Indian Economy News & Discussion - Nov 27 2017

[Vadivel]

Its not that we are lazy. It is mainly the business financing for middle and lower middle class, and the ecosystem is unforgiving for failure when in businesses it is the major concern.

Its unforgiving everywhere except US and some EU countries.

Failure in business or anything else have very high stigma in Korea,Japan and China too. So maybe there are other reasons, access to capital is a constant issue, having no level playing field, but this is so in most other countries as well.


Found a link in Quora about this:

https://www.quora.com/Why-doesn-t-India ... ir-defence

[Vasu]

This recent blip was missed out mostly.

PM Modi's panel wants mandatory R&D funding by companies

The Prime Minister’s Science Technology and Innovation Advisory Council (PM-STIAC) wants to make it mandatory for medium and large enterprises in key sectors to set aside funds for research and development after the Economic Survey pointed out the abysmal levels of investment in this area.

It had said that R&D investment in India has been stagnant for 20 years at 0.6-0.7% of gross domestic product with that by the private sector at 0.35%.

The high-level panel wants the private sector to step up in this regard and take that share to at least 1% of GDP by 2022. The global average is 1.5% of GDP, which is the overall level that the council wants to see in India over the next five years.

Among the few companies that have exceeded the threshold in their respective sectors, according to CII data, are Dr Reddy’s Laboratories, Cadila Healthcare and Cipla, among others.

Good to see Indian pharma spending higher on R&D.

[JohnTitor]

Its not that we are lazy. It is mainly the business financing for middle and lower middle class, and the ecosystem is unforgiving for failure when in businesses it is the major concern.

I beg to differ. Getting people here to do anything is like pulling teeth. Even at work, I have to go through several iterations before the quality is acceptable. I never had this problem when I worked abroad.

I suppose this has to do with the entitlement mentality developed over the last 70 years, where everyone feels they should get something for nothing. It's a sad state but I don't think anything will ever change unless the education system is reformed.

Indians not being entrepreneurial also has to do with past generations being very poor and simply not having the freedom to invest. That has now created a very risk averse mentality among the populace.

[Katare]

A Hypothetical question to the gurus.
Given a choice, which should be GoI's focus from 2019 onwards,
go up in HDI and get whatever growth as a result of that
or
go up in scale of economy and get whatever HDI as a result
What scenarios might come to pass in 10-12 years if we follow one of them?

I am asking this question because I believe the GoI can do much much more now with the resources we have and there is still indecision in governments part to commit fully to its ideals.

added later:
Aside from per-capita income, I am including other indicators which are quantifiable like level of education, Healthcare, IMR, benefits, resources and also non-quantifiable indicators like quality of education, affordability and availability of healthcare, general happiness, approach to law etc.
I do not want to base this on per capita income because there is a huge disparity in wealth distribution and only the number doesn't represent the full picture. Our PCI is ~Rs110000/month but there is still quite a large population that falls way below the median mark of this.

Good question, in India’s case as per many studies, HDI in some cases are not keeping pace with the growth. In large part the goals of HDI and wealth creation are complementary but they also compete for same resources. So what should be the goal for next Indian govt-
Primary focus is on wealth creation
Primary focus is on channeling the spending on creating toilets, sewage treatment plants, hospitals and school and universities

Either way, in long run, we’ll get to roughly the same place but with different pains and profits.

A balance policy with slight bias in favor of economy would be my choice. If HDI grow faster than economy you end up with Cuba like situation. For example lots of great doctors but no money to buy xray and MRI. Lots of educated and healthy young man who don’t want to do menial work and the small economy can’t give them good jobs. By this time nation starts to age and can’t grow fast enough to raise standards of life.

Since we are entering into a demographic dividend phase that will last for only couple of decades, we must focus on growing as past as we can, obviously with some caveats, to receive full benefits of this once in century cycle.

Also focus on economy would generate ever higher resources that can be spent to improve HDI in more balance way.

With that said, we need to identify and eradicate a few things on priority even at the short term cost on economic front. Toilets, sewage treatment, infant mortality and primary education can’t wait any longer

On the othet hand If Investment in HDI leg to far behind than economic growth would automatically slowdown. We did face this during early years after independence quality and quantity of required human capital to use up entire growth potential of the economy.

So its economy for me!!!

[Vadivel]

Its not that we are lazy. It is mainly the business financing for middle and lower middle class, and the ecosystem is unforgiving for failure when in businesses it is the major concern.

I suppose this has to do with the entitlement mentality developed over the last 70 years, where everyone feels they should get something for nothing. It's a sad state but I don't think anything will ever change unless the education system is reformed.

Entitlement mentality I concur. Maybe its a longer than a 70 year trait, but romanticized by Nehru's socialism world view, where poor are entitled because of their various social dis-advantages.

We are bad in following standard processes set and implemented, getting people to follow the due process as you said is like pulling teeth. Product development, engineering need due process to be followed everytime, there is complete lack of it from the few companies i interact with.

[Suraj]

Please be more data driven in your discussions. Enough leeway has been offered, but posters who start anecdotal conversations have a responsibility to find more data and reference material to back themselves up. Posts basically veering into past politics are going to disappear.

