General election 2019 blues

This is a waveless election (2019) wherein the preference or dismissal of a leader and issues seem to be pre-determined by the social background (caste and community) of voters. 

• The BJP  won 31% of the vote with 282 seats nationally in 2014. This is the highest vote to seat conversion indicating heaviest fragmentation of the anti-BJP votes. Plain arithmetic suggests that if all major non-BJP forces come together, the Modi machine will halt.
• Today BJP today rules 17 of 29 states (a year ago 21/29 states), either directly or with its allies. Despite BJP's countrywide presence, it is also true that the opposition has been winning most of the Lok Sabha by-elections which is a sign of defeat for the Modi-Shah combine in these elections.
• Anti Modi factors are: Demonetisation, GST, cow vigilante  lynchings, agrarian crisis, unemployment, inflation, cattle trade ban, etc.
• Pro Modi factors: Good governance, divided opposition, Balakot airstrike, surgical strikes, absence of major scams, etc. Factors such as welfare schemes like the PM Awas Yojana, Ujjwala Yojana (free LPG cylinder connection to BPL families), Rs 2,000 to the farmers, are secondary reasons for BJP.
• BJP which won in UP (71/80 seats), Rajasthan (25/25), Gujarat (26/26), Bihar (31/40), MP (27/29), Chattisgarh (10/11), Maharashtra (22/48) and Karnataka (17/28), in 2014, may lose most of these seats in 2019. 
• There is no perceptible Modi “wave” this time and the muscular nationalism plank that the BJP banks on fails to evoke the required response in the face of widespread agrarian crisis.
• The public resentment against the BJP governments is glaringly evident even though some believe that Modi has no alternative. It is also clear the BJP is not adding any new constituency of voters. The trends point to a clear reduction of the BJP’s tally from its commanding position of 2014. 
• Stung by the failure of the campaign based on muscular nationalism in the early phases of voting, the BJP desperately looks for new strategies and altered roadmaps, with emphasis on Hindutva. The candidature of the Malegaon blast accused, Sadhvi Pragya Singh Thakur, in Bhopal against Digvijaya singh is a major step towards Hindutva consolidation.
• Modi's election campaign is increasingly looking like his style of governance over the last five years, particularly the manner in which demonetization and GST were pursued. A new narrative every day, with new reasoning and strategies along with altered road maps to attain a proclaimed objective. This could also lead to results as chaotic as demonetization and GST produced.
• Congress party has scored some vital points in terms of ideation of new policy initiatives and programmes, but has failed to follow this up with solid organisational initiatives and electoral strategies.
• In Uttar Pradesh, multiple narratives are impacting the election in different ways. BJP's candidate's weaker profile as compared to BSP-SP-RLD alliance is widely acknowledged.
• People are not interested in communal issues but have economic concerns. The BJP had impar­ted a larger-than-life cult image to Modi. Even now they are projecting him as a lone lion in the jungle versus the rest. This is not going to work now.
• Had even a single person been killed in Pakistan by our our strikes, would they have returned Wing Commander Abhinandan in one single piece within days? Is Imran Khan not answerable to the people of Pakistan? So how did Amit Shah claim we killed 250 Pakistanis!” -- Raj Thackeray 
• EVM's are neither easy to tamper with and at the same time not tamper proof. Its non-transparent mechanism gives scope for losing candidate to think that EVM has been tampered with. Unless public confidence is earned, EVM will remain a contentious issue. EC telling that EVMs are perfect without explaining how they are perfect is nonsense.
• This election is not about who wins but to ensure that the BJP loses so that the nation survives. “We will take on each other later.”  -- Raj Thackeray 
• Mukesh Ambani had recently extended his support to Congress candidate Milind Deora in South Mumbai constituency. Raj Thackeray called this shift in Ambani’s loyalty from BJP to Congress is a big message to the country. Ambani is Uddhav Thackeray’s close friend but decided to side with a Congress candidate is a clear indication that Modi is heading towards defeat.

As things stand today, a weak opposition is Modi’s biggest strength and he is likely to benefit from the TINA (there is no alternative) factor the most, with other positives contributing towards making him virtually unassailable. Reactions from the echelons of the Sangh Parivar after the first two rounds of polling point towards a sense of unease. Many leaders admit that there is a possibility that the BJP would only win half the seats it had in 2014. 

Jammu and Kashmir Governor Satya Pal Malik’s act of dissolving the Assembly when three non-BJP political parties in the State were on the verge of forming a coalition government is of a piece with the systematic undermining of democratic polity. Modi unleashing CBI, ED, Income Tax etc on all anti-BJP parties terrorizing opposing candidates and immobilizing their associates is gross misuse of institutions which are supposed work autonomously. In order to safeguard democracy it is important that Modi & BJP must be defeated in this 2019 elections and be watchful that future governments don't follow the same path. 

Functions of money

Anything which is declared by the state as money is money. Anything which is generally accepted in payment for the goods and services or the repayment of debts is money. Money is often defined in terms of the three functions or services that it provides. Money serves as a medium of exchange, as a store of value, and as a unit of account.

Medium of exchange:

Money's most important function is as a medium of exchange to facilitate transactions. Money effectively eliminates the double coincidence of wants problem by serving as a medium of exchange that is accepted in all transactions, by all parties, regardless of whether they desire each others' goods and services.

Store of value:

In order to be a medium of exchange, money must hold its value over time; that is, it must be a store of value. As a store of value, money is not unique; many other stores of value exist, such as land, works of art, and stamps. Money may not even be the best store of value because it depreciates with inflation. However, money is more liquid than most other stores of value because as a medium of exchange, it is readily accepted everywhere. Money is an easily transported store of value that is available in a number of convenient denominations.

Unit of account: 

Money also functions as a unit of account, providing a common measure of the value of goods and services being exchanged. Knowing the value or price of a good, in terms of money, enables both the supplier and the purchaser of the good to make decisions about how much of the good to supply and how much of the good to purchase.

An ideal market economy is one where all goods and services are voluntarily exchanged for money at market prices. Such a system squeezes the maximum benefits out a society’s available resources without government intervention. 

Rupee hits historic low of ₹71 per USD

USD INR breaches life time low of  ₹71

The Indian rupee touched a historic low of ₹71 against the US dollar on Fri Aug 31, 2018, falling 26 paise today, 1.55% during the week and more than 11% year-to-date. It was trading at around ₹64 to the dollar on same day last year. 

The causes of supporting USD and INR weakening are:

• Consistent demand for the USD from oil importers.
• Fall in EM currencies.
• Rising crude oil prices.
• Inflationary pressures.
• Lingering Sino-US trade tensions.
• Looming US sanctions against Iran's oil exports.
• Shutdowns in Libya, debt crisis in Venezuela have led to crude oil supply constraints. 
• India's widening current account deficit.
• INR is under performing its emerging market (EM) counterparts.
• US economy reported best performance in last nearly 4 years, showing 4.2% growth. 
• As the US economy is growing and US Federal Reserve raising interest rates, the demand for dollar has also been increasing.

