrainian Oil Company, Burisma Holdings. He was paid $50,000 per month just to attend a meeting. It was alleged by some advocates and administrators in Obama that Hunter took undue advantage of his father’s position.

Well if it was 2014, why raise this issue now in 2019?
Election!!! Trump!! Mr. Trump has played his ‘trump’ card to eliminate Joe Biden’s campaign for presidency by smearing his image in public. He has great connect with retirees and has a foothold in north eastern states. This is a major reason why the Trump camp is too eager.

Okay with that done, who uncovered this secret?
It was Rudy Giuliani, Trump’s personal lawyer, who went on to claim that the vice-president removed Viktor Shokin, a former prosecutor general of Ukraine, who in turn was investigating Hunter Biden’s involvement in money laundering tracing it all the way back to Brisma. Shokin said to media that he was forced by Petro Poroshenko, the then Ukrainian President, thrice – once on phone and twice personally to halt the investigation. When Shokin tried seizing Brisma’s assets, Poroshenko lost his cool and personally asked Shokin to resign. Shokin said it was all done to please Joe Biden who was threating to withhold a $1 billion loan to Ukraine.

Wait. What? Now Trump is getting accused of same thing his personal lawyer tried accusing Joe Biden of?
Haha. Yes. But even if it’s remotely true, Biden faces complete annihilation of his political career or what’s left of it anyway (he is 77 years old).

Great! Can you lay a time line please?
I thought you would never ask!

May, 2019 – Rudy Giuliani said he was going Ukraine to meet Volodymyr Zelenskiy, Ukraine’s new president, to discuss on matters involving Hunter Biden. After a week, Yuriy Lutsenko, a former prosecutor general, stated that there were no evidences of any wrongdoings by Biden.

July, 2019 – As per White House’s notes, Trump called Zelenskiy to investigate Joe and Hunter Biden.

August, 2019 – Reports start coming out alleging Trump of withholding military aid amounting to $350 million to Ukraine.

September, 2019 – Foreign Affairs, Intelligence and Oversight Committees gets involved in the investigation against Giuliani and Trump. After the whistle-blower’s complaint surfaced, Nancy Pelosi demanded a formal impeachment inquiry against Trump with rising support from Democrats. A transcript related to the call that happened between Trump and Zelenskiy is released by White House in which Trump asked his counterpart to ‘do us a favour’. Subpoenas are issued against both Mike Pompeo, US Secretary of State, (a privy to the call between Trump and Zelenskiy) and Giuliani. Kurt Volker, Special envoy to Ukraine resigns.

October, 2019 – Trump goes public encouraging China to investigate the Bidens. Volker turns over text messages of the diplomats to the Congress. House Democrats subpoenaed the White House to submit the Ukraine documents or else face a full blown impeachment enquiry. A second whistle-blower comes forward. Subpoenas issued against Defence Secretary, Mark Esper and 4 other officials. Marie Yovanovitch, the former U.S. ambassador to Ukraine who was abruptly ousted in May, testifies before the House Intelligence, Oversight and Foreign Affairs Committees alleging Trump pressured to remove her from office. Hunter Biden steps down from a Chinese backed private equity firm. With a vote of 232-196, the House officially adopts an impeachment resolution.

November, 2019 – House Republicans request for eight witnesses to appear at public impeachment process. The first public impeachment process begins on 13th. About 10 individuals testify in these public hearings.

December, 2019 – House Judiciary Committee votes whether to send the report to the House Intelligence Committee. Nancy Pelosi asks the committee to draft the articles of impeachment. The articles are then unveiled by the House Democrats.

Some individuals and their testimonies:

George Kent: The deputy assistant secretary for European and Eurasian affairs, testified that Trump did pressure Ukraine to probe the Bidens.

William Taylor: The acting ambassador to Ukraine, testified that he protested over the policy taken by Trump.

Marie Yovanovitch: Former diplomat serving under Bush and Obama era pointed that the whole process was revolved around quid-pro-quo and that’s the reason why Trump removed her.

Alexander Vindman: The top Ukraine expert registered concern over Trump’s request almost immediately with the legal staff on the National Security Council as per his testimony. He was present when the call was made.