[Uttam]

Here is an article with many useful data (but very deceptive headline):

Number of Taxpayers goes up by 70%, collections down by 34% in April-August period – interesting details here

E-returns filed by individual taxpayers grew 70% annually to 5.4 crore in the April-August period of the current financial year, but the average tax paid by them has come down by 32% to Rs 27,083. In the previous two years (FY18 and FY17), while the growth rate for e-filers for the respective April-August periods were 24% and 39% respectively, the average tax paid had declined marginally from about Rs 44,000 to nearly Rs 40,200 (see chart).

Even though first, demonetisation, and later, the goods and services tax (GST) helped add pace to tax base expansion, the rate of growth in personal income tax (PIT) collection hasn’t risen commensurately. (The number of individual taxpayers rose from 5.9 crore in FY16 to 7.8 crore in FY17 and, taking cue from available data, the figure could be close to 10 crore in FY18. PIT revenue growth, however, rose from 8.5% in FY16 to 29% and then fell to 19% in FY18).

The fact that the average income tax paid by individual taxpayers has come down indicates that mere inclusion of more assessees, who contribute little to the tax revenue, won’t immediately serve the purpose of improving the tax-GDP ratio.

................................

The article's headline is complaining about reducing average IT paid. But, this author ignores (in the headline) the fact that even with smaller average, the total IT collection has gone up significantly. FY 18 (April-Aug) had 3.1 crore filers with average IT of Rs 40167 = Total Rs 124517 crores. FY 19 (April-Aug) had 5.4 crore filers with average IT of Rs 27083= Total Rs 146248 crores. That's an increase of 17.5%. This compared with a nominal GDP growth of about 11.5% (is that correct?) is a huge achievement. This drop in average IT is expected because erstwhile non-payer start with declaring income and pay in small amounts and then gradually grow both. They do this to stay under the radar. (This is my opinion but I also have some anecdotal evidence).

[Uttam]

More on Personal Income Taxes and formalization of the economy:

Number of taxpayers disclosing income over ₹1 cr rises 60% in 3 years: CBDT

Less than 100 tax payers — all companies — made for more than one fifth of the income tax paid during the assessment year 2017-18 i.e. fiscal year 2016-17. Meanwhile, the number of crorepati assessees has gone up by 60 per cent since the assessment year 2014-15, for which experts attribute demonetisation as one of the reasons.

Income tax returns data was made public by the Central Board of Direct Taxes on Monday from e-filed returns (digitally signed, e-verified or where ITRV has been received) and paper returns captured in the system up to August 31, 2018. The department adopts consistency rules to filter data to be used for analysis. Accordingly, over 4.98 crore returns for assessment year 2017-18 and 4.94 crore for assessment year 2016-17 were used for statistical analysis.
..............................................................

SP Singh, Partner at Deloitte India, feels there may be four reasons for an increase in the number of tax returns. These include effect of demonetisation, increase in the use of information being collected digitally and being used by the Tax Department, movement towards digital assessment and decrease in the number of cases being picked up for scrutiny and ease of getting refund, majorly by small and medium taxpayers. “The last two have reduced fear of the tax department among these sections of taxpayers,” he said.

[souravB]

added later:
Aside from per-capita income, I am including other indicators which are quantifiable like level of education, Healthcare, IMR, benefits, resources and also non-quantifiable indicators like quality of education, affordability and availability of healthcare, general happiness, approach to law etc.
I do not want to base this on per capita income because there is a huge disparity in wealth distribution and only the number doesn't represent the full picture. Our PCI is ~Rs110000/month but there is still quite a large population that falls way below the median mark of this.

You still haven't answered the question. Why do you feel the two are disconnected such that they are an either/or priority ? Quality of labour is very directly tied to economic growth.

But I am not talking about quality of labour only. I am talking about a holistic well being of the populace. I understand economy and well being are tied together and they are not disconnected, but a nation can have policy bias towards one or the other.
The reason underneath my question is precisely what you have touched. Should quality of labour be our only focus while growing or we should also invest in overall happiness of our populace? Should we be exporter of good quality labour or be a country where people want to come and live?
Let's take two scenarios of USA and Nordic European countries. Former has a bias towards economic growth and latter has bias towards socialism. All are Developed Nations with excellent HDI but there are differences in policies from each other. In former you earn more but have a very little umbrella should anything go wrong whereas the latter gives you enough money and lets you be secured in times of need.

[Suraj]

This is the Indian economy thread So I do ask to focus on the thread topic.

[Rudradev]

As someone who does not reside in India I'm trying to see the forest for the trees here. Lots of granular information on this thread, yet across the wider internet, one is bombarded with a steady flow of information (propaganda?) that talks of "economic woes", "fiscal troubles", "stock market downturns", and most of all "severe unemployment difficulties".

I am trying to gauge this in terms of overall economic sentiment as opposed to indicators (which can be found aplenty in this thread and several online resources besides). When I ask for anecdotal feedback from friends/relatives in India, I get the usual desi response "argh, government has not done anything, everything is same-to-same"... but I don't know if this is just how desis are primed to respond to questions about anything related to the government, from Hindu interests to national security to education to whatever.

So when I see a story like this:
https://economictimes.indiatimes.com/ne ... 317380.cms

The policy-making body for the Income Tax Department (ITD), while releasing the latest data, also said that the "average tax" paid by corporates and individual taxpayers has seen a jump over the same time period.

The number of salaried and non-salaried taxpayers saw an increase between 2014-15 and 2017-18 assessment years (AY) and it was a result of continuous efforts of the department initiated for widening and deepening the taxpayer base in the country, it said.

