Post Pandemic World-An Indian Perspective(Part 2)

Continuing from the part (i), let us delve further into the issues that India will face in the DC and the AC world, and how we can position ourselves better in handling it, mitigating it.

The Government is definitely ensuring credit flow, but what can the Government do to boost spending . It may happen that despite the credit flow, its impact wont be majorly felt because the demand is not strong.

First we should be aware of the Government scheme that is working on the ground level as I write, which is the MSME Guarantee scheme. The Government has given 3 lac crore guarantees to all the banks and NBFC, which amounts to 20% of the existing loans.The MSME sector is a very important,integral and a large part of India.

The second point that I would like to add is the whole point between fiscal deficit and financial stability.If we look at the amount of deficit at the center and the states which was planned before Covid-19, it was 6.5% of GDP(Center + states). As things looks today it has increased to 11-12% of GDP, which means 5% higher. It is due to loss of revenue and loss due to Covid-19. This 5 percentage points on a 200 lac crore Economy is equivalent to 10 lac crore and is currently sitting on Governments balance sheet . Indirectly, this 10 lac crore pain is taken care by the Government and as pointed out earlier, the major priority in the dc world is to protect the loss of lives and livelihood, and to do this if required the Government should opt for direct cash transfer also and it will definitely be demand boosting.

But if we look at it closely, we would find that what is happening today is that a lot of people are beginning to save money.So even if we give direct cash transfer, the person who gets the cash transfer, for boosting demand, the person needs to spend Money. But what if He/She saves. We won’t get the desired output . This is one of the challenges of mindset . That’s why it is said that “Recession always begins in the minds of the people” and we need to change the minds of people to get demand back.

Next issue is whether India will face bankruptcy in the sectors badly hit by The Covid virus. The sectors are Hotel, Tourism, Airlines, Media, Real Estate, Infrastructure. Definitely, these sectors are facing lot of difficulties and it is on expected lines when we are facing an unprecedented crisis of this magnitude.

But some steps can be taken to manage this crisis.There are three important things that we need to keep in mind.

1. For sectors which are very sensitive to Covid-19, have to take additional precautions.
2. The Businesses have to ensure that the operating overhead, operating cost as a percentage of total Break even, are not disproportionately high from a fixed point of view.
3. If the businesses have excessive leverage , i.e debt to equity ratio is high, then they must approach capital market , raise capital and deleverage the business. Capital Markets are in good shape and they must take advantage of it. The business can raise capital from Private equity,Venture Capital or public market. It is all about de-risking ,deleveraging the business .If things pan out well its fine else in a way it is like preparing an insurance for difficult times ahead.

Another Strange phenomena that we are witnessing , is the euphoria in stock markets , which seems unconnected with reality and really how far it can sustain?

Now we have to see , what the stock markets are saying. They are not looking at earnings for year 2020-21. For the current year , everyone knows that it is going to be a washout and the economy is going to be in a -ve GDP growth. The stock markets are looking at year 2021-22, and are believing that this will be shorter term issue, and in the AC world India will get growth back.Medium term growth is the bet that stock market are taking.Now going to our economic policy, we also similarly like the stock markets need to focus on medium term growth and not just limit ourselves to steroids in the short term . It is now for India to build medium term growth strategy which will make India more sustainable on the areas which was pointed out earlier like Healthcare , Education , Mother Nature , Increase in Private Investments , Becoming more digital, Changing the nature of jobs.The stock market believes India will be able to meet this objective in the medium term and they are definitely not nuts.

Now coming to the Indian economy again, the question that rises is , post the Lock-down ,has our economy come to a halt ? Is there a job crisis ? Is there a possibility of lot of pink slips coming up in the near future?

Post the Lock-down,End March -Early April we were in a bit of shock, and the shock was deep. April was closed to zero in many areas . But by June we saw a pick up in economy. So many are comparably hopeful, than they were earlier. And as some demand returned back, people are feeling better. Stock market is logical, but still are playing the hope trade that future is getting better and let’s not be too pessimistic. Overall we need to be prepare and by Jan-Feb 2021 we should try to reach 90-95% of what the GDP was in Jan-Feb 2020 across all sectors.This will a fantastic achievement and we need to progress towards that.

