Jet Airways bailout. Who pays the price?

The government last week seems to have nudged public sector banks (PSBs) to bail out the bankrupt Jet Airways. Was this a good idea? No, but there was no alternative either. Banks will provide fresh funds of Rs.1,500 crore to restore some normalcy in the airline’s operations. This is supposed to be against ‘security of assets, but this is mainly the value of the 50.5% equity that the lenders have extracted. If no buyer materializes in two months, then the share price, which shot up after the bailout, will fizzle out equally fast and lenders will be left with worthless paper and the prospect of liquidation. 

• The founder Naresh Goyal and his wife Anita Goyal will step down from the board of directors. Mr Goyal sends out an emotional farewell letter in which he says, “No sacrifice is too big for me to safeguard the interest of Jet Airways…”
• Mr Goyal still holds 25.5% of the equity. The stake of Etihad Airways halves to 12%. 
• Jet Air says that the money will be used to clear dues owed to vendors, creditors, lessors, pay salaries to employees and get more aircraft off the ground again. A committee of experts, along with management consultants and an audit firm, will handle the revival of the airline and, probably, find a buyer. 
• Jet Air had two former civil aviation secretaries on its board but couldn’t come up with a plan to stay afloat.
• Jet Air has 22,000 employees.
• Jet Air owes Rs.8,000 crore to banks. The biggest mystery is: Why isn’t anyone holding him responsible for repaying the massive Rs.8,000 crore that the airline owes banks?
• Naresh Goyal’s business dealings are far more controversial than those of Vijay Mallya. But he was sensible enough to maintain a low profile and adopt a humble demeanor.
• Jet  was allowed to fly abroad; got the choicest destinations; was allowed to buy Sahara Airlines to retain market leadership (for a short while) and also wangle a great deal for Etihad Airways, to persuade it to come in as a strategic partner.
• This is hugely ironical when you consider that Vijay Mallya, whose Kingfisher Airlines owes Rs.9,000 crore (with interest) to lenders is having all his assets liquidated and faces untold humiliation. Is the difference in treatment explained by the fact that Mallya chose to run away to the UK when it seemed likely that he would be arrested?
• Why didn’t the lenders demand a board position earlier? 

Rajnish Kumar, SBI chairman has led the restructuring effort and even put his reputation on the line. He told a journalist, “If my transaction is successful, after May 31, I will write a book on it.” If he succeeds, he certainly deserves every accolade; but what if his gamble fails and the airline ends up in a bigger mess, like Air India? Will he be held accountable or will he be allowed to shrug it off and put the airline into liquidation? Remember, SBI has made a virtue of ripping off small account-holders who do not have the resources to maintain a minimum monthly balance and collecting thousands of crores from them.

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Common sense tells us that recapitalisation must be done by owners themselves not lenders. Banks are not supposed to invest any amount of money without 'due diligence' and without 'adequate securities'. It is not bank's job to bailout a privately held company facing financial crisis mainly due to mismanagement of funds by management. In all probability this Jet Air will go into liquidation sooner or later. Then who will be held responsible for doling out this Rs.1,500 crores of depositors money? Also why lenders with exposure of Rs.8,000 crores have no member on Jet Air board is unclear. Unless investigated it is likely to be a scam supported by powerful people. It is likely that Naresh Goyal who killed Jet Air by siphoning off money has been allowed to exit by lending banks & central government without facing inquiry or trial is a big favour. Why same courtesy was not extended to Vijay Mallya & Kingfisher Airlines few years ago in an identical situation?

IL&FS: Rs 91,000 crore mess

IL&FS Head Quarters at BKC, Mumbai

IL&FS Financial Services MD & CEO Ramesh Bawa along with four independent directors and a non-executive director quit on Sept 21, 2018 just hours after the parent IL&FS informed lenders that it would be unable to make payments on ₹250 crore of debt falling due. On Sept 30, 2018, rating agency ICRA had downgraded IL&FS citing factors like liquidity pressure and high debt levels - to BB from AA+. The central government on Oct 1, 2018 dissolved the 15-member board of IL&FS in a move to revamp investor confidence scalded by the firm’s defaults and fears of a credit freeze. The board was replaced with a new six-member panel headed by Managing Director of Kotak Mahindra Bank Uday Kotak. The board of IL&FS has unanimously appointed Hemant Bhargava, Managing Director, LIC and nominee on the board of the company as Non Executive Chairman with immediate effect. The newly-appointed board is expected to chalk out a resolution plan and submit its first take within 15 days.

• The troubles at IL&FS had been intensifying since July, when the company's founder Ravi Parthasarathy has resigned as the Non-Executive Chairman of IL&FS, which he served for over 30 years, citing health reasons. Parthasarathy, an alumnus of IIM Ahmedabad joined the IL&FS in 1987 as President & Chief Executive Officer and was appointed as Managing Director in 1989. He was later designated Executive Chairman of the company.  
• IL&FS also failed to repay corporate deposits subscribed by the Small Industries and Development Bank of India (SIDBI). It only repaid ₹50 crore out of 250 crore.
• Some group companies have started defaulting on repayment of commercial paper and other instruments to the tune of ₹300-400 crore. 
• IL&FS Group has shown a loss of ₹2,670 crore for the year 2017-18 in consolidated balance sheet. The leverage is about 13 times as the borrowing of about ₹91,000 crore is on on the base of equity capital and reserves of about ₹6,950 crore. IL&FS is burdened with a consolidated debt of around ₹91,000 crore, of which ₹55,000 crore is housed in the special purpose vehicles created to build infrastructure ranging from roads to power companies. 
• Among the public sector banks, Bank of India has the highest exposure of Rs 2,388 crore. The company also owes Rs 1,841 crore to Yes Bank, the maximum among private lenders.
• IL&FS has deep business ties with the roads ministry and its agencies such as National Highway Authority of India. States and the centre, including their agencies, owe as much as ₹16,000 crore in receivables to ILF&S. The company claimed in its recent letter to its employees stated that "had the concession authorities released our monies", IL&FS would not be in the current situation.
• IL&FS was due to repay ₹1,066 crore of its debt by October and around ₹1,953 crore between September 26 and September 30. The company needs an immediate capital infusion of ₹3,000 crore and is planning a ₹4,500-crore rights issue. 
• LIC and ORIX Corporation are the largest shareholders in IL&FS with their stakeholding at 25.34 % and 23.54%, respectively. Other prominent shareholders include ADIA (12.56%), HDFC (9.02%), CBI (7.67%) and SBI (6.42%). 

