No amount of forex reserves is ever adequate

In April 2018, India's foreign exchange reserves had hit a life-time high of $425 billion. Things have changed since then. The forex reserves have been falling by about $2 billion a week for seven weeks and present balance is under $400 billion. But government maintain that there's no reason to panic. Falling reserves are a result of RBI's intervention to arrest the slide of the rupee, which has depreciated around 8% in this year (16% in the past 2 years). On Aug 17, 2018 USD/INR touched 70-mark and analysts predict it may touch even 80. Widening trade deficit, sluggish export growth could put further pressure on the country’s forex reserves. 

• Our CAD worsened from $15 billion in 2016-17 to $49 billion in 2017-18. Higher oil prices were only partly to blame. Exports struggled, while we guzzled smartphones and gold. Our FDI/FII flows flipped from an inflow of $21 billion in FY17 to an outflow of $19 billion in FY18.
• The Centre’s response to the rupee weakness was nonchalant. RBI was mum and FM tweets that India’s FE reserves are comfortable, going by global standards and sufficient to mitigate any undue volatility in the FE market.
• Although India's FE reserves are better than many emerging economies, we should remember that no amount of forex reserves is ever adequate and it might not be right to feel complacent about the country’s FE reserves.
• Given that the country’s widening trade deficit, sluggish export growth and growing imports — our FE reserves are likely to be under pressure in the coming quarters. It is therefore better to acknowledge the challenges and think about corrective actions, rather than be in denial.
• After the 2013 crisis, the RBI has been careful about building its forex reserves. Reserves had increased from $275 billion in Sep 2013 to the life-time high of $426 billion in April 2018. Apart from low oil prices & higher NRI remittances, strong inflows from FII's/FPI's and FDI's helped to a large extent in shoring up reserves.
• But this support is likely to be withdrawn in the coming quarters.
• FDIs had been robust in the first two years of NDA rule, growing at 25% and 23% in FY15 and FY16 as PM Modi reached out to overseas investors to fund the country’s growth. But the momentum has slowed down since then with the FDI inflows growing 8% in FY17 and at an even slower pace of 3% in FY18.
• FII's have withdrawn ₹15,771 crore from the equity market for far in FY19 while the outflows from debt segment has been ₹35,449 crore. (In FY18, there were inflows of ₹1,44,682 crore in equity and debt markets).
• In addition between April and June 2018, RBI sold off $14 billion to stave off depreciating rupee. It is therefore not surprising that the reserves are down 10% their peak level recorded in April 2018.
• The Federal Reserve began shrinking its balance sheet since Oct 2017. This is reducing liquidity in global markets, the rate hikes from the Fed are making the cost of financing expensive. It is therefore not surprising that global investors are reducing their investments in emerging markets including India.
• The IMF estimates that the Fed’s tightening can result in reducing flows into emerging markets by $35 billion a year. The world is moving from a period of easy money to one were liquidity becomes tighter and funds become more expensive.
• With Federal Reserve and Bank of England hiking interest rates, the cost of refinancing the loans will become difficult, leading to repayment of some of these loans, causing forex outgo.

There are no easy fixes to this problem. The measures taken to improve the ease of doing business and GST are likely to improve FDI flows in the long term. The government needs to renew the efforts to boost exports, reduce dependence on imports in order to ensure a sustained improvement in the country’s reserves.

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Rupee is expected to remain under pressure in the near future due to rising oil prices, global trade wars, tightening of global liquidity and a strong dollar. When USD/INR touched 70, Union Minister Arun Jaitley said that India’s foreign exchange reserves are comfortable by global standards and sufficient to mitigate any undue volatility in the foreign exchange market. He is only monitoring and reassuring but not indicating any corrective steps. By not improving our exports and reduce dependence on imports, during the past 4 years of low oil price regime, we have squandered away the opportunity to consolidate our economy. Now we can only look eastwards and pray God to help us.

What eased doing business in India?