Moving on to the next issue , the Lock-down is gradually Ending and the UN-lock has begun .The question is how we want to see this Unlock gradually unfold?

We have to deal with reality . We do not know that whether the cure is 6 months away or vaccine is 1 year away . We have to hope that in one year , the world will be able to find a solution through this. Covid is not going to go away in a hurry and we have to refer to some other countries who are dealing it in a better way . We can refer to Hong Kong, Vietnam.These countries handled it well as they had prior experience of dealing with SARS Virus, and it is clear that some of the Low Intensity measures are better than high intensity measures. Low Intensity measures are mask,social distancing as an example.High tensity measures are lock-down.In High Intensity measures the outcome vs cost is not a good equation.Let us Similarly adopt low intensity measures.But India Naturally finds it difficult to adopt a similar disciplinary measure lie everyone needs to wear mask,especially when we are out or in a group. Wearing a mask has to be around the nose and not around the neck.It has been observed that people are not following protocol properly s wearing the mask around neck is same as not wearing the mask at all.Similarly, when it comes to social distancing except for small homes where it is difficult, we have to maintain a distance of 4-6 ft, while in groups.Vietnam,Hong Kong have been successful in implementing those measures with rigor and discipline.

Now Government announced three month moratorium for the loans. But it might have been better if Government had actually given a one time restructuring and paid for it.However this is flawed, as if the interest is waived off from the Loans then how can banks pay the interest to the Fixed deposits by the Indian Citizens.The Government and RBI has rightly taken a stand on this, as fixed deposits matter.Bank is a mere converter here.

However the issue is could the Government have paid for the interest, instead of passing it to the depositors. But what choices Government have here, between its capacity to pay and the decisions to spend money on moratorium or investing it in medium term healthcare. These are the choices that India needs to make.It is very easy to give money that is urgent and immediate, but it is also important to remember that what is effective for India in the future also needs to be invested in. Now coming to the financial side , India’s Govt public debt to GDP in the BC world was around 70%. Globally, if we reach around 80-85% borrowings to GDP, we would start becoming vulnerable to the Global flows that are coming to India.Obviously there is no hard and fast rule, when it comes to the percentage of debt to GDP, but we cannot go too much overboard. Whether we like it or not, we are not US dollars,we are not the reserve currency, we are the Indian rupee and for a long time we will remain an Indian rupee and not become a reserve currency in a hurry.

How do we balance,structure the basic idea of Universal basic Income within the needs of fiscal discipline, fiscal limitation , borrowing Limitation ?

Universal Basic Income is a kind of safety net and any kind of safety net has to be done over the period of 5-7 years.Building it step by step every year.In the dc world, if we can save Lives and livelihoods, then there should not be any limit to borrowings and be ready to do whatever it takes.But if it involves making a choice between healthcare vs something else, we need to make it carefully.But in medium term we have to spend a significant amount of money in the Universal Basic Income by stopping some of the wastage on the kind of cancelling unnecessary subsidies. And finally we have no genuine choice apart from “Growth !! Growth !! Growth!!”And Growth has to come back as a non-negotiable priority, because only if they come back India could fund its projects and do things that it needs to do.

Government should consider genuine big economic reforms like Land and Labor once parliament reconvenes or else risk missing the Growth Highway for the umpteenth time.

There are two points to it-:

1. Labor-:We need to move towards a flexible Labor policy and have safety nets.Safety Net coming out of Government and Business, especially for the people who get hurt.We need the support of both Government and Business in tandem
2. Land-:We need immediate land reforms in Rural and Semi-Urban India , we need to create manufacturing facilities there and must find ways of getting out of Land acquisition Logjam, which we have had for a long time. In addition to that , we should strongly support companies that are setting up manufacturing facilities in Rural and Semi-Urban India, to create jobs there.We also must looking to giving regional subsidies and bringing investment allowance back . If we recall historically , in addition to 100% depreciation we used to give 20 % investment allowance for setting up industrial and manufacturing assets.Let’s bring it back.

