Indian Economy News & Discussion - Aug 26 2015

Lilo · Post by **Lilo** » 03 Oct 2016 17:23

Will greater uptake of tax revenue by the govt increasingly from the hitherto tax avoiding entities - result in them voluntarily calling back the black money stashes from abroad for maintaining liquidity & investment in their indian businesses & set in play a virtuous cycle ? - Provided that govt manages to maintain a longterm desirable economic climate in India to invest & expand .

Or will the greater tax uptake on this local blackmoney result in increased flight of blackmoney abroad - reducing local investment?

So the pressure on local black money should be increased stepby step onlee in tandem with the increasing strength of the economic fence the GOI is constructing around india via DTAAs & other automated financial sharing information systems with tax havens.

If swiss-london-euro channels are in the process of getting curtailed, onlee middle east & to a lesser extent southeast asia are remaining as destinations for Indian black money .

NRao · Post by **NRao** » 03 Oct 2016 18:01

Economics for you.

How 'black money' saved the Indian economy

Not all bad news.

NRao · Post by **NRao** » 03 Oct 2016 18:07

Challenges.

$181 billion Indian black money in tax havens?

Indians' share in this is estimated at $152-181 billion, by one calculation. This is only wealth invested in shares and debt securities or held in bank deposits. It is impossible to get a handle on other wealth invested in physical assets like real estate, gold or art.

That is the estimated portion of what can be estimated. There is a portion that cannot be estimated. And then there is a similar situation within the nation, actually any nation.

Apply your own estimates.

Goes on to state:

Released this week, these estimates follow the train of several such estimates in recent years with Gabriel Zucman, of London School of Economics, estimating it at $7.6 trillion, Boston Consulting Group at $8.9 trillion and Tax Justice Network at $21 trillion.

Very wide spread.

JayS · Post by **JayS** » 03 Oct 2016 18:36

NRao wrote:
The black money transactions happen by agreement from both sides.
That I'd a given.

That quote of mine was if the buyer is not aware.

What then?

OK. I mistook it for all transactions.

This could be brought into system by registering all high value transactions with PAN/TAN records of both parties (This is gonna happen soon I guess) and if IT dept can data mine this to audit such people and cross verify if they are properly filing their tax. Buyer just has to make sure all the money paid is registered with govt. That's how even the concept of taking receipt from shop owners works right? Buyers have to insist for pakka receipt. Theoretically speaking this should ensure white money transaction.

I always try to pay by debit card and get receipt for the transaction (In BLR at least you can easily pay almost all Rs 100+ transactions by card, unless you are buying from roadside subjiwala). I think this is sufficient from the buyers side. More than that, I agree with you that the buyer cannot be held responsible.

nandakumar · Post by **nandakumar** » 03 Oct 2016 18:53

NRao wrote:Economics for you.

How 'black money' saved the Indian economy

Not all bad news.

It is not correct to say that black money component did not feature in real estate lending as Kaushik Basu is claiming. Even in the early eighties HDFC's (the only game in town in the 80s!) loan appraisal process did factor that in their calculations. The change in the boom years was that home owners'equity which used to be reckoned at 30% came down to 10%. What saved us from the crash similar to the West were two things. We didn't have the phenomenon of rampant securitisation of future cash from home loan repayments sustaining all kinds of exotic instruments. Our corporate bond markets then were and continues to be so now, in anaemic shape. No way we could we indulge in the excesses of the West of those days. Secondly, a lot of illegally acquired incomes went into real estate as way of parking such wealth. There was only so much you could stash as currency in bank lockers or gold jewellery. They were 100% equity investment in real estate. Hence no repayment crisis and subsequent fall in market values leading to foreclosures and a fresh round of depression in real estate prices.

Suraj · Post by **Suraj** » 03 Oct 2016 21:49

NRao wrote:
The black money transactions happen by agreement from both sides.
That I'd a given.

That quote of mine was if the buyer is not aware.

What then?

The black economy exists on the back of millions of people saying exactly this. Your argument is that black money is a criminal enterprise of 'big corrupt people'. And yet, every mango man with your argument is feeding it too. So why make It a criminal matter requiring repossession by GoI ? It sounds strange when millions of people feed it, and then turn around and say 'police, catch these black money people!'

Even the black economy transacts in government issued monetary tender, i.e. cash. Therefore at some point someone is converting white money to black. It doesn't matter if 'the buyer does not know'. Anyone can claim that, whether those who are clueless, don't think, don't care, or even those who know and are lying.

Effective public policy attempts to minimize subjective judgment because they're always flawed by nature. In this case, there is a huge subjective bias involved, since everyone deals with black money in their life, even if its over a bag of peanuts. There's no reliable way to tell who doesn't know, who's clueless or who's criminal. Just as white money turns to black easily, the reverse happens too.

Typically white to black conversion occurs when the formal cost of doing business with due reporting exceeds the informal cost of doing so on a cash basis. This will never be fixed solely by prosecuting black money because people are smart and money is easy to hide and move. Conversely, when the cost of transacting informally and carrying cash without any interest income exceeds the gains that can be accrued by formal economic activity, the black money gets back into white economy.