• India jumped up 30 notches into the top 100 rankings on the World Bank’s ‘ease of doing business’ index, thanks to major improvements in indicators such as resolving insolvency, paying taxes, protecting minority investors and getting credit.
• While the jump is impressive, that is not the whole story. Excepting few increases due to increase in computerisation everywhere, nothing much has changed on the ground.
• Modi hailed the jump in India’s ranking as “historic” and said it was a result of “all-round and multi-sectoral reform push.” Jaitley said India’s jump is the highest by any country, and that reaching the ‘top 50’ target set by Prime Minister Modi is “doable”. These guys bombard with publicity every minor uptick but avoids talking about negatives whether it it happened on its own or whether they have done it is immaterial. 
• This ease of doing business in India helps only large corporates and MNCs and has nothing do with informal businesses which contributes 45% GDP and 80% jobs, that stands decimated by Modi's 'hare brained demonetisation' and 'badly implimented noble GST'.
• The persistent problems of India namely agraian distress, joblessness, spiralling down of economy, healthcare & education in doldrums and so on has nothing to with this ‘ease of doing business’.
• While common man continues to suffer, government's coffers could see increased inflows over time.

Jobless growth of India's GDP

• Today, India is facing a peculiar situation of 'jobless growth' and 'growthless jobs' as well, mainly due to defective economic policies and gross fiscal mismanagement.
• During the past three years, public sector, government’s headcount remained stagnant. State-run banks registered a job growth of just 0.5%. Private corporations have no better figures.
• Every year, 10-12 million young Indians join the labour force, 5 million people leave agriculture to join the non-agriculture sectors. In contrast job creation is few lakhs only during the past three years which are mostly replacement recruitment.
• India's GDP growth and new jobs creation in India have not been growing at the same rate. The creation of more and better jobs and livelihoods is imperative for policymakers. Focusing only on GDP growth is a wrong approach.
• About 550 jobs are disappearing everyday, an alarmist declaration of loss of one million jobs during past five years.
• The lack of lending by the banks may very well be one contributing factor. 
• Rise in unemployment is due to agriculture and SMEs, which contributes most employment in India, are the worst affected. The organised sector contributes only 1% of jobs.
• Big multinationals in India are highly capital-intensive, while the SMEs are four times more labour intensive than the large firms. But they are one of the least productive sectors and their real wages are very low. 
• India needs to protect sectors like farming, unorganized retail, micro and small enterprises. These sectors need support from the government not regulation. 
• The agricultural sector in India does absorb more than half the workforce, but a lot of it is disguised unemployment. 
• The view of Indian villages as the economic backbone of India is flawed and will never lead to the kind of mass employment that is desired in India. At best it minimizes agriculture labour migration to urban areas.
• Urbanization creates lots of jobs in developing economies.
• 92% of enterprises that created jobs were from the informal sector, and the biggest stumbling block for these was lack of formal credit. 
• India needs to free up its labour laws which are archaic, restrictive, and convoluted which incentivizes firms to stay small and remain in the informal sector. Firms, which can achieve economies of scale, are the need of the hour to create jobs for the masses in India.
• India needs to focus on primary and secondary education and skills development. A skilled worker has a better chance at finding higher paying employment.
• At present, the business environment is the toughest for small to medium enterprises. Improvement of 'ease of doing business' to firms of all sizes, to be set up and facilitate its smooth running. 
• Focus on infrastructure and tourism, on sustainable basis, will help creation of jobs at the unorganized level. 

My View:

Modi administration, in the name of reforms is actually destroying 'informal sector' which are mostly operated by less educated people employing semi skilled people. Modi's failed demonetization and hurriedly rolled out mangled GST have destroyed informal sector, agriculture, construction and tiny industries, while achieving nothing. Winning elections is all about hammering of selective narratives rather than sound public policies. Aside improving 'ease of doing business', promoting manufacturing, preserving agriculture at profitable levels, encouraging small businesses & industries, services, infrastructure, tourism are the keys for providing employment to masses. Banks must be financially healthy and support informal sector so that our economy grows and provide employment to our aspiring youth. Trophy projects, white  elephants and icons are not the indicators of development. It is all round life style improvement of poorest people, which is called 'development'.

Ease of doing business to economic prosperity

Choropleth map of the World Bank's Doing Business index from "Doing Business 2017"

The ease of doing business index is an index created by the World Bank Group. Higher rankings (a low numerical value) indicate better, usually simpler, regulations for businesses and stronger protections of property rights.