Rupee is still overvalued and healthy forex reserves may limit the downside of the rupee. RBI may crush speculative longs but it can do little to prevent INR opening weaker on gaps. RBI is unlikely to intervene as the rupee is still overvalued and currencies of EMs are also depreciating. 

Since the present situation that is strengthening USD and weakening INR is likely to continue for some more time, USD-INR rate could touch ₹80 by end of the year. Despite good monsoon, depreciating rupee and its consequences on domestic price rises etc could spell doom for Modi since general elections are just 8 months away and there is very little he could do to contain damages.

Turkey's woes today

Turkey's currency, the lira, has hit record lows, creating a headache for the country's president and pushing up prices on everyday items. Although the exact cause is, of course, hard to say, tourism bookings to Turkey have gone up in recent months. Holiday company Thomas Cook has seen a 63% rise in bookings to Turkey.

• On Fri Aug 10, 2018, the US dollar would buy almost six Turkish lira; at the end of January, it would have got you less than four. The Turkey's currency Lira, has lost more than 34% of its value against the US dollar.
• The stock market has also fallen 17%.
• Government borrowing costs have risen to 18% a year.
• Inflation in Turkey has hit 15%.

The causes are:

• Investors are worried that Turkish companies that borrowed heavily to profit from a construction boom will struggle to repay loans in dollars and euros, as the weakened lira means there is now more to pay back.
• Turkey's worsening relations with Trump administration with sanctions due to the detention of American pastor Andrew Brunson, who has has been held for nearly two years over alleged links to political groups.
• On Fri Aug 10, 2018, the US dealt Turkey and the lira a further blow when Trump said he had approved the doubling of tariffs on Turkish steel and aluminium.

These problems were compounded by a political set-up which is unconducive to proper economic management. Much of the recent concern has been fueled by President Recep Tayyip Erdogan's economic policy. Flustered by the current situation, President Erdogan urged supporters not to worry, saying that while overseas investors had dollars, Turks had Allah. Meanwhile, UK Foreign Office recommends against all but essential travel to a number of regions and says not to travel within 10 km of the Syrian border at all, due to the ongoing Syrian war. The US rates Turkey at level three, urging people to reconsider travel to the region.

Read the source article

Although far better, India's direction is Turkish way. Today INR stands eroded by 16% against USD in the past 2 years. In 2018, INR lost 8% value against USD. Our FE reserves is looking southwards. Trade deficit increasing due to reckless import of non-essential items from China. Exports stagnating, inflation above 5% are other negatives. Flight of dollars is due to Fed Reserve increasing interest rates indicates our vulnerability. Increasing oil prices suggest that INR will remain under pressure for many more quarters. Unfortunately, our government doesn't have any plans to resurrect while preferring to be in observing mode perennially. 

Turkey collapsing

Istanbul’s new airport ~200 million passengers a year when
completed in a decade, makes it busiest airport in the world.

The Yavuz Sultan Selim Bridge has little traffic because of
high tolls.  The government is paying the shortfall.

Turkey's president, Recep Tayyip Erdogan, who has dominated national life for 15 years, was sworn in again for 2nd term on July 9, 2018, following a re-election victory that came with extraordinary new powers. The winner of the presidential race is set to assume extraordinary new powers narrowly approved in a referendum last year that was marred by allegations of fraud. These include complete control of the cabinet and the power to appoint senior judges and officials, including unelected vice-presidents. The president will also have the power to issue decrees with the force of law.

• He has wielded his influence to deliver relentless economic growth through unrestrained borrowing, lifting debt levels to alarming heights. 
• In a conspicuous sign of unease among global investors, the value of Turkey’s currency, the lira, has plunged by roughly one-fifth this year, raising prices for households and businesses alike.
• Once complete by 2028, Istanbul’s new airport will have three terminals, six runways and an annual capacity of up to 200 million passengers flying through to more than 350 destinations across the world. It is double the passenger capacity of the world’s busiest Atlanta airport that currently services 100 million passengers a year. The airport's first phase is to open in October 2018 has been brought to life with heaps of public money delivered to construction companies closely tied to Mr. Erdogan. The government has bestowed upon them guarantees against any losses. The airport might prove grander than the flow of passengers, the public will wind up with the bill.
• The New Airport is often referred to as a white elephant, given the mammoth funds poured into it. The builder, iGA, is a 100% private consortium with five equal shareholders. They are going to pay approximately €1 billion rent to the government. In addition, they have €10 billion investment cost. The Turkey Economic Impact Analysis, published in June 2016 estimates that the airport will make $40 billion worth of contributions to Turkey's economy by 2025.
• Turkey's economy expanded by 7.4% last year and the growth has been fed by unsustainable public and private borrowing. But the economy is already stumbling.
• The government has been subsidizing vast infrastructure projects like the airport and 28-mile-long canal linking the Black Sea to the Sea of Marmara. The canal estimated to cost $15 billion (critics say is closer to $65 billion), and displace some 800,000 people has been dubbed his crazy idea. Environmentalists warn that Istanbul's ecosystem damage would make it uninhabitable. Economists say the project is not financially viable.
• Many businesses have borrowed in foreign currencies, which means their debt burdens have risen as lira depreciates.
• Major Turkish companies are persuading banks and other creditors to extend relief, indicating a wave of bankruptcies that could leave financial institutions and taxpayers staring at untold losses. Turkish private sector companies owed more than $245 billion in foreign debt, or nearly one-third the size of the country’s overall economy. And the government is encouraging them to borrow more.
• Turkey can court money by continuing to lift interest rates, already at 17.75%. But that would depress economic growth and hurt real estate and construction industries.
• Turkey can continue the growth while inflation mounts and lira sinks further. That may result in several corporations to insolvency, and force the government to seek a rescue from the IMF, a course that entails painful spending cuts.
• Turkey could be the next country to disintegrate. It has all the ingredients of the beginning of a failed state.
• Some of Turkey’s problems reflect the troubles assailing emerging markets in general. As the US Fed raises interest rates, investors pulling money out of developing nations like Argentina, Mexico and Turkey has pushed down the value of emerging market currencies.
• Everyone is in crisis right now. It’s all around us. Everyone who has the slightest intellect and knowledge of the economy knows this. But the government is hiding it ... says a businessman.
• In Istanbul, merchants complain that they must pay rent in dollars or euros even as they collect lira for their sales. Their rent is effectively going up while sales decline, partly because of a dip in tourism after a spate of terrorist attacks.
• The Turkish lira is like ice in hot weather. The second you take it out, it starts to melt ... says a trader.
• The most vulnerable companies are those that have borrowed in foreign currencies. Four years ago, a company borrowed 200 million lira (~$88 million) for its aggressive expansion from banks at 18% interest. In a bid to limit its debt burden, it borrowed an additional $12 million in the American currency, taking advantage of dollar loans at only 5% interest. By the middle of 2017, the lira had lost more than one-third its value and Turkish interest rates were climbing. The company’s monthly debt payments had risen by almost 50% and at the same time revenues plunged that compelled them to approach a court-supervised debt restructuring.
• A car leasing company insists on pricing his leases in euros to match the loans it takes out to buy new models of cars. With inflation rampant and anxiety pervasive the company, while selling cars after leases are complete, has to discount the vehicles to find buyers and lost money.
• Housing construction has reached its limit, and two million apartments are unsold in the country. Construction work is grinding to a halt, and companies are offering real estate on soft loans or barter.
• Turkey actually is not borrowing any money. These are the Turkish firms that are borrowing money; it is individual debt. But the government has guaranteed the loans and the revenue. This financing model is enriching private firms while saddling the country with debt.
• Inflation has ravaged livelihoods. The village markets have raised prices. Food imported from Romania and Bulgaria, is 50% more expensive than it was a few months ago. 

