Indian Economy News & Discussion - Nov 27 2017

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JTull
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Re: Indian Economy News & Discussion - Nov 27 2017

Postby JTull » 12 Dec 2018 21:00

Supratik wrote:Time to cut interest rates now that Urjit Patel is not there.


That requires MPC support. Though other regulatory capital requirements can be relaxed. Govt had been critical of the directives emanating from RBI which had tied the hands of lenders.

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Re: Indian Economy News & Discussion - Nov 27 2017

Postby Uttam » 12 Dec 2018 21:05

I don't think this is the right time to cut interest rate. The US Federal reserve is about to raise interest rates. That will see some outflow of capital, resulting in a weaker INR. A rate cut in India will further encourage capital outflow, further putting downward pressure on INR. OPEC production cuts are likely to increase crude prices but it is not clear to what extent. Given that next year is for general elections, a weaker INR and higher Crude prices in USD is going raise a lot of hue and cry as well as slow down the economy. I say, RBI should wait and watch for rate cuts.

Liquidity and bank lending is a different issue. They have started easing some of that but there is a lot more room to increase lending especially to infrastructure projects.

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Re: Indian Economy News & Discussion - Nov 27 2017

Postby Supratik » 12 Dec 2018 21:14

It is an election year. Middle class needs sops. SME/MSME needs capital.

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Re: Indian Economy News & Discussion - Nov 27 2017

Postby Supratik » 12 Dec 2018 21:19

There are now two govt people in MPC - Das and Gurumurthy I believe. They have to convince just one more. What are you going to do with being an economic conservative if you loose elections. Yes, there is pressure on rupee and oil prices may rise. But I think 0.25 to 0.5 basis point cut may be absorbed.

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Re: Indian Economy News & Discussion - Nov 27 2017

Postby ArjunPandit » 12 Dec 2018 21:56

IMHO, we have tried the conservative approach for too long and it hasnt yielded the desired results because of two reasons
1. The major loss creator for banking system being large losses which was primarily due to neta-businessman collusion
2. Low level fraud hasnt been been eliminated. Agree sales tax/vat avoidance has been in post GST but not income tax by businessmen
These issues dont result due to macro stress but are causing macro stress by choking MSMEs. That needs to be rectified. The only way is reducing the interest rate.

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Re: Indian Economy News & Discussion - Nov 27 2017

Postby Suraj » 12 Dec 2018 22:49

Here's my view on independence of the central bank: it's not an objective, but rather it's an ideal. The Indian central bank is ultimately a government department, created by an act of Parliament, and whose staff are paid a salary through GoI. It does not have independently elected members, as the regional federal reserve banks in US do. On the other hand, something that IS an objective of a government department, is to operate nicely with the other arms of government.

Lack of ability to achieve an ideal is not a failure, but lack of ability to do a standard job description of a subdivision is. Picking a fight with FinMin and PMO is a losing game, and has been one ever since TT Krishnamachari's days in the 1950s. Government's response to such actions by RBI has always been consistently the same - that they're an arm of government and will defer to the executive when asked to do so. Look up JLN's response to the tiff between Krishnamachari and RBI's Rau, and the words might just be something GoI trotted out today.

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Re: Indian Economy News & Discussion - Nov 27 2017

Postby Supratik » 12 Dec 2018 23:17

Also some inflation is good. The 4% targeting is good. But there is also something called inflation expectation. It helps producers like farmers, industry and even services to expect more returns or less worry about inflation in input costs. It is good for growth. It encourages investments. it is good for income. The current inflation trend is going towards deflationary IMO. So IMO interest rates should be cut keeping an eye on oil prices and fed rates.

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Re: Indian Economy News & Discussion - Nov 27 2017

Postby Katare » 13 Dec 2018 00:46

Supratik wrote:There are now two govt people in MPC - Das and Gurumurthy I believe. They have to convince just one more. What are you going to do with being an economic conservative if you loose elections. Yes, there is pressure on rupee and oil prices may rise. But I think 0.25 to 0.5 basis point cut may be absorbed.


Gurumurthy is not a member of MPC, he is in the rbi board as part time director.

Also, rates usually reflect core inflation (inflation without fuel and food) more than anything else. At 6.1% core inflation in industry and services sector is already beyond the upper limit.