• Economic activity requires a streamlined regulatory environment and transparent policies and accessible to all.
• Entrepreneurial activity is a support to economic growth. Higher entry rate of new businesses cultivates competition and innovation. The entry of new firms into an economy creates jobs, contributes development of the private sector and economic growth.
• Ease of doing business indicators are (1) starting business (2) registering property (3) dealing with construction permits  (4) getting electricity (5) getting credit (6) protecting investors (7) paying taxes (8) trading across borders and (9) enforcing contracts (10) resolving insolvency. 
• Good governance is essential for businesses. Transactions costs are lower when regulations are simple, transparent and predictable. Entrepreneurs do not have to waste resources on red tape enabling anyone to do business without having to resort to connections or informal payments.
• Ease of Doing Business has significant effect to economic growth.
• In developing economies competition, growth and job creation are formed in the informal sector regularly because of too much bureaucracy and regulation. Informal sector firms lack access to the opportunities and protections that the law provides but even firms operating in the formal sector might not all have equal access to these opportunities and protections.
• Since the introduction of the economic reforms in 1978, China has become the world's manufacturing center, where the secondary sector (comprising industry and construction) represented the largest share of GDP. In spite of its slowdown, mainland China is still a main driver of global GDP expansion, accounting for a larger share of world economic growth than the rest of Asia combined.
• Dealing with construction permits and getting credit have negative effect to GDP. Registering property and trading across borders have positive effect. Getting credit has negative effect to GDP. Registering property has positive effect to GDP. Trading across borders has positive effect to GDP. 83% of the total variation in the economic growth can be explained by the changes in the indicators of ease of doing business specifically dealing with construction permits, getting credit, registering property and trading across borders.
• Other indicators such as enforcing contracts, getting electricity, protecting investors, paying taxes, resolving insolvency, and starting a business have no significant effect to GDP. This implies that even if it is easy to do business under these indicators, it has nothing to do with GDP.
• Singapore has the easiest to do business and has the best regulatory performance in doing business in Asia. China produces the highest level of GDP. 

Ever since Modi has become PM in 2014, nothing much has happened for improving 'ease of doing business ranking' which was 130. India had been downgraded in the 2016 to 131. In 2017, India's ranked climbed to 130 out of 190 countries in the World Bank Group's annual report.  India has made a substantial improvement in some areas such as electricity connection, but slippage in other areas, including payment of taxes and enforcing contracts, prevented improvement on the rankings that is followed widely by global investors. The World Bank acknowledges several successes since Mr. Modi took office in 2014. Still, due to even-larger improvements in other economies, India’s ranking in several areas fell this year. On the ease of starting a business, it slipped to 155th from 151st. On dealing with construction permits, it stumbled to 185th from 184th. On paying taxes, it held steady at 172nd. The report’s authors acknowledge that the ranking doesn’t reflect all the progress India has made recently in improving the business environment. Lawmakers have recommended the implementation of a large number of reforms across all states, going beyond the scope of Doing Business. It takes Mumbaikars 14 procedures and about a month to start a new company.

New Zealand tops this year’s ranking, dethroning Singapore to two. UK is ranked 7, USA at 8, Russia at 40, China at 78, Sri Lanka at 110, Egypt at 122, Pakistan at 144, Bangladesh at 176 etc indicates India has to long way to go for economic growth and prosperity.

With in Indian states, AP and Telengana have jointly topped the 2016 ease of doing business rankings, while last-year's topper Gujarat slipped to the third spot. The rankings are on the basis of a 340-point business reform action plan and their implementation by the States for the period from July 1, 2015 to June 30, 2016.

My View:
India's current years credit ratings are just a notch above 'junk status'. Efforts to enhance ratings during 2016 due to higher GDP growth rate & lower inflation rates were brushed aside by Moodys citing huge national debt and fragile public sector banks with Rs.7 lakh crores NPAs which needs huge recapitalization for stay put into business. Credit rating enhancement is at least two years away. The demonetization debacle has further complicated matters. Modi embarking on high speed reforms like GST etc are likely to create confusion & chaos with high inflation in short run while long run impacts are uncertain. In short, India is experiencing uncertain future on economic front with Brexit, H1B visa issues, unencouraging FDIs despite invincible political authority Modi enjoys.