"During a three-year period (assessment year 2014-15 to 2017-18), the number of salaried taxpayers has increased from 1.70 crore (assessment year 2014-15) to 2.33 crore (AY 2017-18). This is a rise of 37 per cent.

"Also, the average income declared by the salaried taxpayers has gone up by 19 per cent from Rs 5.76 lakh to Rs 6.84 lakh," the Central Board of Direct Taxes (CBDT) said in a statement.

During the same period, it said, there has also been a growth of 19 per cent in the number of non-salaried individual taxpayers from 1.95 crore to 2.33 crore and the average non-salary income declared has increased by 27 per cent from Rs 4.11 lakh in AY 2014-15 to Rs 5.23 lakh in AY 2017-18.

I don't know what to make of it.

Is the average working stiff back in desh actually bringing home more money, or is it simply that the govt. has become more efficient at deterring people from under-declaring and/or evading taxes? If people are actually bringing home more money and inflation is (relatively) low, are they recognizing it and feeling good about it?

Then again you see stories like this:
https://economictimes.indiatimes.com/ne ... 277787.cms

Blue Chips are Down

So far in October, foreign portfolio investors have sucked out nearly Rs 19,000 crore from India, double the Rs 9,450 crore they had taken out in the whole of September, and nine times what they had taken out in August. In six months, blue chips are down more than 10% from peak.

There are good reasons for this. For example, a survey of the annual results of about a tenth of listed companies shows net profits down by a staggering 30%. This has been recently published by the respected Centre for Monitoring Indian Economy (CMIE).

On October 11, Credit Suisse (CS) published a report that said from 16% in 2014, the growth of overall lending is reckoned to fall to 10% in 2018-19. CS adds that the worst hit will be non-banking financial companies (NBFCs), which have huge repayments coming up in two months.

The likely failure to do that will impact already-limping bank finances. Banks and non-bank lenders loaded with bad debt, have become extremely risk averse. Lower lending equals diminished spending and investing power.

Unsurprisingly, CMIE shows a dramatic fall in investments. In the September 2018 quarter, the value of ‘new’ projects at Rs 15.8 lakh crore was the lowest in four quarters. The value of completed projects was similarly the lowest in four quarters. The value of stalled and ‘implementation stalled’ projects, taken together, was Rs 10.1 lakh crore, 35% more than the value of completed projects.

...

Obviously, jobs aren’t being created for India’s aspirational young as fast as they should. India lacks reliable employment data because around 85% of its working population is unorganised. However, the CMIE makes a rough calculation — month on month by taking the number of people entering the workforce minus the number who get employment as measured by the Labour Bureau’s quick estimates — as the unemployment figure. Suraj/others, any comment on the quality of this method of estimation?

This shows joblessness rising steadily from 3% of the potential workforce on July 30, 2017, to 8% on September 23, 2018. This is a 167% increase in joblessness — in just 14 months. If true this is indeed worrisome. 3% unemployment is a pretty damn good figure in most contexts; but is it really as high as 8% now?

I guess what I'm trying to get is an overall big-picture of popular economic sentiment in India.

[Singha]

https://dms.licdn.com/playback/C5605AQH ... ngLBrNM7k8

seems TN is a giant in wind power even vs tfta denmark and sweden.

[Gus]

seems TN is a giant in wind power even vs tfta denmark and sweden.

yes. some really strong winds in the bottom around kanyakumari and also near the plains around tirupur-dharapuram.

dharapuram is famous for its winds..really strong gusts.

[disha]

https://economictimes.indiatimes.com/ne ... 317380.cms

https://economictimes.indiatimes.com/ne ... 277787.cms

One has to be very careful on where the data is coming from (data sources) and also the spin put on it by the media. Generally media in India is negative and worse so when their favoured government is not in the seat. So any "analysis" on any data (right or wrong data source) should be taken with a huge bag of salt.

Secondly, never trust an economic analyst. Weathermen have better records than economic analysts. They have their own bias and they also need a living and hence they tend to be more analcysts than analysts.

So let's take look at your URLs. First is the direct quotes from ITD itself. Increase in personal tax base and tax itself (particularly non-salaried) is largely due to de-monetization. There are nuances here, but for brevity will not go into detail. The surprise here is the salaried class. They are definitely earning more if their tax is tax deduction at source.

In effect, demo resulted in @38 lakh more people coming into tax net and an overall 27% increase. This is huge and more of black money coming into fold.

And further the avg. salaried stiff is also bringing in more money since their base and tax also shows increases. This happens only when economy is growing. Not when it is stagnant.

Now, lets take the second link. Here is the quote:

India lacks reliable employment data because around 85% of its working population is unorganised. However, the CMIE makes a rough calculation — month on month by taking the number of people entering the workforce minus the number who get employment as measured by the Labour Bureau’s quick estimates

India has a labour bureau! Yeah, ask anybody in any city to show you the way to labour bureau to register as unemployed and one can as well ask for directions to moon.

What it Credit-Suisse in effect is saying this, we do not know anything but lets go ahead and put a simply-wild-assed-guessestimate on employment numbers based on 15% of the workforce and some data from LB and factor it into a number for economic growth. So one starts with bad data, fills in data (or rather makes data) and then extrapolates into the state of the economy.