GoI is taking the right approach. Prosecution is just one incentive. But they have spent FAR more effort trying to make it easier to do business. They made banking accessible. They made the subsidy access more streamlined. They've also made changes that make it harder to do big ticket deals by cash. By constantly lowering the cost of interacting with government and increasing the cost of doing so informally, they're basically signaling that doing business above the table is more lucrative than to do so under the table. That approach is more mature and works out far better than just throwing some numbers out and asking 'why hasn't GoI rounded up some usual suspects and confiscated this money ??' - this argument is basically political handwaving because you're trying to pick on one class of people and punish them for their alleged crimes, and therefore not really suited to this thread.

Hitesh · Post by **Hitesh** » 03 Oct 2016 22:29

I agree with Suraj in the last paragraph. Also GOI has to lower the tax brackets so people are not afraid to report the income. I also agree with Basu's approach of legalizing the bribery because the IAS is pretty much overwhelmed and there is so much inefficiency in the bureaucracy that normal citizens just want to get the services they want and willing to pay for them. Why not take advantage of that and institute a fee schedule and set up a credit card/debit receipt system where the people requesting the service can show the receipt of paying for such services. This way it makes the government more responsive and allows the government to capture indirectly income tax that have not been paid and would normally pay for these kind of services.

Suraj · Post by **Suraj** » 03 Oct 2016 22:49

Gus wrote:Suraj - zero balance account are below 25%

Yes, it's down to 24% now, from 40% in the early months.

Another thing that helps tax compliance is GST. This is because GST is a cascading value addition-based tax. You can't lie and inflate your input costs or reduce your output prices because the entity at the stage above or below you also reports their transaction and your lie is caught. Further, their motives are contrary to yours - they're motivated to show the full price for the same deal where you're motivated to lowball, and vice versa. The GSTN ensures this matchup and flags any irregularities.

This is an example of a good framework. Prosecuting black money on the other hand, has a large subjective element because a) pretty much everyone is contributing to it and b) GoI's phenomenally bureaucratic interface and weak delivery of public goods and services, is a primary cost reason why business is done below the table. If GoI wants to retain public confidence it also has to spend effort proving that it has done a lot to minimize the cost of interacting with it. It is doing so now.

Deciding who gets punished and who doesn't, is subjective. For example, NRao argued that the buyer should not be punished 'because they don't know'. But this is a subjective argument. Buyers can make that argument any number of ways, out of innocence or in an attempt to deceive. It's hard to tell apart. Likewise, it's subjective to decide who gets punished and who doesn't. Just using tax thresholds aren't enough, because it's just a number that decides whether or not you're a criminal tax evader. The kirana store owner who makes Rs.4.99 lakh is ok, but Rs.5.01 lakh is a criminal ? That sort of thing doesn't work - people will just hide what will put them above threshold, that's all.

The long term effective solution remains what GoI is doing now - constantly reduce the cost of interacting with government and encourage rapid economic growth in the formal sector, and increase the cost of doing business informally. The black to white transition will happen on its own then.

ragupta · Post by **ragupta** » 03 Oct 2016 23:10

No need to legalize corruption by Babus taking money.
If people are in hurry and ready to pay, do something like expedited service with higher fee. something like tatkal for passport.

Prem · Post by **Prem** » 04 Oct 2016 06:07

http://www.nextbigfuture.com/2016/10/in ... tuple.html
India' economy is not ready to quintuple within 15 years

In April 2016, Niti Aayog CEO Amitabh Kant gave a 2032 date to India becoming a $10-trillion economy, a year after Prime Minister Narendra Modi said India should dream of a $20 trillion economy but did not fix a target. India wants to accelerate GDP growth to 10% growth per yaer against its projected growth rate of 7.4% to achieve a $10 trillion economy by 2032. If India grows at 7% till 2032, its GDP will only be $6 trillion in 2032 against $2 trillion as on today while 5-6% of the population will remain below poverty line. The new plan flows out of a Group of Secretaries report that talked of achieving 10% growth "year-on-year in the next five years" by aiming at 10 'Champion States' growing at 12% and more, 4% agricultural growth rate, 10-12% growth in manufacturing and services, worldclass infrastructure and the advancements in technology and innovation.Energy infrastructure is lagging India's economy. If India was growing at 10% per year then they would need about twice the power within 8 years.
India has world's fifth largest coal reserves and still faces acute power crisis. India's per capita power sector consumption, around 940 kilo watt-hour (kWh), is among the lowest in the world. In comparison, China has a per capita consumption of 4,000 kWh, with the developed countries averaging around 15,000 kWh of per capita consumption India is currently facing energy crisis with its major dependency on coal, crude oil imports to meet sharply growing energy needs of the country. More than 40% household lack access to electricity. The current power infrastructure in India is not capable of providing sufficient and reliable power supply. Some 400 million people have zero access to electricity since the grid does not reach their areas. Another problem is unstable power supply. There are frequency fluctuations caused by load generation imbalances in the system and this keeps happening because consumer load keeps changing. Frequency is the most crucial parameter in the operation of AC systems. The rated frequency in India is 50.0 Hz. While the frequency should ideally be close to the rated frequency all the time, it has been a serious problem in India. Poor power quality control has knock-on effects on equipment operation, including large-scale generation capacity. Equipment damage can, of course, further compromise supply and aggravate the effects of chronic fuel shortages.