From soaring bridges to a giant mosque to plans for the world’s biggest airport, President Recep Tayyip Erdogan of Turkey has used gargantuan building projects as an engine of growth and a signature way of leaving an indelible stamp on his nation. The public is weary of Erdogan’s building mania. Erdogan’s projects are guided by an insatiable construction industry that has enriched his ruling circle, raising questions about his management of a faltering economy. Erdogan has created grandiose monuments and infrastructure investments in every town. 

Rupee falling is disastrous

The recent sharp depreciation of rupee is a cause for concern. The depreciation was largely against the dollar, by more than 7.5% in this year 2018. The rupee’s decline is likely to continue due to rise in the current account deficit on India’s balance of payments, intensified by the recent sharp rise in the price of crude oil. The current account deficit rose from $41.6 billion in 2016 to $73.3 billion in 2017. A depreciating rupee affects the local economy in several ways.

• Periodical rupee depreciation is a symptom that India is a bubble economy. 
• The success of India's liberalizing reforms is not because it has transformed into a manufacture & export driven economy, but indicates its emergence as a favored destination for international financial investors resulting in large capital inflows. The large capital inflows resulted in stock market values, but the valuations are not warranted by its potential earnings.
• Large inflows of foreign capital, enhances the liquidity in the system, triggers a credit boom that spurs demand and drives domestic market growth. 
• The debt-financed consumption and investment results in excess liquidity that drives banks to increase lending. This increases the defaults which can lead to systemic fragility that can intensify the capital flight and exchange rate volatility.
• The import liberalization fuels the demand funded by debt and in the absence of matching enhance in exports, the import-intensive consumption and investment results in widening current account deficit.
• The net foreign exchange outflow is due to mismatch between imports and exports and remittances and the deficit gets financed by capital inflows. A country that cannot earn the foreign exchange to finance its current needs is vulnerable to balance of payments difficulties and cannot sustain the value of its currency. 
• The low oil prices, between 2014-17, had depressed the outflows on account of excess import of goods. Now as oil prices have risen to $80 a barrel, the reality is that India is a country that is vulnerable on the balance of payments front.
• Liberalized trade and liberalized capital flows have enhanced India’s vulnerability, of which periodical currency depreciation is a symptom which got concealed so far by the large capital inflows and by the benefits of low oil prices. Both those advantages are now under threat.
• Trade liberalization has increased dependence on imports for consumption and investment and now the depreciating rupee increases cost of imports that aggravates inflation. Increase in the price of crude oil has the potential for much higher inflation. Inflation forces RBI to raise interest rates. 
• Many companies have outstanding foreign currency loans, either as working capital or acquisition-related debt, will be seriously affected.
• The liberalizations results in surge in capital flows that in turn increases private foreign debt. Since large capital inflows make the domestic currency appear strong, much of this borrowing in foreign currency is not hedged for possible losses stemming from any currency depreciation.
• Any plunge in the rupee effectively accentuates foreign institutional investors' losses on their equity portfolios and triggers stop-losses, which forces further sales, dragging markets even further down. 
• A falling rupee, in theory, should help exporters. But due to other factors export gains due to a depreciating currency may be limited.
• A falling rupee impacts tourist & business foreign travelers and students joining foreign universities. 
• FIIs have been supporting the rupee in the last three years, their inflows have dried up. So far in 2018, FIIs have pulled out Rs 46,197 crore from the Indian markets. 
• The Indian currency's vulnerability is particularly heightened by the fact that among its emerging market peers, India runs a high current account deficit.
• Large number of expatriates returning from Saudi Arabia and modified H1B visa rules by USA will hit remittances in coming years and impact current account deficit.

When depreciation actually occurs, the rupee costs of servicing foreign debt rise sharply. When the stagflation afflicts the economy hurts corporate profits and makes the burden of servicing foreign debt too much to bear. The distress sale of assets that follows bankruptcies results in asset price deflation, which worsens the problem. Depending on the intensity of these effects, the bubble can burst and the game of speculation can unravel. It is for this reason the bubble economy becomes unsustainable.

India escaped the last two global financial crises, but it may not be as lucky this time. Rising oil prices & increasing inflation and combined with the bad loans & capital flights already occurring, there is trouble looming. Turkey and Argentina, two of the world's biggest emerging markets, have been plunged into economic turmoil. Both the Turkey's lira and the Argentina's pesos have gone into free fall in recent months due to panic-selling by investors. Emerging markets were under performing by 2.5% so far this year. The strong US dollar is putting pressure on other currencies. Turkey's inflation rate exceeded 10%. The Argentine peso has plummeted by more than 10% against the US dollar. In May 2018, Argentina's central bank hiked interest rates from 27.5%  to 40% to avoid further capital outflows. While Argentina had already requested IMF help to rescue its economy, it is only a matter of time for Turkey to request IMF to help rescue its economy. Other emerging markets may be able to adapt to rising US interest rates without facing such turbulence. The strong $ 400+ billion reserves are sufficient for meeting contingencies but uncontrolled current account deficit will compel FII's to withdraw their exposures in India that will spell doom for our economy. Hence reducing current account deficit and inflation control are paramount.

Risk of doing nothing

 

Hardly a day goes by without a story that financial markets are in “bubble” territory. Stock markets around the world are at record highs and bond yields are at record lows. The former means that valuations are at the upper end of historic ranges. The latter has meant that many unusual things can be sold to investors anxious for yield. 

• Investors remain nervous and many choose to hold significant amounts of cash. This appears to be a conservative strategy but in fact it is a rather risky one. The obvious problem is that with rates at record lows you receive virtually no interest on your capital.
• The bigger problem is that with inflation running well above the level of interest rates the conservative strategy of putting money in the bank is actually destroying your purchasing power at an alarming rate. As inflation has been higher than the interest you have been receiving, your purchasing power has been declining.
• Bank interest rates are likely take a long time before the bank rate gets above the inflation rate. Consequently this trend of real capital loss from holding cash will continue for years.
• While we are conscious that there are fewer opportunities to find attractively valued investments, we continue to dedicate your resources to finding such opportunities.
• Risks that affect investments are -- doing nothing risk, inflation risk, market risk, specific risk, currency risk, default risk, sector risk, liquidity risk, false confidence risk, duration risk and leverage risk.