Jennifer Williams: Special adviser on Europe and Russia to Vice-President Mike Pence, was in the White House Situation room listening to the call. She testified that the requests were “unusual and inappropriate,” but did not relay her concerns to her supervisor.Kurt Volker: The former U.S. special envoy for Ukraine, tendered his resignation after the whistle-blower’s complaint got out stating that he was an intermediary in Giuliani’s exchange with the Ukrainians. This made him turn and hand over the text messages to the Congress.

Written By – Tejas Sharma(PGP 2)

Crisis in the current financial service space in India

There has been a lot of chitter chatter happening everyday about the path the Indian economy is dwelling into and the facts and figures aren’t very hunky-dory. The economy is in a gloomy state and the current situation deserves attention. The growth rate witnessed for the second quarter of the fiscal year 2020 has been 4.5%, which has been the lowest in 6 years. The Monetary Policy Committee has revised its GDP forecast for FY 20 to 5%, which is at its lowest level since the financial crisis of 2008. After the soaring of vegetable prices, the government has increased its retail inflation projection upwards to 4.7-5.1%. With a number of things going wrong, one of the sectors most adversely affected is the financial sector and ironically this is the sector that is expected to be the back bone and bring the country out of a slowdown. Let’s see the country’s stand in that area.

The air in the economy about the banking sector in the past few months has been marred with huge amount of NPAs contributed by the public sector banks and cases highlighting messy corporate governance issues. Even though the RBI has been taking initiatives like setting up the Insolvency and Bankruptcy code, setting Prompt Corrective Action, in order to clean up the mess, the effectiveness of these new frameworks still lie in a grey area. According to ICRA, out of the 2542 cases admitted under the IBC, more than 50% cases are still ongoing in courts. Even the cases that have been resolved, only 15% of the cases have yielded a resolution plan, and the rest have ended up liquidating. Additionally, the recent scams like PMC crisis, Karvy scam, highlights that there is still a fundamentally deeper problem which will take a lot of time to go away from the sector. If we observe most of the recent scams, the regulator comes into the picture only when the scam breaks out and the damage has been done. The important point to note is that, why isn’t there an identification of the problem in the annual inspection conducted by RBI and why isn’t there a damage control in the first place? This issue in the financial sector will not be solved until and unless there is a better fraud detection framework in place and until and unless bank’s top board comprises of ethical professionals. 

To add to the already aggravated problems, due to a slump in demand and wide spread negative sentiments, the bank loans given out is at its lowest pace in 2 years. Even after a 135-bps cut in the repo rate from the Reserve Bank of India, the lending has not been boosted. This slowdown currently being faced is the one caused by a lack of demand. The investment demand is more or less interest inelastic as of now, hence any marginal cut in the lending rates by the bank is not encouraging the demand for investments. The last time when the lending rate was so low post the effects of demonetization and GST, NBFCs quickly backed the banks and became a major lending vehicle for the country. NBFCs have been a great saviour for the credit space as their borrowers range right from the smallest ticket sizes to big budget entrepreneurs. However, after the IL&FS turmoil and the subsequent spill over effect on the other NBFCs, the shadow banking is facing a significant liquidity crunch as well. This is even more dampening as NBFCs have been a major lending vehicle for sectors like real estate, construction and automobiles, all of which have been severely impacted due to the crunch and crisis. The government had announced its plan in budget 2019 of giving a 6 months credit guarantee worth 1 lakh crore to boost the lending by banks to the NBFC sector. However, there hasn’t been any improvements and disbursals in that area as well and banks are reluctant to extend credit to this space.

 In fact, there is an even more threatening situation emerging. NBFCs in a search for growth have switched to lending to smaller ticket sizes and riskier loans. According to a CIBIL report, the loans given out to borrowers with a credit score of “below 700” have gone up drastically. The average ticket size of NBFC loans have dipped from Rs. 1,10,000 to Rs. 41,000. This increase in subprime lending to boost the asset base is more engraving for the Indian economy, especially when the financial sector is already loaded with a bucket of issues. What is more concerning is whether there will be a point when the Indian customer loses confidence in the non-banking lending space of India, which contributes approximately one-fourth of the credit flow?

The regulator needs to step up and remove the vulnerabilities faced by the financial sector. Even though currently the economy is witnessing a slowdown, and not a recession, the slowing numbers are definitely a cause for concern and need to be rectified. For that, the country needs to be backed by a stronger and sounder financial system fully trusted by the people of India.

Written By – Anjali Agarwal (Editor, TJEF)