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From Faith To Leap Of Faith
What Govt., can ill-afford at this hour: IT relief to the individuals – sadly, this year is not the time for Govt for any largesse. GST re-visit – Govt revenues are flat, if not negative. Any Direct Tax reliefs are going to balloon fiscal deficit.
Photo Credit :
Much has been published about the slowdown and the continuous deceleration of the GDP growth in India. Every single data point published further precipitates the concern on how India, considered the hot bed of consumption and a growing economy is coming to a grinding halt.
I borrow the following charts from the paper published by the Former CEA Mr. Arvind Subramanyan’s paper on India’s GDP.
Myth about this chart:
Change in Corporate Tax and easing the debt would bring back the growth.
There are tectonic changes happening for a few years and therefore not everything would become normal- ever again!
* Infrastructure project cost over runs are substantially higher than the 1.04 lac crore fund being discussed
So neither is this sufficient, nor is it going to save the projects from the enormous debt accumulated.
* Manufacturing continues to de-grow and consequently, the growth in Power generation is the lowest in 30 years.
Add to this the fact that price realization of the Gen Cos across India has dramatically fallen due the harnessing of solar energy.
India has identified 8 sectors as core sectors. Electricity ; Steel ; Refinery products ; Crude oil ; Coal ; Cement ; Natural Gas and Fertilizers which contribute an estimated 40% of the IIP and have had 1% percent growth year on year (YTD Nov).
A similar trend is observed in the exports which de-grew 1% this quarter. As Mr. Aravind Subramanian beautifully put it, the average corporate earnings are likely to fall to about 6.1%. If the interest payable is about 10.5%, it net net means that there is 4.4% of shortfall to service the debt.
Reduction in the crude oild prices internationally off-set further damage and cushioned for the short-fall from the other sectors.
The direct reflection of all these are indicated by the below chart on India’s Direct Tax adjusted for inflation.
* What is the short and long term impact on India of this slow down?
This is no ordinary slowdown as many pointed out and one is being naïve and rather foolish if one were to expect a short term fix. There is a need to the grass root level and address things differently…
There are tectonic changes happening across different sectors and the compounded effect is what one is witnessing currently. Understanding these changes and making policy modifications shall help in the medium term even if they cause slight inconvenience in the short term. Some of these changes are mentioned hereunder with a ring side view of what Govt., could do proactively to leverage on these changes to grow the GDP.
Eight Core Industries are Electricity, Steel, Refinery products, Crude oil, Coal, cement, natural gas and fertilizers. The Index of Eight Core Industries is a monthly production index, which is also considered as a lead indicator of the monthly industrial performance. These core sectors grew at 1.2 % for the period Apr-Sep YOY. However in Sep 2019, they contracted 5.2%. so all is not well and the growth of one is inter-related to the others.
Technology changes and the silent pivoting of consumption:
Power Sector: India has embraced green energy and has started harnessing Solar Power. Government has an ambitious green energy target of 175 Giga Watts of Green energy. It is estimated that close to 22% (amounting to about 83 GW) of the total power generated currently is solar.
The collateral damage of this is that as many as 133 Thermal Power plants with installed capacity of 65,133 MW have been shut down. Now try and comprehend what could have happened to the people employed. Solar power is not as labor intensive as thermal power plant is and it is evident therefore that there would have been massive job losses.
Also, many of these thermal power plants would have been at various stages of repayment of debt. This, in turn, would have had an impact on the NPAs.
What Govt. could do:
Clamp down on unilateral pull outs by State Govt from signed PPAs
Phase out of low efficient Thermal Power and adapt Nuclear / Thermal
Create alternate modes of utilization of power from installed power plants
Ensure PPP models are
Incentivize R&D, Tech., Manufacture
Auto Sector: India is at the cusp of embracing 2W/4W electric mobility and adopting alternative modes of urban commute as opposed to ownership of the cars. This trend is reflected in the Global auto sales as well, which are down for the second consecutive year.
Commercial vehicles sales are down too. Construction equipment and tractors are strongly correlated to growth in GDP, industrial output, agricultural output and infrastructure spending (correlation coefficient of ~84%). A downturn in these automotive segments is reflective of the overall slowdown in the economy, with GDP growth rates coming down sequentially over the last five quarters, from a high of ~8% in Q1, 2018 to ~5% in Q2, 2019.
The sector is on the cusp of a pivot. It is just a matter of time before one adapts to connect cars and EVs.
What Govt., could do:
Corporate Tax relief (done)
Reduction in GST for EVs
Delay implementation of BS6
Increase Minimum Support price for farmers
Incentivize Electric mobility. Create hubs for manufacture
IT Sector: Indian IT Industry has traditionally been about supply of heads. Whether it is coders or back end support. India has never really built or dominated in IT products. With changing times and the convergence of data into digital, the technologies that are hot now have changed.
In addition, The Indian IT sector is plagued by a range of macroeconomic concerns. The slowdown in Europe (a major growth driver) and softening US Yields (which curtail spending in the Banking and Financial Services sector) are some of the major concerns portending a gloomy outlook for the industry.