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Re: Indian Economy News & Discussion - Nov 27 2017

Postby Katare » 13 Dec 2018 01:00

Yagnasri wrote:
Katare wrote:
- These are relatively small banks and net impact on loan activity can not be substantial.


I do not agree with it. The so called small banks are are lending to MSME sector and stopping lending will hit MSME sector. In fact small banks generally tend to have small size loans, as they can not take risk with large loans and they are critical to economic activity and job creation.

In respect of private sector banks having less NPA % wise, there is lot of "creative accounting" and write offs which we are not seriously looking into. Let us say there are many ILFS type things going around. Further Private Banks can be more selective in lending whereas PSU Banks can not. This of course will not take away the bad practices of PSU Banks. There are horrible things done by them (and still being done by them) which are not being stepped effectively. RBI as a regulator knows this for years and kept quite.


Lets look at the data.

If weak banks were forced to contract their balance sheet by letting go of higher risk assets that does not mean that that high risk business went unfunded. That bussiness would have gone to banks that can afford the risk. Total loan growth trend for entire banking sector had remained the same or strengthened after the PCA. RBI and GoI control/regulate credit flow to MSME independently and that growth is not dependent on size or type of banks. Every bank has obligation to lend to priority and MSME sector a fixed ratio which ensures the flow to priority sectors remains unaffected regardless of who lends the money.

Last but not least, MSME and counsumer loans are not the main readon of huge NPAs, NPAs are concentrated into large/mega projects in industry, infrastructure and construction industries.

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Re: Indian Economy News & Discussion - Nov 27 2017

Postby Atish » 13 Dec 2018 01:34

It does not work like that in practice. People who have working relationship with one bank for decades cannot switch overnight to another. The marketplace is not that efficient or competitive.

Aggregate is hiding thousands of businesses suffering cash crunch for no fault of own. Real businesses jobs lives.

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Re: Indian Economy News & Discussion - Nov 27 2017

Postby Katare » 13 Dec 2018 06:46

Most of NPAs exists in very large size accounts ( Steel, infra, power, builders) where loans are syndicated by pooling money from several banks. Replacing one bank with another for such loans shouldn’t be an issue for the lead banks.

The type of loans you are talking about are not under stress so i don’t think there were any restrictions on any bank for lending based on those profitable relationships.

Whatever way we cut it, i have to concede that some viable loan growth must have been lost by the PCA actions. But that is the intended job of a regulator i.e. to ensure a healthy balance.

PCA is not a new measure either, it has been in existence since early 2000s with some really draconian tools available to RBI. They have revamped the PCA regime recently but what has really changed is that banks can’t lie by fudging the balance sheet anymore, thanks to AQR ( asset quality review)

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Re: Indian Economy News & Discussion - Nov 27 2017

Postby yensoy » 13 Dec 2018 08:18

It's too late for MSME lending to lead to job growth and feeling of goodwill to support the 2019 elections. If that were a strategy, it should have been done last year. It takes time for loans to be given, equipment to be purchased, people to be employed and prosperity to permeate to a larger section of society other than direct employees of MSMEs.

It is also an unfortunate situation that many employed are not going to vote (because they are in their karmabhoomis away from their native places) but the unemployed will. One more reason the MSME route is not going to help electoral politics at this juncture.

Now it is more about transferring the excess reserves from RBI balance sheet to the goverrnment's so it can be doled out directly to targeted persons, e.g. farmers, and for absorbing possible tax cuts.

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Re: Indian Economy News & Discussion - Nov 27 2017

Postby Yagnasri » 13 Dec 2018 09:47

Lack of credit is hurting honest people. While NPAs are in big accounts but the fear and reluctance had spread everywhere in PSU Banks. So called systemic measures are not taking into consideration the honest borrowers and need to keep funding their activities.

The problem with RBI people now is they are not really into actually banking and many PSU senior bankers themselves are also like that. No one really want to lend in PSU banks. Particularly for small borrowers. That is why large corporate end up getting huge loans as they have lend somewhere to achieve overall targets.

Priority sector lending most of the time is a eye wash. For example remove gold loans and see how many crop loans are really given. You will find the nearly zero in most of the branches. Even then major banks like SBI do not pass the agri lending targets even after showing gold loans as agri loans. They are not simply interested as no one in the top going to lose their jobs if they dont lend.