• Its woes are shared by other infrastructure funding institutions in India that have been unable to cope with projects that have got stuck and become unviable. IL&FS needs nearly ₹15,000 crore in financial support to avert a collapse and could only be saved if lenders agreed to take a big haircut.
• IL&FS had compromised on corporate governance and risk management norms. The risk management committee of IL&FS did not meet between 2015 and 2018, except once in July 2015. IL&FS has not been able to take up any new infrastructure projects after 2015.  
• The fact that the company continued to pay dividends and huge managerial payouts regardless of looming liquidity crisis shows that the management had lost total credibility. The company paid dividend of ₹65.70 crore in 2017-18. The company posted a standalone profit of ₹584 crore in 2017-18. Average managerial remuneration increase was 66% in 2017-18 and the average salary increase of other employees during the year was 4.44%. Last year Ravi Parthasarathy, the Chairman, got a 144% jump in remunerations to ₹26.3 crore, Hari Sankaran, Vice-chairman and MD, got a 3.86% hike to  ₹7.7 crore and Arun K Saha, Joint MD & CEO, 10.43% hike. 
• The financial mismanagement of the IL&FS is apparent from its rapid debt built up and misrepresentation of true state of financial fragility, which is being reflected in unprecedented rating downgrade from highly rated to a default category.
• The report also warned about repercussions due to lack of authentic information in the market about the financial status of 169 unlisted group companies of IL&FS.
• The group will sell its corporate headquarters in Mumbai’s Bandra Kurla Complex (BKC) to raise funds to stave off repayment challenges and switches to an asset light strategy. The sale of the corporate headquarters is expected to fetch Rs 1,300-1,500 crore. IL&FS is also planning to sell some 25 projects, which will reduce its debt by Rs 30,000 crore.
• The Ministry of Corporate Affairs got a lookout notice issued for former directors Ravi Parthasarathy and Ramesh Bawa, and serving directors Hari Sankaran, Karunakaran Ramachand. However, Ravi Parthasarathy is in London at the moment for medical treatment and there is no clarity about when he will return. All others are said to be in India.
• Board directors can’t be absolved of their obligations by resigning abruptly. That wouldn’t absolve them of any wrongdoing. The government on Mon Oct 1, 2018 ordered an investigation by SFIO into IL&FS and its subsidiaries after they failed to make repayments on time, damaging investor confidence and sparking fears of defaults by other NBFCs that roiled the markets. 
• The Serious Fraud Investigation Office (SFIO) kicked off its probe into financial irregularities at IL&FS by questioning the top management, searching the group’s offices and gathering information from its servers. The agency will also question the ousted directors and former chief Ravi Parthasarathy. 
• Apart from the board members sacked on Oct 1, 2018, the agency will also question those who resigned recently amid defaults and rating downgrades. For instance, Ramesh C Bawa quit as chief executive and managing director of IL&FS Financial Services on September 21, the day it defaulted on an IDBI letter of credit that came due. 
• Gujarat Urban Development Company Limited (on behalf of the Government of Gujarat) and IL&FS are jointly developing Gujarat International Finance Tec-City (GIFT) project since 2006 when Modi was  CM of Gujarat. IL&FS is an 50:50 investor and co-developer in the project. About 866 acres of real estate is to be developed for commercial, residential etc to provide one million direct & indirect jobs in Financial, IT & BPO segments. After 12 years and as on Jan 1, 2018, the GIFT city has 2 million sq.ft. operational and 3 million sq.ft. under development out of has 62 million sq. ft. in its master plan. GIFT has attracted about $1.5 billion in investments. About 150 companies have started operations employing just 8,000 people. The city hopes to employ a million one day.
• "It is completely baseless to say that ₹70,000 crore worth of project (GIFT City) has been handed-over to IL&FS. In all the phases of GIFT City development, only ₹10,000 cr is projected to be spent on entire infrastructure development," says the Gujarat government.
• The Congress on Sept 30, 2018 stepped up its attack on PM Modi, with party President Rahul Gandhi alleging that public savings (funds from SBI and LIC) was being used to bail-out the debt-ridden IL&FS group. 
• The Congress has raised the issue and warned of "an impending 'Lehman Brothers-type' economic crisis facing the country". The IL&FS crisis has also dented equity investors confidence in the entire NBFC space. Congress party has called for a forensic audit of the group over the disbursement of ₹42,000 crore in the last four years.   

The central government's swift action to seize control of IL&FS, within hours of payments default, and ordering investigation is more typical of China's command-and-control economy than a free-wheeling democracy like India, stunned investors by surprise. It indicates that Govt, FM, PM etc are aware of the situation for the past several months but actions were announced in a dramatist manner. The restoration of confidence of the money, debt and capital markets, the banks and financial institutions in the credibility and financial solvency of the IL&FS Group is of utmost importance for the financial stability of the nation. Modi & Jaitley have few options since the economy was already grappling with surging fuel prices and a plunging currency and widening fiscal gap. Any company going bust due to mismanagement, reckless spending, non transparent operations, financial frauds, political corruption etc and Govt attempting to recapitalize with a hope to turn around is generally futile. Very rarely, say 1 or 2 in 100 will succeed. The classic examples are Air India, BSNL which went from bad to worse to worst. The best way is to wind up these companies, liquidate its assets and pay up prorata due amounts to creditors even if it entails loss of credibility. That would at least send clear message that government will never bailout any company at the expense of public interest. Lenders are hopeful of recovery with 10-15% haircut, but when it really happens it could be as high as 25-30%. Govt must ensure that who ever has committed process violations must be prosecuted and punished, but in India the statistics show dismal 6% conviction rate. The new board members suffer legacy issues and none has any experience in infra space to handle the crises and instill market confidence.