This resulted in the reduction of the yield in the per hour fee of the coders of erstwhile technologies. This is evident in the below 4% growth that each of the IT majors in India have registered in the past three quarters or above. While there are news articles on how the sector is creating over 4-5 lac jobs this year, the important thing to note is that these jobs are coming at the cost of the existing ones and not just that, a majority of the 4 million people employed in IT sector would either have to reskill themselves to remain employed to avoid being pruned.
What Govt., could do:
Corporate Tax relief (done)
Creation of hubs for emerging technologies
Incentivize re-skilling of employees
Incentivize tech start-ups investment in India
Consolidation and duopoly:
Telecom: India boasts of being World’s second largest market with 1.2 billion subscribers (as of May 2019) mobile and fixed line users and also home for the second largest number of internet users. It’s internet charges are the lowest in the world but not the spectrum charges. The hyper competitive environment in the sector has seen multiple exits and one large merger (Idea and Voda). It is estimated to employ about 3 million people directly and 2 million indirectly.
The sector owes about 95000 crores and is seeking relief from the govt., which might not come though. This might lead to a duopoly and imminent massive lay-offs. Ironically, this is happening at a time when media and telecom are converging at an unprecedented pace. Faster speed and cheaper internet is resulting in an exponential increase in the consumption of media from OTT platforms upping the quantum of digital consumption even from the tier-3/4 towns in India. Having a duopoly at this juncture would be detrimental to the sector. There might be few or no takers for the 5G spectrum. In addition, the state run telecom players are struggling to port from 2G to 3G leaving them on a path to extinction.
From a security, fair practices and equitable market place creation perspective, the imminent duopoly needs to be culled fostering smaller, regional players to invest and enter the space. This can only happen if the government is willing to overhaul the policies and keep the spectrum costs reflective of the reality.
The current 5 G spectrum is priced at Rs 492 crore a unit as the base rate for 5G airwaves in the 3.3-3.6 GHz bands, and mandated that telcos buy in a block of 20 units. Thus, an operator would need to pay at least Rs 9,840 crore to buy 5G spectrum on a pan-India basis as the regulator suggested it should be put to auction in the block size of 20 MHz. This means, a carrier would need to spend around a whopping Rs 50,000 crore for 100 units for effective roll-out of 5G services which Airtel as well as Voda have requested Govt to revisit.
Corporate Tax relief (done)
Reduction in GST for EVs
Amicable settlement of the past dues
Incentivize 5G investment in India
Revisit the 5 G spectrum costs
Getting Bharat back on feet:
According to World Bank study of 2017, a whopping 42.7% of the workforce in India is still employed in Agriculture sector. This sector however contributes to only 15.4% to the GDP of India. This is the sector that pretty much represents the rural India often referred to as Bharat.
Demand for consumer goods in rural India recorded its worst performance in the last seven years, as growth slumped to 5% in the September quarter of 2019, from 20% in the corresponding quarter last year, according to a report from market research firm Nielsen. Rural India accounts for 36% of total expenditure on FMCG products in India. Historically, this market has grown 3-5% higher than urban India. However, in the September quarter of 2019, urban demand increased by 8% against the 5% clocked by rural. While this is due to a sharper slowdown in rural demand, Nielsen’s report also noted that distribution in rural India has steadily dipped. Spurring the rural demand is an absolute need of the hour. Good monsoon is something that is in no one’s control but ensuring a decent MSP (minimum support price) is and this directly puts the money in the pockets of the farmers and trickles in from them to all the supplementary and ancillary businesses.
In most parts of India, prices of vegetables and many fruits were driven high because of crop damages caused by excessive and unseasonal rains, which hit supplies. Onions saw an almost 200% rise in prices in November and December 2019, sparked by a poor rabi harvest last year. But wheat and other cereals have also seen a price inflation, which Himanshu does not attribute to natural causes.
The Food Corporation of India’s granaries, in which the government stocks food grains for use during calamities, have been overflowing for most of last year. In July 2019, the FCI had 45.8 million tonnes of wheat storage, as against the buffer norm of 27.5 million tonnes. It also had nearly double the amount of rice stocks than the buffer norm of 13.5 million tonnes. Many feel that this is irrational and has led to artificial inflation in cereal prices.
Increase the MSP
Incentivize adaption of new technology/ crops
Address the distribution losses in Food
Re-look at the GM seeds to improve throughput
Address the food inflation
Inter-linking of rivers to provide better irrigation
What Govt., could do:
In summary, What Govt., can ill-afford at this hour: IT relief to the individuals – sadly, this year is not the time for Govt for any largesse. GST re-visit – Govt revenues are flat, if not negative. Any Direct Tax reliefs are going to balloon fiscal deficit.
Large welfare schemes.
How many of the above are considered important to address and handled in the budget 2020 would be evident in a few days but the biggest need of the hour, is to shift the narrative from Faith and take a Leap of Faith and make 2020 the Leap of Faith Year!
Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.