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.

Modi at Davos and Budget

WILL THE REAL MODI PLEASE STAND UP?

• Depending upon the audience Modi takes different avatars.
• In Davos last month, Modi defended globalization and warned against protectionism but his last week's budget did not suggest pro business statesman, but a protectionist strongman familiar in poor countries.
• The last budget before 2019 elections squelches any hope that Modi would push long pending market friendly reforms.
• But the budget confirms his re-election plans i.e. grand pro-poor gestures avoiding any pro-rich plans. 
• Modicare plan for 50 crore poor people, even though with initial allocation of a pittance of Rs.2,000 crores, devastated Bombay Stock Exchange wiping out investor health by more than Rs.5 lakh crores on a single day.
• Faced with failure of 'Make in India' to boost employment, government hiked import tariffs to coerce companies to build mobile phones, auto parts, toys etc in India.
• These protectionist policies, which failed in the past, will only ensure Indians pay high prices for shoddy goods and firms getting more interested in manipulating duties than satisfying customers.
• FM Arun Jaitley's initial promise for lowering corporate taxes by 2021 appears unrealistic with economy growing at mere 6.5%.
• In the last 4 years, Modi failed to privatize a single public sector enterprise even though Air India privatisation is in process.
• ONGC buying out HPCL is only Government exiting business falls short of privatization. 
• No Indian politician can bolster his 'pro-poor' credentials without also sticking to the rich.
• According to the law passed in 2003, central government is committed to limit the fiscal deficit to 3% of GDP by 2009 whereas budget 2018 indicates fiscal deficit at 3.3%.
• Some analysts argue that budget could have been even worse.
• It is too soon to say whether government will stick to its budget estimates or open its populism gates even wider as elections approach. 
• But one thing is certain: Davos version of Modi bears little resemblance to his domestic avatar.

Modi doesn't do what he talks and doesn't talk what he does

Politics without principle, progress without compassion, wealth without work, 
learning without silence, religion without fearlessness and worship without awareness 
will destroy human race ...  Anthony de Mello

For every politician winning election, at any price, is foremost. Anything else secondary. Therefore Modi will do anything including destruction of economy or arousing communal passions or declaring war on Pakistan or anything for winning 2019 general elections. But one thing is certain. He will give nothing really to the poor. He rather believes in fascist Mussolini type spectacular announcements  followed up by relentless media campaign and propaganda. Lacking humility, honesty, integrity and morality, he is dangerous for Indians and its democratic polity.

Banks NPAs & Recapitalisation

  

  Banks NPA's & NPA Ratios in June 2017

• As in June 2017, Banks NPAs are Rs.829,338 crores and NPA ratio is any where up to 24%. As on date  NPAs are in excess of  Rs.11,00,000 crores.
• Steadying a tottering financial system is never a graceful exercise, as American and European authorities discovered after the financial crisis. Without reform, another recapitalization is meaningless.
• The recently announced Rs.211,000 crores Banks Recapitalisation by central govt has three components:
  (i)   Budgetary support Rs.18,000 crores only.
  (ii)  PSU banks will need to go raise Rs. 58,000 crore from the market. Who will buy? May be cash rich public sector industries will be coerced to buy them. 
  (iii) The government will issue “Bank Recapitalization Bonds” for Rs. 1,35,000 crore which will be used to buy more shares in public sector banks. But these have to bought by the banks themselves. All these bonds have to be paid back in the future along with the interest by the central government. In effect, nation's future money is being pumped into today's banks recapitalisation.
• Effectively all 21 ailing banks will get additional cash of Rs.76,000 crores only, in next two years.
• Despite the roundabout method of recapitalisation, getting money into the banking system is a good policy. Having fresh equity makes it easier for them to acknowledge past mistakes and move on. Govt need to pump in ~Rs.75,000 crores every year over next few years from budget to make PSU banks vibrant.
• But every NPA has to be booked entirely by from Bank's equity only. Writing off NPAs will result in capital erosion to that extent. NPAs exceeding 10% will erode equity completely.
• Public sector banks have frozen up on lending because their capital to loan ratios will not allow any more.
• Since banks needs to have 10% of every loan from its equity, larger equity base will be helpful to some extent in resuming lending business.
• But banks recapitalisation helps adequate equity in books to resume lending of consumer deposit money.
• Any deposits withdrawal run by public will be disastrous for banks, with inadequate cash and massive deposits to service.
• But the banks lending money to its promoter (government) by buying bonds for funding additional equity acquisition of the same bank might be legal but is grossly unethical.
• With 80% NPAs irrecoverable, Banks would never initiate hard steps for recovery of these NPAs with massive haircuts contracting their equity.
• But when will they earn profits and cover up irrecoverable NPAs? With reforms and tight future lending and banks managed professionally without political influences and temptation of corruption, it would easily take over 10 years. Until then it is just hollow talk only.
• This Banks Recapitalisation exercise (equal to 1% GDP) may not increase fiscal deficit in  books, but will damage economy the way its corresponding fiscal deficit would have done or even more. 
• The best way and the only way is that banks take over NPA companies and liquidate them in auction and book losses. With what ever is left out they should draw their operations afresh and move on carefully. Any other way will be round about and postponing eventualities, achieves nothing and wastage of time & money.
• While national debt may create some assets, it also means that the present government is creating liabilities for unborn citizens reducing their ability to produce and makes them poorer.