IL & FS ruckus - Domino effect

The IL&FS downgrade has lessons for many other financial market constituents

• The ruckus that has followed the recent credit downgrade at project financier Infrastructure Leasing & Financial Services (IL&FS) highlights how financial troubles at a single institution in India can set off a domino effect across the entire financial system. 
• IL&FS and its subsidiary IL&FS Financial Services enjoyed high credit ratings and seemed to be a go-to name for short-term lenders until reports leaked out a week ago that the subsidiary had missed due dates on commercial paper, while the parent had defaulted on deposit dues to SIDBI. 
• Thereafter, rating agencies ICRA, India Ratings and CARE swung into belated action to abruptly downgrade IL&FS and its subsidiary from high investment grade (AA plus and A1 plus) all the way to junk status (BB and A4). With the ratings falling off a cliff, the 30-odd mutual fund schemes holding a ₹3,500 crore exposure to IL&FS entities were forced to take sudden write-downs, jolting their investors. 
• Domestic banks and insurers, also said to hold significant exposures to the group, may soon have to follow suit. IL&FS, meanwhile, is in parleys with its major shareholders LIC and SBI for a lifeline, which may not go down well with the latter’s policyholders and investors.
• There are lessons for almost all financial market constituents from this episode. For rating agencies, it is a matter of concern that, though the stretched liquidity position of the group was known for some time, it took an actual default for them to revisit their investment grade ratings. 
• Though the raters repeatedly flagged loan book concentration, high debt levels and the dire financial straits of group firms in their reviews, they seem to have pinned their hopes on IL&FS’ big-name promoters (LIC, Abu Dhabi Investment Authority, SBI, Central Bank) to bail it out of its troubles. This exposes the fragility of the ‘structured obligation’ ratings often handed out to weak entities hailing from marquee industrial groups. 
• The mutual fund industry too does not come out of this episode smelling of roses. Instead of restricting their exposures to the high-risk paper to their ‘credit risk’ funds, fund managers also parked it with their liquid and low duration funds, despite marketing them as low-risk alternatives to savings bank accounts. Here, SEBI should revisit its recent fund categorisation rules to ring-fence these categories of debt funds from credit risks. For banks, this again drives home the risks of funding long-gestation projects with short-term money.
• Overall, even if IL&FS manages to tide over this episode, it has underlined the need for institutional investors in the Indian bond market — banks, mutual funds, pension funds and insurers— to build their own capabilities for independent credit appraisal instead of over-relying on rating agencies for their investment calls. Of course, this does not absolve rating agencies of the need to to be proactive rather than reactive with their rating actions.

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Every one would like to invest in profit making companies and none would be interested in loss making companies even with a pole. Raising Rs.4,000 crores might enable IL&FS to fulfill payment obligations but problems remains where they were. Like most infrastructure companies that are on the verge of collapse, its investments in infrastructure will result in massive haircuts even if they are able to salvage. IL&FS with Rs.100,000 crores exposure is another big NPA. Its share price tumbled from Rs.94 in Jan'2018 to Rs.27 today (17/9/2018) i.e. depreciation of 71% in the current year. 

ATMs dry

 

Amidst reports of a cash crunch from different parts of the country, Union Finance Minister Arun Jaitley said the government was “tackling the issue quickly” to overcome a “temporary shortage” caused by a sudden spurt in demand. But the truth is that almost all ATM's in the country didn't go dry overnight. In most places ATM's were short of cash since 3 months. And RBI claims that its vaults had stock of over Rs. 2 lakh crores of currency. Only our Lutyen's Nero's deliberately ignored as a step towards less cash society.

• Cash is coined liberty, fundamental right of citizens. Cash is a form of wealth and citizen's right to hold their wealth in any form can't be constrained.
• As long as people are poor and less educated and governments are irresponsible, inefficient and blatantly corrupt in public spending, efforts for cashless transactions or higher tax realizations will be thwarted by its citizens.
• While the shortage of currency is about Rs. 70,000 crores as estimated by SBI, RBI vaults stocked over Rs. 2 lakh crores of currency to meet any contingency. But deliberately, this was not put to use and people were subjected to hardships during past 3 months. Who is responsible for this mess?
• While 130% cash withdrawals compared to cash deposits for any bank is normal, last few months banks experienced more 200% cash withdrawals. This could be attributed to crop harvesting season, marriages, elections in some states etc. which are well known.
• But the most prominent reason is that people are exhibiting loss of trust in Banks due to high NPAs, centre's draft FRDI bill with 'bail in' clause and centre's reluctance in not increasing deposit insurance amount from Rs. 1 lakh per depositor (fixed in 1990's) to proposed Rs.10 lakhs per depositor.

• FM Jaitley has attributed the situation to a "sudden and unusual increase" of cash in "some areas". Which areas? Poll-bound areas? Why? Nobody is answering that and nobody is clearing the air on what could have caused the "unusual increase".
• One reason could be that since all the ATMs have not been recalibrated to dispense the new Rs.200 and Rs.50 notes, while at the same time Rs 2,000 notes are being phased out (speculation only), cash is finding it difficult to make its way to the people. 

Modi & Jaitley must understand that the government is duty bound to provide as much cash as people want and the government and the RBI cannot arbitrarily control the supply of cash to pursue their ulterior motives. People hoarding cash only reflects their loss of faith in government, RBI and Banking system. If they can't provide even printed fiat currency, Modi, Jaitley and Urjit Patel are unfit in their positions and must be ejected out.

Vinod Rai: The culprit of 2G fiasco

Although corruption existed in 2G spectrum allocation, it was not certainly to the mythical proportion  (Rs. 1,76,000 crores) as Mr. Vinod Rai said. If this was in US, Mr. Rai probably would have been cooling his heals in jail. Not surprisingly, in India he has been rewarded in India with post retirement assignments which only affirms that he is a BJP's stooge.