Actually they do even worse, they are looking at CMIE data on investments and loan recovery etc and extrapolate into labour statistics and project a level of unemployment. I think the suit-boot bankers at Credit-Suisse did not bother to talk to local pakorawallas. Or did not bother to look into local weather factors for last 3 months.

My take: A donkey's fart contains more information on the state of local economy then the above analysis by Credit suisse.

My suggestion, go with the ITD report. Since the data is right and not some cooked up numbers.

[sanjaykumar]

Its unforgiving everywhere except US and some EU countries.

Failure in business or anything else have very high stigma in Korea,Japan and China too. So maybe there are other reasons, access to capital is a constant issue, having no level playing field, but this is so in most other countries as well.






There is no question there is an etiology for this seeming laziness and Indians' never ending quest for loop holes. I did not mean to cast aspersions on Indian hardwiring (brain etc), only the software it is running displays the times it was written-the licence raj, sifarish, baksheesh, no social security net, no family or clan network of back ups. All making for any entrepreneurial venture high risk.

I think China must have seen similar times, China is certainly 10-15 years ahead of India economically. So perhaps my post was a bit unfair.

[Rahulsidhu]

Great stuff as usual from Neelkanth Mishra, on India's energy requirements:

The fact that India may struggle to pay for the energy it needs to grow the economy at even 7 per cent a year is concerning, and challenges the widely held view that 8 per cent growth is just around the corner. Structural changes on several fronts may be necessary to overcome these hurdles: Improve capital inflows, grow domestic energy production, increase energy efficiency, and also accelerate the transition to more domestic sources of energy.

https://indianexpress.com/article/opini ... y-5413413/

[Rahulsidhu]

Is the average working stiff back in desh actually bringing home more money, or is it simply that the govt. has become more efficient at deterring people from under-declaring and/or evading taxes? If people are actually bringing home more money and inflation is (relatively) low, are they recognizing it and feeling good about it?
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.
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Obviously, jobs aren’t being created for India’s aspirational young as fast as they should.
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I guess what I'm trying to get is an overall big-picture of popular economic sentiment in India.

I will take a stab at such a description. Pointwise:

1) The increase in tax collections is driven by a combination of both: higher growth/incomes and better tax administration/enforcement. It is a great trend for India and especially more impressive when you consider it in 'real' terms, with inflation being low.

2) The problem for India is that unlike most Asian countries that grew rich, ours is a demand-side/consumption driven growth, rather than supply-side/production driven growth. This shows up in various ways-- high trade deficits, low jobs growth (relative to the growth of GDP).

To explain the point a little bit, production led growth is when a lot of new factories etc are put up (without the requisite domestic demand) with a target of exporting to overseas markets. This creates jobs, then income and then domestic consumption.

In India's case, there is more consumer demand than production, which is partly met with imports and these imports are financed by external capital (there is no other way -- it has to be. Sometimes the external financing flows stop suddenly, and the rupee drops. This is what we saw last month).
Hopefully, with time, the imports are slowly substituted with domestic production which also grows competitive enough to export to the world. This creates jobs and raises incomes, completing the cycle.

Note that I am presenting the aggregate picture. Industry specific trends can vary-- Indian IT industry grew based on exports alone before there was much domestic demand.



I am not objecting to the latter model on moral grounds -- it is inherently weak and places limits on how fast you can grow, and jobs growth will inevitably lag economic growth. The Indian economy is presently witnessing exactly that bound on growth as capital flows dry up.

[JohnTitor]

2) The problem for India is that unlike most Asian countries that grew rich, ours is a demand-side/consumption driven growth, rather than supply-side/production driven growth. This shows up in various ways-- high trade deficits, low jobs growth (relative to the growth of GDP).

I'm not sure that's a problem. It may lead to lower (immediate) growth But the growth will be stable. That means over the long term the movement will not be as much as said Asian economies.

[Suraj]

2) The problem for India is that unlike most Asian countries that grew rich, ours is a demand-side/consumption driven growth, rather than supply-side/production driven growth. This shows up in various ways-- high trade deficits, low jobs growth (relative to the growth of GDP).

I'm not sure that's a problem. It may lead to lower (immediate) growth But the growth will be stable. That means over the long term the movement will not be as much as said Asian economies.

You're expressing the logic of stock market alpha and beta indicators - a higher growth, higher volatility stock vs a lower growth, lower volatility stock.

There's no specific one is better than other claim here. It depends on what your values of alpha and beta are. Feel free to define alpha and beta values against a benchmark, e.g. world growth rate or Asian growth rate.

Available data shows that sustained long term growth rates from the East Asian model are higher than 'our' approach, despite the higher volatility, and is contrary to the claim.

[chetak]

https://dms.licdn.com/playback/C5605AQH ... ngLBrNM7k8

seems TN is a giant in wind power even vs tfta denmark and sweden.

They even have a near complete monopoly in sourcing manpower from TN for wind power projects all over India and that too from a few specific districts only. It is a vertical speciality.

[disha]

2) The problem for India is that unlike most Asian countries that grew rich, ours is a demand-side/consumption driven growth, rather than supply-side/production driven growth. This shows up in various ways-- high trade deficits, low jobs growth (relative to the growth of GDP).

This is a sure-fire way to ruin particularly when it is coupled with a very inflexible labour and limited infrastructure policy.

Problem with export led growth is that it is a race to bottom and very limited generation of IP. And subject to vagaries in the destination export market. And it is not as simplistic as creating job, then income and then domestic consumption.

