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India’s national budget will be presented in Feb 2021. After decimation of economy due to prolonged covid19 shutdown last year, sharp recovery was seen during last quarter, with some economic parameters reaching pre-Covid levels. Covid infections have been falling in the recent months. Recently, two locally produced vaccines have been approved for emergency use. Thus things are looking up to some extent.

Budget should provide platform for sharpy increased growth and employment in the coming years. Here are some ideas for budget and beyond.

Not all of them are new, most are basic enablers.

1.   Get rid of inflation targeting- focus on growth and jobs

Stated monetary policy goal of RBI (reserve bank of India) for the last few years has been on keeping inflation low (4% target) by so called “inflation targeting”. Essentially reducing inflation by increasing interest rates. This is based on policy used by famous US Fed chairman Paul Volcker decades ago to control galloping inflation. This simply does not work in India. India is fundamentally different – some reasons – govt buying grains at artificially high prices from farmers, highly subsidized handouts to poor, inefficient supply chains, numerous intermediaries, etc. All it does is making borrowing costly and making Rupee stronger. The policy of RBI / govt needs fundamental rethink. Goals should be more like that of US Fed – “maximum employment, stable prices, moderate long term interest rates”. Restating goal is first step in implementation. As I explain later, this is not optional.

2.   Don’t reinvent wheel – find reasons and improve

Govt applies quick fix or announces new initiative without studying the reasons for under-performance. Take the case of power which is basic necessity for growth. Most of the power distribution companies are making huge losses. Union govt recently spent 1000s of crores on re-capitalizing them. Power generation companies charge Rs 2.0 – 3.0/ unit to distribution companies. Even though customers are charged Rs 5-8/unit, most of them continue to make huge losses and supply is unreliable in many cases. They frequently default on payments to power producers. It can’t be just distribution loss. Govt should ask tough questions to understand reasons for under-performance instead of recapitalizing them again and again.

Same is the case with some of the public sector banks – govt is recapitalizing them again without understanding reason for under-performance. Main expertise required by banks is the ability to balance risk and returns i.e. lend profitably keeping in mind risk at an acceptable level – which some of them lack. Either they are overcautious in lending or reckless in lending large amounts without proper understanding of risks involved.

3.   Govt wants to double farmer income- why only farmers?

Stated aim of govt is to doubling farmer income in the next few years. Govt has tried to do this by increasing purchase of grains at higher and higher prices (minimum support price-MSP), highly subsidized/ free inputs (e.g. fertilizer, power, water, pesticides), loan write off, etc. But this is no win game.

Individual income from farming is falling continuously due to – more mechanization, population growth, smaller land holding, static price of agriculture produce, too much production of items for which there is no demand, etc. Consequently, large number of people are migrating to cities/towns looking for work- in most cases it is much more lucrative. 

This is an irreversible trend. Bottom line is – there are too many people in agriculture. Govt/ NITI Ayog should make a strategic plan on how to shift most people to manufacturing, service, construction, tourism, or other sectors. Aim should be doubling income of everyone rather than only farmers.

4.   Keep competition in view when making policy 

In the last few years govt has provided financial incentives (PLI scheme) to mobile/ electronics companies to set up large manufacturing operations in India. Some of them are shifting from China. This has met with considerable success- potential is enormous-only surface has been scratched so far. E.g. Apple Inc alone had revenue of > $200 billion in 2020. Many of them employ thousands of people.

Recently, there was rioting due to wages not being paid on time in one of the new manufacturing subcontractors of Apple. Usual culprits have jumped into fray supposedly to protect worker rights. It should be borne in mind that India is competing against China and ASEAN countries. These countries have limited or no democracy with little or no worker rights, and worker unions are not allowed. Some like China use slave labor according to reports. Several riots have taken place in these countries.

Total management control, responsive/supportive govt, no unions and low cost are the major attractions for outsourcing companies. To compete with these countries India should make changes to match their laws as much as possible. It could be – simple+ few labour laws, total management control, no union, supportive govt, no inspection for 5 years at the start of enterprise.

Garments is another sector with enormous export potential, in which India has been steadily losing market share to countries like BD, for somewhat similar reasons.BD is targeting $40 B/year in exports. India has natural advantage in garments and has great employment potential.

5.   Form a cartel to sell grain mountain

Govt through Food corporation of India (FCI) buys massive amounts of many types of grains at high prices (MSP) to support farmers. The purchase is way above needs of the country. Some of the grain rots, some disposed off way below market price, often it is exported at below procurement prices. India is among largest producers of many grains e.g. rice.

Like oil cartel OPEC, which has managed to keep oil prices mostly at high levels, India should consider forming a grain cartel so that grains can be sold at more lucrative prices.

6.   Build road and other infrastructure faster and take care of workmen

Massive amounts of road, rail, housing other infrastructure is being built to make up for under-investment for decades. Plan was to spend $1.5 trillion in 2019-20. This is indeed a large amount. However, compared to China – size of investment, speed of execution, quality are somewhat lower. For comparison, China built 2900 km of high speed rail (bullet train) in 2020. Faster completion should be incentivized. Speed can be increased by faster regulatory clearances, automation,quicker payment to contractors. This has many advantages- faster utilization of assets, reducing financing cost, earlier toll collection hence returns, increased job creation, deploying earned money in new projects, etc. These projects employ lakhs of people most of them hired through subcontractors. And subcontractors pay minimum attention to welfare of workers. Govt should insist on better deal for workmen- minimum wage, electronic payment, other benefits, and attention to health + safety. Considering large numbers employed, this will lead to more even distribution of wealth.

These are some of implementable ideas worth pursuing. More in the pipeline.

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Full page newspaper advertisements promising eye popping returns. Indians’ investment in Cryto-currencies (Crypto) hit $10 billion last week as per news reports– said to be one of the biggest in the world. Crypto related company executive (mostly young) interviewed on business channels hinting not to miss the bus- invest, trade and earn fantastic returns. Big financial institutions who thrashed Crypto initially are investing in Crypto currencies though gingerly. El Salvador and some other countries have made Bitcoin (a Crypto currency) the legal currency, so have some other countries. Use of Crypto transaction is legal in many countries including USA .