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Re: Indian Economy News & Discussion - Nov 27 2017

Postby disha » 13 Dec 2018 10:42

"Unemployment and Farm Stress" are fake news. But then human brain is wired to listen to any news seemingly negative first and tend to believe in it, since it is always a matter of survival.

Here are two news items:

Industrial Output Growth Fastest In 11 Months

Factory output, measured by the index of industrial production, grew at an 11-month high of 8.1 per cent in October. The growth, reports said, was aided by a favourable base effect and robust output in all major sectors — manufacturing, electricity and mining. Manufacturing sector, which accounts for more than three-fourths of the entire index, recorded 7.9 per cent growth in the month of October. The mining sector, which had contracted by 0.2 per cent in October 2017, posted a growth of 7 per cent. Output in the power and capital goods sectors grew by 10.8 per and 16.8, respectively.

Consumer durables and non-durables grew by 17.6 per cent and 7.9 per cent in October, respectively. At least 21 out of 23 industry groups in the manufacturing sector have shown positive growth during October 2018, reports say. The previous high IIP growth rate was recorded in November last year at 8.5 per cent. IIP grew at 1.8 per cent in October 2017.

November Retail Inflation Hits 17-Month Low

Retail inflation plunged to a 17-month low in November. It fell to 2.33 per cent on an annual basis, the smallest increase since June 2017 and continues to remain below the Reserve Bank of India's medium-term target of 4 per cent for a fourth straight month. This is mainly on account of decline in food prices.

Retail inflation, which is calculated on the consumer price index, has been revised for the month of October at 3.38 per cent from 3.31 per cent earlier. In the year-ago period (November 2017), it was at 4.88 per cent.


And this one

https://www.business-standard.com/article/news-ani/over-2-1-crore-households-electrified-in-past-two-months-118121300132_1.html

Over 2.1 crore households have been electrified since October 11 last year, the Union Power Ministry has said. The nation is expected to achieve 100 per cent household electrification by December 31, 2018.

"Nine states have achieved 100 per cent saturation in household electrification under Saubhagya scheme. These states are Madhya Pradesh, Tripura, Bihar, J&K, Uttarakhand, Mizoram, Sikkim, Telangana, and West Bengal," the ministry said in a statement.

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Re: Indian Economy News & Discussion - Nov 27 2017

Postby chetak » 13 Dec 2018 12:26

Yagnasri wrote:Lack of credit is hurting honest people. While NPAs are in big accounts but the fear and reluctance had spread everywhere in PSU Banks. So called systemic measures are not taking into consideration the honest borrowers and need to keep funding their activities.

The problem with RBI people now is they are not really into actually banking and many PSU senior bankers themselves are also like that. No one really want to lend in PSU banks. Particularly for small borrowers. That is why large corporate end up getting huge loans as they have lend somewhere to achieve overall targets.

Priority sector lending most of the time is a eye wash. For example remove gold loans and see how many crop loans are really given. You will find the nearly zero in most of the branches. Even then major banks like SBI do not pass the agri lending targets even after showing gold loans as agri loans. They are not simply interested as no one in the top going to lose their jobs if they dont lend.


Even now, all banks are asking you to pledge property papers of worth equal to or more than the value of the loan.

They are actively avoiding phone calls from politicians and baboos.

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Re: Indian Economy News & Discussion - Nov 27 2017

Postby Yagnasri » 13 Dec 2018 12:37

chetak wrote:Even now, all banks are asking you to pledge property papers of worth equal to or more than the value of the loan.

They are actively avoiding phone calls from politicians and baboos.


As for as avoiding phone calls I am not sure. They may try but can not avoid for long time.

If the banks particularly PSU Banks go for some sort of Loan against property mode for all the loans it will have serious negative effect on the MSMEs.

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Re: Indian Economy News & Discussion - Nov 27 2017

Postby Suraj » 13 Dec 2018 12:59

These are teething pains associated with formalizing an economy that depended less on defined due process, statutory basis and laws to get things done, and more on relationships. Loans offered not on the basis of defined risk-benefit analysis but influence. A Mallya thinking he can define the terms of his own repayments and assert his agreement of due process of law, via Twitter posts from an English mansion. Formalization of the economy is more than just about taxation. It's a quest to make every aspect of economic transactional activity procedural and dependent merely on presented basis, regardless of who you are. In the absence of a personal credit scoring, a standard CA certified process for establishing bookkeeping rigor and other details, there'll remain some difficulties in accomplishing formal economic activities. However it is critically important to persist with this and continue to streamline how the formal economy operates.

