बुधवार, २२ नोव्हेंबर, २०१७

knock knock.. Is crisis at door?

Rather go to bed without dinner than to rise in debt. -Benjamin Franklin 

We are going to bed without dinner but still debt is rising. Our outstanding liability is around 67% of total GDP. Fiscal deficit at the end of August was around 96% of the budget estimate for 2017-18. Then one important question arises – ‘Are we moving towards 1991?’ Let’s see.. 



(Source - Data from Reserve Bank of India is used for calculation)

Fiscal deficit is obviously very high. For this time, I am taking absolute figure (not in percentage). Both states and central fiscal deficit is very higher than 1990s Fiscal deficit. Total outstanding liability is rapidly increasing and very high compare to 1991. Revenue deficit is also higher than 1991 in absolute terms. 






(Source - Data from Reserve Bank of India is used for calculation) 

So does it mean we are very close to crisis? Let’s see another side of picture.. Foreign reserves are increasing and very high compare to 1990s. Now let’s observe the trends of the ratio of these variables to foreign exchange reserves. As far as ratio of fiscal deficit to foreign exchange reserve, total outstanding liability to foreign exchange reserve and revenue deficit to foreign exchange reserve are concerned we are at good position compare to 1990. It means we have enough foreign reserves. This is good but again our net exports are negative and not improving. Yes it is true that we are at better position compare to 1991 but now it’s hard time to think about our outstanding liabilities. We can’t ignore the total outstanding liabilities of states. Although various steps has been taken into account for domestic industries, net export is not improving. Just limiting the expenditure is not enough.

https://drive.google.com/file/d/1Uv3xU1Xyckxi2QZv-EHg20pAh2jdoDFD/view?ts=5a1607e9

(Continued...)

शनिवार, १४ ऑक्टोबर, २०१७

Indian states.. life in debt…

Our system - of debt-fueled economic growth, of ineffective democracy, of overloading planet Earth - is eating itself alive - Paul Gilding.

Forget about debt-fueled ECONOMIC GROWTH, few Indian states have only growth in their OUTSTANDING LIABILITIES. We talk too much about outstanding liabilities and Fiscal Deficit of Central government. But we can’t ignore the financial health of Indian states. Andhra Pradesh is continuously borrowing from markets. West Bengal is new competitor for Andhra Pradesh. One might say that revenue deficit or fiscal deficit is under control or government is taking serious steps to control their deficits. But these deficit can't be financed by borrowing. If it is a case then we should start thinking about outstanding liabilities of Indian states.

(Source - Reserve Bank of India - Handbook of Statistics on Indian States. To make it simple, data selection is restricted to 2013 as Telangana state is created in 2014 and Andhra Pradesh is very important state as far as OUTSTANDING LIABILITIES are concerned.)

Every state is showing OUTSTANDING PERFORMANCE in OUTSTANDING LIABILITIES. States are continuously borrowing. Okay, this borrowing can be justified if states have good economic growth. But are these states really growing? 

(Source - Reserve Bank of India - Handbook of Statistics on Indian States)

 

Total outstanding liabilities to GSDP is also increasing. In 2013, debt to GSDP ratio for Andhra Pradesh was around 71% while for West Bengal it was 64%. It's like both states are in competition and they both have forgotten that the in future, these loans have to be paid. If this trend remains same then it will be dangerous for W.B. and A.P. 
The borrowing not only restricts the spending of borrower but also increases the interest rate in market. Although it's not applicable here but if O.L. is high enough then to avoid riskiness, state government might have pay high interest on new loans in future. So it might create a debt trap. 
Again I am not in favor of restricting the government spending. But it should be productive. We must re-think our policies like subsidies. Agriculture is a state subject. And most of the subsidies are given for this sector. But still this sector is not improving. Government should find an alternative for such policies.
In Maharashtra state assembly, former finance minister informed that although the debt of Maharashtra State is huge, state can borrow more because GSDP of Maharashtra is high compare to the other states. So state government should borrow and spend that money on workers and farmers. Now here is a problem. According to 14th finance commission, for additional borrowing, interest payment to revenue receipts ratio should be less than 10% and debt-GSDP ratio must be less than 25%. According to this criteria Maharashtra is not eligible for additional borrowing as debt-GSDP ratio is more than 25%. Now same former finance minister might demand same thing i.e. state government should borrow or center should provide a financial aid. And center can announce announce any dam package for any state for no reason (except elections). Spending of borrowed money must be restricted to few areas. Gujarat state had debt to GSDP ratio of 25 % in 2016 but in same year, interest to revenue receipts ratio was more than 10%. And now packages are being announced by central government for Gujarat state. These announcements must have some criteria. Even though these announcements are the tools for elections, these announcements are not good as far as financial discipline of state is concern and that's why states are not worried about debt. But when borrower lends money to the next borrower then if one commits suicide, other has to commit suicide because first borrower will lose money and second will lose one lender.