Suraj · Post by **Suraj** » 04 Oct 2016 06:12

Another report that confuses nominal and real growth rates. 10% nominal growth rate (not real growth rate) is sufficient to achieve those figures, and has already been achieved over the past 16 years. There's no reason it can't be accomplished over the next 16, with effective governance. In fact, in pretty much every year in the past decade and half, nominal growth was >7%, typically over 10% and hit the mid teens a few times.

A_Gupta · Post by **A_Gupta** » 04 Oct 2016 07:17

Prem wrote:http://www.nextbigfuture.com/2016/10/in ... tuple.html
India' economy is not ready to quintuple within 15 years

The key to this article is that it is advocating that India join China's One Belt One Road program.
The owner of the blog is from Hong Kong. Other articles about India at that website:
http://www.nextbigfuture.com/search?q=India

This is the recommendation of the above quoted article:

China is eager to build these things for all of Asia and Africa and South America.

Developing countries like India should take advantage of this to get the foundations for future growth built.

Ever since China launched OBOR, most Indian analysts have regarded it more as a threat than an opportunity. Only a minority, consisting almost entirely of economists, have seen it as an opportunity to modernise India’s stone age infrastructure and pave the way for rapid industrialisation and employment growth. What it turns out to be will depend entirely upon what India wants it to be.

The incontrovertible fact today is that China has the finance capital, the technology and above all the overwhelming need , in its own national interest, to accelerate the development of these countries to an extent that could not have been imagined even half a decade ago. It is also an incontrovertible fact that the tunnel, road and rail links that it intends to build will pierce the natural ramparts of South Asia, the Himalayas, and end India’s geographical hegemony over the rest of south Asia.

If India chooses to stay out of OBOR it will only increase its isolation within South Asia, and hasten the end of its regional hegemony. But what will be even less excusable is that it will pass up a once-in-history opportunity to harness China’s economic muscle to India’s development. The way to avoid this is to join OBOR, invite Chinese investment in Indian infrastructure, and use the connectivity this creates to increase trade and investment with other south Asian countries and, of course, with China.

It also links to this article:
http://thewire.in/58810/india-must-embr ... road-plan/
Why India Must Embrace China’s One Belt One Road Plan
By Prem Shankar Jha

Here are Prem Shankar Jha's other articles on India and China:
http://thewire.in/55186/india-losing-opportunity-china/
India is Losing an Opportunity With China
http://thewire.in/53677/narendra-modi-g ... closer-us/
How the Modi Government Spurned Friendly Overtures by China to Move Closer to the US

----
Now, if India can use Chinese resources to mutual benefit and without compromising India's security interests that is one thing; but these articles don't exactly advocate that.

Suraj · Post by **Suraj** » 04 Oct 2016 07:34

Using alarmist faulty math to make a case makes me skeptical. It's fine to argue in favor of OBOR - it has its pros and cons - but a valid argument is more helpful than scaremongering.

gakakkad · Post by **gakakkad** » 04 Oct 2016 18:19

In April 2016, Niti Aayog CEO Amitabh Kant gave a 2032 date to India becoming a $10-trillion economy, a year after Prime Minister Narendra Modi said India should dream of a $20 trillion economy but did not fix a target. India wants to accelerate GDP growth to 10% growth per yaer against its projected growth rate of 7.4% to achieve a $10 trillion economy by 2032. If India grows at 7% till 2032, its GDP will only be $6 trillion in 2032 against $2 trillion as on today while 5-6% of the population will remain below poverty line. The new plan flows out of a Group of Secretaries report that talked of achieving 10% growth "year-on-year in the next five years" by aiming at 10 'Champion States' growing at 12% and more, 4% agricultural growth rate, 10-12% growth in manufacturing and services, worldclass infrastructure and the advancements in technology and innovation.Energy infrastructure is lagging India's economy. If India was growing at 10% per year then they would need about twice the power within 8 years.

Chinese mole is going all shanghai in stats and madarsa in maths...

http://statisticstimes.com/economy/gdp- ... -india.php

This site shows "REAL GDP Growth rate" that is adjusted for GDP deflator (ie it has a base year)...and gdp @ current prices...ie not inflation adjusted....

year real current prices
2013-14 4.74 11.54
2012-13 4.47 11.88
2011-12 6.69 15.77
2010-11 8.91 18.66
2009-10 8.59 15.18
2008-09 6.72 15.75
2007-08 9.32 15.91

Also note that GDP is "projected" from "sample" economic activities ...and a lot of the assumptions are outdated...because we did not always have an IT industry etc...indian cagr has almost always been double digit in the last 15 years...other thing is that if there is a boom in electronics the impact of GDP growth rate will be massive...not only because it ll direclty add to the economy ....but mainly because of the way it ll impact the way the gdp is calculated....

i d say a very conservative projection of indian GDP in 2032 would be 10-12 trillion... i d put my money on 15....and 20 is by no means out of reach...