Question on many people’s mind is — is the hype true?
Should I jump in become wealthy overnight?

What is Crypto ?

Let us take a step back and try to understand what Crypto is. Crypto can be defined as virtual or digital money that takes the form of “tokens’’ or “coins. Most of Cryptos are entirely intangible- meaning nothing physical like credit card or currency notes.

Crypto only exists on computers- no coins and no notes- no govt involvement. Decentralized: Cryptos don’t have a central computer or server. They are distributed across a network of (typically) thousands of computers. Peer-to-Peer: Cryptocurrencies are passed from person to person online. Users don’t deal with each other through bank or banking regulator such as RBI or US Fed. So, no trusted third parties. Anonymous: Need not give any personal information to own and use Crypto-No rules about who can own or use. Trustless: Users are in complete control of their money and information at all times. Encrypted: Each user has special codes that stop their information from being accessed by other users i.e. it is encrypted. Global: Cryptos are border-less & can be sent across border without permission or commission.

There are 4000 Cryto currencies as of January 2021. Three most popular being: Bitcoin, Ethereum, Ripple. Bitcoin is the 1st & most popular, released in 2009 & founded by Satoshi Nakamoto. Bitcoin is based on a distributed ledger known as blockchain technology. About 18.5 million Bitcoin tokens are currently in circulation, against a present market cap limit of 21 million.
In April 2011, one Bitcoin was worth one US$. By December 2017, one Bitcoin was worth more than 20k US$. Bitcoin value as on 24–01–22 is $35,407. Since there are no underlying assets, price is determined purely by supply and demand.

Nuts and bolts of bitcoins:
Parts of Crypto ecosystem: Miners: who try to solve mathematical puzzles generate Cryptos and claim reward. Exchange : A business (usually website) where one can buy, sell, or trade in Crypto. Wallets: Software programs which hold private and public keys and enable users to send & receive Cryptos and monitor balance. (see schematic on how Bitcoins work)

Can I become quickly become wealthy by investing in Crytos?

It is true that value of Cryptos have sharply appreciated since Nov 2020 (see five year chart of Bitcoin vs US$). There is no surety that this uptick will continue. However, Bitcoin is down 8.7% year to date, and the second-largest, ether, is down 14%. Value tends to be very volatile. For example, during May 2021, value of Bitcoin crashed by 50% when Elon Musk of Tesla expressed concern over the environmental impact of bitcoin mining.

The direction of bitcoin’s trading so far this year has been almost identical to the moves of the tech-dominated Nasdaq Composite, which is down 7.3% year to date.

As mentioned previously no single entity has ownership of Cryptos & no one is really responsible for security of Cryptos. Frauds and stealing of Cryptos do happen.To be precise, yes, Bitcoins can be stolen/hacked and there are many such examples. Biggest Crypto heist in history has taken place probably in South Africa, $3.6 billion worth of Bitcoin disappeared from Africrypt, a Crypto investment company- fraudsters are said to be founders of company.
Law enforcement in most countries may not be of much help since Cryptos are not considered legal investment products and they may not have competence.

In many countries including China, Crypto is banned. China also banned Crypto mining recently- many miners were forced to shift Crypto mining to other geographies.Russia has also made Crypto mining illegal. There were also news reports that in India Cryptos will be banned or at least regulated which made Crypto industry extremely nervous. And full page ads disappeared from news papers!

Due to anonymity, Cryptos are often used for illegal, criminal, terrorism, drug related transactions. Recently Indian govt law enforcement agencies unearthed large amounts of cash when they raided Crypto exchanges. They suspect that this cash may be related to black money, bribes or other criminal activities.

So, should I invest after all?

Crypto investing could be risky but could be rewarding in short term.
Cryptos carry following risks:
Hype risk — might get carried away by hype; Security risk — scams, hacking, theft; Volatility risk — unexpected market movements; Liquidity risk — not being able to sell (or liquidate); Vanishing risk — some cryptocurrencies may simply vanish; Regulation risk- regulators are hard at work on laws to regulate — may not be profitable after all; Tax risk- could be taxed for each transaction & gains may be soon vanish.

If one has stomach for these risks, go for it!!

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It has been 2 weeks since complete shutdown has been ordered in India to slow the spread of Covid-19 virus- that is to flatten the rate of infection curve.Three weeks complete shutdown started on 25th March. Except for essential services all persons were asked to stay at home. With some exceptions complete shutdown seems to be a happening throughout the country.

Govt. has to decide pretty soon whether shutdown has to be continued or unwound in steps. Covid specific treatment facilities have been ramped up. Number of tests have increased 10 fold. Meanwhile, in the last few days, number of infections increased sharply primarily because of discovery of unreported large religious gathering in which several people were Covid +ve.

I found  no indication yet of flattening of curve on all India basis. Growth curve is still high and steady. But rate of infection is nowhere close to what some consultancy organizations predicted i.e. 300 million infections and death of millions. As of  today infections were 6760 and deaths 200 which is of course no small number.

Is there any indication of flattening the curve in some states?  Are the trends of various states different from each other in some way?

In this blog I will try to answer this question.

How was the data analysed?

State-wise data up to 9th April was downloaded. Separate mathematical models were built for four southern states namely Karnataka (KR), Kerala (KL), Tamil Nadu(TN), Telangana (TG).  Growth  data was fitted  to standard form of the logistic equation common in ecology and evolution. It provides easily interpretable parameters : intrinsic  growth rate, initial population size, and   carrying capacity. The maximum possible population size in a particular environment is called the carrying capacity. Intrinsic  growth rate  is the maximum growth rate that would occur if there were no restrictions imposed on total population size.

 Charts of the above mentioned states are seen below. Both actual data and fitted curve (red) is seen.