शनिवार, १२ ऑगस्ट, २०१७

Maratha Kranti Morcha.. What does it show and what does it mean?

Maratha community is protesting since last few years. One thing we should appreciate that the protests were peaceful. But I disagree with the concept of this protest. My relatives and friends who are part of this silent protest march might not like this opinion but this is what I think. 
In democracy everyone has right to protest. I am not against any protest march. Everyone should express his/her disagreements. People from Maratha community are also suffering from problems like poverty, unemployment etc. These problems come regardless your caste. (But what about social discrimination? In Maharashtra, (so called progressive state) we have seen honor killings. Right now I don’t want to get into this and I won’t talk about caste discrimination). But certain things are difficult to understand.
One thing which I observe is that the name of Chhatrapati Shivaji Maharaj has been used intensively. Protestors were saying that Chhatrapati Shivaji Maharaj was their ancestral. It shows that they are Kshatriya (Upper caste). But still they want reservation! Demanding reservation by showing upper caste status is simply hypocrisy. They should have demanded reservation without their caste status. We have reservation because of existing caste system which is exploitative. Given demand is pushing this exploitative system up. 
Another thing which is the most important and dangerous that is LOVE FOR KING and KINGSHIP. I personally respect Chhatrapati Shivaji Maharaj. Creating new empire is very difficult. His policies, governance were really good. But in democracy, we can just respect KING AND KINGSHIPS but we can’t follow them. Democracy has its own problem but it is the upgraded system. In democracy no one can enjoy a special treatment because of his/her ancestral. If he/she is enjoying then it is the biggest threat to our democracy. Now why this is happening? (I am just focusing on their demand related to reservation) I tried to find the data related to state-wise agricultural population. But I couldn’t find any data on OPEN SOURCES. So I am using some proxies. I am computing agricultural population by using rural population growth rate (majority of agricultural population is still living in Rural area) and households who hold agricultural land.
I found category-wise household (who hold agricultural land) data (2010). Then I used same population growth rate to estimate future trends.

In others categories, we have OBC, Marathas, Kunbis and others. Right now I am using others as a proxy for Marathas and Kunbis. OBC population is high but ignore OBC population wont make big difference as the numbers for SC and ST are comparably low. I know it is harsh assumption. But I don't detailed data. But roughly we can say that Maratha community is still engaged in agriculture sector. 
Then I calculated per capita agricultural GSDP by using same population. 


Here per capita GSDT is very low. Per capita GSDP in 2011 was app. 1300 while in 2013 it was app. 1450. I know these numbers are really weird. We are using proxies for various variables. Okay lets assume that the per capita GSDP is fours time higher than these numbers. Then also per capita GSDP will be low. The growth of agriculture sector in Maharashtra is also not good.

So with given numbers and graphs we can say that the agriculture distress may be the reason. So I think agriculture reform can be one solution. High per capita agricultural income may solve this problem up to certain extend.
So next time I hope this protest will be a protest of farmers, landless farmers and agricultural laborers.