Banks NPA situation was equally bad and needed recapitalisation ever since Modi became PM 3+ years ago. Instead of doing the right things for vibrant economy, Modi focused on vanity and spectacularity of new schemes and none of them have done any good for the economy. In fact reckless reforms like Demonetisation & GST have destroyed all sectors of economy. The only way our economy can grow and stabilise is with improving agriculture viability that enables rural spending and consumption and support the economy. But Modi & Jaitley are known for their tinkering the economy with disastrous effects only. Today, public deposits in banks in excess of Rs.1 lakh per customer are highly unsafe with RBI insurance covering up to Rs.1 lakh only!

GST deficit slowly reducing?

 

EENADU Telugu Nov 24, 2017

• GST after disrupting economy for continuously for 5 months limping towards zero deficit.
• In July 2017 it was utter choas, August ended with deficit of 29% (Rs.12,210 crores) improved in September to 24% (Rs.10,343 crores) and further improved during October 2017 to 17.6% (Rs.7,559 crores). Quarterly (Aug-Oct 2017) collection stood at Rs. 98,930 crores against target of Rs.129,042 crores with 23% deficit of Rs.30,111 crores.
• This would enlarge fiscal deficit from 3.2% of GDP to 3.5%. Already GDP growth rate took severe beating nose diving to 4 year low of 5.7% which otherwise should have been 9.1%.
• Oil prices are shooting up with current price at its 4-year high of $63.4 per barrel. The rising prices will further impact our fiscal deficit and inflation.
• The resilient Indian economy withstood impact of harebrained demonetisation and even before it recovered fully, Modi unleashed badly designed GST only to demonstrate that he is bold and his intentions of continuing financial reforms but causality is the nation and its people. Boldness is different from recklessness, he failed to grasp.
• Now, with sentiment completely destroyed, investments at standstill, informal sector decimated, agrarian sector in deep distress, construction paralyzed, empty coffers, wide ranging joblessness, dwindling exports, uncontrolled imports, rising oil prices and so on are having its adverse effects on economy, simultaneously. How long consumption driven economy will survive on a single service sector? There is no one who could pop us up from our self inflicted distressed economy.
• Any economist will tell you that the only way to boost a sagging economy is by increasing government spending on infrastructure thus creating large scale construction jobs and increasing consumption, funding it by widening fiscal space by increasing fiscal deficit even at the risk of higher inflation. Modi is just not doing that and result in near future is anybody's guess.
• Tax terrorism in the form incessant raids by taxmen and trying to impose service tax on software exports with retrospective effect from 2012 will further ruin any chances of economic recovery.
• While GST deficit might become zero by the end this financial year, after 3 quarters, it has left us in deep distress, gravely wounded and uncertain future.
• Who is responsible for this all round distress? ... The answer is Modi and his quack advised Modinomics.