A diversified equity portfolio, or a balanced portfolio of equities, corporate credit and government bonds, are expected to continue to provide investors with capital growth in real terms. In fact such portfolios may be less risky to your financial well-being than sticking your money in the bank.

The only certainty is uncertainty. There is no such thing as “risk free”. 

Even government and banks can or have the potential to default. 

Past performance is no guarantee of future results and the value of such investments and their strategies may fall as well as rise. Capital security is never guaranteed. Yields on investments may fall or rise on the performance of the investment and the financial markets.  As such no warranty can be given that the yields will consistently attain such levels over any given period.

Return of protectionism

Prime minister Narendra Modi has applauded India’s latest budget delivered by his finance minister Arun Jaitley, but the parallel chorus is fading out by the day. It was Utrjit Patel, RBI governor last week, this time it’s Modi’s former advisors, Arvind Panagariya, who was also deputy chairman of the Niti Aayog until August 2017.

The RBI's monetary policy committee listed out reasons why inflation could stay well above the RBI target of 4% throughout the next financial year. RBI expects a rise in food and vegetable prices, crude oil prices and cost of health and personal care. Three other factors that will likely fuel inflation emanate from Jaitley’s budget. 

• Proposal to raise minimum support price (MSP) for farm products
• Hike in custom duties for various products including industrial inputs
• Wider-than-expected fiscal deficit

All this assuming that the south-west monsoon will be normal this year. The future of investments is  as bleak as it was before. For Modi government, these  nonchalant jabs from the RBI governor it is yet another sign that its populist budget may not help push the growth pedal. 

Substantial liberalisation under PV Narasimha Rao and Atal Bihari Vajpayee, India became the first democracy to achieve 8% plus growth for nine years beginning in 2003-04. The top industrial tariff rate fell from 355% in 1990-91 to 10% in 2007-08 and imports and as proportion of the GDP expanded to 30% and exports to 24% by 2011-12. Sadly, a new generation of bureaucrats seems to have now replaced its more enlightened predecessor. It is on course to erect the wall of protection all over again. 

Those who cannot remember the past,
are condemned to repeat it ... George Santayana 

Much is said about liberalisation and globalisation which benefited only one half of the world population while leaving other half in distress. What is visible is the constant economic growth that had eradicated extreme poverty and at the same time helped rich to become extreme rich, albeit unjustly. The casualty is environment, over extraction of non replenishable natural resources and workers with stagnant wages in developed nations. Today, US has accumulated trade debt of $20 trillion, up from $1 trillion during 1980's and has no clue or any forward looking plans to repay that debt and trade gap of $100 trillion is likely in next few decades and is saddled with huge industrial work force with stagnated wages. On other hand, China armed with huge trade plus faces deterioration of social values, degradation of landscape & environment and over exploited 150 million labour force with no human rights for over 30 years. Economics are complex and any change usually has unintended consequences. Over dependence on either exports or imports, for prosperity, is detrimental to any nation. The prudence lies in living within means and/or maintaining manageable trade gap at all times. Economic growth is never a true indicator of progress, development and wellness of any nation.

Riskless capitalism leads to NPAs, in India

"Riskless capitalism" is a term first used by Raghuram Rajan in November 2014. The Indian growth story cannot be over-simplistically explained as a result of "market-oriented" reforms. Public sector bank credit-financed investments, particularly in the infrastructure sector, played a significant role in sustaining growth, most crucially after the global economic crisis. Such a growth trajectory, however, proved to be unsustainable with the expansionary phase coming to an end in 2011-12 and bad loans piling up in the banking system.


STYLIZED FACTS

• The Indian economy saw a boom between 2003-08 and a bust in 2008-09 whereas the second boom was for two years between 2009-11 followed by a decline.
• Private corporate investment grew faster than public investment during the booms increased from 6.5% to 10.3%.
• Credit from the public sector banks reached high levels during both the boom periods and a decline in between the two booms during 2008-09. Credit flow from the private sector banks did not follow this trend.
• By the time of the second boom, the banks were recklessly lending to already highly indebted companies.
• In the first boom, the real interest rates fell from 12% to 2.5%. In the second boom real rate of interest was increased.
• The fiscal deficit was reduced drastically during the first boom period. A “pause” button was pushed following the global recession and the fiscal deficit expanded from 2008-09.
• Import intensity of the Indian economy has been steadily rising in the high growth phase and continues to rise today.

GROWTH MODEL

• The internal constraint is the rate of profit should at least be equal to the interest accrued on the debt taken in the past. The external constraint is the Gross External Financing Requirements (GEFR) should be equal to net capital inflows and change in foreign exchange reserves.
• These two constraints are the boundaries for the economic system to function well where neither the domestic financial sector comes under severe strain nor the economy is faced with a balance of payment crisis.
• A developing country faces a foreign exchange constraint arising out of the current account needs as well as the international debt servicing payments accrued in the past.
• Investment decision of a private firm is aggregated to  - first, how much of investment is to be undertaken? Second, how is this investment going to be financed?
• The state-owned banks were made to relax their risk function. And the risk-taking of private investment, was passed on to the public sector banks. High profits of successful investment projects were not shared with the lenders. The losses incurred in failed investments was passed on to the state to clean up. This is being witnessed in India today as increasing NPAs and the clamour for debt write-offs. 
• This is the process of "riskless capitalism” , the former RBI  Governor Raghuram Rajan was alluding.

CONCLUSION

• The promoter enjoys riskless capitalism even in these times of very slow growth, how many large promoters have lost their homes or have had to curb their lifestyles despite offering personal guarantees to lenders? Who pays for this one way bet large promoters enjoy? Clearly, the hard working savers and taxpayers of this country! As just one measure, the total write-offs of loans made by the commercial banks in the last five years is Rs. 1,61,018 crore, which is 1.27% of GDP ... Raghuram Rajan in 1994
• The first boom was triggered by export surge accompanied by public sector bank lending, debt inflows and low real interest rates. The second boom was a result of a more reckless lending by the public sector banks in the face of interest rate hikes by the RBI. Such a “riskless capitalism” could not have thrived without the support, active or otherwise, of the state.
• The second boom was short-lived because of the unstable nature of this growth rate as well as a rise in the domestic real rate of interest from 2010-11 due to RBI’s efforts towards inflation targeting. The effect of this increase in the domestic interest rate was muted because international borrowing costs got lowered due to monetary easing in the US in the aftermath of the global economic crisis.
• While the cost of domestic credit increased, its international counterpart declined causing a change in the composition of corporate credit in favour of higher external commercial borrowings. With increase in domestic interest rates, the growth rate fell on the unstable path. The economy eventually hit the lower constraint implies debt defaults, which manifested in the large-scale accumulation of NPAs of the PSBs.
• Faced with an asymmetry of power, banks are tempted to cave in and take the unfair deal the borrower offers with massive haircuts. The banks debt becomes junior debt and the promoters equity becomes super equity. 

Why the fuss about Fiscal Deficit?