Data sources -
Planning commission, RBI (handbook of statistics on Indian states), Economic Survey of Maharashtra 2011-2012



शनिवार, २२ जुलै, २०१७

Credit flow in agriculture – A puzzle..

Last year, we had a good discussion over agriculture and its future. I always thought that the credit flow in Indian agricultural market is not enough. Agricultural sector in India is continuously facing insufficient credit delivery (Godara, R. L., Singh, P., & Singla, S. (2014).). Authors also point out that the Indian banking system is not willing to give any king of credit to farmers especially small and marginal. Therefore government must encourage the credit delivery as credit is very important. In India, proper agricultural credit supply is badly required for agricultural production (Das, A., Senapati, M., & John, J. (2009)). By using Panel Data Analysis, authors show that there is an immediate, significant and positive impact of direct agricultural credit on agricultural output. Indirect agricultural credit has also positive and significant impact on agricultural output but the effect is not immediate. Credit has also positive impact on use of inputs in agriculture (Narayanan, S. (2016)). But author finds that the GDP is not sensitive to the credit.
But now I am confused. Yesterday I was looking for data related to the agricultural credit and agricultural productivity. I was astonished. Credit flow is increasing continuously. There is no doubt about it. But the total agricultural loan outstanding is also increasing continuously. For a while, suppose we accept the fact that the credit growth is helpful for agricultural growth. Then with given credit supply, agriculture output and productivity must be improved. If these two variables are improved, then the outstanding loan amount must be declined. But this is not happening. 


Then where is this amount going? Capital formation in agriculture sector is also declining, So this amount is not being used for capital formation.

Then it means either cost of production is very high and increasing continuously or there are some leakages in whole system. If it is because of first reason then we should focus more on productivity of given sector. And if it is because of second reason then we have to take some serious steps to maintain the health of financial institutions. It's like either Green revolution or Financial reform!!!

(Continue..) 

References - 
Godara, R. L., Singh, P., & Singla, S. (2014). Agriculture Credit in India: An Analytical Study. International Journal of Latest Trends in Engineering and Technology (ISSN: 2278-621X), 3(3). Das, A., Senapati, M., & John, J. (2009). 
Impact of agricultural credit on agriculture production: an empirical analysis in India. Reserve Bank of India Occasional Papers, 30(2), 75-107. 
Narayanan, S. (2016). The productivity of agricultural credit in India. Agricultural Economics, 47(4), 399-409.

Data sources -
Indiastat, RBI, World bank.

शनिवार, ८ जुलै, २०१७

Too much investment but where is capital?

Long-term unemployment can make any worker progressively less employable even after the economy strengthens - Janet Yellen. 

Economy is growing rapidly, FDI is surging but where is Capital? Where are jobs and how can we create jobs without capital?? With business friendly policies, government is doing everything to have large FDI. Okay, let’s discuss some papers related to FDI and Economic growth. 
As far as capital is concerned, FDI is very important which is connected with job creation (Chowdhury, A., & Mavrotas, G. (2005). FDI and growth: a causal relationship (No. 2005/25). Research Paper, UNU-WIDER, United Nations University (UNU)). With two way link between FDI and GDP, India is becoming a favored destination for FDI. FDI is increasing with increasing GDP. GDP is not increased by FDI but this causality runs more from GDP to FDI (Chakraborty, C., & Basu, P. (2002). Foreign direct investment and growth in India: A cointegration approach. Applied economics, 34(9), 1061-1073). FDI is an important factor for developing countries as far as economic growth is concerned. By stimulating investment, increasing human capital and transferring technology, FDI helps economy to grow (Gola, Kali Ram, Mridul Dharwal, and Ankur Agarwal. "Role of Foreign Direct Investment in the Development of Indian Economy." Gyanpratha-ACCMAN Journal of Management 5.1 (2013).). In the development of India, FDI has played very important role as a source of capital but also for creating competitiveness of economy. FDI also affects political and economic stability, budget discipline, inflation, governance, interest rates, institutional and infrastructural development conducive to attract competitive FDI, policy and regulatory framework (Vishwakarma, R. Foreign Direct Investment and Economic Growth: Evidence from India). 

