Indian Economy Crises - Updated, News & Discussion

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Nirmala Sitharaman rules out quick recovery for Indian economy
FM said it’s too soon to say whether India would be able to stick to fiscal deficit targets.
India’s Finance Minister Nirmala Sitharaman said it was too early to say if the slowdown in the economy had bottomed out.
Companies are planning new investments after $20 billion worth of corporate tax cuts announced in September, Sitharaman told reporters in New Delhi Friday. Actual investments may take some time to materialize, she said.

Prime Minister Narendra Modi’s government has unveiled several steps since August to revive economic growth from the weakest pace since 2013. The surprise decision to lower taxes for companies raised concerns about India’s fiscal discipline, with Moody’s Investors Service cutting the country’s sovereign debt outlook to negative last week amid concerns over slowing growth and revenues.

Sitharaman said it’s a bit too soon to say whether Asia’s third-largest economy would be able to stick to its fiscal deficit targets. However, the government’s asset sales program -- key to plugging a gaping hole in the budget -- is moving ahead comfortably, she said.

India intends to bring the nation’s cooperative banks under the purview of the Reserve Bank of India, she said. Currently, state governments share regulatory functions with the central bank over cooperative banks, many of whom are failing because of fraudulent lending practices.

 

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Indian economy: problems pile up for Narendra Modi
The prime minister has room to stimulate growth but must avoid policy mis-steps of his first term
New Delhi’s Gandhi Nagar market is one of India’s largest garment wholesale hubs, jammed with inexpensive, ready-made garments for the aspirational but price-sensitive lower middle class. The vast array of kids’ party wear, elaborately-embellished jeans and other clothes draws traders from across north India, who stock up on merchandise to sell in small-town shops and rural bazaars.

Typically, the run-up to the annual Diwali festival is the market’s peak season, when the narrow lanes are so jammed with buyers hauling clothes it is difficult to move. But this year, traders complain, the festive shopping season has been gloomy, with sales falling precipitously as a deepening economic slowdown hurts ordinary Indians.

Hit by lay-offs, pay cuts and reduced earnings, anxious consumers are tightening their belts. “For common people, these are luxury items,” says Sahil Nangru, 26, whose small business makes children’s outfits, selling them wholesale for around Rs500 ($7) a set. “People do not have money in their hands these days. Businessmen do not have money to invest.”

Diwali in Kolkata. Traders complain of a gloomy festive shopping season © Alamy
Weak consumer demand is fuelling a vicious downward spiral. In recent weeks, Mr Nangru and his partner, Pradeep Chawla, have shut down two of their four small garment-making workshops, and laid off 25 workers. “For the last three or four months, we’ve had absolutely no work,” says Mr Chawla. “Now because of Diwali we’ve had some orders. But if we have no business, we have to let the workers go, it is natural.”

The gloom at the market reflects the malaise in India’s economy, now under the spotlight after the hoopla of prime minister Narendra Modi’s security-focused re-election campaign — and his triumphant victory just six months ago.

Not that long ago India was revelling in its status as the world’s fastest-growing large economy. It seemed on the cusp of its aspiration of growth rates of 9 to 10 per cent — the pace economists say is necessary to create sufficient jobs for the estimated 12m Indians entering the workforce each year.

Small shop owners in Delhi's mall complain that 'people’s businesses have collapsed' © Hindustan Times via Getty Images
But since the second quarter of 2018 — when gross domestic product grew at a brisk 8 per cent year on year, India’s economy has steadily lost steam. GDP growth sank to just 5 per cent in the three months to June 2019, its slowest pace in six years. And as the economy skids, India’s millions of self-employed, vulnerable contract workers and farmers have all taken a hit.

“People’s businesses have collapsed,” says Nidhi Varma, who runs a small shop in a Delhi mall, and has watched as other shops shut down around her in recent months. “People don’t have enough profit to pay rent.”

Before the election, Mr Modi’s government had brushed aside warnings of economic fragility, dismissing them as too pessimistic and politically motivated. But with the deepening economic distress impossible to ignore, debate is mounting over precisely what ails the economy, the root cause of the slowdown, and how long it will last.