Spending on infrastructure projects could be lower as sluggish GST growth have upset the government’s budget calculations and GDP growth rate is to take a further hit. The revenue shortfall could be over Rs. 80,000 crores if the current trend continues until the end of the year and will force a re-think in government spending. GST's ambiguous rules, onerous return filing system and glitches with its IT back-end have made doing business far more complicated for many companies. Frequent changes in tax rates launch have heightened business uncertainty. Hurried GST roll out had resulted in a lot of chaos and pandemonium. PSU's reduced dividend, RBI's less than half dividend all have impacted government revenues contrary to budget projection of 17% growth in tax collections. Above all, psu banks recapitalisation and rising oil prices needs to be supported from the budget. So where are we heading for?

Jaitley's Rs.50K stimulus package. Will it work?

• Arun Jaitley more or less announced Rs.50,000 economic stimulus package by loosening fiscal deficit from 3.2 to 3.7% to halt economic slow down which slipped from 7.1% to 5.7%. It was actually projected to grow from 7.1% to 8.1% this year but for demonetization, unprepared and hurried roll out of 'mangled' GST etc.
• History and experience had shown that any where in the world 'stimulus packages' never yielded targeted results except giving some initial confidence boost.
• Chinese government went on spending trillions of dollars since 2008 to boost its sagging GDP growth rate but ended up in piling up huge national debt and white elephant trophy projects which are even more difficult to maintain & service. GDP remained stagnant below 7%. 
• This Rs.50,000 comes from printing currency notes which will result in higher 'inflation' which in turn hurts poor & poorest most. It tantamount to taxing the lower classes for the benefit of upper classes who gets the benefits. In other words we are following the economic model aptly described as "Socialize the risks and privatize profits". Ridiculous!
• The 2009 US $787bn Obama's stimulus package had actully contracted economy by 2.8% and jobs saved were no where nearer to targeted saving of upto 2.3 million. Tax concessions which were expected to increase consumer spending have resulted in individuals saving those tax concessions in view of uncertain future. The Stimulus for small business helped create jobs. The aid helped, but many states were so underwater that their losses outweighed the federal assistance.
• More than stimulus package which is a 'monetary policy', a 'fiscal policy' would give much better results rather little bit slowly. 

If you haven't done anything for yourselves, your life is not wasted.

In democracy, governments can't be overthrown; they collapse under their own weight.

If stimulus package solves problems, they why limit it to Rs.50,000 crores, make it Rs.5,00,000 crores. The caution indicates their doubts about results. A popular saying says 'if you are not sure of results, then don't do it'. Modi's senseless decisions of demonetization and subsequent unprepared, hurried and mangled GST roll out have hit the economy by several lakhs of crores of rupees etc are such undemocratic decisions that is short off war with common man. Consequences are surfacing incessantly there after. There is no escape from consequences of wrong doings. Stimulus package with a meager amount is another attempt to divert public attention and to claim government is responsive. What is needed is sound thinking, careful planning and meticulous implementation. None of the Modi's team members are good for anything. It doesn't require more than common sense to say that this stimulus package will not succeed and nation will be burdened and people impoverished. At best this will add some more fire to Modi's advertisement and publicity! Within three days of demonetization, it was amply clear that it was heading for colossal failure and arrogant Modi refused to take any corrective steps like restoring status quo ante or allowing old notes also to continue for at least three months. Instead he made impassioned appeal to people to bear the pain for 50 days and thereafter targeted results would be imminent. But what happened is 'all pain and no gain'. Even Supreme Court, the constitution protector, failed in its job by remaining a mute spectator by passing just a remark 'discontinuing of higher denomination notes appears to be carpet bombing and not surgical strike'. Modi is worse than VP Singh of 1990. One more foolish decision by Modi will be enough to see Rahul Gandhi as PM in 2019. 