Okay.. I am in agreement with above views. But is capital really being created by this surging FDI? I have some doubts over it. Given figure shows the trends of capital formation in India. [For household investment, I have simply used house saving (I assumed that the household saving is equal to the house investment. I also assumed that the household investment is used for capital formation). For public capital formation, I have used government’s finance for public capital formation. By subtracting the addition of above two factors from total gross capital formation, private capital formation can be obtained.] 

Figure no. 1

Given figure points out certain points. Government finance for capital formation is continuously increasing. But most important thing is that the private capital formation is not increasing (Although it is decreasing in given figure but assumptions don’t allow me to say that but we can say that it is not increasing definitely for sure). 

Figure no, 2

Figure no. 2 shows the trends in foreign direct investment. FDI is decreasing till 2011 but after that, FDI is raising. But still there is no any improvement in private GCF. It means FDI is not creating new capital. Technology might be transferred but capital is very important as far as employment is concerned. Without capital, jobs can’t be created. Investors don’t care about job creation as they are interested in the returns. And if the main aim behind this increase in FDI is not capital creation then the Make in India campaign is just useless. 
Yes proper econometric analysis is required but definitely there is little room for doubt.

(Data sources - World Bank, RBI and Open Government Data (OGD) Platform India) 

शुक्रवार, ३० जून, २०१७

GST, GST and GST

“Only two things are certain in this life – death and taxes.” – American author Mark Twain