Covid-19 Karnataka

Covid-19 curve Kerala

Covid-19 curve TN

Covid-19 curve Telangana

It is seen that states have different steepness of curve which is indication of  rate at which number new cases are added. It appears that start of  flattening of the  curve has started in the case of  Kerala. Now let us look at the table of parameters.

Covid model parameters

As per the table, Karnataka has the lowest carrying capacity at 211 i.e. number of infections at which flattening of curve is likely to occur and least growth rate of 0.214. Tamilnadu has the highest carrying capacity and growth rate. These prediction are valid provided same trend continues which may or may not hold.  There could be surprises like people not disclosing contact with Covid +ve people.

So what can we say?

Clearly there is  difference in trends between various states. Aggressive lock-down measures seem to be showing benefits in some states.  Govt. appears to be  on right track  in localizing measures to tackle this pandemic.

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Last month India shut its borders and stopped flights to prevent  covid-19 infections widespread transmission in the country.  Began with stopping flights from countries considered to be hotspots and gradually shut down all flights. Domestic flights, rail, and all other modes of transportation was shut down progressively. Maximum effort was put in tracing & tracking quarantined, and infected individuals. Treatment facilities are being ramped up. 3 weeks  complete shutdown starting on 23^rd March was announced. Except for essential services all persons were asked to stay at home. With some exceptions complete shutdown  seems to be a  happening throughout the country.
Objective  is to reduce rate of infection (& deaths) and flattening the curve.
Is the flattening likely to happen? This is one everyone’s lips.

I will try to answer this question.

What does the trend look like?

Many companies have built predictive mathematical models, their predictions vary greatly. With my expertise in  statistics, ML, quality, etc, I  thought I will try to answer this question.Data of confirmed cases for 3 periods ending on 26^th, 28^th, 30^th March was used for this analysis. One of them (30^th March) is shown below. Predictive models were built for each period.  Exponential model  seems to fit the data quite well in each case, with R² >=.98.  No flattening of the curve is  seen.

This was compared to Hubei province of mainland China which is  considered to be epicentre of covid-19. Exponential model doesn’t fit this data, but gompertz model  fits data quite well with R² = .98. Flattening of curve can be clearly seen here. Daily change is near zero.

Is flattening of rate of infection happening?

Using the models built for  3 periods predictions were made for 2 weeks after start of lockdown. These  are compared with actual data as seen in the chart below.

It is seen that predicted curves of more recent data is flatter than that of earlier dates. Actual curve is lower than all predictions.

Does it mean that rate of  infections is flattening? Probably.
After all this a predictive model- only time will tell.

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FM Nirmala Seetharaman will be presenting Modi govt.’s much awaited budget in February. There is realization in the government circles that  more of the same won’t do for many reasons. Economy has been slowing down in the last few quarters. Consequently tax collection has also decreased. There is urgent need to create jobs. Stated objective of making Indian economy $5 trillion one in 4 years will remain a pipedream if rate of growth doesn’t accelerate soon. Radical changes and new thinking is called for.

Here are some ideas for long term growth.

Think entire ecosystem and competition

Before deciding on policy, tax structure and incentives, entire ecosystem has to be thought through. Decisions should be mainly based on growth and job creation potential. These should also consider competitive landscape.

Consider the  example of aviation sector which is the 5th largest in the world.

Following are some of the aspects which should be considered : size and specification of airports, businesses around airports, airlines, airport taxes, aircraft types, aircraft maintenance facilities, flight crew, flight support staff, aviation fuel, competitors, landing rights ,pilot training, duty free shops, manufacture of aircraft parts, regulation, technical manpower, etc. All these have tremendous potential for generating growth, job creation & tax collection.

To get a sense of potential of this sector –  about two lakh people work on support functions in Bangalore airport alone.

Now some of the policies making India noncompetitive:

Tax changed on aviation fuel in India is much higher than in nearby counties. This is one of the reasons for local airlines making losses most of the time. Most aspiring pilots have to go abroad for preliminary pilot training making it expensive and airlines hiring foreign pilots  to make up for the shortfall. Due high GST on maintenance, most of aircraft are sent to nearby countries for carrying out SMRO. Large part of outbound air traffic is grabbed by foreign airlines for various reasons.

Same can be said about solar energy farms. Large number have been  implemented due to government’s green energy push. But, most of solar cells used are imported from China due to cost.

Completely rework audits

In spite of audits by as many as 5 agencies massive fraud in some large public sector banks went undetected for years. More are getting detected, latest being PMC bank scam. Bank officials could easily hoodwink RBI (Reserve Bank of India) officials year after year until a whistleblower reported the scam.

Almost all banks use specialized banking software made by leading IT companies. Auditors / regulators require  competence in following: IT audit, familiarity with banking software, cyber security, record storage, certification of software. RBI’s regulation and audit function has to be completely revamped keeping these things in mind. Probably entirely new set of people with these competencies are required. Banking software should be redesigned to keeping audit aspects in mind. Also mechanism and resources should be put in place to investigate and quickly convict scamsters.

If this is not done soon there is a danger of foreign investment flows slowing down.

Data collection and analysis of inflation and GDP data

I wrote previously why so called “inflation targeting” is flawed concept and focus has to be on growth. Several articles (article1, article2) by economist have appeared in the leading newspapers supporting this idea. Also wrote that collection and analysis of economics related data should be completely revamped. Government has set up a committee for the purpose. This welcome initiative should consider these facts: almost everyone has a cell phone nowadays, most mandis are computerized, all finance/ banking data is computerized, railway data available online, all tax and goods movement data including GST is on a single IT platform. Therefore, data collection can be quite extensive and near instantaneous, instead of being sampling based at present. It is now possible to store massive amounts of data in the cloud and do statistical analysis on the big data to do much better analysis. Using Machine learning and AI it is possible to build much better predictive econometric models.