Demonetization effect: RBI dividend to Govt halved

• The RBI dividend  paid to the government is the lowest since 2011-12 (Rs 16,010 crore).
• The RBI did not provide any reason for the decline in dividend. 
• Economists said this indicated the cost incurred by the central bank in printing new notes as well as in sterilizing liquidity old currency notes that were scrapped returned to the banking system.
• In the Union Budget for 2017-18, the government had accounted for a dividend of Rs 74,901 crore from the RBI and other nationalized banks. RBI’s share would be Rs 58,000 crore. 
• RBI Governor Urjit Patel told a parliamentary panel that notes not returned remain the RBI’s liability and cannot be passed on to the government as dividend. 
• The low actual dividends will exert pressure on the government and its fiscal deficit could increase from 3.2% of the GDP to 3.4% this year. 
• At its peak, the excess liquidity parked by banks neared Rs 5 lakh crore, on which the central bank had to pay them 6% interest.  The average daily liquidity absorption continued to remain above Rs 2 lakh crore after demonetization was announced.
• The appreciation of the rupee, 6% since Jan 2017, against the dollar depressed returns, in rupee terms, on the RBI’s foreign holdings.

Modi who highlights and bombards on media even smallest achievements are great, will never talk about such negatives. As Gujarat CM he neither owned up responsibility for massacre of over 2000 Muslims nor regretted it. So far, he has not talked about demonetization failure, its impacts and remedial measures taken for mitigating the problems it created to common people of India, especially in Parliament where he is duty bound to do so.

Growth may not be in 6.75-7.5% range: Economic Survey

Read in English - Economic Survey says growth may not be in 6.75-7.5% range

• GDP Growth during 2015-16 was 7.9%. GDP Growth during 2016-17 was 7.1% ... against anticipated 8.5% due to demonetization. 
• GDP Growth during 2017-18 is projected to be 7.7%, but the Economic Survey has a pessimistic view on growth forecast with downward risk to the earlier estimated growth range of 6.75-7.5% GDP growth for 2017-18. Growth is expected to undershoot the earlier range.
• CPI inflation to be below 4% by March this fiscal, which only indicates anemic condition of economy.
• The challenges included are appreciation of the rupee, farm loan waivers, rising stress on balance sheets in power as well as telecom and transition issues arising from implementing the Goods and Services Tax (GST).
• Fiscal slippages due to series of deflationary impulses that are weighing on an economy yet to gather its full momentum.
• Farm loan waivers by states would touch Rs. 2.7 lakh crore and could cut economy demand by up to 0.7% of GDP.
• Fiscal deficit will be 3.2% of GDP in 2017-18 as compared to 3.5% last fiscal.
• Since February 2017, the rupee has appreciated by about 1.5%.
• The bank NPA's rose from 9.2% in Sep 2016 to 9.5% in Mar 2017.
• Reliance Jio’s entry with free voice and data has led to a brutal price war in the telecom industry, hurting revenue and profitability of incumbents amid ballooning debt, increasing the sector’s share of non-performing assets, which is a cause for worry, the Economic Survey said. Ironically, Reliance Jio was funded by same banks to the tune of Rs.1.80 lakh crores which has exposure in telecom sector to the tune of Rs. 5 lakh crores and their diminished EBITDA has lost its ability to service massive debt. 
• A positive unintended consequence of demonetization is that about 5.4 lakh new tax payers* have joined the tax net post note ban, which probably could have been achieved even without note ban.
  *mostly between Rs.2.50 & Rs.3.00 lakhs taxable income with aggregate tax payment less than Rs.100 crores.

Read - Economic Survey is a wake-up call for Centre

Even as the unintended consequences of  arrogant, audacious & attrocious demonetization of Modi are surfacing at regular intervals and estimated to normalize in about two years time, the hurriedly implemented mangled GST, with in six months of note ban, has created avoidable numerous troubles to trading, manufacturing and informal sectors disturbing supply chain of commodities is unpardonable another adventure by Modi for political and personal glorification gains rather than in public and national interest. Almost all segments of economy are suffering and the most prominent being loss of millions of jobs and distressed agriculture. For increasing speed of travel, if your car driver presses brakes instead of accelerator, again and again, what will you do? Simply change the driver. Right. Driver Modi must be replaced, if our nation needs to progress.

This is no way to manage country's finances!