Gyan · Post by **Gyan** » 04 Oct 2016 19:15

The return by Rent on property in Delhi is around 1-2% of the value of the property. While the return should be average of the Bank FDR rate to Bank Prime Rate ie 8-10%, this shows that the property prices are inflated 2-4 times due to black money.

panduranghari · Post by **panduranghari** » 04 Oct 2016 19:30

Urjit Patel on JaiItaly's cue cuts funds rate from 6.50% to 6.25%.

Bad move. Race to the bottom?

Gus · Post by **Gus** » 04 Oct 2016 20:42

huh?

what is with the phrase "race to bottom"

panduranghari · Post by **panduranghari** » 04 Oct 2016 22:29

Race to the bottom means competitive devaluation of the currency. Making one currency just a little bit cheaper than another one. Its a Sophie's Choice.

NRao · Post by **NRao** » 04 Oct 2016 22:41

Rahul M wrote:66% is a bit too much IMO.

'surgical strikes' on black money holders are supposed to start tonight. we can expect an extension by a week or so to gather up some last minute holdouts.

Guess you are more than corrct Sir:

June, 2016 :: India's black economy shrinking, still exceeds Thailand and Argentina's GDP

It said the size of the India's black economy expanded rapidly over the 1970s and 1980s, but since then had been contracting at a gradual pace and is now estimated at around 20% of the country's GDP.

The term 'black economy' typically refers to the economic activities outside formal banking channels and include cash transactions in high-value assets like gold and real estate.

"Given that India's GDP in calender year 2016 is expected to be $2.3 trillion, the size of India's black economy is about $460 billion (over Rs 30 lakh crore), which is larger than the stated GDP of emerging markets like Thailand and Argentina," Ambit Capital Research said in a research note.

Majority of this black money is locked up in physical assets such as real estate and gold, it added.

In addition to that number is the black money that is outside India. That is estimated anywhere from a few 100 billion, all the way to a cool $1 trillion.

deWalker · Post by **deWalker** » 04 Oct 2016 23:06

Bloomberg's take on India rate cut. De rigeur comparison and contrast with Rajan's term

http://www.bloomberg.com/news/articles/ ... stormy-era

Suraj · Post by **Suraj** » 04 Oct 2016 23:37

panduranghari wrote:Race to the bottom means competitive devaluation of the currency. Making one currency just a little bit cheaper than another one. Its a Sophie's Choice.

But the RBI didn't change exchange rates, just the funds rate, i.e. the lowered the cost of money, not its exchange value. Such a phrase is confusing in the context of the event.

The Bloomberg article is fairly unconcealed in is propping up of Rajan. Even referring to his removal as 'nationalist' . It's not worth taking too seriously, because it's a geopolitical article and not an economic one.

Gus · Post by **Gus** » 04 Oct 2016 23:45

panduranghari wrote:Race to the bottom means competitive devaluation of the currency. Making one currency just a little bit cheaper than another one. Its a Sophie's Choice.

and .25% - the bare minimum cut - is a "race"?

Suraj · Post by **Suraj** » 05 Oct 2016 00:02

Gus wrote:
panduranghari wrote:Race to the bottom means competitive devaluation of the currency. Making one currency just a little bit cheaper than another one. Its a Sophie's Choice.
and .25% - the bare minimum cut - is a "race"?

Not to mention the US Fed etc are waiting for a chance to RAISE rates. It's a race where one player just ran 0.25m in the opposite direction from which all others are trying to run

deWalker · Post by **deWalker** » 05 Oct 2016 03:14

Suraj wrote: ...
The Bloomberg article is fairly unconcealed in is propping up of Rajan. Even referring to his removal as 'nationalist' . It's not worth taking too seriously, because it's a geopolitical article and not an economic one.

Perceptions - "market sentiment" if you will - do matter, so I'd think we shouldn't just brush it off. If the market views the new RBI Governor as risky, it will adjust accordingly. Just $0.02.

On an objective note, I did a double-take on the inflation band mentioned in the article - 2 to 6 % is the range apparently agreed to (haven't seen confirmation elsewhere). 6%, even for India, is high. The higher inflation acceptance will devalue the INR, making exports more competitive and imports expensive. Perhaps we are able to accept that when oil prices are low...

Suraj · Post by **Suraj** » 05 Oct 2016 03:31

There's already market data posted above, in the form of rising foreign holdings of rupee denominated bonds through september, regardless of whether masala bonds are included. it's in this post. If Rajan's exit first week of September was supposed to herald market tumult, it didn't play out. The push for increased foreign holdings of this debt, along with supportive rate policy, was one of the primary features of his tenure. Instead, the matter was priced in during the fall in holdings in June, and has since more than recovered.

deWalker · Post by **deWalker** » 05 Oct 2016 06:32

True, will be interesting to see what any reaction might be to the rate lowering.