Case in point is iPhone and ZTE. And Huawei.

On ZTE -> https://www.lightreading.com/components ... -id/746658

A ban on the sale of US components to ZTE nearly drove it out of business, and it has shouldered fines equal to about 8.6% of its revenues in the last fiscal year. (See ZTE Racks Up $790M Q1 Loss on US Ban.)

Even if they have not severed their ZTE ties, service providers that once dealt exclusively with the Chinese vendor, such as Italy's Wind Tre, have started relationships with other suppliers. How damaging this could ultimately be remains unclear, but the US penalties have taken a heavy toll. For the first six months, ZTE reported a 27% drop in revenues, to 39.4 billion Chinese yuan ($5.7 billion), compared with the year-earlier period, and swung to a net loss of RMB7.8 billion ($1.8 billion), from a profit of RMB2.3 billion ($330 million) for the first half of 2017.

Of course the losses will lead to job loss and without any other industry providing for those jobs.

And if it was as simple as creating job, then income and then domestic consumption, it is interesting that even though iPhones are manufactured in China they are unaffordable in China itself. Of course if ZTE had invested in IP rather than doing an assembly, it would have been able to cater to domestic demand.

I have cited network, telecom and computing products as an example. But one can find similar examples all over the place, one just has to look.

Problem with lack of domestic consumption, is that when global growth is hit the recession strikes hard. Very hard. Look at Japan.

India's problem is not about production or consumption., India's problem is about anti-business laws and practices, lack of infrastructure including financing and education infrastructure and too much government interference. For example, taking over Tata airlines to create a junk called Air India. It will take now ages to undo such stupidity.

Here is a case in point -> https://swarajyamag.com/insta/iit-madra ... d-ministry

Of course IITM honchos are sore, but have they thought through and created a world class nuclear research facility for 3rd generation or 4th generation nuclear research? Are they going to just mint out BEs and B-Techs for the US? Kalpakkam is very near, so I am sure they can provide some RAs and provide for some RAs in their masters and phd programs. And this is for one of India's premier engineering college. What about other not-so-premier colleges?

My point is orthogonal to above. Where is the long term thinking to do basic research and improve the life of the nation's citizens? Demand and supply and growth will automatically follow. To state that not having a supply side production hence leading to not a high growth economy is just lazy analysis.

[Suraj]

GST Is Softly Killing Sub-Optimal Firms, Boosting Formalisation And Impacting Short-Term Jobs Growth

According to a study of hiring trends in 1,610 companies by CARE Ratings, over the last two years (2016-17 and 2017-18) big companies created net new jobs while smaller companies destroyed them. A report in Business Standard summarising the CARE report says that 705 small companies – more than 40 per cent of the sample – cut jobs. The smallest among them (net sales below Rs 50 crore) reduced jobs by 3.9 per cent in 2017-18 over and above the previous year’s cut of 7.3 per cent. Clearly, demonetisation and the goods and services tax (GST), have made small companies wither at the roots, forcing formalisation and job creation in larger companies.

At the other end of the spectrum, the biggest companies (those with annual sales of over Rs 10,000 crore) saw jobs growth accelerate from 3 per cent in the year of demonetisation (2016-17) to 4 per cent in the year of GST (2017-18).

While this is not good news for any government in an election year, there is little doubt that over the long run, formalisation of jobs and the elimination of sub-optimal smaller companies that survive only by avoiding taxes or to grab small sector benefits, will put India Inc on a sounder footing.

As Manish Sabharwal of TeamLease, a manpower services firm, told me in an interview published in my book, The Jobs Crisis in India, our problem is wages, not jobs per se. Jobs are in plentiful supply at low wages, but not at levels where people are willing to take up work. This is reflected in the Centre for Monitoring Indian Economy’s Unemployment studies, which show a more than 4 per cent drop in the labour participation rate (which is those employed plus those actively looking for jobs) from 46.9 per cent in January-April 2016 (before demonetisation and GST) to 42.7 per cent in May-August 2018 (post-GST). Worse, this trend may be impacting the women’s labour participation rate more than that of men (see here).

Overall, though, if we assume that informal labour means exploitation and low wages, the trend towards formalisation is good over the long term.

Sabharwal told me: “In my view, there are two kinds of small enterprises: baby and dwarf. Both are small but the baby is going to grow and the dwarf isn’t. India is a nation of corporate dwarfs, not babies. You can have small enterprises, but people use small and informal interchangeably. Informal is illegal, small is beautiful. Illegal has to go. In India, there is a transmission loss between how the law is written, and how it is interpreted, practised and enforced. That is one reason why we have a wage problem. Informal enterprises cannot attract credit, they cannot attract talent, they cannot build brands, and therefore they are dwarfs. And dwarfs don’t pay proper wages. When everybody is working for dwarfs – dwarfs are synonymous with (low) productivity and informal dwarfs are even more synonymous with it - how will wages rise?”

The difference between India and China is that we have too many dwarfs, and too few small companies that want to grow. Sabharwal said: “If you look at the 90th and 10th percentile of companies by size (in India), there is a 24 times difference in productivity between big and small. If you have that much difference, why would a small company pay a wage premium? In China, that difference between the 90th and 10th percentile is six times. And 24 times is the difference between informal and formal (here). The point is, if you don’t pay the wage premium you will never be productive. You are stuck in this low-level equilibrium of too many enterprises, low productivity and no wage premium.”