New Delhi insists the difficulties are a cyclical blip, brought on by tumultuous international conditions. But many economists believe the slowdown is of India’s own making — the result of policy mis-steps, sluggish market-oriented reforms and Mr Modi’s failure to resolve problems in the financial system left by over exuberant lending during the previous Congress administration.

“Blaming it all on the outside is too easy,” Raghuram Rajan, former Reserve Bank of India governor, said in a recent lecture, his first on the state of the Indian economy since leaving the job in 2016. “India is poor. It has a lot of potential for growth on its own, without relying on the outside. Why aren’t we growing at 7 or 8 per cent?”

Private investment has been muted for nearly a decade since the global financial crisis. New Delhi has little fiscal firepower left for stimulus, with an annual public deficit — including the centre, states, and state-owned entities — estimated at nearly 10 per cent of GDP. Now, private consumption is faltering, as the public mood darkens, and easy consumer credit dries up after last year’s shock collapse of Infrastructure Leasing & Financial Services, a major finance company.

Narendra Modi's cash ban invalidated overnight 86% of the country's currency in circulation © NurPhoto via Getty Images
According to the most recent RBI consumer confidence survey, Indians’ optimism about their future prospects is ebbing away. Families have been living beyond their means, drawing down savings and taking loans, expecting better days ahead, government statistics show. From 2012 to 2018, household savings fell from 23.6 to 17.2 per cent of GDP. Household debt has risen sharply, though at 11 per cent of GDP it remains low by regional standards.

“There is a general environment of extreme risk aversion,” says Gagan Banga, vice-chairman of Indiabulls Housing Finance. “Today we have a situation where the business community in general is scared to invest, the consumer is scared to consume, and lenders are scared of lending both to business and consumers because they feel that the money will get stuck.”

India’s automotive industry — which accounts for around 40 per cent of manufacturing GDP — suffered a contraction in passenger and commercial vehicle sales of 23 per cent year on year from April to September. Sales of motorcycles and other two-wheelers — often a leading indicator of the strength of the rural economy — contracted 16 per cent. Other industries, from fast-moving consumer goods to aviation, are slowing.

India's deepening economic recession has hit many garment vendors hard © Bloomberg
India is forecast to grow 6 per cent this financial year, but some see that as over-optimistic. Arvind Subramanian, the government’s former chief economic adviser, dropped a bombshell in June, when he argued that India’s official GDP statistics probably overstated growth by 2.5 percentage points a year from 2011-12 to 2016-17.

Though the government has rejected his claim, many economists in India and abroad have questioned the credibility of India’s headline GDP growth in recent years, which have often appeared at odds with weaker underlying data. Mr Subramanian, who says he raised his concerns about the data when in government, believes India has been struggling since the global financial crisis.

“The malaise is not recent,” he said recently. “Essentially, India never recovered from the global financial crisis. Investment and exports — the main engines of growth for developing countries — have never recovered.”

Others believe Mr Modi’s policies — to clean up and formalise a notoriously corrupt business culture — have also taken a toll, inflicting severe disruption on two of the country’s most employment-intensive sectors.

His draconian 2016 cash ban — through which 86 per cent of the country’s currency in circulation was invalidated overnight — and the chaotic rollout of a new tax system were knockout blows for millions of small, informal enterprises that had operated beyond the tax net. Many could not cope with either the goods and services tax’s technical or financial demands. Real estate was also hard hit, leaving developers with a vast inventory of unsold and unfinished buildings.

“The sequence of demonetisation and the GST essentially was the straw that seems to have broken the Indian economy’s back,” Mr Rajan said.

Raghuram Rajan, former Reserve Bank of India governor: 'Blaming it all on the outside is too easy' © Bloomberg
The aggressive anti-corruption drive has also unnerved corporate India, deterring investment. Businessmen say officials seem to view all entrepreneurs as inherently suspect, and treat corporate distress as evidence of deliberate malfeasance.