I have written this article before 20-30 days. But for some reason I couldn’t post this.
So what is GST? I think you must hear something about GST. So I am not going to repeat everything. I am explaining some issues. Implementation is not my concern as it is routine now but there are some INBUILT problems. Before that I would like to discussion some historical aspects of TAX REFORM in INDIA. You might know that India is quasi federal state. So there is a division of tax powers between central and state governments.
State taxes are – Agricultural personal income, sales taxes, excise on alcoholic beverages, state transport taxes, some property taxes, electricity taxes etc.
Centre taxes are – Non-agricultural personal income and wealth taxes, corporate profit taxes, customs and excise duties (now manufacturers’ VAT) of manufactured products.
Some tax reforms are –
1)      The Income Tax Act, 1961 – result of recommendations from ‘Income-tax Investigation Commission’ headed by Sir Srinivasa Varadachariar in 1947, ‘Taxation Enquiry Commission’ of 1953-54 constituted under Dr. John Matha, by Nicholas Kaldor and ‘Direct Taxes Administration Enquiry Committee’  (Tyagi Committee, 1958).
2)      Post 1961 –
·         ‘Committee for Rationalisation and Simplification of Tax Structure’ (Under Bhoothalingham) recommended measures for rationalization and simplification of personal income tax and corporation tax.
·         ‘Direct Taxes Enquiry Committee’ i.e.  Wanchoo committee (1971). This Committee is very important as far as tax evasion and black money is concerned. According to this committee high tax rates, controls, licenses and ineffective information system were major problems in Indian direct tax system. Committee also suggested the reduction of effective top marginal rate to 70%. Another Committee under K.N.Raj in 1972 suggested a novel option to bring agricultural income under income tax net through integrated system of agricultural and non-agricultural income. Personal income tax rates in India were quite high in earlier times. At its peak in 1973-74, the maximum marginal rate of tax (with surcharge) was as high as 97.75 per cent. Keeping in view the recommendations of the Wanchoo Committee (1971), marginal tax rates were reduced gradually to 50% in 1985-86.
·         As far as indirect tax reforms are concerned, committees like L.K. Jha, Raja Chelliah (father of Indian Tax reform). L.K. Jha committee (The Indirect Tax Enquiry Report (1977)) suggested the unification of rates and creation of input tax credit, manufacturing stage value added tax (MANVAT). Modified Value Added Tax (MODVAT) was introduced by V.P. Singh government in 1986 which promised rebates on input taxes paid by manufacturer. Chelliah committee gave three reports in 1991, 1992 and 1993. Some suggestions were – reduction in the corporate tax, integration of excise duties with a Value Added Tax system, improvement in administration of taxation, computerization etc.
·         Former P.M. Dr. Manmohan Signh reduced the number of bracket to 10%, 20% and 30%.
·         Tax force on Direct and Indirect taxes (under Vijay Kelkar, 2002) some steps like increasing the income tax exemption limit, rationalization of exemptions, abolishment of long term capital gains tax and wealth tax etc. So finally wealth tax was also abolished. There was also an extension of MODVAT.
·         CENVAT was introduced in 2000-2001 (Central VAT).
·         With 88 amendment, all taxes of services put under central subject in 2003.
Now before moving towards GST, we should under the difference between direct tax and indirect tax. Indirect tax is one which is directly paid by tax payer like income tax while indirect tax is paid indirectly like tax on product. GST is indirect tax.
Now I have read some research papers and articles.  I am going to summarize one paper and one article.
GST in Malaysia: An Ungly Truth or A Beautiful Lie? written by Lim Boon Poh, Teoh Wei Chieh, Yap Wei Wah and Young Kai Han . The main object of this paper is to find the relationship between the inflation rate and the impending implementation of Goods and Services Tax (GST) in Malaysia and the short term and long term impact of GST on inflation in Malaysian context when GST is implemented. Some economists believe that the implementation of GST will significantly increase the inflation rate but this inflation will only have a short term impact on the economy. On the other hand, some economists believe that the GST will only have a small impact on the inflation. But this can be criticized as workers will demand higher wages as cost of living will be increased in next round. So the cost of production for the firm will increase. Therefore price will be increased and there would be higher inflation. Same thing is concluded by given authors. Author found that there will be price hike after GST implementation. They also accepted the second opinion as inflation will be higher in next period because of second round effect. As far as policy implications are concerned authors are in agreement with the concept of GST. Government revenue can be increased because of GST. Deficiencies in the tax collection system can be reduced after GST implication. But authors disapproved the government’s claim about GST and inflation. Inflation will be higher in both short and long run.
I found one interesting article- GST: Some less explored issues written by Arun Kumar. Indirect tax leads to increase in prices and reduce the demand. Author said that if the tax rate remains the same as earlier, the tax collection would fall as value addition is only a fraction of the value of a product. Author also informed that the cascading effect can’t be removed completely as far as some goods and services are concerned. He suggested that GST has no impact on the black money. There is no any evidence. But price of service will definitely rise. And price of some intermediate and final goods will be increased. Finally author concluded that to increase tax-GDP ratio, tax revenue has to be increase but with that prices will rise and demand will fall. And if tax revenue falls then government spending has to be reduced.

What I feel is that GST is just routine step towards new generation taxation system. For example our ancestors used to stay in hut but now we are living in proper house with AC accommodation. But we must understand the cost of staying.. That is we have to examine the cost of GST taxation. I am concerned about the price and uneven of burden of taxation. Above articles and papers pointed out that price might increase because of GST. But with that we can’t ignore the nature of indirect tax. Marginal propensity to consume (MPC) is higher for poor people and lower for richer people. So with increase in income, poor people tend to consume more therefore they might face more pressure of taxation. So without proper redistribution policies, burden of taxation might be shifted to poor people. Another thing which is also important and interesting is interest rate. Men in power want the reduction in interest rate. But if GST creates any kind of hike in price level then RBI will keep interest rate unchanged. So we need proper fiscal and monetary policy to tackle these problems of GST.
But one thing I must say, don’t expect anything because incompletion of these expectations is not good as far as socio-eco-political conditions are concerned.

References -
Income Tax Reforms in India By Anuradha Chavan Patil
GST: Some less explored issues - Arun Kumar
(http://www.tribuneindia.com/news/comment/gst-some-less-explored-issues/123518.html)
Lim, B. P., Teoh, W. C., Yap, W. W., & Yong, K. H. (2014). GST in Malaysia: An ugly truth or a beautiful lie? (Doctoral dissertation, UTAR).