1. Modi & Jaitley's Budget 2017 - Snap shot is as given above.
2. Definitely you don't spend your earnings the way Modi & Jaitley are spending nation's money.
3. With monthly income of Rs. 100,000 spending is Rs.125,000 (revenue deficit of Rs. 300,000 per annum).
4. Borrowing of Rs.500,000 (fiscal defict) is OK if it is meant for investments like buying car or apartment or resalable assets like gold, shares etc. but within limits. Surely fiscal deficit of Rs.500,000 which is 42% of tax revenues is untenable.
5. Borrowing is deplorable it it is meant for luxury expenses like holidaying, buying durables or spending for fun.
6. Deficits are neither bad nor avoidable but within permissible limits and must not be passed on to children.
7. For the country to develop, it must not have 'revenue deficit' but could have a small  'fiscal deficit' which could be bridged by long term soft loans from World Bank/IMF etc
8. Any prudent person will save 30-40% of net revenue (after tax income) for gold, investments etc. and will manage family expenses with 60-70% of net revenues.
9. That is why rating agencies have downgraded India, two years ago, to 'baa' (only a notch above junk status) and bluntly told Modi & Jaitley,recently, to cleanup balance sheet by enforcing reforms and also stated that upgrading is at least two years away. 
10. With this rating all cheaper interest foreign investments shy away from India. 
11. Only hedge funds with 'flight capital' and looking for big returns with some risk invest in India in small amounts.

Congress led UPA had revenue deficit prior to 2013 mainly to due to high crude oil prices and their pro-poor welfare schemes. During Modi's rule of 3 years, bank NPA's has trebled to nearly 6 lakh crores during past 2 years and became worthless. Modi with low oil price (almost 1/3rd) regime since 3 years had saved nearly Rs.4 lakh crores in the last 3 years with just 15% passed on to consumers and with minimum welfare where the money has gone??  Guess!

Low Oil Prices Scenario

Historically, the OPEC, cartel of oil-producing nations, has been able to manage oil prices because of the lack of flexibility in global supply. And a small cut in OPEC supply can have a significant impact on the global oil price. 

This price surge started in around 2003 and reflects the persistent long-term growth of the key oil import markets of China and India. OPEC members produce 40% global proportion of oil with very low production costs. The key “swing producer” Saudi Arabia, has used its surplus capacity to influence price. The OPEC cartel is clumsy, given that some member states have an incentive to “cheat” by exceeding their authorized production quotas.

United States supplies of “shale oil” are said to be at risk once global oil prices fall below US$60 a barrel in terms of the current costs of existing operations or even US$90 a barrel in terms of investment in new projects.

US Shale Oil:

The advent of the US shale oil boom changed this dynamic. The industry has lower fixed costs but higher variable costs and is more like an industrial process than a major one-off investment. That makes it more responsive to price movements and more flexible in adjusting short-term output.

Overall though, shale is a relatively high cost source of oil, especially compared to Middle East production. As a result, when US shale threatened OPEC’s market share, the cartel allowed a position of global oversupply to develop to make oil prices fall to make shale unprofitable. Middle East production costs at as little as US$10 a barrel, while US shale can come in at more than US$70. The plan to cripple shale oil production has certainly had a significant effect. The price has fallen from a high of US$115 a barrel in mid-2014 to a low of US$27 in January 2016.

Why haven’t US producers been laid low given that the oil price has already fallen below the cost of shale oil production? The answers are:The first is that many companies managed to hedge their production when prices were higher, selling future supplies of oil at a high enough price keep profits coming in. A second is that many got bank loans to pay for investment. Loans need to be repaid, and so lower oil prices led to a need for higher output at almost any price. A third, and important reason, is that the cost of US shale production has decreased due to efficiency gains and production costs got reduced costs to as low as US$30 a barrel.

Russia Pressure:

Oil exports account for over 60% of export revenues, on average, for OPEC countries and account for as much as 90% of Saudi budget revenues. In Russia they account for around half of total federal budget revenues and a similar amount of total exports. Any fall in prices can lead to both fiscal and budget deficits. Russia looses about $2 bn in revenues for every dollar fall in the oil price, and its economy would shrink by at least 0.7%.

Despite pressure, the gap between breakeven and actual price can be sustained for a while. Both Saudi Arabia and Russia have built up significant currency reserves during the period of high prices which are now being used to finance a budget deficit and sustain spending. Russia is reaching the limits of its reserves getting exhausted by early 2017. Currency devaluation is a blunt tool for Russia and others to consider to reduce costs in dollar terms.