“Many parts of business in India were like a dirty white shirt,” says Uday Kotak, chief executive of Kotak Mahindra Bank. “India needed to clean it with soap and a wash, but we must take care that in the wash process, we avoid tearing the shirt.”

But it has left many businesses struggling to deleverage and survive the crunch. “There was an underlying shakiness and shoddiness in lending and governance standards,” says Saurabh Mukherjea, founder of Marcellus Investment Managers. “The general prosperity in the country and the abundance of black money masked that shoddiness. As the tide of black money goes out, you can now see who is standing naked.”

It is a far cry from the kind of job-generating economic boom Mr Modi was expected to deliver back in 2014, when he promised to bring “good days” to a young, restless population. “It’s a crisis,” economist Abhijit Banerjee said days before he won the Nobel Prize this month. “People are poorer now than they were in 2014-15.”

In public, Mr Modi, and his cabinet, still talk grandly of India — now a $2.9tn economy — growing into a $5tn economy by 2024. Finance minister Nirmala Sitharaman has blamed the auto industry’s woes on millennials, who prefer using Uber to car ownership. A government minister pointed to the strong box office take for the latest Bollywood films on their opening weekend as evidence of India’s sound economic fundamentals. Members of Mr Modi’s Bharatiya Janata party insist that the recovery’s “green shoots” are visible.

Independent economists warn that India’s many serious vulnerabilities — including overstretched public finances and the fragile financial system, including shaky shadow banks — will continue to weigh on the country’s prospects.

They say New Delhi has failed to recognise the severity of the financial system’s non-performing loan problem, or the risks posed by the fragility of shadow banks and housing finance companies, which are themselves big borrowers from mainstream lenders. Rating agency S&P has also warned of the rising risk of contagion from the possible collapse of shadow banks.

“The financial system is jammed and firms are reluctant to invest — and this is at the heart of India’s challenge,” Mr Subramanian said, calling New Delhi’s “under-recognition of how serious the problem is” a major hurdle.

New Delhi boasts of stopping politically-directed lending to influential tycoons, once a pillar of the state banks’ business model. But as it struggles to revive growth, it is pushing lenders to ramp up credit to small enterprises and households instead. During a recent nine-day “loan festival”, lenders pushed out $11.5bn in credit to small borrowers, raising questions about due diligence.

“A public sector dominated banking system cannot serve the needs of an expanding economy,” says Ila Patnaik, professor at the National Institute for Public Finance and Policy in New Delhi.

Mr Modi’s unassailable political position gives the government a freer hand to push through contentious, market-oriented economic reforms. New Delhi just announced a $20bn corporate tax cut to make India a more competitive investment destination.

Amitabh Kant, chief executive of Niti Aayog, a government think-tank, says privatisation of state enterprises, and major reforms in sectors like agriculture and mining, are on the agenda. He also insists recent painful disruptions will bear fruit with the emergence of a healthier business sector. “This government is fully committed to a high trajectory growth path,” Mr Kant says.

Mr Kotak is also cautiously optimistic that India will gradually bounce back, especially if fresh steps are taken to tackle the shadow banks. “We will take some time to navigate our way out of this — it’s not something that will happen overnight,” he says. “But in India, it’s never as bad as it looks. And it’s never as good as it looks either.”

Additional reporting by Jyotsna Singh

Inflation: Fight over onion prices makes farmers weep
India is one of the world’s biggest exporters of onions, selling some 2.1m tonnes of the vegetable — worth nearly $500m — to foreign buyers in the past financial year. But last month, prime minister Narendra Modi’s government roiled the global market when it abruptly banned all onion exports after unseasonal rains damaged much of the standing crop, driving local prices to a six-year high.

Onion farmers have been hit after the government banned all exports of the crop following damaging unseasonal rains © AFP/Getty Images
Surging prices for onions, staple of Indian cookery, have been known to ignite the wrath of Indian consumers. But the export ban highlights how farmers have been squeezed by New Delhi’s focus on controlling inflation and ensuring stable food prices for urban consumers.