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Re: Indian Economy News & Discussion - Nov 27 2017

Postby chetak » 13 Dec 2018 18:05

Brazil approves WTO action over Indian sugar subsidies

Brazil said it has decided to start a formal action at the WTO after failing to receive enough information from India following letters it sent to the Indian govt seeking clarifications on sugar policies


Sao Paulo: The Brazilian government approved consultations at the World Trade Organization regarding subsidies it says India gives to cane producers and sugar exporters, Brazil’s trade ministry said.

Brazil said it has decided to start a formal action at the WTO after failing to receive enough information from India following letters it sent to the Indian government seeking clarifications on sugar policies.

“The suspicion is that Indian domestic support (to farmers) and its subsidies to sugar exports caused significant impacts in the sugar market in a context of falling prices and decreasing production in the main centers Brazil, China and Thailand,” the Brazilian trade ministry said in a written statement late Tuesday.

India is expected to surpass Brazil as the world’s largest sugar producer in the current global sugar crop, with output around 33 million tonnes while Brazil’s production is expected to fall almost 10 million tonnes to below 30 million tonnes.

Brazil said India’s government policy to guarantee a minimum price for cane to farmers has caused production to surge. It says this policy, combined with subsidies to sugar transportation, is allowing the country to ship excess sugar production abroad.

Sugar prices in New York reached a 10-year low in September. Prices have recovered a bit since then, but are still barely covering production costs for most companies.

As a result, Brazilian mills sharply reduced their sugar production in the current season, diverting cane to ethanol instead and leaving sugar equipment idle.

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Re: Indian Economy News & Discussion - Nov 27 2017

Postby Arima » 13 Dec 2018 19:12

Indian cane sugar MSP prices higher than brazil or international prices? i dont think so.

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Re: Indian Economy News & Discussion - Nov 27 2017

Postby nam » 13 Dec 2018 19:31

We need an alternate to this MSP thing. Being in WTO, this MSP would be used to hit us regularly.

GoI needs to find a better way of giving MSP. Call it Employment benefits or something and try to compensate the farmers indirectly.

Farmers could be paid a certain amount annually and their land be contracted to private enterprise who can produce from the land. The risk will be on the private enterprise, while the farmer does not make losses. Private enterprise then pays GoI certain amount, which covers part of the payment to the farmers.

Sort of like a pension scheme. This will encourage farmers with small land holdings to move out of farming and get in other means of work, with the GoI payment providing comfort.

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Re: Indian Economy News & Discussion - Nov 27 2017

Postby vijayk » 13 Dec 2018 20:40

https://en.wikipedia.org/wiki/Rythu_Bandhu_scheme

Rythu Bandhu scheme also Farmers’ Investment Support Scheme (FISS) is a welfare program to support farmer’s investment for two crops a year by the Government of Telangana.[1] The government is providing 58.33 lakh farmers, ₹4000 per acre per season to support the farm investment, twice a year, for rabi and kharif seasons.[2][3] This is a first direct farmer investment support scheme in India, wherein the cash is paid directly.[4]


Established 10 May 2018
Budget ₹12,000 crores per year

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Re: Indian Economy News & Discussion - Nov 27 2017

Postby Supratik » 13 Dec 2018 21:33

Katare, can you post a source for the 6.1% core inflation number you stated above. I don't recall seeing it.

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Re: Indian Economy News & Discussion - Nov 27 2017

Postby VKumar » 13 Dec 2018 23:37

Cane sugar import duty is 100%
Tea, coffee is 111%
Chocolate is 60%
Honey is 67%
Wine is 150%
Olive oil is 45%

There are many non tariff barriers too.

Therefore we will face difficulty in exports as other countries retaliate.

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Re: Indian Economy News & Discussion - Nov 27 2017

Postby disha » 14 Dec 2018 00:08

^How?