VINOD RAI, THE CULPRIT

• Vinod Rai was then serving his central posting under the Finance Ministry, and following his retirement from IAS in 2008, it was P Chidambaram, the then finance minister who appointed him as the CAG. 
• It was during his six-year tenure that the CAG blew the lid off what came to be known as the 2G scam, Coalgate scam, CWG scam, lapses in Air India Ltd ’s acquisition of aircraft, holes in defence spending, the sale of sugar mills in Uttar Pradesh, and anomalies in the award of contracts to exploit natural gas reserves. These audit reports had impacted functioning of the then Congress-led UPA government.
• Forbes described Rai as being among that "rare breed of civil servants who knows how to get work done in the government." The Business Standard reported that “this was the first time the apex auditor had shown the courage to take on the mighty”.
• Vinod Rai has been called many things in the wake of the 2G spectrum allocation audit – a rare civil servant, a courageous man, a BJP stooge, and a commander general when it comes to conducting audits.
• Under Rai, the CAG became more media-savvy, with him holding a press conference, every time he submits a report to the Parliament. He also oversaw the creation of small booklets on his various reports for the better understanding of "audit" for parliamentarians.
• He propounded astronomical figures that common Indians had never heard of – the Rs 1.76 lakh crore 2G scam, the Rs 10,67,300 crores coal scam, the Rs 141 crore Commonwealth Games scam. As his audits threw these numbers, life became difficult both directly and indirectly for the then Congress-led UPA government.
• However RP Singh, who headed the CAG team that audited the 2G spectrum allocation, “did not have a hand in compiling the final report.” He asserted that the report was “forced” on him and that he was not the one who put the “figure” of Rs 1.76 lakh crore in the report. This 2G scam was only in the head of Vinod Rai and the Rs 1.76 lakh crore number never held much conviction. Even in the CBI charge sheet, the number had come down to Rs 30,984 crore. Trying to arrive at any kind of number was always incorrect.
• The then Union Minister Kapil Sibal drew flak when he made a statement back in January 2011 that the 2G spectrum allocation had caused no losses to the government. After the CBI court verdict, Sibal lashed out at those who had criticised him for his ‘zero loss’ statement.
• By attacking government policy and not just its expenditures, Vinod Rai may not have been going beyond his constitutional mandate, but he was clearly prioritising the CAG’s SOPs.
• With Justice O P Saini, of the CBI special court, acquitting all 18 accused in the 2G spectrum allocation case not only have Vinod Rai’s numbers come to question, but also his role as the chief auditor. It was on the basis of his report (i) that the CBI launched its investigation and (ii)  India voted for in the 2014 General Election.
• Post his retirement in November 2013, Vinod Rai still dons many hats. He is the chairman of UN Panel of External Auditors, honorary advisor to Indian Railways, and was most recently appointed the president of COE of the BCCI by the Supreme Court. In February 2016, Rai was appointed the chairman of Banks Board Bureau (BBB), the body which advises the government on top-level appointments at public sector banks and ways to address the bad loans.

CBI COURT DISMISSES THE 2G CASE

• On Dec 23, 2017, Special CBI judge O P Saini, acquitted former telecom minister A Raja, DMK MP Kanimozhi and all others in the 2G Case, said the CBI cannot absolve itself of the burden to prove its case by “piggy riding on the so­ called high magnitude” of the case and the media hype. At the final stage, legally admissible evidence is required,” judge said.
• “In view of deficient, or I may say nil evidence on record, I find myself unimpressed and unmoved, whatever may be nature of the case,” the judge said.
• High profile nature of a case cannot be used as a ground for holding people guilty without legal evidence. Lack of commercial prudence in execution of documents cannot be used as a ruse to hold people guilty of corruption,” the court said.
• The CBI had alleged in its chargesheet that there was a loss of Rs. 30,984 crore to the exchequer in allocation of licences for the 2G spectrum which were scrapped by the top court on February 2, 2012.
• This verdict doesn't override the Supreme Court judgement that the procedure followed for allocating 2G spectrum licenses during UPA was illegal and cancelled all licenses.
• Special judge remarked that everybody was going by public perception created by rumour, gossip and speculation. However, public perception has no place in judicial proceedings. The judge laments the role of "prominent public-spirited persons" who went on and on about wrongdoing but had no evidence to submit. Apparently this means that nobody had any good or first-hand evidence in his possession". The judge also said that for “the last about seven years on all working days, summer vacation included, I religiously sat in the open Court from 10 am to 5 pm, awaiting someone with some legally admissible evidence in his possession, but all in vain. Not a single soul turned up.” Needless to say CBI was let down by its own witnesses.
• Videocon Telecommunications, which lost its nationwide telecom licence in February 2012 following a Supreme Court (SC) order, will claim Rs 10,000 crore as compensation from the government. Many others may also follow suit.
• Vinod Rai who has made far reaching comments on UPA and Manmohan Singh etc at the fall of hat on 2G scam during past several years, has so far not commented on the issue on any forum.

SPECTRUM AUCTIONS, THE TRUTHS

• The aim of public policy just to maximise gains for the exchequer from allocation of natural resources is fallacious and misleading. Priorities must be ensuring the wider net for access to mobile telephony, broadband and high-speed internet.
• The private concessionaire has to make profits and therefore if you charge more for natural resources, the costs will be passed on to the users. 
• The money that telecom companies pay to the state is almost entirely borrowed from banks. If the government earns revenue from auctions, it must dig into other pockets to capitalise banks straddled with debt as a consequence of those very auctions.
• A healthy telecom sector, characterised  by steadily increasing teledensity and connectivity, engenders productivity and employment, providing a boost to the economy. The “notional” gain of earning revenue through auctions, therefore, pales in comparison to the very real, massive costs borne by the economy. The state of the telecom sector in the country and the impact of its poor performance on the economy speak for themselves.  
• For foreign companies Telenor, Etisalat and Sistema, who invested a lot of money, time and resources in India, this single judgment of SC wiped out all their investments. They were like innocent bystanders and this has hurt the sentiment of foreign investment.
• The ramification of the 2G debacle is that the telecom sector is reeling with debt running up to Rs 4 lakh crore, owing partly to auctions and license cancellations. When telecom companies do well, 5-10% of their topline goes to the government as part of a revenue share model. When they perform poorly, not only do banks lose out, but the adverse financial consequences are passed on to consumers, and the government loses out on revenue share as well as direct and indirect taxes paid by telecom companies. Currently, India’s telecom sector is one of the worst performing ones in the world.
• Recently, worried about the banking sector’s huge exposure to the telecom industry, SBI Chairman has asked the DoT to work out a bailout package for the operators, including deferred payment for spectrum and rationalising spectrum fee. The telecom sector, which could come under stress due to declining revenues with their total EBITDA on annualised basis is ₹65,000 crore which is unsustainable for debt of more than ₹4 lakh crore.
• In the business of politics, “facts” are easy to conjure and manufacture, and public perceptions are hard to change. The untruths can cause immediate and irrevocable damage. The truth will ultimately prevail but in the meantime, its absence can be devastating for some.
• The '2G Scam' and its malicious campaign has facilitated that catapulted Modi as PM and Kejriwal as CM of Delhi. Others were richly rewarded notable among them are Vinod Rai, Kiran Bedi, Arnab Goswami runs his own TV channel funded by NDA MP.