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In the last few quarters, growth of Indian economy  has slowed down and govt. has been under tremendous pressure to act to reverse the trend. It started with failure of large non banking financial company (NBSC) called  IL & FS which spread to other NBSCs. Main reason for slowdown is the  finance drying up due to ongoing cleaning up of financial sector. This is due  to implementation of  goods and services tax (GST), insolvency and bankruptcy code (IBC), demonetization, increased regulatory scrutiny about non performing assets (NPA), & crackdown on scamsters .

Path breaking economic reforms

Modi government has implemented several path breaking reforms almost at the same  time.

GST tax reform  subsumed 100s of state and central government taxes into a single nationwide indirect tax running on a common IT system. Overnight numerous tax inspections at state borders became redundant.  This has lead to significant (10-15% ) reduction in  travel time between destinations and  reduction in supply chain costs.

Government  decided that all new vehicles from April 2020 onwards  should meet BS VI  pollution standard and  better safety features. Government think tank NITI Ayog announced that within 2 years all new vehicles should be electric  without determining effect on IC engine ecosystem or jobs  or local availability of EV technology. Typically, IC vehicles have 20% import content and EV have 50-80% import content. Per axle overload was also increased in 2018.

Due to increased scrutiny of  banks and NBSCs, non performing assets (NPA) are being promptly recognized and many large defaulting  companies were sent to bankruptcy court. Several promoters of companies were kicked out of their companies. Resolution was achieved  for some large companies who were in trouble. But the process has been slow.

Unexpected adverse consequences

Sometimes good reforms lead unexpected adverse consequences. Here are some examples.

Commercial  vehicles sales have come down sharply (30%)  and they  form a large part of manufacturing ecosystem thus effecting economic growth.  One of the causes  paradoxically   is  the  improved supply chain efficiency due to GST.  Due to faster movement of  trucks and larger load carrying capacity,  less number of vehicles are needed. Hence demand for commercial  vehicles has shrunk.

Similarly, due to imminent  implementation of stringent pollution standards and  talk about switching to EV vehicles, has  resulted in large number of people postponing purchases. Also, vehicle manufacturers are reducing inventory of  polluting vehicles to comply with the law. This has led to sharp drop in purchase of cars in the recent months.

Due to implementation of  IBC and other measures financial system is getting cleaned up which is good for the economy. Hidden NPA are being promptly unearthed. Previously  borrowers could cheat banks or default on loan payments with impunity. Now  in the best case scenario borrowers will get ejected from their companies. In the worst case scenario they may land in jail which happened in some cases. This  is probably first time since independence such a thing is happening. This has forced  people to change the way of doing   business and many are apprehensive. This is one of the causes of  sharp drop in private sector investment as most people are in wait and watch mode. Some crooks reportedly  are making arrangements to exit the country.

Should the reforms stop?
No way!

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India has never been a trading nation. After collapse of USSR, trust of foreign policy shifted from non-alignment to improving relations with western block led by US. Governments of the day signed free trade agreements  indiscriminately. Most countries have trade surplus with India. Nobody was too bothered so long as foreign exchange reserves were sufficient to meet the import  needs. Foreign exchange reserves presently stand  at a comfortable level of $ 450 B. 

India has never put any emphasis increasing  exports as the trust of foreign policy, like most countries do.No real effort has been made to increase  exports or minimize massive imports. Exports by IT services, pharma, gold and jewelry have been some of the exceptions to this trend. They are leaders due to their own efforts not due to any support from government. Meanwhile imports of all kinds of goods from simple household items to sophisticated ones have skyrocketed. No concentrated effort has been made to find import substitutes or produce the goods locally.

So long as economy was buzzing along there was no pressure on govt. to rethink. Suddenly in the last few quarters, growth has slowed down and govt. has been under pressure to do some fresh thinking. Main reason for slowdown is finance drying up due to cleaning up of financial sector. This is due   to implementation of   GST, IBC, demonitization, increased regulatory scrutiny about NPA, & crackdown on scamsters .

One obvious way to restart the economy would be increasing exports.

India has nothing to export?

Think again. Some think that only some special goods or services can be exported in which the country has special strengths- and India lacks these. Nothing can be farther from truth.

India is already large producer of many items, in many cases, 1st or 2nd largest in the world. Some examples : Steel (2nd largest), cement (1st), primary Aluminium(2nd) , milk(1st), cotton( 2nd), Alumina (2nd), mobile phones (2nd), iron ore( 3rd), coal (2nd), wheat ( 3rd), sugar (2nd) , rice(2nd), 2 wheelers (1st), cars (4th), aviation (4th), fruits and vegetables, plastics, textiles, garments,jewelry, refined petroleum, FMCG goods, military hardware, etc. These producers have technology/know-how, size,  are price competitive and  have good quality.   

Why India is a laggard then ? 

What is missing is sharp focus.

Clear thinking has to be done to determine actions to be taken to increase exports. Action could be  in the form of identifying few key focus areas for export, tax breaks, lowering cost of inputs, lowering cost of capital, lowering logistic costs, improving ease of doing business, incentives, keeping rupee exchange rate low, and more importantly encouraging trading partners to buy more. 

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PM Modi in the second term has set ambitious targets  for the country on GDP growth, job creation and increasing  income.  First target is increasing size of Indian economy to $ 5 trillion in 5 years, from  roughly $ 2 trillion at present.  Infrastructure investment of  Rs 100 lakh  crore in 5 years is  one of the  things  being considered to achieve this. As per calculation of some experts , GDP growth has to accelerate  to  8-8.5%  (from current 6.7-7.2%) to achieve this. This along with other large  handouts for weaker sections  is a very large sum of  money to be raised.
Where is the money going to come from?   It is going to be challenging task considering the  state many  financial institutions are in.