Spiralling food prices dogged the previous Congress-led government, contributing to its unpopularity, especially among urban voters. Through bulk commodity imports, sporadic export restrictions and limiting increases in the state procurement price for wheat, rice and other commodities, Mr Modi has successfully tamed food price inflation.

But the policies are fuelling rural distress, say economists. To ease the pain, the government is providing Rs6,000 ($85) in annual income support to each of India’s 145m farmers, at a price to the exchequer of $12bn a year. The cash support follows the rollout of social welfare schemes, including the provision of cooking gas cylinders, toilets and health insurance to poorer families.

But former central bank governor Raghuram Rajan warns that without stronger growth and healthier public finances such initiatives are unsustainable. “The government has been fairly successful in expanding its welfare programmes, which gives it a lot of political capital among people,” he says. “But you can’t keep spending without generating new growth, so something will have to give.”

 

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If India Story Isn't Dead, It's Certainly On Life Support
If the India story isn't dead, it's certainly on life support. The economy grew at 5 per cent in the last quarter for which data is available, leading to a rash of downward recalibrations of growth for the full financial year. Most recently, the Economist Intelligence Unit suggested that growth in 2019-20 will be 5.2 per cent -- significantly below potential.

It is hard to overstate the degree of gloom you'll find in policy and business circles in India right now, at least behind closed doors. There was a time, not long ago, when 7 per cent or even 8 per cent growth was considered India's birthright, the floor below which GDP growth would not drop unless there was a global crisis. Today, we're staring instead at a 7 per cent ceiling -- a ceiling that, most of the time, may loom out of reach.

What's going on? The Indian economy is facing a perfect storm, beset by a combination of cyclical and structural factors that makes recovery doubly difficult. The immediate concern is crashing demand. As freshly minted Nobel laureate Abhijit Banerjee has pointed out, household consumption has fallen since Prime Minister Narendra Modi entered office in 2014, something that hasn't happened in "many, many, many, many years." His advice: Get money into the hands of the rural poor and "pray."

The immediate cause of the demand slowdown may have been the twin blows of demonetization and the new indirect tax regime, as well as the collapse of shadow banking credit last year. But there is a deeper problem as well: Promoting consumer demand should never have been considered a sustainable growth model in the first place. Instead, India should have been focusing on encouraging greater levels of private investment.

This reflects a broader unwillingness to confront the structural problems in the Indian economy. In 2013, as India was buffeted by the taper tantrum, many voters believed that replacing the apparently ineffective Congress-led government in New Delhi would lead to a growth revival. Instead, fundamental problems are being exacerbated.

One of the central issues in India is the size and inefficiency of the public sector. State-owned companies monopolize the lion's share of household financial savings and then deploy them incredibly inefficiently. Government-owned banks, which comprise over 70 per cent of India's banking sector, constantly misallocate capital because of priorities foisted on them by politicians.

Some public companies -- such as those in telecom and aviation -- are supported by the central budget for years while making losses, rendering it difficult for private players in their sector to survive. Others -- in oil and insurance -- are protected by statute and serve essentially as ways to funnel consumers' cash to the government budget instead of into productive investment.

The first thing that any government that wished to revive investment and growth would do is dismantle the state sector. Instead, the Modi government has backed the companies it owns with renewed fervor.

Similarly, you can't expect investors to flock to India when they're worried about regulatory and administrative uncertainty. Yet, earlier this year, those who had invested billions in e-commerce discovered the rules of the game were being changed to protect local players. Last week, two big telecom majors -- already debt-ridden because of exorbitant spectrum fees -- were ordered by the Supreme Court to pay $13 billion in dues to the government. The markets suspect this will drive at least one of them out of business.

Even the shadow banking crisis may partly have been precipitated by the government highway authority building up masses of unpaid bills with a prominent shadow banker. This is why there's so much gloom in Indian policy circles at the moment. For years, it was argued that political stability at the top would mean essential administrative changes would follow and Indian growth would race into double digits. But even a prime minister with enormous political capital and a parliamentary majority can't seem to reduce the enormous risks associated with investing in India.