The bankruptcy of US oil producers has begun as banks begin to call in loans, new financing gets harder to find and hedging programmes expire, leaving producers fully exposed to a lower oil price. Many OPEC countries have begun to despair that no end of the current oil price slump is in sight. It appears that Russia is becoming increasingly desperate to coordinate a production cut with OPEC, in stark contrast to its previous reluctance to engage with the cartel. 

A US$30 oil price has brought many producers to their knees, with the resulting possibility that the majority of OPEC countries, plus Russia and the US, may all be set to reduce output in 2016 and bring the oil market back into some form of balance. Only Saudi Arabia, with the largest financial reserves (about US$600 billion) and an avowed strategy to maintain market share, appears firm in its resolve to maintain production and brutally test the economic robustness of its major competitors.

Low oil prices impacts Gulf states:

• Analysts expect oil prices to remain depressed for the remainder of 2016.
• In 2014, after almost a decade of record highs, the price of a barrel of Brent crude began to collapse from a peak of US$140 to less than US$30.
• Saudi Arabia is lining up a US$2 trillion sovereign wealth fund to see it through the twilight years of the oil era. But not all the countries of the Gulf Co-operation Council, or GCC, have this kind of cash. 
• Even for Saudi Arabia, the new era of low oil prices spells increasing budget deficits, reductions in state subsidies and a slowdown of the energy and construction sectors.
• Bahrain is still coming to terms as subsidies fall and inflation rises, people living and working in the region are starting to experience a reduction in the purchasing power of their incomes and increase in the cost of living.
• If the price remains low, reserves also will start to run out in two or three years.

Low oil prices impact on India:

• Current account balance:
  India imports nearly 80% of its total oil needs which is one third of its total imports. A fall in oil prices by $10 per barrel helps reduce the current account deficit by $9.2 billion or 0.43% of the GDP.
• Inflation:
  Because of use of oil in transportation of goods and services and fall in global crude prices decrease in prices of all goods and services thus helps reduction of inflation. Every $10 per barrel fall in crude oil price helps reduce retail inflation by 0.2% and wholesale price inflation by 0.5%.
• Oil subsidy and fiscal deficit:
  The government compensates oil companies for any losses or under-recoveries from selling fuel products at reduced rates resulting in higher fiscal deficit. A fall in oil prices reduces companies' losses, oil subsidies and thus helps narrow fiscal deficit.
• Rupee exchange rate:
  A fall in oil prices is good for the rupee. But the dollar also strengthens every time the value of oil falls. This negates any benefits from a fall in current account deficit.
• Petroleum producers:
  The fall in global oil prices affects the exporters of petroleum producers in the country. India is the sixth largest exporter of petroleum products in the world earning $60 billion annually. India's buyers of its exports are net oil exporters and fall in oil price impacts their economy, and hamper demand for Indian exports.
• Remittances from abroad:
  Indians remittances from abroad, mainly Gulf, were $70 billion in 2013 thus reducing current account deficit.  Fall in oil prices affects oil-exporting Gulf countries and in turn affects inward remittances into India.

My View:
Oil prices at moderate levels of $50-70 is good for economic stability of the world. Either high or low oil prices hurts some nations while doling out windfalls to others.

India is immensely benefited in the last two years by saving at least Rs.500,000 crores worth in foreign exchange outflow reducing the impact on fiscal deficit, trade deficit and inflation under control, even though inward remittances from Gulf had reduced to some extent. Ruthless Modi govt retained all the benefits of low oil prices by increasing duties on petrol & diesel to alarmingly high levels making them most expensive in the world. While UPA Govt made consumers pay international market prices during high oil price regime for nearly 10 years, Modi & Jaitley though fit not to pass on benefits of reduced oil prices to consumers. This is nothing but taxing public without legislature approval and is unethical as well as immoral.

However negative effects of prolonged low oil prices will be felt here after, mainly Indians in Gulf region losing jobs and returning to India. Already diminishing exports are hurting trade deficit even though imports have also reduced to some extent.