Financial sector  crisis

Some of  the banks  (particularly public sector banks ) and  finance institutions  are  going through a  crisis. Large loans given to  many  companies  have turned into non-performing assets (NPA).  This has come into open due to tighter scrutiny of financial sector by RBI and implementation of   Insolvency and bankruptcy code (IBC) introduced in 2016.  This  has resulted in forcing promoters of  companies out of their companies  or  in some instances  companies going into liquidation. Some of the reasons for  NPAs are:

• Lousy due diligence : in many cases  banks have lent large amounts without doing even basic due diligence. There are instances in which  loans were repeatedly  given to companies even when their  registered address was bogus. Recently, a large housing society received eviction notice from a bank only to be hastily withdrawn.
  It emerged that builder had hypothecated the buildings after selling them!
• Fraud : Many tactics were used –  promoters took massive loans then gave ‘loans’  to related parties or  shell companies and didn’t return the loans ( turned them into sick companies), got phony orders from foreign entities owned by them,  made purchases at highly inflated prices, made sham  purchases, diverted funds to unrelated businesses, evergreening of loans to show that companies are  healthy.  Lenders  and auditors failed to detect such frauds for years. Diamond  merchant  Nirav  Modi’s  companies are one such example and fraud is said   to be about  1.4 B dollars. Lead banker  was Punjab National bank.
  Weak legal system has allowed borrowers to escape jail and many of the scamsters have fled the country.
• Changed economic circumstances or competitive landscape:  Due to changed circumstances, once profitable companies  have  started making massive losses.  Companies in telecom sector is one such example.  After entry of new player  Jio with  superior technology, better offerings and ample  funding,  incumbent players started making huge  losses due to catastrophic loss of market share. Some of them  merged with other players at deep discount, others  went bankrupt thus sinking large sums of money.

Fix  finances first  then raise money

Before ambitious targets are achieved financial sector should be  put in order, tax system should be straightened out, exiting funds should be utilized efficiently. These are some of the things which should happen.

• Poor state of financial institutions: Punjab national bank which lost huge amount of money  in Nirav  Modi scam is a typical example. Audits by multiple agencies ( external auditor, internal auditor, IT auditor, SEBI, RBI, vigilance ) failed to detect the fraud for many years.  Govt has spent 1000s of crores in re-capitalizing  banks with no end in sight. Unless banks skill sets related to — risk assessment , customer orientation, lending profitably, audits improve,  
  –losses and  scams will recur.
  A complete overhaul of audit process is called for.
• Same goes for corporate audits-  they are found wanting. Recast of audit mechanism is need of the hour including stringent punishment for scamsters.
• High tax rate: Less than 2% of the population pays income and other taxes. People having  legally earned income end up paying large percent of their income as taxes.   For example, income tax  rate is 20% for a  person earning Rs 5 lakhs/year. Assuming GST rate of  18%  for a  purchase, he has to shell out about Rs 1400 for a item costing Rs 1000. This severely curtails their purchasing power thus reducing overall demand for goods. Taxation structure should be tweaked to increase demand for locally produced goods.
• Reduce subsidy : Most of the population (98%) don’t pay taxes. Farm income is totally tax free.  In addition, irrespective of income,  farmers receive handouts and are entitled to highly subsidized inputs (e.g. electricity, water, fertilizer , pesticide) for farming.   Many  people convert  their ill-gotten wealth to  farm income to escape taxes.  Excessive amounts of  grains are produced for which demand is low or price is low.  Taxing farmers is a political hot potato. Not all the farmers are poor or need support. Clever ways can be found to tax them. Money spent on subsidies can be reduced, for example, by  reducing extent of subsidy depending on value of purchase.
• Fix GST :  Even though GST has lead to greatly simplifying tax payment throughout the country many anomalies exist. For example, commonly used items like    biscuit   are taxed at 18%, cement at 28% and issues with input credit.    
• Use foreign exchange reserves:  India has accumulated $ 438 B foreign exchange reserves, 8^th highest in the world.  But this is not due to trade surplus unlike other countries which are export champions. This money is stashed away with foreign  banks or in US govt. bonds earning almost nothing.  Instead, money can be lent to  high quality borrowers to setup manufacturing facilities or  infrastructure. Some experts think that  $200 B in reserves is sufficient. But RBI can start small lending say $20 B/year.
• Improve data collection: As of now sectorwise data with sufficient granularity, detail and accuracy does not exist. A good system should be setup for periodic collection, analysis and reporting. This should in fact be the  top priority.Use foreign exchange reserves:  India has accumulated $ 438 B foreign exchange reserves, 8^th highest in the world.  But this is not due to trade surplus unlike other countries which are export champions. This money is stashed away with foreign  banks or in US govt. bonds earning almost nothing.  Instead, money can be lent to  high quality borrowers to setup manufacturing facilities or  infrastructure. Some experts think that  $200 B in reserves is sufficient. RBI can start small by lending say $20 B/year.Poor state of financial institutions: Punjab national bank which lost huge amount of money  in Nirav  Modi scam is a typical example. Audits by multiple agencies ( external auditor, internal auditor, IT auditor, SEBI, RBI, vigilance ) failed to detect the fraud for many years.  Govt has spent 1000s of crores in re-capitalizing  banks with no end in sight. Unless banks skill sets related to — risk assessment , customer orientation, lending profitably, audits improve,  
  –losses and  scams will recur.
  A complete overhaul of audit process is called for.
• Same goes for corporate audits-  they are found wanting. Recast of audit mechanism is need of the hour including stringent punishment for scamsters.
• High tax rate: Less than 2% of the population pays income and other taxes. People having  legally earned income end up paying large percent of their income as taxes.   For example, income tax  rate is 20% for a  person earning Rs 5 lakhs/year. Assuming GST rate of  18%  for a  purchase, he has to shell out about Rs 1400 for a item costing Rs 1000. This severely curtails their purchasing power thus reducing overall demand for goods. Taxation structure should be tweaked to increase demand for locally produced goods.
• Reduce subsidy : Most of the population (98%) don’t pay taxes. Farm income is totally tax free.  In addition, irrespective of income,  farmers receive handouts and are entitled to highly subsidized inputs (e.g. electricity, water, fertilizer , pesticide) for farming.   Many  people convert  their ill-gotten wealth to  farm income to escape taxes.  Excessive amounts of  grains are produced for which demand is low or price is low.  Taxing farmers is a political hot potato. Not all the farmers are poor or need support. Clever ways can be found to tax them. Money spent on subsidies can be reduced, for example, by  reducing extent of subsidy depending on value of purchase.
• Fix GST :  Even though GST has lead to greatly simplifying tax payment throughout the country many anomalies exist. For example, commonly used items like    biscuit   are taxed at 18%, cement at 28% and issues with input credit.    
• Use foreign exchange reserves:  India has accumulated $ 438 B foreign exchange reserves, 8^th highest in the world.  But this is not due to trade surplus unlike other countries which are export champions. This money is stashed away with foreign  banks or in US govt. bonds earning almost nothing.  Instead, money can be lent to  high quality borrowers to setup manufacturing facilities or  infrastructure. Some experts think that  $200 B in reserves is sufficient. But RBI can start small lending say $20 B/year.
• Improve data collection: As of now sectorwise data with sufficient granularity, detail and accuracy does not exist. A good system should be setup for periodic collection, analysis and reporting. This should in fact be the  top priority.