One positive sign is that, after six long years of complacency, the government finally seems to have admitted that there are serious problems with the economy. It recently slashed tax rates on companies, for example, and has promised that further tax reforms will follow. Still, the government shows no sign of having an overarching plan to deal with the country's fundamental economic weaknesses.

For decades, India had leaders with policies but not enough power. Now we have a leader with all the political clout one could want but not the policies the economy needs. It doesn't seem a fair exchange.

(Mihir Sharma is a Bloomberg Opinion columnist. He was a columnist for the Indian Express and the Business Standard, and he is the author of "Restart: The Last Chance for the Indian Economy.")

Disclaimer: The opinions expressed within this article are the personal opinions of the author. The facts and opinions appearing in the article do not reflect the views of NDTV and NDTV does not assume any responsibility or liability for the same.


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Woe for India as economy goes from bad to worse
NEW DELHI (BLOOMBERG) - The sudden slowdown in India's economy is spreading from carmakers to gold, leaving policymakers fretting as the room for stimulus runs out.

A crunch that started out in the shadow banking industry and hurt retailers and auto businesses is now infecting everything from diesel to home sales. Company defaults on bonds are at a record, output of coal, cement and other heavy industries are contracting, manufacturing is shrinking and trade has plunged.

On top of that, toxic air in New Delhi is driving away tourists, disrupting flights and shutting schools. It's all culminating in Prime Minister Narendra Modi's biggest test since he was re-elected with an overwhelming majority in May, with the government so far failing to inspire confidence in its efforts.

"The current downturn is so broad and relatively deep, there is a downward spiralling effect that takes more than political rhetoric to change course," said Mr Seth Freeman, a senior managing director at GlassRatner Advisory & Capital Group in San Francisco, who specialises in strategy on emerging markets entry including India. "Something has to happen that restores confidence."

The government has taken several steps to boost the economy, the biggest of which was a cut to corporate taxes worth US$20 billion (S$27 billion), spurring a rally in the stock market. However, the fiscal measures so far have focused on boosting investment rather than domestic spending, with the authorities stopping short of bailouts and direct support to consumers, given a widening revenue hole in the budget.

The Reserve Bank of India has already cut interest rates five times this year, by a cumulative 135 basis points, though banks aren't passing on the easing to customers. The door for further rate cuts may now be closing as inflation starts to tick up and the US Federal Reserve signals a pause in its easing cycle.

It was not so long ago that India was the world's fastest-growing economy, expanding more than 8 per cent in the first three months of last year. Now, it is posting growth of 5 per cent, the weakest pace in six years. That may not look so bad in a world economy that is also fast losing momentum, but for a country with 1.3 billion people and widespread poverty, growth of 5 per cent is considered recessionary.

"The economy has performed worse than most had anticipated this year," said Mr Darren Aw, Asia economist with Capital Economics in Singapore. "There is a case for fiscal loosening to complement monetary easing."

With tax collection lagging estimates, economists predict the government will miss its budget deficit target of 3.3 per cent of gross domestic product this year. To plug the revenue hole, Finance Minister Nirmala Sitharaman is extracting more dividends from the central bank and state-run companies, and selling some government assets.

Missed Chance For Modi
The run of bad news may be hurting Mr Modi's party's popularity. The Bharatiya Janata Party lost some ground in two crucial state elections last month, especially in drought-stricken farming districts. He faces three provincial elections between now and the end of 2020.

It's against that backdrop and opposition from farmers that Mr Modi's government decided at the last minute not to join the world's biggest regional trade pact - the Regional Comprehensive Economic Partnership. That may help shore up his popularity with rural citizens, a key voting bloc, but is a missed chance to integrate India's manufacturing within global supply chains and boost trade.

From the RBI to the International Monetary Fund, growth projections have been downgraded for this year. The central bank is forecasting growth of 6.1 per cent in the year through March 2020, down from 6.9 per cent previously, while the World Bank cut its projection to 6 per cent from 7.5 per cent.