As I mentioned earlier, my attention is drawn more to the more laissez-faire position taken on inflation. This article says pretty much the same as in the Bloomberg piece and sets the timeframe 4% Inflation Target Set for 2021. The measures taken will certainly aid growth but they are also at some odds with the previous Governor's attitude (although Rajan had also reduced rates, it was common knowledge that his inflation horizon was shorter).

Suraj · Post by **Suraj** » 05 Oct 2016 07:34

The 6% inflation upper band is not high in an Indian context. In fact it's close to historic lows, so the current inflation targeting mechanism already goes far beyond prior inflation management exercises.
Inflation rate in India under different governments at the Centre

Further, Rajan's inflation targeting exercise also dovetails with the effort to increase attractiveness of Indian debt to external investors. High inflation drives rate increases which in turn are terrible for bond prices.

vina · Post by **vina** » 05 Oct 2016 10:53

But the RBI didn't change exchange rates, just the funds rate, i.e. the lowered the cost of money, not its exchange value. Such a phrase is confusing in the context of the event.

The Bloomberg article is fairly unconcealed in is propping up of Rajan. Even referring to his removal as 'nationalist' . It's not worth taking too seriously, because it's a geopolitical article and not an economic one.

From Econ 101, from interest rate parity arbitrage, a cut in interest rate (while others hold it constant) will mean a weakening of the value of the currency! He is right.

The RBI press meet yesterday was the most insipid and lacklustre in memory and nay it was in many ways bizzare. Really miss the presence, gravitas, intellect and the articulation of Raghuram Rajan. The present line up are shown up as a bunch of tongue tied chumps, with hardly any thought being articulated , and basically a set of rubber stamping machines. Not ONE had a dissenting opinion ? Sounds like group think to me.

Anyways. Lets wait and watch. Remember. 5% inflation is HIGH and so is an RBI repo rate of 6.25% , especially so , when world over, the rate is negative to close to zero in most major economies.

India NEEDS a truly independent central bank that is tasked with inflation targeting. This historical lack of independence along with the command and control days, allowed the Central Govt to bankrupt savers (via negative real interest rates) and use that in wholly unproductive areas (dole outs, huge public sector white elephants, and crony mai-baap , and license permit quota raj capitalism).

Suraj · Post by **Suraj** » 05 Oct 2016 11:32

vina wrote:From Econ 101, from interest rate parity arbitrage, a cut in interest rate (while others hold it constant) will mean a weakening of the value of the currency! He is right.

No, in the context of his original statement, he's wrong and so are you. He referred to a competitive devaluation. There's no competition to devalue through rate cuts. Everyone else - at least every major economy running ZIRP-ish policies - is trying to raise rates.

Further, a rate cut leading to weakening currency is just a construct in theory. In the real world, there are so many externalities involved that the relationship is nowhere near clear . Just the pass through of the rates took several rounds of cuts to accomplish, never mind any impact on exchange rates.

vina · Post by **vina** » 05 Oct 2016 11:58

Everyone else - at least every major economy running ZIRP-ish policies - is trying to raise rates.

Further, a rate cut leading to weakening currency is just a construct in theory

That makes the arbitrage parity principle work even faster as the interest rate differentials narrow and while the inflation (and inflationary expectations) differential remain high. Okay, Arvind Virmani and others are predicting a sub 5% headline inflation read by March 2017 , which is fine, and the RBI has now lowered the "real interest rate" to 1.25% . So at best you are looking at a 0.25% cut, if all the ducks line up on the inflation front and the other major economies hold off on rate increases.

panduranghari · Post by **panduranghari** » 05 Oct 2016 16:33

Suraj wrote: But the RBI didn't change exchange rates, just the funds rate, i.e. the lowered the cost of money, not its exchange value. Such a phrase is confusing in the context of the event.

The Bloomberg article is fairly unconcealed in is propping up of Rajan. Even referring to his removal as 'nationalist' . It's not worth taking too seriously, because it's a geopolitical article and not an economic one.

Bloomberg has its own agenda. So we should take them with a bucket of salt.

In theory, RBI can control the exchange value but they are not aggressive about it like PBoC or BoJ. Its a net loss for us to forcibly control exchange rates as it will store more trouble for the future.

panduranghari · Post by **panduranghari** » 05 Oct 2016 16:34

Gus wrote:
panduranghari wrote:Race to the bottom means competitive devaluation of the currency. Making one currency just a little bit cheaper than another one. Its a Sophie's Choice.
and .25% - the bare minimum cut - is a "race"?

In the global context, it is.

Its the 102 rate cut globally amongst the G20 nations. There have been no rate rises except the lats december one by US fed.

A_Gupta · Post by **A_Gupta** » 05 Oct 2016 17:38

"....From Econ 101, from interest rate parity arbitrage, a cut in interest rate (while others hold it constant) will mean a weakening of the value of the currency! He is right."

This following is from the US Federal Reserve:
https://www.stlouisfed.org/on-the-econo ... hange-rate

A common story connecting these two events is based on the argument that a high-interest-rate currency should appreciate relative to a low-interest-rate currency. If the Fed raises interest rates while other central banks maintain or even lower their interest rates, then the return on savings is more attractive in the U.S. than in other countries. Given this higher rate in the U.S., international capital should flow from other countries to the U.S., resulting in the dollar's appreciation.