Way forward for  growth and job creation

Following are some of the reasons for slowing growth rate and relatively low job creation.

• Poor export performance:  Notwithstanding  IT and few other items, India has failed as a exporting nation. China with 5 times India’s GDP exports 8 times as much as  India. There is tremendous potential for  exporting commonly used items such as garments in which India has natural advantage being largest producer of Cotton. Even Bangladesh exports more. Persistently overvalued Rupee exchange rate is one of the  reasons. High supply chain  cost, taxation, inflexible labour laws are the other reasons. Many countries put invisible trade barriers.  A coherent export/ import policy is need of the hour. Limited number of items should be prioritised for creating large export markets.  Areas in which India has natural advantage should be the focus  to start with.
• Too much imports : In many cases importing goods is cheaper than local production. For example, cooking oil imports for many years was over $ 1B. Even tomato purée in large quantities   was imported to manufacture ketchup. Last year imports of Agarbatti (incense stick) was Rs 800 crore. Recently I purchased a laptop bag – nothing fancy – was surprised  to find it was made in  a far eastern country. It is possible to import even common use goods duty free or at low duties due to agreements (such as with  Asian countries , WTO)  India has signed many years ago. Almost all countries have trade surplus with India- for example- China had yearly  trade surplus of  $ 50-70 B in the last few years.   Some of these agreements have to be renegotiated. India’s trading partners should be encouraged to buy more.
• Imports are lucrative for government: Imports like gold, petrol are taxed heavily and they   play a large part in meeting short term tax collection targets. Hence, policy makers may  not be  keen on giving incentives for local manufacture.  Long term interests should be balanced with short term revenue targets.
• Pubic sector: Due to the same reason, pubic sector companies are forced give large dividends and do  share backs.  Consequently, most of them have been laggards in investments over the years. With some exceptions, since opening up of economy in 1991,  most of the investments have come from private sector.

5  trillion dollar GDP  and 100 lakh crores investments  are good targets to have. But more importantly, funds should be deployed in a meaningful way.  Following should be basis: goods/service created should have sufficient demand, there should be  enough  people capable of buying these goods, should lead to  growth of  real income, support ‘make in India’ & job creation. Priority should be given to investments   which can earn adequate returns

Of course,  achieving  $5 trillion depends on Rupee to Dollar exchange rate weaker Rupee  is not necessarily bad thing.

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Newspapers and TV channels routinely report on inflation numbers whether they have gone up or down and to what extent. And what the government/ RBI (Reserve Bank of India) is doing about it if it has shot up?  If inflation index shows a spike, there is a panic in government circles. Inflation has remained steady over the last few years and is in fact falling. But, is low inflation good? Not necessarily.

During the 1st term of Narendra Modi led government, in consultation with then RBI governor Dr Rajan, a law was passed whereby main focus (rather only focus) of monetary policy and government was to maintain retail inflation in the 2-6% band. And to progressively reduce deficit to around 3.5%.
Entire focus of the monetary policy was so called ‘inflation targeting’. I.E. progressively reduce inflation year on year primarily by keeping interest rates high. No mention was made of increasing GDP growth rate or job creation.

What really happened
When PM Modi took over the reins of power in 2014 from Manmohan Singh led UPA government economy was in mess. Inflation was running in double digits, growth had started stalling, corruption scandals were order of the day and it was widely held view that it was a directionless administration. So, main focus of the new govt. was to bring order and reduce inflation to start with. Govt. managed to these pretty quickly. However, this  has  continued as main plank of the policy even after 5 years.

Why lowering inflation may not be good
Inflation index called CPI (consumer price index) is a composite number derived from of prices of basket of various items, & their respective weightage based on their relative importance. There are mainly two inflation numbers published at periodic intervals, headline and core inflation. Inflation targeting strategy supposedly targets headline inflation.
India being a large country — prices vary a great deal from place to place. Prices depend on many factors – distance from production centres, transportation costs, income levels at the location, applicable taxes, number of middlemen, etc. Income level varies great deal through out the country. For example, apples produced in north of the country sells for Rs 50/kg at Delhi wholesale market and consumer in Bangalore typically pays Rs 120/kg. Obviously, the difference is  due to transportation costs, numerous middlemen, losses due rotting, etc and has nothing to do with  interest rate set by RBI.
The inflation index gives great deal of importance to food items which may not be important anymore, for most people for two reasons. For city folks with higher income, food items form small part of their expenses. Low income families are provided highly subsidized food grains and some other items, hence does not matter for them either. In many cases price paid by poor is absurdly low – for example rice which sells for Rs 35/kg typically is supplied at Rs 1/kg.
However, low prices of food items hits farmers hard as their buying power greatly depends on it. As farmers and rural folks constitute more than 50% population this effects demand for most items such as — FMCG items, tractors , electronics, two wheelers. This effects growth of entire Indian economy. In spite of government fixing higher and higher reserve prices at which it buys food grains from farmers, prices have remained at low levels. In fact in most cases, food grain prices have remained stubbornly below reserve prices fixed by the government. While inflation has started falling and has remained low, worryingly for the government GDP growth has started falling in the recent quarters.