1. Budget deficit =      total expenditure – total receipts
2. Revenue deficit =   revenue expenditure – revenue receipts
3. Fiscal Deficit =       total expenditure – total receipts except borrowings
4. Primary Deficit =    Fiscal deficit- interest payments
5. Effective revenue Deficit = Revenue Deficit – grants for creation of capital assets
6. Monetized Fiscal Deficit =  part of the fiscal deficit covered by RBI borrowing

The Golden Rule of fiscal policy is that the government should borrow only to invest that benefits future generations and not to fund current spending, maintaining inter-generational equity. Hence, the best way is to spend the borrowed money is for projects like infrastructure. The policy suggestion is that government’s budget should have no revenue deficit, a situation where the government’s day to day earnings are not enough to finance its day to day activities.

• Overseas investors and rating agencies relies a lot on this number to judge the health of the country's economy.
• Fiscal Responsibility and Budget Management (FRBM) panel has recommended a fiscal deficit target of 2.5% of the GDP for fiscal 2022-23. The panel suggested 'escape clause' in case of over-riding consideration of national security, acts of war, calamities of national proportion and collapse of agriculture severely affecting farm output and incomes. Also, "far-reaching structural reforms in the economy with unanticipated fiscal implications" too can trigger deviation, not exceeding 0.5%, from the targets.
• This forces the government to walk the tightrope every time the budget comes, as it also has to attend to social sector needs and create enough stimulants for the growth engines of the economy to keep running.
• Any slip on fiscal deficit discipline puts the government at risk of inviting the wrath of the global rating agencies, whose outlook often determines the volume of investment flows into the domestic economy and markets. 
• Any government's move to go for additional market borrowing will be seen as a ‘negative’ that could widen the fiscal deficit. 
• A small fiscal deficit is a good idea but the problem is when the deficit swells and becomes untenable. In a high fiscal deficit environment, government borrowing can crowd out* bank credit, thereby forestalling any chance of capex revival.
  *is the high level of public borrowings that reduces the borrowing opportunity of the private sector.
• Fiscal deficit is met through borrowing by the government from the open market at competitive rate of interest, which increases the overall interest rate in the economy. It also adds to the burden on the future generation violating the principle of inter-generational equity.
• Surging oil prices mean a higher import bill for India and that will translate into higher expenditure. The faltering tax receipts, which are yet to shake off the twin impact of the GST and demonetisation will also widen fiscal deficit.
• Share sale in PSUs is not easy with the market outlook not that promising, limiting the government’s ability to mop up much revenue from that avenue.
• Credit growth in the economy is burdened with huge NPA loads forcing banks remain extra cautious in extending credit to industry. 
• Some economists and industry veterans say there is nothing so sacrosanct about this 'fiscal deficit' number and the government can always relax it a bit and work on it later on. It would be unwise to cut back on government expenditure, only to contain fiscal deficit, as long as that extra expenditure of the government is for investment and not for consumption.
• Ex-RBI Governor Raghuram Rajan opposed the higher fiscal deficit view for stimulating economic growth citing the dismal scenario of the Brazilian economy. He warned that the enormous costs of becoming an unstable country far outweigh any small growth benefits that can be obtained through aggressive policies. 
• Higher inflation remains the biggest headwind in deficit dynamics. Retail inflation @ 5.21% in Dec 2017 was much above RBI’s comfort zone of 4%. RBI’s stand is that higher fiscal deficit will bring more inflation and may distort economic activities in general.
• This year, loans repayment & interest payouts will take up 32% of the centre’s earnings, pensions and subsidies 23%, state grants 23% and defence expenditure 16%. These repetitive expenses will effectively mop up 94% of the total budget receipts. That leaves little room for allocations to new ideas or schemes. Higher fiscal deficit indicates the fragile state of the Centre’s finances, and its control over interest, pension and subsidy expenses indicating extremely limited elbow room in deciding on its budget allocations. 
• The other problem with the expenditure pattern is that the bulk of the budget spending goes into consumption or maintenance expenses, with very little spent on creating new assets.

The analysis tells us that for government to be really able to launch bold new schemes or make a difference to citizens’ welfare, it needs to clean up its finances first — pare down debt, save on interest payouts, reduce pensions and subsidies and raise asset creation. It must also ensure that its receipts grow at a far faster pace than expenses in future, so that the debt can be paid down. Therefore, the success or failure of the annual budget exercise really has to be measured on the progress in these parameters over the years.


Govt breached fiscal deficit target of 3.2% (actual 3.5%) in the current year 2017-18, same as previous year. The budget for 2018-19 projected fiscal deficit target at 3.3% of GDP against the earlier target of 3%. The reason for breaching current year target is mainly due to demonetisation and GST resulting in lower revenues and higher expenditure. 2018-19 being an election year, the budget is not so conducive for higher revenues and govt populist expenses are likely to go uncontrolled. Rising NPAs are big drag on economy. Oil prices surge will result in lower GDP growth and higher inflation thus widening fiscal deficit. Modi has learnt in very hard way not to play gimmicks with economy with reckless adventures but people of India paid the price for no fault of theirs.

What to do with your money right now?

If you are just retired and with plenty of cash, retirement benefits, naturally you will have a dilemma what do with the money safely with maximum returns, liquidity and with minimum income tax liability. While equities and mutual funds seems to get you good returns, never go by television recommendations unless you have in depth knowledge of what you are set up to do.

• Never lose money. Focus on capital preservation strategies.
• Remember, risk exists every where. 
• Spread your money across asset classes; debts, equities, mutual funds, real estate and gold. 
• Retain certain amount of cash both at home and in bank to manage unforeseen situations.
• Make sure to have enough life, accident and health insurance cover for you & family.
• Stay away from hyped markets. That would be the right time to exit.
• Avoid cryptocurrencies unless you are tech savvy, prepared to gamble and lose.
• Don't lend money to friends & relatives. You may end up losing money and also relationships.

INSURANCE

• Insurance is not investment. It is the price you pay for some kind of protection of your family against contingencies of unforeseen events like death / accidental death / hospitalisation shocks. 
• Do take appropriate life, personal accident and mediclaim policies for self and family.
• Don't buy equity-linked insurance plans (ULIPs). Your money goes to the agent and the insurer and not into your investments. They are losing propositions.
• Buy either term policies (these are the cheapest) or buy money-back schemes, which are also cheap but you get your money back. Read the fine print carefully rather than trust an agent's verbal assurances.

80C INVESTMENTS

• Investments in PPF, NSCs, 5 year Bank deposits, NPS etc. may save you on income tax liabilities, But be aware of 5+ year lock in periods.