Do the economic theory and data support this story? A standard textbook theory—uncovered interest rate parity—argues exactly the opposite: high-interest-rate currencies should depreciate.

Consider an investment strategy of borrowing in a low-interest-rate currency and investing in bonds denominated in a high-interest-rate currency. This is typically called a carry trade. Carry trade investors have to move funds from one country to another, exposing their investment to exchange rate risk.

For example, suppose the U.S. short-term risk-free rate (say, the three-month rate) is higher than Japan's. An investor can borrow the money for three months in Japan, exchange the Japanese yen into the U.S. dollar and invest the money in a U.S. risk-free bond, which yields a higher interest rate than Japan's. After three months, the investor has to exchange the money denominated in the U.S. dollar back to the Japanese yen and repay the loan. Therefore, the total return of a carry trade strategy is the interest rate difference, which is positive, plus the change in the exchange rate during the three-month period, which could be positive (negative) if the dollar appreciates (depreciates).

The uncovered interest rate parity theory predicts an average expected return of zero for the carry trade investment strategy. For the zero return to occur, the positive gain from the interest rate difference must be offset by a decrease in the exchange rate, which implies a depreciation of the U.S. dollar. Otherwise, the carry trade can make a positive expected profit.

However, empirical studies have documented that the high-interest-rate currency does not tend to depreciate as predicted by the theory. Rather, they found that the behavior of exchange rates is actually well approximated by a property called a random walk: almost unpredictable in the short run, with the best forecast of future exchange rates being its current value. Finally, there is weak evidence that a high-interest-rate currency actually has a tendency to appreciate, which is consistent with the story described earlier.

In sum, the theory predicts that a rate hike in the U.S. should depreciate the U.S. dollar. In reality a higher interest rate may have very little or no effect on the exchange rate, given the strong empirical support of the random walk behavior of exchange rates in the short run.

vina · Post by **vina** » 05 Oct 2016 18:14

A_Gupta wrote:"Do the economic theory and data support this story? A standard textbook theory—uncovered interest rate parity—argues exactly the opposite: high-interest-rate currencies should depreciate.

What holds is covered interest rate parity, and especially in cases with countries with big differentials in inflation (like India and the rest of the major economies), you want to use REAL Interest rate parity (A rupee in India today will be buy 5% less in a year from now, while the same amount if held in dollars will hold it's value and buy same).

Believe me. For a country like India, unless inflation comes down, you cannot cut interest rates without devaluing the currency. You will be simply MURDERED . The Govt might lean on the RBI and make it a rubber stamp to cut interest rates, but if they don't cut the deficits at the same time and keep the inflation down , it is going to be a repeat of UPA II with inflation running high at 10%. The Govt BETTER walk the talk and keep it's end of the promise.

Anyways, the classic case of this happening is when George Soros made a cool $1 Billion on his $10b bet against the pound and broke the Bank of England in the ERM days , when Germany increased interest rates in the aftermath of unification of East Germany when they paid a whole Deutsche Mark for the Eastern German currency .

With lower interest rates, the Bank of England (UK wasn't doing well economically and needed lower rates for growth) blew threw it's reserves in defending the pound within the band of ERM and finally had to give up and let the GBP float. Soros and the guys who shorted the GBP made a killing.

Same case in the "Taper Tantrum " in 2014. Remember, the RBI had an emergency rate increase to stabilise the Rupee , and also the Russians who had to increase their interest rates by close to 600 bps to defend the Ruble in the aftermath of it going into a free fall.

A_Gupta · Post by **A_Gupta** » 05 Oct 2016 20:15

I thought that the RBI does not intervene in the market to set/defend the price of the rupee. i.e., no George Soros is possible.

Suraj · Post by **Suraj** » 05 Oct 2016 23:14

vina wrote:That makes the arbitrage parity principle work even faster as the interest rate differentials narrow and while the inflation (and inflationary expectations) differential remain high. Okay, Arvind Virmani and others are predicting a sub 5% headline inflation read by March 2017 , which is fine, and the RBI has now lowered the "real interest rate" to 1.25% . So at best you are looking at a 0.25% cut, if all the ducks line up on the inflation front and the other major economies hold off on rate increases.

The problem with utilizing interest rate differential theory here is that the rupee is not fully convertible on the capital account, and RBI does not maintain a free float currency like USD or GBP. They have a separate and explicit exchange rate focused sterilization bond program to maintain their dirty peg against the basket of currencies they use. I don't claim it's perfect or unbreakable (as BoE found out the hard way before they free floated), but it's the explicit tool they use.

As such, an argument about competitive devaluation (even if all countries in question were moving interest rates in the same direction, is not an easy one to make. They simply don't handle exchange rate policy the same way. And in any case RBI is cutting interest rates while others are moving upwards, so there's no competitive behavior.

Also, RBI hasn't raised repo rates since 2013. The last ones were during Rajan's first policy review in Sep 2013 and I think one in the Dec 2013 review. It did not raise rates during the 2014 taper scare - the rate was flat all of that year at 8%. The extent of his hawkishness was to pause, which is counterbalanced by the fact that he also cut rates 50bps out of nowhere in 2015, after two rounds of 25bps cuts earlier that year.