Three Points that India need to do to Bring back Investments exiting from China.

1. The Government has already done something good, which is reducing tax rate on corporate whether it is for new Investment 15% and for existing companies 25%.
2. We have to work on developing a Single Window for all approvals and full protection once the approvals are given.We don’t want an investigation 5-10 years later saying that what you did was wrong.We should be strongly against any regulation or legislation, which is retrospective in nature.We need to do things which are forward and not do things that are backward and changing the past.
3. We need to give confidence to Investors whether foreign or domestic that if we come to India, they are not going to face endless litigation , taxation issue seven years down the line into future.
4. Building the right mindset.The risk taker taking risk in his/her money and putting into work has to be respected.We need to change the attitude of society which has looked down to the risk takers in many ways.The fact of the matter is if India aspires to take its growth rate to back to 7-8-9%, we have to salute the risk takers.It is not going to be the people who put their money in the safety of public deposits , which will build the India of future.
5. Land and Labor reform that has been mentioned earlier.

The Government has to make sure that in the coming days the Economy is not in recession but in a recovery mode .

If we invest medium term and get our priorities on investing right as mentioned earlier on the kinds of Healthcare,Education,Whole are of Rural-Urban Re-balancing,Recognizing physical world and digital world changes,going all out to encourage private investments.If we can get this right,we have a medium term growth opportunity The stock markets seem to be betting on it. We must prove them right not wrong.

Tax Friction in India and what can be done to reduce it.People are saying it as Tax terrorism but Government is saying Ease of doing business.

Anybody in India who is in a position of taking decisions , or regulatory calls , or policy calls have become too much “Lakeer ka fakeer”.The human mind has one of the best capabilities in any situation of human Judgement of what is right and what is wrong.We cannot have rules and lines in such a manner that we top thinking and using your mind and mindlessly follow a line which is written in some rule. We are in a uncharted world, a world we have never seen.And in this new world , If India has to progress , we have to be flexible to use human judgement and stop worrying that if I use my judgement I will have investigating agencies going after me. This is the single most fear that we need to correct and move away from “Lakeer ka fakeer” to someone lets say I am a human being , I have a human mind,I have the ability to think , take my call on analysis and judgement and if I take a bonafide decision which is right based on my judgement it shall be honored and not question 5 years down the line based on hindsight.

This becomes a much bigger threat for a civil servant.Because right now , five years or 7 years after I retire, a bunch of devil will come and take away my pension and my peace of mind.But the good news is that there is a change of law in that.There is also changes in the prevention of corruption Act, where bonafide acts are getting protected.This changes were made during Arun Jaitley’s time.If we are doing the right things and are not afraid of taking right decisions , we will make progress.If we cannot do this , we run the risk of not coming out of our Chakravyuh.The Government has become receptive to this and especially in the AC world they have started to recognize the challenges we all will face together.This is really a great opportunity for the civil society,Government and business to work together for a common purpose.

Need for Bad Banks in India supported by the Government and why private asset Reconstruction companies have failed?

If we look at the late 90s, we saw the first big crisis in the Indian financial sector in indian financial market. We have to recollect the crisis faced by the Unit trust of india, IFCI and IDBI .When IDBI faced problems, then IDBI and IDBI bank was merged, we created a bad bank within IDBI called IDBI SASF. This was done in 2002-2003 . Over the last 17 years we have forgotten what has happened there. Even if we create a bad bank, the fundamental issue remains the same, which is the bank must be able to recover the assets for which the money has been lent for. This Objective must be achieved else it is futile.

Secondly,if we create the bad bank, the core issue is at what price the banks will move the loans to the bad bank.How will the pricing process happen?If it would be a market driven process, the way it should be, then we cannot have only one bad bank.We need multiple bad banks in that case.In absence of multiple bad banks, there will be no fair pricing and we run the risk of black box.

Finally, I would like to conclude with that we have to optimistic.We have to cleanse ourselves internally .The cleansing has to vigorous but we have to be careful, that the cleansing should not lead to a torn white shirt.In short, the cleansing , though is important need to be done with care so that it does not torn the fabric of the Economy.