शनिवार, १७ जून, २०१७

Farm loan waiver, why? Another crisis for Maharashtra?

Everywhere, everyone is debating and explaining his/her opinion on Maharashtra farm loan waiver. I am just trying to explain it with some data and evidence. Before discussing the FUTURE OF MAHARASHTRA ECONOMY, I would like to explain an importance of credit in agriculture sector.

Attempts to strengthen Indian agriculture must address not only farm production (farmers) but also processing, marketing, trade, and distribution. We must link farmers to markets. In this endeavor, marketing and rural credit systems are extremely important. (Acharya, S. S. (2006). Agricultural marketing and rural credit for strengthening Indian agriculture.).
The agriculture sector of Pakistan still suffers from low productivity, expensive financial support to the farmers, inefficient market structure and improper research. Thus to develop farming sector and to increase the farming efficiency it was recommended to enhance the accessibility of small and marginal farmer to formal agricultural credit. Loan for the livestock should be enhanced and this would definitely enhance farmer’s income and ultimately would reduce poverty (Ayaz, S., Anwar, S., Sial, M. H., & Hussain, Z. (2011). Role of agricultural credit on production efficiency of farming sector in Pakistan-a data envelopment analysis. Pak. j. life soc. Sci, 9(1), 38-44.)
Adequate availability of credit on time is an important requirement for the rural people, particularly under conditions of scarcity of resources and uncertainty. Convenient and safes-saving facilities are perhaps even more important to smooth out the peaks and troughs in incomes and expenditures in the rural arena. Lack of savings facilities also force families to rely on inefficient, inconvenient and costly alternatives. Agricultural credit can be a solution for this perspective. (Islam, A., Islam, D. R., Siddiqui, M. H., & Karim, L. (2014).

Importance of agricultural credit for rural development of Bangladesh: A descriptive approach. International Journal of Economics, Finance and Management Sciences, 2(1), 68-83.)

How agricultural credit should be provided? The famous agricultural economist Louis Tardy (1938) has laid the following criteria for good system of agricultural credit.
1. Credit should be granted for a sufficiently long period commensuarate with the length of operation, which it is designed to facilitate.
2. It should be granted at a reasonable rate of interest.
3. It should be adequately secured to avoid any abuse of credit facilities, but the security need not necessarily be material.
4. The security should, if necessary, be in the form of a personal credit secured mainly by the borrowers’ socio-moral standing and farming ability.
5. It should be related to the average yield and capacity for repayment of the farms, particularly during period of economic depression.
6. It should be placed in the hands of institutions the directors, which have received special training and had actual banking experience (http://shodhganga.inflibnet.ac.in/bitstream/10603/96016/12/12_chapter%203.pdf)
But if you observe our credit system in rural area, either people are engaged in informal sector where no one cares about these rules or formal sector is not interested to imply these rules. So it is not just about farm loan. It is about our credit system who forces our farmers into life time debt.
One might say that there are so many people who are not farmer but still getting benefit of agriculture scheme. Again it is not a problem of agriculture schemes. This problem is related to the system in which everything is implemented.
Again one might say that this announcement of government will throw our state in financial un-stability. Or government might increase tax rate to pay that amount.. Yes it might happen but there are so many other ways to finance given amount.

First of all I would like to discuss the finance condition of Maharashtra. 





First two diagrams show that the fiscal deficit and debt of Maharashtra state are very large. This might prove above point that it’s not good for our state. But if we see another two diagrams then you will realize that Maharashtra is in good shape. 





Debt as % of GSDP and fiscal deficit as % of GSDP both are not too bad. So we can afford this announcement. But this credit is very important as far as agricultural growth is concerned. If we have good monsoon this year, new credit will definitely help this sector (more than the given cost).. But this is not a permanent solution. We have to take some steps towards market reform. Market failure is not because of production or input it just because of unnecessary regulations which are imposed on farmers which are continuously reducing the realization of price for farmer.