Does the RBI have control over retail inflation?
It does not appear to be so. RBI sets lending rates depending on inflation index, higher the expected inflation, higher is the lending rate to banks. This is called Repo rate which is 5.4% currently.
RBI’s own studies have indicated weak or no correlation between repo rate and inflation index. In fact during last fiscal, actual inflation numbers were consistently and significantly lower then RBI predictions. However, increasing lending rate makes borrowing costlier for wide range of goods and services such as housing and electronics.

For these reasons, a new framework is needed. Emphasis of new framework should be on growth and employment generation NOT on ‘inflation targeting’. How inflation index is calculated requires a re-visit as well.
See my coming blog on how to revive growth ….

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PM Modi lead NDA govt completed 8 months in office recently. It has been a hyper active period with slew of  initiatives/announcements related  investment, manufacturing (‘make in India’), financial inclusion (‘Jandhan Yojana’), skill development (‘skill india’),  security, digital connectivity (‘digital India’) and  health and hygiene (‘Swatch Bharat’). PM Modi  also made  several successful foreign trips. India also had numerous high level visits from  foreign countries. Last high profile  visitors being – US President Obama &  US foreign secretary John Kelly.

It is now time for action. First step in making  these mega  initiatives bear fruit is to ask bold fundamental questions & challenge assumptions- then make plans based on these. Here are my five  big ideas on  way forward – these can  add 2% to the GDP. Most of these will support ‘make in India’ initiative.

 

1. Economic policy:

Some questions-

RBI   reduced lending rates only recently but rate is still pretty high- is there an advantage in keeping them high?
Why  govt is so fixated on holding deficit percentage – there is also news that govt is reducing investment to meet deficit target.
Govt also set itself a further deficit reduction targets for coming years –is it desirable?

What should be done?

There is no evidence to prove  that keeping lending rates high brings down inflation –see my previous blog. On the contrary  it chokes growth in sectors which are dependent on borrowing from banks such as consumer goods, construction, housing , manufacturing, etc.

In the developed economies there is very little scope of improving infrastructure or basic needs of citizens as they are already taken care of- hence growth has to come from increasing consumption. In India, there is big scope for increasing  growth by improving poor state of infrastructure, meeting basic needs of large set of citizens, manufacturing. All these need large investments. Increasing investment into productive sectors will increase growth.
Anyway, deficit targets were fixed by previous govt. – was based on  fanciful  assumptions – it looks like these will not be met. If there is no acceleration in growth soon it is unlikely that challenging deficits targets will be met in the coming years too. As  long as productive assets are being created this will not lead to increased inflation.

It should be noted that China’s economic boom at least  in the initial years was primarily due to massive govt funded  investment  into infrastructure – & use of infrastructure is not free in China.

Govt should not be too fixated on reducing deficits at the cost of investment.  If investment is reduced to control deficit as proposed,  it will lead to downward growth spiral. Hence, there is a need to re-look at the proposed deficit   targets in the coming years & keep the deficit levels at the highest rate possible without stroking inflation.   Same goes for ‘fighting’ inflation by keeping interest rates high- lending rates should be kept as low as possible.

2. Air travel:

Two fundamental questions-

Why the cost of air travel so high in India (travel to Singapore costs only 10,000 Rupees whereas B’lore to Calcutta costs 15000, B’lore to Gulf 30000), but still, except for one carrier, all  Indian carriers have been  making losses year after year? Air India’s accumulated losses are about 5.9 billion Dollars –with no profit in sight any time soon.

Why outgoing air travel is almost completely dominated by gulf and other foreign carriers?

Why repeated safety and other violations (e.g. it has worst on time performance of all carriers) particularly  by Air India is being tolerated by the   aviation regulator – DGCA  year after year?

Reason:

One reason touted for high fares and losses is- costly aviation fuel due to high level of taxes.  Due to this   local airlines are at disadvantage. Is it the only reason for the high cost ? Probably not.  If this were so, how is that one Indian airline is  able to make profits consistently?  This aspect should be studied.

Primarily due  terrible state of affairs in Air India foreign carriers are able to price their tickets at very high levels and rake in high profits. Due to AirIndia’s inability over the years to  ramp up operations quickly, foreign carriers have been able grab most of outbound market especially to Gulf destinations.  As 7 million Indians make gulf their home, this is a captive market waiting to be grabbed.

What can be done:

Reduce duties on aviation fuel as well other charges – this is happening already- support Indian carriers so that they become competitive –and treat all the Indian carriers equally. Remove all restrictions on private airlines so that they can grab as much of outgoing market as possible – this should enable them to double their size in next 5 years . Stop govt patronage to Air India – ask it compete for market share. Make  Air India public sector company to begin with, to reduce govt interference, ask it  to shape up otherwise sell it off. Reducing cost of air travel in India can give a big fillip to tourism industry.

Revamp  DGCA completely, bring in experienced  engineering talent – if required on deputation from foreign regulators such as US’s  FAA.

3. Oil and gas

Why does India import 85% oil and more than 50% natural gas ?
India is 4^th largest importer of oil – last year’s import bill was about  100 billion dollars. This is a big strategic and security issue.
Going by the current trends –no major discoveries in last 5 years-  this is only likely to go up. In the same period US has almost become self sufficient due to shale revolution- India does not even have a draft shale gas policy let alone any new discovery. Gas is imported at 3-4 times the cost of locally produced gas.

Reason:  Public sector ONGC has not made any new oil discovery in the last 10 years. Only major Gas discovery made by RIL is stuck in technical issues and litigation. Even when discovery is made DGH (the down stream regulator) and ministry takes ages to check this and give their approval. Many of the old public sector refineries can’t  handle different grades of crude thus reducing their flexibility.