[disha]

Thanks Suraj San for posting the above link. I read through it but could not get around to post the above link. What caught me is this:

As Manish Sabharwal of TeamLease, a manpower services firm, told me in an interview published in my book, The Jobs Crisis in India, our problem is wages, not jobs per se. Jobs are in plentiful supply at low wages, but not at levels where people are willing to take up work. This is reflected in the Centre for Monitoring Indian Economy’s Unemployment studies, which show a more than 4 per cent drop in the labour participation rate (which is those employed plus those actively looking for jobs) from 46.9 per cent in January-April 2016 (before demonetisation and GST) to 42.7 per cent in May-August 2018 (post-GST). Worse, this trend may be impacting the women’s labour participation rate more than that of men (see here).

Women's participation rate could be due to cultural rather than structural issues. But is open to speculation and hence will not go there.

What caught my eye is this ->

our problem is wages, not jobs per se. Jobs are in plentiful supply at low wages, but not at levels where people are willing to take up work.

In essence what it means to me is that there is a large pool of migrant workers who are willing to migrate from one area (say Nepal/Bihar to another area say Gujarat/Mah) since they will find plentiful jobs there and the employers will also find employees at the very low end of the pay scale. Alternatively schemes like MNREGA has provided a floor below which seeking employment does not make sense.

It could be that the above is due to lopsided growth where certain regions of India are almost to developed economy status and certain regions are below sub-saharan. Is this due to policy or infrastructure or both?

[Suraj]

I would not make the same conclusion about migrant workers. I think that's orthogonal to what's being explained, that is, companies that are 'dwarfs' cannot grow business and cannot grow wages, and are stuck with offering dead end wages with no scope for growth. These businesses survive on the margins and depend on non compliance with taxation regime or regulations to keep cost of business low, but correspondingly have very little scope for growth. Such businesses are being replaced by larger businesses that can invest, take advantage of the increasing formalization of economy, and workers themselves are willing to hold out for good jobs as opposed to any job, as the labour participation data suggests. I think this formal data is extremely useful, since in a largely formalized economy, this data provides a good picture as to the unemployment situation.

While large parts of the economy remain informal , it's essentially impossibly for the government to 'do anything' meaningfully because they cannot be data driven in their decisionmaking. Formalization is important, and the government is doing the right thing by emphasizing it.

[Uttam]

My Opinion: Insolvency and Bankruptcy Code, 2016 is proving to be the biggest reform India has seem since independence. The crony capitalism and the nefarious alliance between politician and capitalists has been the biggest bane for India. I am not saying every capitalist is/was like that, but most of them are/were. Again, I don't blame the capitalists. They are opportunists by their very definition. When the SYSTEM allowed them to take advantage of the powerless banking system, they took advantage of it. IBC changed all of that. Look at the loan recoveries since IBC. Pre-IBC banks used to take a haircut of 80-90%. Now they are averaging about 40% haircut. EssarSteel is epitome of this nefarious alliance. Facing the loss of company to ArcellorMittal, now suddenly they have dug out cash from their backyard and are willing to pay almost the entire loan balance. LINK

In my other life I have studied and published on lack of legal protection of lenders and how it resulted in the South East Asian currency crisis and how it is related to lack of capital availability in countries like India. (can't share it because I want to maintain my anonymity, but you can search plethora to academic literature on the subject). In my humble opinion, IBC will help in increasing capital availability and it will force capitalists to invest in good projects thus increasing national ROI. This capital returned to banks will again be deployed in even more productive investments. IBC has the potential to result in a big multiplier effect on the economy.

[Suraj]

Uttam, paraphrasing Hernando de Soto's The Mystery of Capital there ?

Yes, capitalism works when backed up by strong legal frameworks for ownership of property. IBC does that. Demonetization does that. GST does that. All of them force businesses to operate in a predictable and formal manner.

One cannot expect the government to handle unemployment, inflation and general macroeconomic policy when private enterprise does not even function formally and in a legally predictable manner. What the government has done is to attempt to force formalism and ensure policymaking is therefore more effective as well.

[Suraj]

Obviously, jobs aren’t being created for India’s aspirational young as fast as they should. India lacks reliable employment data because around 85% of its working population is unorganised. However, the CMIE makes a rough calculation — month on month by taking the number of people entering the workforce minus the number who get employment as measured by the Labour Bureau’s quick estimates — as the unemployment figure.

Suraj/others, any comment on the quality of this method of estimation?

The quality of our macroeconomic data is weak. It's not merely something that one can fault the government for. The nature of the economy is informal. Tax compliance is low but rising. EPFO/NPS membership is tiny compared to the total labour base. Approx 50 million people are in NPS (last data I can find) and about 10K new people join every day. That's 3.6 million, if they join every day of the week, which isn't the case. Total labour pool on the other hand is north of 500 million people.

How do you make clear policy actions when you have data comprising ~10% of something - the total labour force in this case ?

This is why so many actions of the government have focused on making economic activity formalized. It makes it easier to track and fix problems when you actually have a handle on what/where the problem itself is.

A lot of policy actions are not effectively transmitted when the system is not working formally. Let's take a middle class issue. EMIs on property. RBI cuts rates. Banks don't always follow . They're not simply being profiteers. Their loans on the books are red because - prior to IBC 2016 in particular - NPAs were difficult to tackle and they usually took a huge haircut. When they had a chance to make extra on the spread when RBI cuts rates, they do that, to manage their books. One could argue banks "should not do that", but that's not really how things work.