Who sold us the 2G 'scam'?

The conviction rate for the CBI is less than 5%. The CBI and ED seem to be lacking necessary forensic skills as far as financial frauds are concerned. Unless these agencies are modernised, we will continue to see more such cases that are heavily hyped but can only end up as having to be dismissed. Supreme Court judgment 2012 cancelling all 2G licences is a matter of regret in which the SC at that time moved from a pre-conceived notion to a pre-determined conclusion. They decided before any hearing that A. Raja was guilty but then chose to punish the completely wrong parties. Auction is not necessarily the only way of allocating public resources. For sure, we could have implemented the process better and in a more transparent fashion, but throwing out the policy to punish the guys because of perceived and unproven personal benefits was like throwing out the baby with the bathwater. Auction of spectrum at high prices means that it is no longer viable or justifiable for a new player to challenge the incumbents. The higher spectrum costs will be passed on to the public at the end of the day. After his retirement as CAG in 2013, Vinod Rai regularly writes articles in magazines, was conspicuously silent on failed adventures of BJP/Modi's demonetization, GST and many more.

This is a kind of economic collapse

JNU professor Himanshu says the economic slowdown is not the result of a one-off event like demonetisation, nor a technical problem but the slump began almost two years ago. This is a kind of economic collapse. The first step to tackle it is to acknowledge it.

• The economy is in a trough. GDP growth dipped to 5.7%. The Index of Industrial Production for July came in at 1.2%. Consumer Price Index showed that the inflation rate had risen to a  high of 3.4%.
• While Finance Minister Arun Jaitley acknowledged that the GDP numbers for the April-July quarter were of concern, BJP president Amit Shah told that the slowdown in the economy was due to “technical reasons”.
• These numbers might be an early warning of possible stagflation with low demand, high unemployment, decline in GDP and persistently high prices.
• There are many reasons for the collapse of domestic demand and the economic crisis India is facing and the government has limited room to manoeuvre and bring the economy back on track.
• RBI has confirmed, what all of us knew, demonetisation caused much pain without any gain. But demonetisation was not the trigger for the economic collapse one is witnessing today.
• It is a kind of economic collapse. The data is clear on this. Since 2015-16, growth rates have been going down. These numbers represent a very serious set of problems with the economy that have been neglected for a long period of time, which is why they have come to bite us today.
• Some of these problems started in 2013-2014. Wages had started turning negative in real terms since 2013. The problem of non-performing assets had appeared by then. The global recession was visible. These factors were well-known. The one big trigger was in August 2014, when primary commodity prices collapsed following a fall in oil prices. This hit farmer incomes hard.
• The droughts of 2014 and 2015 were difficult to deal with and agriculture GDP contracted and these factors severely dented agricultural incomes. With wages going down, rural demand collapsed by 2015.
• Jobs were not being created and wages were turning negative in real terms – growing slower than the rate of inflation.
• The government neglected the severe depression in rural demand for a long time that eventually spilled over to other sectors. Exports had been falling and the government ignored the trouble spots. Private investment has slowed down and credit growth is at its lowest.
• Construction has been the bulwark of employment in the non-agricultural sector in the past 10 years. But the government was in denial till chief economic advisor accepted the possibility of demand deflation in the economy. But this admission should have come earlier.
• In a normal monsoon year in 2016 after two consecutive droughts, when the situation was improving, demonetisation broke the back of the informal economy. It acted almost like a drought does on the economy. Demonetisation delayed hopes for the revival of the economy, and demand deflation was extended.
• Surely, GST has impacted the informal sector in terms of taxes and cost of compliance, which basically means hiring consultants. If it hits the unorganised sector, then manufacturing will be in deeper trouble in the coming quarters.
• The current scenario is uncertain about the next two to three quarters with no signs of private economic activity reviving. Worse, agriculture will make a very low contribution to growth with food grain production remaining flat. The livestock sector has been hit by political beef controversy that could contract the livestock sector as well. Excluding cotton, all major kharif crops have shown a decline in acreage.
• This year even though monsoon was good but its distribution is unlikely to contribute much to GDP in the next quarter.
• There are no visible signs of green shoots right now in the economy. The SBI has already pared down the growth rate for the entire year to 6.5%. There is almost a consensus emerging that the mess in the economy is far more serious than what people had assumed earlier.
• Farm loan waivers by nine states have sucked up the resources of state governments – there is a decline in capital formation in the states. That is telling us that state government expenditure towards investment is going down. The spending capacity of states has been squeezed quite dramatically and total fiscal deficit of states has increased. This impact the government’s ability to ramp up expenditure in the coming months to revive demand. By the end of June, the Central government had already reached 92.4% of its fiscal space. So, there is not much manoeuvring room left for either the states or the Centre.
• Government might have to breach the fiscal deficit target to revive demand. The government is hoping to collect more from non-tax revenue sources. It had a lot of hope for one source initially – dividend from the RBI which has been dashed. Two other sources the government is banking on are telecom auctions and disinvestment of PSUs. Both depend a lot on market conditions. Even though it has floated the idea of selling off Air India, it may not materialise soon. Given the market situation and the heavy squeeze on the telecom sector caused by the launch of Reliance Jio these decisions could get delayed.
• This is similar to what happened during the time of the AB Vajpayee government (1998-2004). At that time, too, the government failed to recognise that there were problems. The “India Shining” slogan came out of not recognising the economic situation. Inflation was low, wage rate growth was low, agriculture had almost collapsed. Foodgrain production on per capita basis had turned negative. This is true with this government also. Foodgrain production was 265 million tonnes in 2013-2014 and it has been projected up to 276 million tonnes for this year. So in four years, it has gone up by just 10 million tonnes, the lowest in the last 15-20 years. This is lower than the rate of growth of the population. In terms of per capita, that means foodgrain growth is negative. Incomes are negative in real terms. Agricultural investment is negative. This is similar to the NDA government period 1998-2004.
• But 2008 was different because the problems that hit our shores spiralled out of a global crisis. We had one of the best runs of growth between 2004 and 2008. The government distributed a lot, it earned a lot. The agriculture sector was clocking around 4% growth. Incomes were rising. Global commodity prices were rising, so terms of trade shifted in favour of the agricultural sector and farmers benefitted. Construction and manufacturing were growing at their fastest rates. That gave us the cushion to go in for a fiscal stimulus and revive demand.We were not so directly exposed to the financial crisis in developed economies and domestic demand was the prime driver. Right now, the engine of the economy – domestic demand – has collapsed.
• 2018 will be the last Budget the government will be presenting. In 2019, it would be a vote-on-account. The first thing is to acknowledge the gravity of the problem. The government has played blind for long to what has been happening in the economy. The finance minister has come on record to say that these are of concern. That is the first time the government has acknowledged such concerns. But if they actually have a very good idea of the magnitude of the problem is unclear. Right now the engine of the Indian economy, domestic demand, has collapsed.
• The share of private final consumption expenditure as a share of gross domestic product, it was roughly 62% during the third quarter of 2016-2017 – this is the festive season, so private consumption is usually high. Then, mid-way through this quarter, demonetisation happened and sucked out buying power. Compared to the third quarter of 2016-2017 with severe disruption in its second half, the share of private final consumption expenditure in gross domestic product has come down now. in the last quarter, it was down to 57%. That should be a worrying sign.
• There have been too many disruptions in the economy at the same time. What is needed is somebody who can work hands on with the economy.
• The entire economic policy-making group including the RBI in it. The policy-making is never one individual, it is a collective effort. Unfortunately the government’s ability to tap into a pool of economists and experts is very limited. Niti Aayog is in transition now, RBI is already under fire, the chief economic advisor may change now. There needs to be a point where experts, economists and policy-makers come together.
• Differences are bound to be there. No two economists are going to have the same opinion. This government has far less differences than the previous one and that is its problem. Somehow the government must seize the moment and act fast. If this continues for long, it will take a disproportionately greater effort to recover to what is now considered a normal 7% growth rate.