EQUITIES

• The last two years equities have seen terrific returns from the stock market. Is the economy booming? No, but a lot of investors hope that it will start growing faster. 
• The World Bank and other institutions forecast that growth should accelerate in 2018-19. Many savvy investors have already entered the stock market on that expectation. 
• As more money has come into the market, it has boosted share prices and created a positive feedback loop where investors have pumped even more money into stocks.
• Despite forecasts, markets could go in either direction.
• Unless you are an active watchful person, on daily basis, with propensity to exit as per strategy, risks are high.
• Index funds have shown persistent growth over years with lower risks. Invest in less risky index funds rather than in risky equities.
• Equities may not get you periodical returns but in long term they are sure get you impressive gains.
• Good to be a equities trader rather than and equities investor.
• Those who have time and inclination to do their own research may invest directly in stocks or via equity mutual funds. The second route is fire-and-forget. Both methods can fetch great returns. Both methods also carry the risk of capital loss.
• May be it is good to stick to mutual funds and commit to systematic investment plans (SIPs) for three years, or longer. These are likely to fetch excellent returns.
• The economy may recover. But uncertainty exists.
• Series of assembly elections and a general election scheduled in the next 15 months. Political uncertainty might cloud short-term returns. What happens if there are apprehensions that the Narendra Modi government will not return?

DEBTS

• Debt comes in many shapes and sizes. Bank fixed deposits are the default option. You can also buy mutual funds dealing in different types of debt. In addition, you can buy corporate debentures, or subscribe to corporate fixed deposits.
• Interest rates rise when inflation rises. If inflation rises, the value of money erodes faster. If interest rates rise, any portfolio of previous debt instruments loses value because that same money invested now could be earning more interest.
• Bank deposits are safest, highly liquid but with low returns. The new FRDI Bill highlights the fact that bank deposits are not guaranteed beyond the limit of Rs 1 lakh. That limit was set in 1993. The limit might get raised to Rs.5 lakhs, prior to the passing of Act. Be informed of this.
• Avoid PSU banks with huge NPA's. Also avoid private banks with low equity, lower reserves and higher NPAs. Any government would be reluctant to take this step, fearing a political backlash. Since many PSU banks are struggling to cope with bad debts bail-ins are now neither impossible, nor illegal.
• Mutual funds exploit changes in interest rates. Safety varies. Mutual funds that focus on corporate debt give much higher returns but take larger risks. It's important to understand that you can lose capital in a debt fund. So understand safety, risks and returns before investing.

REAL ESTATE

• Real estate is entirely local market. The investment is illiquid. Selling may take several months. But returns are impressive. 
• This segment has huge percentage of 'black money' intertwined with 'white money'. 60:40 is the default ratio. Even 80:20 is not uncommon. 
• Booms and busts are cyclical and occur side by side too.
• Sometime legal complications might get your investment locked for several years.
• Apart from politicians, corrupt bureaucrats and unethical businessmen, you may get entangled with mafia and local goons.
• So invest only in legally clear properties. Obtain the help of known advocates and chartered accountants. Remember brokers are not your friends.
• Stay away from hypes.

GOLD

• Gold and precious metals are the age-old hedge against inflation and uncertainty.
• But gold yields no interest and capital appreciation is uncertain.
• Making charges for jewellery add considerably to cost. It's still worth investing as security. 

Neither a borrower nor a lender be ... William Shakespeare

Read the source article

Helicopter money

The Bank of Japan is getting flak for not announcing it as part of its recent stimulus package. ‘Helicopter Money’ is an idea that is doing brisk rounds in global economic circles.

What is it? 
Helicopter money is an idea mooted by Milton Friedman in his paper ‘The Optimum Quantity of Money’ in 1969 for governments looking to lift their economies out of a slump. “Let us suppose that one day a helicopter flies over this community and drops an additional $1,000 in bills from the sky, which is, of course, hastily collected by members of the community. Let us suppose further that everyone is convinced that this is a unique event which will never be repeated.” Friedman’s theory was that the lucky citizens, thrilled with the windfall, would rush to spend. Higher money supply with no immediate change in output, would lift inflation. And improved consumer confidence would eventually prompt manufacturers to increase output and create more jobs, thus giving the economy a steroid shot to get it going.

Why is it important? 
In a bid to stimulate growth and fight deflation, governments have effected cuts in interest rates, turned to negative rates and unleashed many rounds of the infamous QE or Quantitative Easing. But GDP growth rates, whether in the US or Eurozone and Japan remain stubbornly low. Hence the recourse to more direct methods, like helicopter money.

Putting cash directly into the hands of consumers, it is hoped, will quickly kick-start a virtuous cycle of consumption that can boost up GDP. This is something that indirect QE, which transferred liquidity to banks in order to step up lending, couldn’t achieve. 

Of course, helicopter money, in today’s sophisticated world may not really have Phillip Hammond or Janet Yellen scattering bagfuls of cash from a helicopter. Instead, the British or American governments may decide to give tax refunds or tax credits or even make direct cash transfers to identified citizens. Some devious economists have even suggested pre-loaded smart cards with a certain amount of cash. If citizens don’t spend it within the specified time, the cash will simply disappear!

Why should I care? 
Sounds like a great idea! So when will the Indian government take to helicopter money to boost the economy? Alas, with the RBI watching over inflation and deficits like a hawk, this isn’t likely anytime soon. But we Indians can take comfort from the fact that we thought of helicopter money long before others did. MGNREGA paid cash to rural folk for 100 days of guaranteed work. In cases where that money went into benami accounts, that’s a form of helicopter money. On a more serious note, the excise duty cuts on cars and consumer goods announced in 2008-09 after the global credit crisis were a version of helicopter money too.

What about Pay Commission payouts? Well, strictly speaking, that cannot be termed helicopter money as it is recurring, and paid as reward for work. But these payouts can certainly serve the purpose of helicopter money.

The bottomline 
Helicopter money sounds wonderful, but it works only when people spend the money. Question is - will they hoard it?

Read the source article

While the developed countries have been fixated during the last decade on ways to put more money in people's pockets to stimulate demand, India without any due diligence decided to go the other way, and freeze out a bulk of its citizens' purchasing power by demonetisation. What was supposed to be a surgical strike against tax cheats and counterfeit currency became an attack on the large informal economy that ran on cash and carpet bombed the whole economy. The evil thinking was that about Rs.5,00,000 crores would not get deposited in banks by the people holding unaccounted money and the bonanza would be used recapitalize the banks saddled with NPA's. But in the end, almost all of the cash came back. There was absolutely no need to demonetize the economy in order to recapitalize banks. It's no coincidence that a new GST, implemented was supposed to create a common nationwide market by removing a complex web of local taxation. But when it became operational in July 2017, the single market became a side show, and the tax itself became an enforcement mechanism debacle. Like in the West, where a decade of monetary adventurism has altered people's portfolio choices and made risky assets frothy, India has reached the same end point, by flying the money helicopter in reverse. Unlike quantitative easing, which is a reversible stimulus for the demand side of the economy, India's cash ban and now the GST are seeking to permanently alter the supply side. An ebullient stock market is merely betting this experiment will succeed. But increasing the speed in wrong direction and expecting desired results is insanity.