Now when IBC works properly, banks get paid on their loans when the bankruptcy process accords the creditors back their capital, and therefore they are able to function more predictably, which means rate cuts are also able to be transmitted more effectively.

[Prasad]

Question from layperson: Can the Ruias now actually pay whatever they're paying legally? Can the govt/ibc ask for their source of funds? Can't let them borrow money now and stymie somebody like Mittal taking over.

[Suraj]

Question from layperson: Can the Ruias now actually pay whatever they're paying legally? Can the govt/ibc ask for their source of funds? Can't let them borrow money now and stymie somebody like Mittal taking over.

They made the same offer earlier in the year, but it didn't work. They did so again because IBC was amended in June enabling lenders to withdraw a company from the insolvency process if 90% of creditors agree to the plan. However, it's up to the lenders to agree, and that means the Ruias have to line up the cash up front and demonstrate they aren't simply borrowing from Peter to repay Paul.

The Ruia bid relates to their prior consortium bid with Russia's Numetal/VTB. They essentially claim these two entities have arranged the funding for them.

I hope the creditors don't agree to the Ruia's proposal though, and instead follow the NCLAT CoC decision and let ArcelorMittal take over. More in this article: ArcelorMittal wins, but Ruias’ repayment offer will test IBC

Meanwhile, ArcelorMittal is of the view that applicability of section 12A will be in violation of IBC regulations. “Our understanding is that the IBC’s section 12A does not apply to the resolution process of Essar Steel. Section 12A clearly states that any application to withdraw must be submitted prior to issuance of the invitation for expressions of interest and must be accompanied by a bank guarantee for the specified amounts. The expressions of interest for Essar Steel were issued in October 2017,” said an ArcelorMittal spokesperson in an emailed response. “We expect the process to continue as per the clear terms of the IBC.”

Essar Group has not disclosed if the firm has received a letter of commitment from any bank to repay the dues of Essar Steel. Two bankers close to the development said ArcelorMittal had received a letter of commitment from French lender Credit Agricole for the acquisition. It could not be ascertained immediately if Credit Agricole has further sold its exposure to other banks. Credit Agricole did not respond to an email.

A banker involved in the insolvency proceedings said if Essar could pay the money earlier, it should have done so before the deadline lapsed and that it would be difficult to reverse the process.

The creditors would be naive to ignore a ban k guarantee on ArcelorMittal's part in favor of a higher claim by the Ruias not backed by a demonstrated guarantee. It's their money after all.

[Prasad]

Thanks Suraj. So even if the shareholders approve this, the Ruias don't really have a legal stand here and Mittal should get it is the right understanding.

[Suraj]

Thanks Suraj. So even if the shareholders approve this, the Ruias don't really have a legal stand here and Mittal should get it is the right understanding.

NCLAT decides whether they have legal standing, but even then, it's for the creditors to agree whether or not to accept the Ruia's handwaving , rather than ArcelorMittal's more credible but smaller offer. As it stand, ArcelorMittal have already won the bidding process.

Edit: looks like the creditors did the smart thing and continued with the choice of ArcelorMittal instead of being tricked by the Ruia's headfake:
Essar Steel lenders settle for Arcelor

The world’s largest steel maker, ArcelorMittal, on Friday said it had been chosen by lenders to takeover debt-laden Essar Steel for around Rs 42,000 crore.

In a statement, ArcelorMittal said its resolution plan for Essar Steel, which the lenders auctioned to recover over Rs 49,000 crore of unpaid loans, included “an upfront payment of Rs 42,000 crore” to settle debt and “a further Rs 8,000 crore of capital injection into the company to support operational improvement, increase production levels and deliver enhanced levels of profitability”.

The Committee of Creditors issued ArcelorMittal and its partner Japan’s Nippon Steel & Sumitomo Metal Corp a Letter of Intent (LoI) declaring them as the “successful applicant”.

The development comes a day after promoters of Essar Steel offered to pay lenders Rs 54,389 crore, including an upfront cash payment of Rs 47,507 crore to clear all dues of lenders, and pull the firm out of insolvency proceedings.

[hanumadu]

Question from layperson: Can the Ruias now actually pay whatever they're paying legally? Can the govt/ibc ask for their source of funds? Can't let them borrow money now and stymie somebody like Mittal taking over.

They recently sold their refinery for a Russian company for 50k crores.

[nandakumar]

Now Ruias will go to NCLAT alleging that creditors have wrongly rejected their offer and if they lose appeal before the SC. The circus will go on.

[SaraLax]

Question from layperson: Can the Ruias now actually pay whatever they're paying legally? Can the govt/ibc ask for their source of funds? Can't let them borrow money now and stymie somebody like Mittal taking over.

They recently sold their refinery for a Russian company for 50k crores.

Some people here are posting wrong & misleading info. Other people are a bit lazy ...

Below is a quote from an Economic Times article from November 2017.

The Essar Group, which built an oil refinery, steel plants, and telecom and port businesses from the ground up, has been divesting some assets to bring down debt in the past few years. The sale of Aegis (Essar's BPO business) and Essar Oil was part of this de-leveraging exercise. Before it undertook the sale of Essar Oil, the group had a gross debt overhang of about Rs 122,000 crore. After the sale of the two businesses — Essar Oil and Aegis - the group has managed to reduce its debt exposure by Rs 75,000 crore.