The Wire: Wide Angle: Episode 10: Demonetisation Anniversary

Yashwant Sinha Indicts Arun Jaitley's 'Mess'

• I shall be failing in my national duty if I did not speak up even now against the mess the finance minister has made of the economy. I am also convinced that what I am going to say reflects the sentiments of a large number of people in the BJP and elsewhere who are not speaking up out of fear.
• Jaitley was, to begin with, a lucky finance minister, luckier than any in the post-liberalisation era. Depressed global crude oil prices placed at his disposal lakhs of crores of rupees. This unprecedented bonanza was waiting to be used imaginatively. The legacy problems like stalled projects and bank NPAs were no doubt there and should have been managed better like the crude oil bonanza. But the oil bonanza has been wasted and the legacy problems have not only been allowed to persist, they have become worse.
• So, what is the picture of the Indian economy today? Private investment has shrunk as never before in two decades, industrial production has all but collapsed, agriculture is in distress, construction industry, a big employer of the work force, is in the doldrums, the rest of the service sector is also in the slow lane, exports have dwindled, sector after sector of the economy is in distress, demonetisation has proved to be an unmitigated economic disaster, a badly conceived and poorly implemented GST has played havoc with businesses and sunk many of them and countless millions have lost their jobs with hardly any new opportunities coming the way of the new entrants to the labour market. 
• For quarter after quarter, the growth rate of the economy has been declining until it reached the low of 5.7% in the first quarter of the current fiscal, the lowest in three years. The deceleration had started much earlier. Demonetisation only added fuel to fire.  According to the old method of calculation, the growth rate of 5.7%  is actually 3.7% or less.
• SBI chairman stated that the telecom sector is the latest entrant to the long list of stressed sectors.
• The reasons for this decline have been allowed to accumulate over time to cause the present crisis. It was not difficult to take counter measures to deal with them that called for devoting time to the task, serious application of mind, understanding of the issues and then working out a game plan to tackle them. It was perhaps too much to expect from a person (FM) who was carrying the heavy burden (Defence, Divestment & Corporate Affairs) of so many extra responsibilities. The results are there for all of us to see.
• The only new thing is the reconstituted Economic Advisory Council of the prime minister. Like the five Pandavas they are expected to win the new Mahabharat war for us.
• Forty leading companies of the country are already facing bankruptcy proceedings. Many more are likely to follow suit. The SME sector is suffering from an unprecedented existential crisis.
• The input tax credit demand under the GST is a whopping Rs 65,000 crore against a collection of Rs 95,000 crore. The government has asked the income tax department to chase those who have made large claims. 
• We protested against raid raj when we were in opposition. Today it has become the order of the day. Post demonetisation, the income tax department has been charged with the responsibility of investigating lakhs of cases involving the fate of millions of people. The ED and the CBI also have their plates full. Instilling fear in the minds of the people is the name of the new game.
• Economies are destroyed more easily than they are built. It took almost four years of painstaking and hard work in the late nineties and early 2000 to revive a sagging economy we had inherited in 1998. Nobody has a magic wand to revive the economy overnight. Steps taken now will take their own time to produce results. So, a revival by the time of the next Lok Sabha election appears highly unlikely. A hard landing appears inevitable. 
• Bluff and bluster is fine for the hustings, it evaporates in the face of reality. 
• The prime minister claims that he has seen poverty from close quarters. His finance minister is working over-time to make sure that all Indians also see it from equally close quarters.
• P Chidambaram said that Congress is happy that Yashwant Sinha has echoed their criticisms of the government. He also tweeted "Yashwant Sinha speaks Truth to Power. Will Power now admit the Truth that economy is sinking?"