Economic survey 2018

• GDP is likely to touch 6.75% by the close of this FY. Far behind 8% of 2015-16. Remember GDP growth has nothing to do with well being of common man.
• Tax base goes up but tax collections are lower.
• Three year low oil price bonanza is over. The benefit was squandered away foolishly by Modi & Jaitley. Any further increase of oil price will not only slow does GDP growth but impacts inflation.
• A $20 per barrel increase in oil prices will result in GDP growth slowdown by 1%, and a rise in inflation of 1%.
• If high international oil prices persist or elevated stock prices correct sharply, provoking a ‘sudden stall’ in capital flows is likely.
• In the medium term, the three areas that would require a policy focus including employment, education, and agriculture.
• Further economic reforms like completing banks recapitalization, completing privatization of Air India.
• The Sensex has risen 46%, during past 2 years, while economic growth and corporate profits have decelerated. This trend has largely been driven by expectations of a revival in growth and a sudden change in the savings pattern of households after demonetisation. A sharp correction cannot be ruled out in case future growth of the economy and corporate earnings do not remain in line with current expectations and stock markets could trigger "stall" in capital flows and force hikes in interest rates.
• Due to climate change, annual agricultural incomes could reduce by 15-18% in irrigated areas and 20-25% in unirrigated areas. Higher investment needs to be made towards expanding irrigation with the implementation of efficient drip and sprinkler technologies. A plan to provide direct income support to farmers can be put in motion to replace inefficient agricultural subsidies. 
• Although India's unemployment rate is around 3.5%, the unemployment rate in the 15-24 age group stands at 10.5%, as per ILO estimates. India has an abysmally low capacity to provide jobs to first-time workers. The only solution for India is to strengthen its manufacturing sector. 
• Providing incentives to labour-intensive export sectors  will not only provide jobs but also implies higher current account surplus for the economy which can provide a cushion against swings in the global oil prices. Therefore, it would go a long way in reducing India's historical macro-economic vulnerability. 
• Congress leader  Randeep Surjewala said that it has turned out to be much ado without direction, cohesion and vision. Modinomics had decoupled India's robust economy by myopic vision and the double whammy of demonetisation and ill-conceived GST. With one year to go for next general elections, Prime Minister Modi has plunged India's Economy towards despondency, dejection and dire straits.
• Senior Congress leader P.Chidambaram said though the survey says growth rate for 2017-18 will be 6.75%, implying a second half growth rate of 7.5%, it offers little evidence in support of this claim. Causing 'agrarian distress' is the designed objective of the Modi government as the agriculture-GDP growth under the Modi government has plunged to just 1.9%, half of what was achieved in the first four years of the UPA. It is obvious that the government hopes that the private sector will come to the rescue of the economy. There is not much gas left in the government.
• In a jibe at the government, Mr Rahul Gandhi tweeted, "The Economic Survey 2018 says, 'Acche Din' are here, except for these minor hiccups: Industrial Growth is (down). Agricultural Growth is (down). GDP Growth is (down) and Job Growth is (down). Don't worry Be Happy!" He also tagged a video of the song "Don't worry be happy" with the tweet.

Modi is in a fiscal bind. Revenue collection remains under pressure following the chaotic roll-out of a GST, and with an eye on next year's election, his spending priorities may turn to the distressed rural sector, putting pressure on the budget deficit. Even though government committed 3.2% budget deficit for this year analysts expect this at 3.5% this year and and 3.2% next year.

Economic upturn is defined as higher GDP growth over three consecutive quarters. Not every uptick which Modi's team bombard incessantly in media and social media. All these economic data doesn't mean anything really. Go to a village and talk to them or meet some frustrated unemployed youngsters in every street corner in the evenings and you will realize state of economy. Nearly 10% of voters for 2019 elections are first time voters in age band of 18-25 educated and/or skilled joined workforce but unemployed who have no knowledge of history or politics or bothered about GDP growth or corruption. Most of them are engaged in subsistence activities and are thoroughly frustrated. They would teach lesson to Modi and BJP in 2019 general elections.

The man who could not do any thing with Rs.4-5 lakh crores of oil bonanza money in 3 years except resorting to wild gambling what can he do now with no money, non performing economy and almost all sectors in distress. Corruption is not the only high priority item in our country. The priority items are healthcare, education, unemployment, agrarian distress, and many more after which corruption control and bullet train comes. Unfortunately for our flamboyant PM style, spectacle and display alone matters and nothing else. Modi has made a hash of anything and everything. The worst PM ever in history of India. The only way to show performance is to create wrong data and that is what exactly he and his gang are doing.

S&P's rationale for India's status quo

OVERVIEW

Despite two quarters of weaker-than-expected growth, India's economy is forecast to grow robustly in 2018-2020 and foreign exchange reserves will continue to rise.

Nevertheless, sizable fiscal deficits, a high net general government debt burden, and low per capita income detract from the sovereign's credit profile. We are affirming our 'BBB-' long-term and 'A-3' short-term sovereign credit ratings on India. 

The stable outlook reflects our view that, over the next two years, growth will remain strong, India will maintain its sound external accounts position, and fiscal deficits will remain broadly in line with our forecasts. 


RATING ACTION

On Nov. 24, 2017, S&P Global Ratings affirmed its unsolicited long- and short-term foreign and local currency sovereign credit ratings on the Republic of India at 'BBB-/A-3'. The outlook is stable.


OUTLOOK

The stable outlook reflects our view that, over the next two years, growth will remain strong, India will maintain its sound external accounts position, and fiscal deficits will remain broadly in line with our forecasts. Upward pressure on the ratings could build if the government's reforms markedly improve its net general government fiscal out-turns and so reduce the level of net general government debt. Upward pressure could also build if India's external accounts strengthen significantly.

Downward pressure on the ratings could emerge if GDP growth disappoints, causing us to reassess our view of trend growth; if net general government deficits rose significantly; or if the political will to maintain India's reform agenda significantly lost momentum.


RATIONALE

The ratings on India reflect the country's strong GDP growth, sound external profile, and improving monetary credibility. India's strong democratic institutions and its free press promote policy stability and compromise, and also underpin the ratings. These strengths are balanced against vulnerabilities stemming from the country's low per capita income and relatively high general government debt stock, net of liquid assets.

Institutional And Economic Profile: The ruling party continues to consolidate its power at the state level and, despite obstacles to the implementation of reform, strong growth is likely to continue Narendra Modi's coalition, led by the Bharatiya Janata Party (BJP), has further consolidated power in state-level elections in 2017 and we expect it to make further gains.

One-off factors, such as demonetization and the imposition of a goods and services tax, have led to some quarterly cooling in India's high growth figures.

Nevertheless, the medium-term outlook for growth remains favorable, based on private consumption, an ambitious public infrastructure investment program, and a bank restructuring plan that should help revive investment.

The ruling BJP-led National Democratic Alliance (NDA) coalition dominates the electoral scene, and has a clear majority in the Lok Sabha (the Lower House of parliament, which is directly elected by the people). However, it lacks a majority in the Rajya Sabha (the Upper House, which is largely elected by state assemblies under India's federal system). In the Upper House, the opposition has been able to stall some reform efforts. The NDA has been doing well in 2017's state-level elections and is forecast to make further gains at this level, which could eventually lead to a majority in the Upper House.