What can be done:

Simplify  oil discovery policy radically and fix the price of oil/gas (based on ease of extraction- onshore, offshore, deep sea, and so on)  to balance between cost to consumer  and  at the same time making it   attractive for investment. It is necessary to make investment attractive as most of oil and gas is found in not easy to find unlike oil rich countries. Shut down   regulator DGH – it has only lead to endless discussions, litigation and delays.  Also, regulator’s impartiality is in question as  it is manned mostly by   public sector oil industry employees on deputation- they are unlikely to go against their parent organizations. Have a simple revenue sharing price formula in which share of the govt progressively  increases as the years go by -so  that contractor recovers his investment. Have a time bound approval mechanism. Come out with attractive shale gas policy pronto.
Build a large corpus when the price of oil is low -as it is now-so that there is enough buffer for investment and to subsidize when the price of oil begins to climb again. Modernize refineries so that they can handle all types of crude including low grade   crude – which many of them are unable to do at present.

Have 20-30 year  fixed price contract with foreign oil suppliers (particularly the ones with high production cost or their govts are vulnerable ) similar to what Russia signed recently with China. While western oil companies are moving out of Russia due to uncertain environment – China is quietly pouring billions of  dollars in developing oil resources. Negotiate with the US so that they allow their shale gas producers to export low cost gas –currently    export is allowed only to their  strategic partners.

Encourage India’s oil suppliers to invest more in India and import more to reduce massive deficits.  Use foreign exchange reserves to fill strategic reserves which are being constructed – buy oil when the prices are low – which is now .

4. Electronic Hardware:

Why does India  import  almost 100% of electronic hardware ? Most of the imports are from  China. TV sets, mobile phones/ tablets, electronic switches, computers, medical equipment are imported – the list is endless. Only cell phone assembly plant in India shut down recently. This  plant  based in Chennai, owned by Nokia, employed 20,000 people.  Current imports are about 100 billion dollars which is likely to touch 300 Billion dollars in the next 5 years if the  govt’s ambitious  digital India & computerization programs takes 0ff & internet penetration in India reaches the expected level. Import bill is lot  more than India’s oil import bill.

What can be done:

Provide incentives & improve ease of doing business -and woo    investors particularly from Taiwan, Japan and South Korea. These countries are the largest investors in China and have created millions of jobs there. Just doing  electronic assembly can create millions of  jobs.For example, Foxconn a Taiwanese  contract manufacturer, employs 1.2 million people mostly in China. Foxconn is a contract manufacturer for Apple, Xbox,Amazon and many  others.But just incentives may not be sufficient inducement for this to happen quickly- for this to happen quickly  some amount coercion is required. One way would be- tax on imports – rate of tax progressively  decreasing with lower import content.   This is somewhat similar to strategy followed by China- insisted on technology transfer and partnership with Chinese companies in the initial years as a condition to access large Chinese market.

Make it mandatory for large electronic networks such as  Facebook, Flipkart, LinkedIn, Amazon, Google, Microsoft, Visa, WhatsApp, Twitter, Yahoo and Indian telcos to have  their server farms in India. Presently none of them have servers in India. After all, ultimate objective of these platforms is e-commerce. This is important due to economy and security  considerations. At the rate which  these networks are exploding investment of billions of dollars will be needed. For example, India constitutes 2^nd largest number of  Facebook users, so is the case of   LinkedIn. Transaction done on Amazon platform in India is likely to  touch 2 billion dollars this year. Apart from employing thousands it will also  lead to skill development on a massive scale.

 

5. Metal and Mining:
   Why no addition has been made to Gold reserves even though India has been consistently 1^st or 2^nd  largest importer of Gold all these years?
   Legal Gold imports were roughly 50 billion Dollars last year, probably the total is 70 billion dollars -may be even more.
   India has one of the largest reserves of Iron ore & fourth largest Steel producer – still is a very large importer of Iron ore?
   India one of the largest Coal producers and has one of the highest  coal reserves- still a large Coal importer?

       Reason:

Except for one  mine  in Karnataka which produces  small amount of Gold –there has not been  addition in the last 60 years – there is not even a Gold exploration policy.
Mining of  Iron ore was stopped in large parts of country due to orders of supreme court- have started to reopen.  Also, imported ore in many cases is  cheaper than locally produced ore.

Coal mining is largely the monopoly of  Coal India and they have not been able to ramp up production.  Also, calorific value of coal produced is inferior to imported coal in most cases.  Some times, landed cost of imported coal is cheaper than        locally produced coal.

What can be done:

Urgently, put gold exploration policy  and incentives in place to encourage gold mining. In the short term,  import gold directly from gold producers such as South Africa.  Bypassing intermediaries  can save lots of money , put smugglers out of business, &  lead to development of gold processing industry in India. There is no reason why govt of India should not certify purity of Gold.  For example, India imported gold worth Rs 1 lakh  crore      from Switzerland alone last year. India should also explore  buying up  gold mines. By using large gold jewelry manufacturing  talent in India, India can become a big exporter in the field.

Encourage development of Iron ore mines by speeding up environmental clearance and sorting out other issues. Treat private and public sector producers on par. Allow export of some portion  of ores produced. Countries like Australia have achieved  high living standard mostly by exporting natural resources- there is no reason why India should not be doing the same. There is no reason why India can’t become second largest Steel producer- most resources are already available- all which is needed is encouraging environment.

Same goes for Coal. There is no reason why coal India should  have monopoly for mining coal- coal is not a strategic material any more – open the field completely. Govt has taken encouraging moves in this regard. Allow export of coal later.

 

All these initiatives  will contribute   substantially to  GDP growth and act as fillip to ‘make in India’ initiative. Recently,some skeptics expressed doubt whether there is market for output for ‘make in India’ . There is no need to find new markets – market already exists in India right now.

This is by no means a comprehensive list – there are other large opportunities, for example, import of  bulk drugs and pharma ingredients.