Everyone in the country knows our economy is distressed and in deep trouble due to foolish acts of our PM & FM. Some speaks and many (BJP/Modi bhakts) won't. After inflicting irreparable damages, what is the point in appointing 5 member Prime Minister Economic Advisory Council or working out on a meager Rs.50,000 crores stimulus package or announcing Rs.16,000 crore free electricity for all by end of 2018 benefiting 4 crore poor people. Any change in economic direction will take few to several years and nothing much can be expected before 2019 elections. Destroying the institutions like Planning Commission etc have had its effect for this directionless economy. Unless Modi learns to respect experts and take their advice - discarding the habits of consulting quacks and astrologers, India has no future. Alternately, people of India may find Modi's substitute in 2019 and they will.

Jan Dhan Yojana fails to deliver!

• Pradhan Mantri Jan-Dhan Yojana (PMJDY), launched by the Prime Minister of India Narendra Modi on Aug 28, 2014, is National Mission for Financial Inclusion to ensure access to financial services, namely, Banking/ Savings & Deposit Accounts, Remittance, Credit, Insurance, Pension in an affordable manner. Account can be opened in any bank branch.
• The plan envisages universal access to banking facilities with at least one basic banking account for every household, financial literacy, access to credit, insurance and pension facility. In addition, the beneficiaries would get RuPay Debit card having inbuilt accident insurance cover of र 1 lakh.
• PMJDY accounts also allow an overdraft facility of up to Rs 5,000 in one account per household, preferably held by a woman member. 
• The Prime Minister personally mailed to Chairmen of all PSU banks to gear up for the gigantic task of enrolling over 7.5 crore (75 million) households and to open their accounts. He categorically declared that a bank account for each household was a "national priority". 
• Total of 7 Crore (70 million) bank accounts have been opened with deposits totaling more than ₹5,000 crores as of Nov 6, 2014. As the government met the target, Govt revised the target for opening of bank accounts under the PMJDY, 7.5 crore to 10 crore by Jan 26, 2015. Almost 75% of the accounts or 5.66 crore, have no money.
• In the name of financial inclusion, the government has created more problems for the poor. The project is well intentioned and perhaps necessary for a country in which 40% of the population is unbanked. But, in the hurry to roll out the project, proper communication, especially to the undereducated and the poor, could not happen. Significant percentage of people haven't returned to the branches to do serious transactions.
• The scheme has been criticized as an effort to please voters that has created unnecessary work-burden on the public-sector banks. It has been claimed that the poor deserves food more than bank accounts and financial security. Further, these accounts have not yet added considerable profits to PSU banks. Offers like zero balance, free insurance and overdraft facility would result in duplication. Very few people are eligible to get the life insurance worth ₹30,000 with a validity of just five years. The claimed overdraft facility has been completely left upon the banks and only those people would get the overdraft facility with satisfactory transaction record.
• While JDY has inflated the number of account holders, it has done nothing to boost the volume of transactions. As on March 24, 2017, public banks, regional rural banks and 13 private lenders reported that 92,52,609 accounts were frozen under JDY due to lack of transactions.
• In the first two weeks of demonetisation, the total balance in no-frills accounts under the JDY increased to Rs 72,834.72 crore, a jump of Rs 27,198 crore in 14 days, of which most money was deposited in an effort to convert black money into white money by black money holders. The scheme, took 16 months until Dec 2015 to accumulate a balance of Rs 27,283 crore, 
• The total cost of operation of Jan Dhan accounts by State Bank of India is Rs 774.86 crore, Parliament was informed on Mar 28, 2017. Banks had to incur a cost of at least Rs 200 on opening each account apart from the manpower cost and this totals roughly Rs 1,500 crore for just opening the accounts.
• The profligacy of Modi on his hurried, ill conceived schemes without adequate preparation and then projecting failed schemes as successes impoverishing nation is highly despicable. The quantum of money spend for campaign & publicity by all related agencies is too much for developing economy like India. India needs a statesman as Prime Minister, not a rogue politician.
• Public Expenditure Wastage Control Commission must scrutinize all waste expenses of public money by any one and every one for compliance of procedure and economies of expenditure observed including PM & CM. And if not followed, it must levy immediate financial penalties on such person and also recommend to competent higher authorities to consider and take punitive steps against such persons. All within a time frame of three months. Only disaster management expenses, certain defense expenditures and nuclear related expenses could be exempted.

Thrift is my guiding principle ... Indira Gandhi 
What ever is worth doing, is worth doing slowly.

My View:

Banks are ill equipped to handle this huge number of new account holders leading to deteriorating of services. The costs of managing these accounts are huge for already NPA stressed banks. Most of the Rs.5,000 over drafts per account will turnout to be irrecoverable and unless centre absorbs and writes off these amounts bank's margins will again come under severe stress. Poor banking connectivity is another constraint. Significant number of people had opened multiple accounts under the scheme, adding to the existing problem of dormant accounts. When Indira Gandhi got elected from Medak (Telangana) in 1980 she compelled PSU banks to open branches in Medak district. After few years almost all branches were wound up would due to lack of business and viability, booking significant losses. Needless to say any scheme prior to implemented should be researched, tailored to suit local needs and planned to implement over a time frame for producing lasting results. But unfortunately almost all Modi's schemes are announced hurried and launched without any preparation with massive national & international publicity costing hundreds of crores of rupees to nation and then they just fail. This is no way a democratic government should function. Hence, every government expenditure must have prior legislature approval and budget provision voted so that sufficient discussion of priorities takes place before announcement and implementation. The only exception could be defense, disaster management and nuclear related matters.