India is not a major destination to export to for Wine and Olive oil and definitely not Honey. And which other countries produce sugar, tea, coffee & chocolate and export to India? In a trade war, one cannot retaliate on non-trading items. Imagine US retaliating on Indian Honey imports asking for reduction of duty on Cane Sugar exports from US to India. Or Chocolate. Or Tea. Or Coffee. Or Olive oil. Or Honey. Maybe Olive Oil. Yeah, imagine US trader thinking of making high margins in Indian market exporting 'extra virgin olive oil' to India!!! Imagine common man of Tamizh nadu and Gujarat screaming non-availability of 'extra virgin olive oil'!!

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Re: Indian Economy News & Discussion - Nov 27 2017

Postby sivab » 14 Dec 2018 10:30



Piyush Goyal destroys canards about RBI, dismisses political statements from RRR etc. At 29 min mark says govt. never asked for Capital to be transferred to GoI. Just questions why RBI needs 30+% of capital when no committee recommended it. Says RBI arbitrarily changed PCA rules on April 1, 2017 with onerous requirements. Adds such requirements does not exist anywhere in the world. GoI wants it to be aligned with what is practiced in rest of the world.

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Re: Indian Economy News & Discussion - Nov 27 2017

Postby yensoy » 14 Dec 2018 11:19

https://www.bloomberg.com/news/articles/2018-12-14/rajan-gopinath-see-crisis-risk-if-india-focuses-only-on-growth?srnd=premium-asia

Rajan, Gopinath See Crisis Risk If India Focuses Only on Growth

India, one of the world’s fastest-growing major economies, risks being pushed into a crisis if the government sacrifices macro-economic stability for growth, according to economists including International Monetary Fund Chief Economist Gita Gopinath and the nation’s former central bank governor Raghuram Rajan.

To achieve macroeconomic stability, the nation needs to maintain low and stable inflation, ensure combined government budget deficit leaves room for private investment and keep a check on external-financing requirement to reduce vulnerabilities, they prescribed in a report, An Economic Strategy for India, released in New Delhi Friday.
...
The 13 authors of the report include Pranjul Bhandari, chief India economist at HSBC Holdings Plc, Prachi Mishra, chief India economist at Goldman Sachs Group Inc., and Sajjid Chinoy, chief India economist at JPMorgan Chase and Co.


Full report here: https://uchicago.app.box.com/s/f47rz9hwbw9z7lu41f7hnunwxsj58xhp; I have yet to read it in its entirety.

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Re: Indian Economy News & Discussion - Nov 27 2017

Postby Supratik » 14 Dec 2018 18:09

What kind of crisis?

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Re: Indian Economy News & Discussion - Nov 27 2017

Postby Aditya_V » 14 Dec 2018 18:12

Which Government signed such an unfavourable WTO agreements, we should probably agitate and consider withdrawing from WTO.

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Re: Indian Economy News & Discussion - Nov 27 2017

Postby JayS » 14 Dec 2018 20:58

sivab wrote:

Piyush Goyal destroys canards about RBI, dismisses political statements from RRR etc. At 29 min mark says govt. never asked for Capital to be transferred to GoI. Just questions why RBI needs 30+% of capital when no committee recommended it. Says RBI arbitrarily changed PCA rules on April 1, 2017 with onerous requirements. Adds such requirements does not exist anywhere in the world. GoI wants it to be aligned with what is practiced in rest of the world.


Brilliant. Thanks for posting. Can someone please write out the points he made. Very good points (and from the acting Finance Min himself) to destroy propagandists.

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Re: Indian Economy News & Discussion - Nov 27 2017

Postby Suraj » 14 Dec 2018 22:19

Supratik wrote:What kind of crisis?

Lack of opportunities for the Chicago boys. Sounds like a screed by a bunch of folks trying to gain relevance in Indian policy circles. Please use the global economy thread to research on the authors' backgrounds. The word 'crisis' shows up a grand total of once in that document, for all the headline sensationalism of Bloomberg.

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Re: Indian Economy News & Discussion - Nov 27 2017

Postby Kakkaji » 14 Dec 2018 22:57

This isn’t Sparta! Why Das may succeed where Patel failed

Patel’s job was to communicate and he failed: Economic Times wrote a story in the early days of the crisis how industrialists and bankers are making a beeline to the corridors of power in Delhi to vent their grievances about their financing problems and the reluctance of RBI and Dr Patel to hear them out. These complaints have only increased in the past few months as the IL&FS crisis closed off the funding tap to non-banking finance firms who in turn were forced to deny even sanctioned loans to small and medium enterprises. Many industrialists and bankers have privately complained that Dr Patel and senior RBI officials often don’t meet and appear to not want to listen to their views and concerns.