Gross domestic product data due Nov 29 will probably show a mild recovery in growth to 5.5 per cent in the September quarter, though economists say the main reason for that may be a statistical gain.

"Some of the rebound in growth will be driven by favourable base effects," said Ms Priyanka Kishore, head of India and South-east Asia research at Oxford Economics in Singapore. "In the absence of a stronger policy push to revive stalling income growth, underlying spending momentum is unlikely to pick up substantially."

India's biggest shopping season around the festival of Diwali also turned out to be a damp squib this year. Bank of America Merrill Lynch said research from 120 retail outlets in the financial capital of Mumbai indicated a drop of more than 90 per cent in customers compared with the previous year's festival period.

Car sales also remained depressed last month, although the exception was Maruti Suzuki India, India's biggest seller, which posted the first gain in nine months in October.

For Fitch Ratings, a turnaround will only come about once underlying pressures in the financial sector ease and credit growth improves.

"The financial sector is very crucial for the macro outlook in India," Mr Brian Coulton, Fitch's chief economist, told BloombergQuint. "What we have tended to see when we've had problems in the financial sector, which then feed through to the real economy, it takes an awful long time to turn that around."

 

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What ghost cities tell us about India's economy
In India, deindustrialisation & lack of manufacturing is majorly responsible for the ghost city phenomenon.
By Kala S Sridhar & Vishal R

The phenomenon of ‘ghost cities’ — underoccupied or unoccupied property developments — in China has been quite controversial, many pointing out that cities such as Pudong, a district of Shanghai, earlier described as a ghost city, are today bustling, ‘normal’ urban habitations. Be that as it may, China’s ghost city phenomenon has been a result of policy, over-urbanisation and unbridled loans from State-run banks to the urban development infrastructure corporations (UDICs), the special purpose vehicles (SPVs) set up for every city, with not enough residents willing to move in there.

There are a large number of ghost cities in India as well: Ross Island (Andaman & Nicobar Islands), Fatehpur Sikri (Uttar Pradesh), Dhanushkodi (Tamil Nadu), Mandu (Madhya Pradesh), old Goa and Vijayanagar (Karnataka). Causes for these ghost towns include natural calamities such as earthquakes, cyclones or epidemics, and historical reasons such as invasions or wars.

Dhanushkodi was declared unfit for living by the Madras government in 1964, following a devastating cyclone that submerged many parts of the town underneath sand dunes. The 2011 District Census Handbook of Ramanathapuram district mentions that just before the tsunami that struck the Indian Ocean in December 2004, the sea around the town receded, and parts of the submerged town were visible to some local fishermen.

The most recent ghost city to consider here is Amaravati, the capital of the newly carved Andhra Pradesh. Investors set aside huge investments, farmers sold land and bought equipment (read: earthmovers) in the hope that they would get a stake in the booming town’s success — none of which has happened, as the new government is apparently not interested in continuing, even though substantial investments have already been made.

Ghosts Don’t Lie
Policies leading to such situations arising in India have been deindustrialisation, such as the case of the shut Ideal Jawa motorcycle factory in Mysore that closed and never reopened. This could be quite similar to ‘Motown’ Detroit’s downfall in the US. The case of Ideal Jawa also points to the general decline in manufacturing in Indian cities, which have increasingly come to depend on the service industry.

November 2016’s demonetisation drive also has reportedly led to the decline of some towns such as Tiruppur in Tamil Nadu, which depended on the now liquidity-starved knitwear industry. The well-intentioned goods and services tax (GST) also added to the town’s slowdown.

While there is a lot of literature on how cities add to the macroeconomic growth and GDP of a country due to their scale and agglomeration economies, there is much less research on how they can solve problems associated with the slowing of macroeconomic growth/GDP. When there is a general business slowdown, economists talk about monetary policy cutting down interest rates, and increasing government expenditure. Because of their scale and agglomeration effects, cities should be an important driver of resurgent macroeconomic growth in countries battered by slowdown. Yet, very little is talked about cities as important drivers of growth during a slowdown.