The sale of Essar Oil and Aegis has enabled the group to significantly pare its debt including working capital to Rs 52,000 crore, with Essar Steel owing banks about Rs 42,000 crore.

This would mean that the Ruia's are not financially strong on their own to fund this attempt to pull Essar Steel out of the NCLT run Insolvency proceedings. The source of the funds for their attempt to pay all of Essar Steel's debts to creditors is supposed to involve atleast one controversial entity - the same Chinese bank (i guess it's ICBC) which had lent to Anil Ambani for his Power Company's Sasan Power and RCom's Telecom projects & then took hime to NCLT for non-payment of interest & loan for RCom project related lending. There is not a lot of clarity. Initially these brothers tried to use VTB bank of Russia in some proxy manner of getting back their hold on Essar Steel but that bid seems to have been thrown out.

[Suraj]

Now Ruias will go to NCLAT alleging that creditors have wrongly rejected their offer and if they lose appeal before the SC. The circus will go on.

The IBC process doesn't quite work like how the Ruia's are trying to do. You don't get to say "stop the bus now! we will pay the ticket later!" No, to be eligible to bid, one has to clear their own pending dues first, and in time. ArcelorMittal itself had to clear its own dues to be eligible to bid, and they did clear them (technically, their past dues are currently in escrow, to be lifted if they succeed in the Essar bid). The IBC process is designed to put an end to the extend and pretend methods of the past, by a) switching from debtor in control to creditor in control b) making steps time bound and c) requiring one to pay down past dues to bid for future stakes. No more of the "we'll pay later! here's the very large number we'll pay you! believe us!" nautanki.

IBC entirely reverses the prior debtor-in-possession paradigm (the entity owing money keeps and controls the asset until the insolvency/bankruptcy proceedings have entirely concluded in an adverse decision), to a creditor in control (the insolvency professional immediately takes charge and drives the steps in a time bound manner, and the debtor becomes optionally capable of bidding if they clear dues). India historically always had debtor in possession. Even US Chapter 11 bankruptcy is debtor in possession. UK's insolvency/bankruptcy laws are similar to the creditor in control approach of IBC 2016

Everyone keeps thinking about the old way of doing things, but the IBC works according to a very different paradigm where the debtor doesn't have anywhere near the power they once did. The Ruia's have already not managed to do the procedures required by IBC in time. They have no escrow of their 45K crore past dues in place. Their appeal against any adverse decision in NCLAT will just get told they didn't follow the rules.

[hanumadu]

They recently sold their refinery for a Russian company for 50k crores.

Some people here are posting wrong & misleading info. Other people are a bit lazy ...

Below is a quote from an Economic Times article from November 2017.

The Essar Group, which built an oil refinery, steel plants, and telecom and port businesses from the ground up, has been divesting some assets to bring down debt in the past few years. The sale of Aegis (Essar's BPO business) and Essar Oil was part of this de-leveraging exercise. Before it undertook the sale of Essar Oil, the group had a gross debt overhang of about Rs 122,000 crore. After the sale of the two businesses — Essar Oil and Aegis - the group has managed to reduce its debt exposure by Rs 75,000 crore.

The sale of Essar Oil and Aegis has enabled the group to significantly pare its debt including working capital to Rs 52,000 crore, with Essar Steel owing banks about Rs 42,000 crore.

This would mean that the Ruia's are not financially strong on their own to fund this attempt to pull Essar Steel out of the NCLT run Insolvency proceedings. The source of the funds for their attempt to pay all of Essar Steel's debts to creditors is supposed to involve atleast one controversial entity - the same Chinese bank (i guess it's ICBC) which had lent to Anil Ambani for his Power Company's Sasan Power and RCom's Telecom projects & then took hime to NCLT for non-payment of interest & loan for RCom project related lending. There is not a lot of clarity. Initially these brothers tried to use VTB bank of Russia in some proxy manner of getting back their hold on Essar Steel but that bid seems to have been thrown out.

Yes, they did try to get back their company at much lower prices by fraudulent means.
Selling Essar Oil alone would have taken around 40000 cr debt off its books. Essar Group did get around 8 billion dollars from sale of Essar oil after accounting for Essar Oil's debt. If they really wanted to they could have prevented their company from going through bankruptcy. I am not saying that we should believe them when they say they are willing to pay a higher amount to get back their steel company, but I believe they had the money. May be they prioritized it to retire debt of other group companies. Debt is part and parcel of all corporations, so having debt in itself doesn't mean they are insolvent or doing bad. If other group companies are able to service their debt on their own, Essar Group still has a wad of cash lying around.

[JohnTitor]

I don't think anyone is saying debt is the issue. What is the issue, however, is using political influence to fraudulently obtain vast amounts of debt, splurge and then use same influence to renege on debt without any consequence.

IBC just short-circuits the system by taking away their company on case of non payment .

[hanumadu]

I am talking about purely the ability of the Ruias to come up with the money.

[ArjunPandit]

Not sure if it's suitable for GDF, BUT VIRAL acharya had expressed concerns about the govt interference

Key diff points
1. Pca action
2. Rbi balance sheet
3. Payments regulator

[JohnTitor]

It's almost as if the upcoming elections are causing all the insects to come out of the woodwork. I'm not surprised about the CBI but the RBI is a bit unexpected