The case of Bandhan Bank is a classic example of how poor communication can cause so many problems. Different rules on promoter lockin and sale of equity shares and inability of two regulators to talk to each other ended up hurting investors of Bandhan Bank. The problem could have been solved by a simple phone call, yet it was not for a strange reason.

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Re: Indian Economy News & Discussion - Nov 27 2017

Postby Neshant » 15 Dec 2018 12:05

Perhaps something that needs to be started and scaled up in India?

If this can be done for meat, can the same not be done for plants on a cellular level?

What would the farmers of India do for a living if that came to pass.


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Re: Indian Economy News & Discussion - Nov 27 2017

Postby chetak » 15 Dec 2018 15:10

The unjustified closure order of the Sterlite's Thoothukudi copper plant in TN has now been reversed by the NGT.

This plant was producing approx 40% of India’s annual copper production of 10 lakh tonnes. The 1200 tonne per day, 400,000 tonne per year copper smelter complex is run by Sterlite Copper, a business unit of Vedanta Ltd, which is a subsidiary of London-based metals major Vedanta Resources Plc.

Now, an investigation needs to be done into how and why this plant was forcibly closed and who was responsible for the closure and why offshore entities were involved in the violent agitation in which several lives were lost.

This was a wilful and targeted hit at 40% of India's copper production and as such, it has serious national security implications apart from the more obvious economic implications.

Tamil Nadu chief minister Edappadi Palaniswami said his government will challenge the NGT verdict in Supreme Court.


Sterlite Thoothukudi plant: NGT sets aside Tamil Nadu government's closure order


Sterlite Thoothukudi plant: NGT sets aside Tamil Nadu government's closure order


Shinjini Ghosh NEW DELHI, DECEMBER 15, 2018

The green tribunal asks Vedanta to utilise Rs.100 crore over three years for welfare activities in Thoothukudi.

Terming the Sterlite plant closure as “unjustifiable”, the National Green Tribunal on Saturday set aside the orders passed by the Tamil Nadu government to shut down the plant.

A Bench headed by NGT Chairperson Justice Adarsh Kumar Goel has directed Vedanta to utilise ₹100 crore over the next three years, for “welfare of the inhabitants” of Thoothukudi.

The Tamil Nadu Pollution Control Board has been directed to pass fresh order of renewal of consent for the copper plant.

“The appellant (Vedanta) will also be entitled to restoration of electricity for its operations,” said the bench while stating that the plant has to comply with suggestions put forth by the NGT-appointed committee.

Vedanta has also been directed to deposit a sum of ₹25 crore for inappropriate handling of copper slag.

A monitoring committee comprising of members from the Central Pollution Control Board, TNPCB and district administration has been directed to regularly monitor the “safe handling of effluents and emissions including solid waste.”

The directions came after Vedanta challenged Tamil Nadu government’s closure order issued in May this year.

A committee constituted by the NGT earlier, had said that the plant’s closure was “against the principles of natural justice.”


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Re: Indian Economy News & Discussion - Nov 27 2017

Postby Katare » 16 Dec 2018 03:49

Supratik wrote:Katare, can you post a source for the 6.1% core inflation number you stated above. I don't recall seeing it.


Look for RBI press release after latest MPC meeting. Governor himself provides those numbers with context. Not surprisingly none up the DDM cared to mention it anywhere that I remember seeing. If you can't find let me know I'll dig it out.

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Re: Indian Economy News & Discussion - Nov 27 2017

Postby Suraj » 16 Dec 2018 04:00

I’ll save everyone the trouble . 6.1% was the October core consumer inflation figure, since fallen to 5.x% in November . RBI reports both headline retail inflation and core CPI figures . It’s their own choice to decide what number they publicize more .

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Re: Indian Economy News & Discussion - Nov 27 2017

Postby Katare » 16 Dec 2018 05:21

I suspected that the numbers (about how much capital RBI is hoarding) that are being thrown in media (and also quoted by Piyush Goyal) can't be true or atleast have to have a different context. Why would RBI governors like to horde money even at the risk of loosing their jobs. Does not make any sense, so I did a little bit of digging and here are my findings from RBI reports....