The story of ghost cities in India should teach us some lessons on how to make cities engines of growth even during slowdowns. Indian cities have been hubs of services, primarily, following trends in the national economy. However, they have to industrialise and manufacture, to enable faster commuting, facilitate to access the internet easily, and electrify the powerless.

There were many older cities built around manufacturing — Jamshedpur, Durgapur, Bhilai, Bokaro, etc — that continue to be economically vibrant till this day. States should compete, and offer incentives for manufacturing plants to be located in their cities, and not just software firms, hospitality chains and retail outlets.

Dhanushkodi should teach us how we should employ manufacturing or artificial intelligence (AI) to power information about impending disasters, such as cyclones & earthquakes. Weather forecasting has to be further improved to prevent and mitigate urban flooding and its significant after-effects.

Be Good Cityzens
Above everything, policy certainty is needed for cities to enable them to function efficiently as effective land and labour markets. Currently, our cities are constrained with regulations in each of these factor markets. Land regulations are archaic and urban labour markets are nearly dysfunctional, which are problems essentially for manufacturing firms. Entrepreneurial skills, manifesting themselves as startups (focusing on both manufacturing and services), should be encouraged at the city level, as startups are concentrated primarily in urban areas.

One hopes that India’s ghost cities are temporary, and will be converted into economically vibrant nerve centres to support the rest of the economy. The ‘Make in India’ initiative should be actively supported at the city level by unleashing land and labour markets. With these policy initiatives, cities can serve as channels by which economic slowdown can be redressed.

(Sridhar is professor, Institute for Social and Economic Change, Bengaluru, and Vishal is former director, Directorate of Municipal Administration, Government of Karnataka)

 

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Indian economic crisis bigger than that of 2008 as slump more protracted
The comment comes amid growth slowing down to a six- year low of 5 per cent in the June quarter, which has been followed by a rash of downward revision in growth estimates.
MUMBAI: The consumption slump, a major challenge afflicting the economy, cannot be attributed to the NBFC crisis as it predates the first default by infra lender IL&FS, says a brokerage, which has also slashed growth forecast to 6 per cent with a downward bias.

Many people attribute the deepening slowdown in consumption to the NBFC crisis that began in September 2018 when IL&FS went belly up following which consumption financing - a forte of shadow banks, stopped with a chill in disbursements by these players.

According to Prachi Mishra, chief economist at Wall Street brokerage Goldman Sachs, her analysis indicates that consumption has been falling since January 2018, which is much before the end August 2018 default by IL&FS which triggered the liquidity crisis for NBFCs.

She said the fall in consumption is responsible for a third of the overall dip in overall growth, with the global slowdown coupled with funding constraints.

"There is a slowdown and the growth numbers have fallen by 2 percentage points," Mishra said, speaking at an event.

However, she expects growth to tick up in the second half, courtesy the easy money policy of the RBI which has slashed the key policy rates by a record five times or by 135 bps to a decadal low of 5.15 per cent since February and also the push to sentiment from the growth enhancing measures like the recent massive tax giveaways to corporates.

Mishra said investments and exports have been sliding for a long time, but it is the steep consumption slump which has is the new pain area.

"The present slowdown is protracted and has lasted for over 20 months now," Mishra said, adding this is different from the growth headwinds like demonetisation or even the 2008 financial crisis, which were temporary in nature.

The comments come amid growth slowing down to a six- year low of 5 per cent in the June quarter, which has been followed by a rash of downward revision in growth estimates to the tune of 70-110 bps, including by the RBI which now expects the economy to expand by 6.1 per cent and also by multilateral agencies like IMF and the World Bank.

Research by the brokerage points out that 40 per cent of the pain is coming from the slump in global trade, over 30 per cent from consumption slowdown and the rest is due to the severe funding constraints. Addressing the same event, Srei Infra Finance chairman Hemant Kanoria said there is a need for the economy not to be "messed" around for political gains.

Kanoria said his company has cut down on disbursements and chosen to focus on holding on to liquidity for the rainy day, which has resulted in a sharp 30 per cent dip in new construction equipment hiring.