The coalition has also managed to pass a number of reforms to address long-standing impediments to the country's growth. These include comprehensive tax reforms through the introduction, on July 1, 2017, of a goods and services tax (GST) to replace the complex and distortive system of domestic indirect taxes. Other measures include a Bankruptcy Code and nonperforming loan resolution framework; a plan to recapitalize state-owned banks; a plan to strengthen the business climate by simplifying regulations and improving contract enforcement and trade; and reforms to the energy sector.

However, confidence and GDP growth in 2017 appear to have been hit by the sudden demonetization exercise in late 2016 (by which high-value cash notes of Indian rupee [INR] 500 and above, which constituted about 85% of the country's cash stock, were replaced with new notes, in an effort to curb tax evasion).

The July 1, 2017 introduction of the GST, which combines the central, state, and local-level indirect taxes into one, has also led to some one-off teething problems that have dampened growth.

Nevertheless, in the medium term, we anticipate that growth will be supported by the planned recapitalization of state-owned banks, which is likely to spur on new lending within the economy. Public-sector-led infrastructure investment, notably in the road sector, will also stimulate economic activity, while private consumption will remain robust. The removal of barriers to domestic trade tied to the imposition of GST should also support GDP growth.

Ratings are constrained by India's low wealth levels, measured by GDP per capita, which we estimate at close to US$2,000 in 2017, the lowest of all investment-grade sovereigns that we rate (see "Sovereign Risk Indicators," Oct. 13, 2017, also available at www.spratings.com/sri). That said, India's GDP growth rate is among the fastest of all investment-grade sovereigns, and we expect real GDP to average 7.6% over 2017-2020 (6.5% in per capita terms).

Flexibility And External Performance Profile: Ongoing expenditure pressure at both the central government and state level will ensure fiscal consolidation remains slow, but India's external position is a strength given the planned ramp-up in public-sector-led infrastructure investment and the persistent deficits, especially at the state level, fiscal consolidation will remain difficult.

The rupee's liquidity in international foreign exchange markets will continue to buttress our external assessment.

Recapitalization of state-owned banks is likely to pave the way for some improvement in credit expansion from 2018. India's external position remains a credit strength. According to the "Triennial Central Bank Survey," published on April 2016 by the Bank for International Settlements (BIS), the rupee was traded in 1.1% of all foreign exchange transactions globally. We therefore consider the rupee to be an actively traded currency, which increases India's ability to finance external imbalances. The recent increased issuance of offshore rupee-denominated bonds (masala bonds) is a testament to this flexibility.

We forecast that India's external debt, net of liquid public and financial sector external assets, will average a modest 8.4% of current account receipts over 2017-2020. The level of economy wide external indebtedness is likely to remain contained throughout the forecast period, underpinned by an improved current account deficit, which we forecast will average 1.8% over 2017-2020, down from the 2.3% level recorded on average between 2011-2016. Recent narrowing has been driven by robust
exports and lower global oil prices. The Reserve Bank of India's foreign exchange reserves stood at above US$400 billion in October 2017, amounting to over six months of import cover, a sizable buffer.

Against the backdrop of the planned ramp-up in public-sector-led infrastructure investments, as well as persistent deficits at the state level, the large general government debt load and India's overall weak public finances continue to constrain the ratings. India has a long history of high net general government fiscal deficits (net of liquid assets, deficits averaged over 8% of GDP over the past 20 years and 7% in the past five years).  The planned large infrastructure investment program is likely to limit expenditure flexibility, even though the government is likely to be able to tap private sector funds for the construction of many of these infrastructure projects.

In addition to expenditure demands, the country's fiscal challenges also reflect revenue underperformance compared with most peers at the rating level. India's general government revenue, at an estimated 22% of 2017 GDP, is low compared with peer sovereigns. Administrative efforts to expand the tax base--including demonetization (which has increased the number of tax registrants) and the introduction of the GST in July--corroborate our belief that government revenues will accelerate into the forecast period.

Although we expect central government to broadly succeed in controlling deficits at the federal level, we foresee that problems at the state level will add 3% on average to the consolidated general government deficits over the forecast horizon. 

India's high fiscal deficits in past years have led to the accumulation of sizable general government borrowings (about 67% of GDP in 2017, net of liquid assets) and relatively high debt servicing costs (close to one-fifth of general government revenue). We project that net general government debt will decline by a modest amount over our forecast horizon. India's government borrowings are mostly denominated in rupees, which largely mitigates exchange rate risks. The small portion of external government debt is predominantly sourced from official lenders over long tenors and at concessional rates. 

India has a two-tier banking sector. Its private sector and foreign banks amount to about 30% of the banking system, with the public sector amounting to 70%. The private sector banks have better profitability and higher internal capital generation, and are better capitalized with lower-stressed assets than government-owned banks. 

Given their weaker profitability, we estimate that public-sector banks will need a capital infusion of about US$30 billion to need capital to make large haircuts on loans to viable stressed projects and meet the rising requirement of Basel III capital norms. 

In October 2017, the government committed to a capital infusion plan of roughly that size, partially financed by the government itself and the rest raised via other sources. We include planned recapitalization costs to our assumptions of the sovereign's general government debt issuance. Our Bank Industry Credit Risk Assessment for India is '5' (with '1' being the strongest assessment and '10' the weakest). Nevertheless, combining our view of India's government-related entities and its financial system, we view the country's contingent fiscal risks as limited. 

The Reserve Bank of India (RBI) has made substantial progress in lowering consumer price index (CPI) inflation following the introduction in February 2015 of its medium-term inflation target band (with 4% CPI inflation plus or minus 2% as the principal nominal anchor for monetary policy), aided by broadly lower oil prices and other factors. Other steps taken to strengthen policy formulation include the introduction of the monetary policy committee framework, improved communication, and efforts to strengthen monetary policy transmission (for example, through new guidelines requiring banks to determine their lending rates using marginal cost of funds). These have also helped improve monetary effectiveness. We expect the RBI to continue to achieve its inflation targets. We believe these RBI measures will support its ability to sustain economic growth while attenuating economic or financial shocks. 

Earlier when the rating was given usually the government took a view that 

they are under-rating our performance. Now we are saying they may be 

over-rating our performance. In either case the consensus seems to be 

they are not rating properly. So leave it there ... YV Reddy

S&P was kind enough to use soft words and yet made their point of the reality clearly. In the past we had the advantage of low oil prices continuously for 3+ years but the advantage was squandered away by lethargy and reckless spending. Going forward our wrecked economy has to face increased oil price regime. Modi's reforms so far have been disruptive in nature with poor design, badly implemented without any mitigation space and had decimated informal sector. These have resulted in closure of 250,000 SMEs and livelihood loss for over 2.5 million workforce. All his vanity schemes launched with spectacularity have bounced. The result is economy shattered and all sectors are in deep distress except MNCs and service sector. The real position is reflected by 90% usage of fiscal space within first three months and reduced revenues and expenditure uncontrolled. Modi with quack advised schemes effortlessly wrecked economy but rebuilding the same is painfully slow and will take its own sweet time and in the meantime poorer classes are subjected to enormous pain for no fault of theirs. What is store for India, time will reveal in next one and half years i.e. prior to 2019 general elections. I foresee stable or worsened situation.