Law requires RBI to transfer all of its profits to govt in the same year. But the profit is calculated after providing for all the loss coverages, depreciations and other contingency. This gives RBI board first shot at retaining a portion of the annual gross profit and sending leftover to GoI as net profit/surplus.

How much capital RBI has ? - Rs 5 corer (no typo), after that it's gold reserves have increased in the value giving it another odd Rs 6.5K corer (0.001% of total asset). Most central banks have equity capital (tier 1) from 0.5% to 11% of the total assets and some have laws mandating regular addition of a percentage of profit to capital reserve.

RBI Balance sheet size - Rs 36 lakh corer

RBI manages a separate fund called contingency fund (CF) as primary risk capital and each year it adds a large percentage of gross profit to this account to cover for its risks. CF has reserves of Rs 2.3 Lakh corer, which comes to 7% of the total assets.

How big the CF should be?
This was determined by two committees in late 90s and early 2000s. First committee (Subramanian), in 1997, recommended the reserve size to be built up to 12% of the total assets over several years. Usha Thorat committee in 2004 recommended that reserves should be set at 18% of the total assets. RBI board accepted the 12% recommendation but rejected the 18% as too high.

So as of today the CF stands at 7% while minimum recommended size is 12%. Good commercial banks would maintain have twice the minimum required capital to have a safety margin because once you hit the minimum you go in to prompt corrective action.

Is RBI growing CF too fast since the NDA govt took over?
The size of CF reserves have decreased from 9.2% in 2014 to 7% of total assets in 2018. A net decrease of 2% point of total asset size. RBI has added to this fund every year but the balance sheet has grown much faster than the money added to the CF reserve. So all in all RBI has been pretty generous with the govt in giving out dividends.

So where is this Rs.9.6 lakh corer figure coming from?

That number is being arrived at by adding unrealized gains worth Rs 6.9 lakh corer in currency and gold revaluation account (CGRA). These notional gains come from devaluation of the currency not from any banking operations, although they are real. These gains can't be transferred to anyone unless they are realized first. Just like when your stocks gain in value, you have unrealized gain but you have to sell those stocks to convert those gains in profits before you can use it. How can you realize or monetize these gains? I am not sure how this can be done and what impact it would have on inflation.

So combined reserves have gone up to 27% of total assets. Which is obviously much higher than RBI needs immediately and some ways must be found to transfer it for either debt reduction or public use. If Rupee appreciates most of this money will disappear in no time.

As per Rakesh Mohan (ex RBI deputy governor, in 3 part series at Business Standard that I can't access in full anymore unless I pay Rs2000 to them) so quoting from memory-

RBI has maintained 20% of total asset as capital reserve for many years and it has been constant for a while. He also says that 20 major central banks of the world all maintain combined capital reserve ratio around 20%, some more some less. So if RBI reduces the capital from 27% to its regular of 20% it can free up Rs 2.7 Lakh corer.

One option is to give this out to govt in one go or if GoI leaves it on RBI's balance sheet, which is growing more than double digits/year, it'll receive heftier bonuses in future as bank would add smaller amount to CF as it has been doing since 2014.

Rupee has lost its value against foreign currency for last 70 years but there has never been a transfer of the capital from RBI to GoI in the past. This is uncharted territory fo all....

Suraj
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Re: Indian Economy News & Discussion - Nov 27 2017

Postby Suraj » 16 Dec 2018 05:56

Katare, interesting summary. Mind adding references too ? Always helpful in this thread :)

sivab
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Re: Indian Economy News & Discussion - Nov 27 2017

Postby sivab » 16 Dec 2018 06:56

^^^ Not sure why he had to dig for this info, it was well reported on MSM. Here is one reference

https://economictimes.indiatimes.com/in ... 625456.cms

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Per Piyush Goyal, GoI is not asking RBI to transfer capital to GoI, but is asking RBI to strengthen financial system with that reserve.

Supratik
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Re: Indian Economy News & Discussion - Nov 27 2017

Postby Supratik » 16 Dec 2018 22:48

Rural distress due to low food inflation. Correction IMO will be to increase MSP and extend it to all agricultural produce.

https://www.livemint.com/Money/MbvHpRKc ... ion-h.html


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