Reliance Communications is sinking

• Reliance Communications, 7th largest telecom service provider posted its yearly loss of Rs.1,283 crores.
• Its debt stood at Rs.45,733 crores, as on March 2017, prompted banks raise red flag.
• Rating agencies downgraded RCom over debt concerns.
• In seven days, RCom stock tanked 33%.
• The lenders has granted seven month standstill on the debt.
• By Dec 2017, it will have to conclude merger deals with Aircel and sale of 52% Reliance Infratel's equity to Brookfield infrastructure for Rs.25,000 crores to pare down its debt to Rs.20,000 crores.
• Debt pile up was due to its decision to switch from CDMA to GSM and purchase of 3G spectrum at Rs.8,585 crores.
• And then company landed in debt trap i.e. borrowing money to repay debt.
• Reliance Jio's aggressive marketing has impacted smaller companies like RCom losing its subscribers. While Airtel experienced severe contraction of profits all others viz. RCom, Idea, Vodafone etc slipped into losses.
• They expect reduction in market share resulting in pressure on margins.
• In last quarter RCom lost 29.5 million customers, whereas Airtel and Idea gained 22.41 and 14.4 million customers.
• The current issue is partly due to delay in shifting from CDMA to GSM that resulted in its low value subscriber base. Initial attempts to upgrade to GSM has not yielded any good results.
• Today it has 62,000 cell sites compared to Idea-Vodafone's 273,000 and Airtel's 185,000. 
• As investments slowed so are subscriber additions, as people chose operators with superior networks.
• RCom plans to sell of its Dhirubai Ambani Knowledge City's 135 acres in Navi Mumbai and 4 Acres property near Connaught place New Delhi to retire its remaining debt.
• RCom proposed to surrender part of spectrum to escape payment liabilities to DoT. 
• Merged entity AirCom of RCom-Aircel-MTS with its 10% market share, sub optimal quality subscribers, less spectrum and debt burden will find it hard to service with its prevailing EBITDA. 
• It is even more tricky to incur capex for modernisation given its financial health and inability to raise bank loans.
• Anil Ambani's elder brother, Mukesh Ambani, might not allow RCom to die because of its name "Relaince" attached to it.

My View:

While AirTel, Idea and Vodafone continuously invested in capex, spectrum and marketing to increase its presence and value, RCom did nothing of that sort and landed in trouble. Also banks are to be blamed which funded Reliance Jio to the tune of Rs.180,000 crores only to trouble the saturated telecom sector pulling down almost all telco's with combined exposure by banks to the extent of Rs.400,000 crores. SBI Chairman expressed concerns about telco's combined EBITDA dropping to levels where debt servicing becomes hard and their loans might get turned into NPA's. Needless to say like in any other case, here too promoter owners will walk off with riches, banks will get charge of worthless assets and will have to take huge haircut. And then PSU Banks will look at centre to recapitalize them. Same old story repeating.

Modi, the Prime Minister of Gujarat & UP

Centre announced waiver of farmer loans in UP in fulfillment of Modi's election promise in the just concluded UP Assembly election winning with huge majority, at an expense of Rs.50,000 crores. BJP is still unable to finalize CM candidate and new government yet to be formed and union agriculture minster announced in parliament that central government will pick up the bill. While helping distressed farmers is appreciable the same would have been for all farmers in the country, not just UP.

• This is in contradiction of Centre's outright rejecting the demand of AP & Telangana government's request, 3 year ago, for RBI & Banks assistance in rescheduling the loans and eventual waiver by state governments citing banking norms and credit discipline.
• Farmers are in distress and debt ridden in the entire country, not just in UP. This Centre's loan waiver for UP only is grossly discriminatory.
• Going forward, farmers will never pay back loans, even if they can, awaiting waiver in next elections within 5 years.
• This will destroy public sector banks, which are already saddled with over Rs. 6 lakh crores NPAs mainly due to defaults by industrialists.
• Just 3 days ago, SBI Chairman Arundhati Bhattacharya said such sops may disrupt credit discipline among borrowers.

Apart from plethora of issues being faced by farmers, the foremost & utmost is the MSP (Minimum Support Price) of Centre which doesn't even cover expenses where as logically MSP should cover all expenses plus 50% profit margin for decent farmer livelihood. Lower MSP enables produce buyers to buy below MSP prices pushing weak farmers into distress and debt ridden. Mechanism must ensure that farmer is enabled to sell his produce at above MSP, which was forgotten several years ago. Other problems are non-timely availability of fertilizers and substandard seeds, pesticides, non availability of labour due to MNREGA, storage facilities etc. Erratic rains compounds farmers risk. Crop insurance with easy process of claims is a must.

Crop loan waiver has a major devastating effect of non availability of bank credit in future with fear of non-recovery and farmer will slip into hands of ruthless money lenders with interest rates 4-6 times bank rates. Today only 25% farmers (who are owners of land only) gets bank credit for crops and it must be ensured all farmers whether land owner or not must get crop loan if he is genuinely cultivating. Unless all these issues are resolved within short time frame, farmers will continue to be in distress and nation's future food security comes under threat. And uncontrolled rural to urban migration will not only increase rural distress but also stresses weak urban infrastructure.  

The practice of attending farmers issues once in 5 years during election and forgetting them thereafter must be stopped. It must be on year to year basis at budget time and uniform for all farmers of the country.

My View:

Farm loan waiver and rural focus are policies of Congress, never of BJP. Now I see BJP shifting towards rural issues and copying Congress. Anyway, 70% of population are rural & agriculture based and can't be ignored by rulers. All constitutional office bearers must remember that they are oath & constitution bound, not their election promises which are often senseless and mindless.

Modi, Jaitley & RBI have forgotten all the rules, regulations & principles cited while rejecting cooperation to AP & Telangana for farmer loan rescheduling & eventual waiver by state governments where as now centre waiving UP farmer loans without even being asked by UP Government is height of their arrogance & stupidity and doesn't go well with preservation of unity & integrity of India. Centre's discriminating attitude between states ruled by BJP and non-BJP will ignite north-south divide apart from being unconstitutional, illegal and violation of oath. Shamelessness & arrogance at its peak with Modi reducing himself as Prime Minister of Gujarat & UP.

14th finance commission has not made any provision for this type of money transfer from centre to UP and Budget 2017 has no mention about this item at all. How will this be done? When centre could do UP farmer loan waiver without budget & 14th Finance commission provision, why cant it grant special status to AP as promised while passing AP Reorganization Bill in Parliament in 2014? Any answer from Modi, Jaitley, Venkaiah Naidu etc? They won't answer because they are answerable to none.

PS: Unless rules are modified restricting spending money strictly as per provisions of approved budget and discretionary spending money is restricted only during war & natural calamity times by executive orders, irresponsible and unmonitored spending through banks and PSU's will go un-audited by CAG and unnoticed by parliament and is detrimental to fiscal discipline.