Suraj · Post by **Suraj** » 06 Oct 2016 00:49

IMF raises India GDP growth projections to 7.6% for FY2017 and FY2018

The International Monetary Fund (IMF) on Tuesday raised projections for India’s economic growth by 0.2 percentage points to 7.6 per cent for 2016-17 and 2017-18. The projections came in at a time when the Fund said global economic growth will be subdued this year, following a slowdown in the US and Britain’s vote to exit the European Union. It, however, retained global economic growth at 3.1 per cent for 2016 and 3.4 per cent for 2017.

In its World Economic Outlook, IMF also kept gross domestic product (GDP) expansion for China unchanged at 6.6 per cent in 2016, which would decelerate to 6.2 per cent in 2017. That way, India would keep its position of the fastest-growing large economy that it snatched from China in 2015-16.

“India’s GDP will continue to expand at the fastest pace among major economies, with growth forecast at 7.6 per cent in 2016–17,” it said in its outlook released three days ahead of its annual meetings with the World Bank in Washington.

The Fund cut growth rate of the US by 0.6 percentage points for 2016.

Final black money tally may go up by Rs 10,000 cr

“The total figures could go well beyond Rs 75,000 crore. A final report will be submitted by the Central Board of Direct Taxes (CBDT) by next week,” an official said.

Devaraj Reddy, president of The Institute of Chartered Accountants of India, said at least Rs 71,000 crore was declared under that Income Declaration Scheme (IDS).

Finance Minister Arun Jaitley had given a figure of Rs 65,250 crore but said this was provisional. As many as 64,275 declarants disclosed black money but this figure could be revised upward, he had said.

Central Board of Direct Taxes head Rani Singh Nair met regional heads on Tuesday and sources said IDS and its aftermath were discussed.

India plans to take away RBI's debt management role in two years

India plans to transfer the central bank's responsibilities for managing public debt, on behalf of the government, to a new independent agency in the next two years, the finance ministry said.

The shake-up aims to resolve a potential conflict of interest the Reserve Bank of India (RBI) faces as the body responsible for meeting the inflation target as well as for selling and buying government bonds.

India funds the majority of its fiscal deficit from bond sales by the RBI which involves setting interest rates on the securities that are auctioned, and can potentially lead to conflicts of interests.

As part of the change, the ministry will set up a cell that will advise the central bank in finalising the government's market borrowings as well as managing its liabilities, the finance ministry said in a statement.

India extends steel floor prices to December 4 to curb cheap imports

India extended a floor price for imports of steel products for a further two months late on Tuesday as the government tries to protect the domestic industry from cheap overseas shipments, especially from China.

The floor price, or the minimum import price, was introduced for six months in February, the first time the government had taken such a step in more than 15 years. It was extended from its initial expiry in August to October 4.

The second extension, announced by the commerce and industry ministry on Tuesday, is a sign India is growing increasingly protectionist as it tries to support local players in the world's only major growing steel market.

Steel production upto August (PDF) continues to remain strong - 63.2MT vs 69.9MT for second placed Japan, and far ahead of the 4th placed US who produced 53.4MT. Next year we should overtake Japan for 2nd place. Would have happened 4-5 years ago if plants like POSCO and Mittal's project were allowed to come up in a timely manner.

tandav · Post by **tandav** » 09 Oct 2016 13:31

To start catching up with China we need to start adding absolute GDP/PPP GDP growth greater than their absolute GDP/PPP GDP growth and also per capita increases. AFAIK at China is 6.5% of a $14.7/21.3 (Nominal/PPP)Trillion dollar economy every year and we are adding 7.6% of a $2.3/8.6 Trillion (Nominal) dollar economy.
https://en.wikipedia.org/wiki/Economy_of_China
https://en.wikipedia.org/wiki/Economy_of_India

Interestingly the Chinese run their economy with paper cash only with the largest bill being RMB 100 ~ Rs 1000.
http://www.nytimes.com/2013/05/01/busin ... trust.html

chaitanya · Post by **chaitanya** » 10 Oct 2016 21:06

Industrial output contracts 0.7 year-on-year in August

NEW DELHI: India’s industrial prodution fell 0.7% in August, slighlty slower than 2.5% decline in July.

Data released by the statistics office showed a 0.3% fall in manufacturing production in August and a sharp 5.6% decline in mining output compared with a 0.8% growth in July. Manufacturing as a sector has the highest weight in the Index of Industrial Production (IIP). The pace of electricity generation marginally improved 0.1% compared with moderation in the previous month.

Bad loans mountain grows, risks delaying bank clean-up

MUMBAI: Stressed loans in India's banking sector crossed $138 billion in June, RBI data reviewed by Reuters shows, an increase of nearly 15 percent in just six months that suggests a state clean-up effort will take longer and cost more than expected.

India Inc pitches for sops to boost consumption-driven demand

NEW DELHI: Disappointed with the 0.7 per cent contraction in industrial output, India Inc has pitched for incentives to boost consumption-driven demand for attracting fresh investments.
...
"The industrial output growth for August is a dampener with a huge drop in capital goods, meaning thereby the investment cycle is stubbornly stuck in a shell," Assocham Secretary General D S Rawat said.

Ease of doing business race hots up among states

Suraj · Post by **Suraj** » 11 Oct 2016 04:04

Indirect tax mop up grows 26 per cent to Rs 4.08 lakh crore in April-September

Indirect tax collections during the first half of the current fiscal grew 25.9 per cent to Rs 4.08 lakh crore mainly on account of 46 per cent jump in excise duty mop up.

The net indirect tax collection in the April-September period accounts for 52.5 per cent of the Budget 2016-17 estimates.

A finance ministry statement said net tax collections of central excise jumped 46.3 per cent to Rs 1.83 lakh crore during April-September, as compared to Rs 1.25 lakh crore in the year-ago period.

Net service tax mop up during April-September grew 22.1 per cent to Rs 1.16 lakh crore, compared to Rs 95,780 crore during the 6-month period of last fiscal.

Tepid growth in direct tax receipts in first half of FY17

Driven by indirect tax receipts, overall tax collections rose 17.8 per cent in the first half of the current financial year against almost 12 per cent targeted in the Budget for the entire 2016-17. Growth in direct tax collections at 8.95 per cent during April-September was less than 12.65 per cent projected in the Budget due to 27 per cent higher refunds (year-on-year) and subdued corporation tax receipts.

The bad news on the direct taxes front came close to less than expected collections from spectrum. Against Rs 64,000 crore projected in the Budget, spectrum auction will fetch just Rs 32,000 crore this financial year.

Taxes yielded the government Rs 7.35 lakh crore in April-September 2016 against Rs 6.24 lakh crore a year ago. The tax collections were 45 per cent of Rs 16.31 lakh crore estimated for the entire financial year in the Budget.

Direct tax collections up to September are at Rs 3.27 lakh crore against Rs 3 lakh crore during this period. Till September, 38.65 pre cent of the Budget Estimates (BE) at Rs 8.47 lakh crore has been achieved, which would require higher mop-up in the second half vis-a-vis the first one to meet BE.

Niti Aayog studies Chinese coastal manufacturing zones

Government think-tank Niti Aayog is studying China’s coastal manufacturing zones, a move that can help India develop its 7,500 km of coastline and help the country further strengthen its export potential.

During the recently-concluded fourth round of India-China Strategic Economic Dialogue last week, Aayog has proposed closer interaction with China’s National Development and Reform Commission (NDRC) for analysing the Communist nation’s “huge success” with coastal manufacturing zones (CMZs).

“We want to study China’s experience with the coastal economic zones and port-led development in China where the cities were granted special status to open coastal cities. They enjoy special policies. Aayog wants to analyse them,” Niti Aayog Vice-Chairman Arvind Panagariya told reporters here.

“Aayog has proposed closer interaction with NDRC on understanding China’s huge success in developing such zones and analyse their experience.”

IWAI plans to spend Rs 2,000 crore on Odisha waterways

With the Centre set to float a tender for development of 36 waterways in the country, the Odisha government said the Inland Waterways Authority of India has plans to spend Rs 2,000 crore in the state in the first phase.

“For the first phase of waterways development, the IWAI has proposed to spend Rs 2,000 crore in Odisha,” transport and commerce minister Ramesh Chandra Majhi said.

The Centre through IWAI planned to develop the waterways from Jionkhali in West Bengal to Talcher in Odisha, a 588 kilometre stretch, the minister said adding that the detailed project report was being prepared by technical consultants.

Of the 588 KM waterways, called East Coast Canal, which will integrate with the Brahmani river and Mahanadi delta rivers, work on a 201 KM stretch will be completed in the first phase.

Centre to invest Rs 15,000 crore to expand Panipat refinery

The central government will invest Rs 15,000 crore to increase the capacity of Panipat refinery from existing 15 million tonnes (MT) to 25 mt to create huge employment opportunities, Union Minister Dharmendra Pradhan said here today.

Also, an ethanol plant would be set up at a cost of Rs 500 crore by the Indian Oil Corporation in Panipat to generate alternative fuel from agricultural residue which would boost agriculture sector, the Petroleum Minister said.

JNPT handles most exports in FY16

Nhava Sheva (Navi Mumbai) port handled the highest amount of merchandise trade in the country during the past financial year, at $45.1 billion.

This was revealed on Monday, after the commerce ministry unveiled a new online portal aimed at analysing foreign trade statistics. Developed by Gramener, a private data visualisation company, in association with the ministry of electronics and information technology, the portal would allow traders and analysts greater access to foreign trade data.

Delhi Airport was the second choice for exporters, sending out merchandise worth $29.4 bn. Followed by Chennai port with $28.4 bn of merchandise.

Petroleum and other mineral oils were the highest traded commodity, worth $65.9 bn, followed by non-monetary unwrought forms of gold ($31.5 bn) and non-industrial diamonds ($14.1 bn).