Highlighting that this is a broader trend among the shadow banks, Mishra said NBFCs' credit growth has dipped to 13-14 per cent now as against a growth of 24 per cent till the recent past and blamed it on the slowing demand for loans, the increased regulatory pressures and a risk aversion.

NBFCs are show shy of lending that they are preferring to invest in government bonds rather than making loans, she said, adding this aspect needs to be broken.

 

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India’s economy is in crisis, says Nobel Prize winner Abhijit Banerjee
The Nobel winner is being championed by liberals because of his criticism of Modi. But his work contributes to reproducing poverty and inequality.
Aparna GopalanOct 23, 2019 · 06:30 am

Economist Abhijit Banerjee. | Joseph Prezioso/ AFP
News of Indian-born economist Abhijit Banerjee’s Nobel Prize win has been met with a triumphal response in the Indian media. Excerpts of his forthcoming book have been circulated. Several interviews with him have been published. His mother has been featured in the news, not only to express her pride at her son’s achievement but also because she was invited by West Bengal Chief Minister Mamta Banerjee to comment on poverty policy over tea.

This much is par for the course in a country where the media is practiced in expressing unthinking adulation. What is surprising is how the media has positioned Banerjee’s prize (which he shares with Esther Duflo and Michael Kremer)as a slap in the face of Prime Minister Narendra Modi, whose economic policies Banerjee has criticised in the past. As India’s economic crisis deepens, Modi’s opponents have used this Nobel win as an opportunity to blame the Bharatiya Janata Party’s unsound policies for the slump.

Dangerously, criticism of the BJP has not come in the form of reasoned democratic debate. Instead, it is being carried out by replacing one authority, Modi, with another, presumably higher authority – liberal economists like Manmohan Singh, Raghuram Rajan, and now Abhijit Banerjee.

An anti-Modi symbol?
Journalist Vinod Dua, for instance, in a recent show spoke of Banerjee in uncharacteristically reverential tones, casting the MIT economics professor as practically a freedom fighter and a revolutionary. Dua’s programme, like a lot of the news coverage, turned Banerjee into a symbol of all things anti-Modi: because Banerjee is an alumnus of Jawaharlal Nehru University and has won the Nobel, Dua assumed him to be a champion of secularism, good economic policy and of India’s poorcamaraderie on Tuesday.

Ironically, Dua’s main point was that this Nobel is a decisive verdict on the importance of free and critical thinking. But not once did Dua use his own free and critical thinking to tell us what Banerjee’s research achieved that is so significant. Like much of the rest of the world, Dua too farmed out his thinking on this subject to experts placed on pedestals, in this case the Nobel Committee. But really using our free and critical thinking would entail asking: why exactly should we celebrate Banerjee’s Nobel Prize? Do we really understand what he thinks?Do we know his politics and should we agree with them?

Nobel laureate and economist Abhijit Banerjee met Prime Minister Narendra Modi on Tuesday. Credit: Narendra Modi via Twitter
Banerjee was awarded the prize for bringing an experimental method to development economics: the randomised controlled trial. As explained in some recent articles, a randomised controlled trial involves breaking the problem of poverty down into infinitesimal, disconnected pieces. Bad health outcomes, for instance, are broken down into smaller factors like medical staff not coming to work, poor quality medicines, the lack of preventative vaccinations, and so forth. Each factor is then individually “experimented” on.

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For example, researchers might dock the pay of one group of nurses for each day they are absent, and then compare this group’s results to a group of nurses who weren’t targeted. This helps researchers to see if punishing nurses is the way to fix attendance. Similar experiments are done with other tiny issues. In the end, a set of tiny policy prescriptions emerge.

Methodological problems
Influential economists have severely criticised this method in many different ways. First, the scope of randomised controlled trials, in terms of the evidence they can generate, is just too small. There are many problems to scaling up findings: does something that works in rural Rajasthan also work in metropolitan Delhi? How do we know which results are applicable to which places?

Second, randomised controlled trials don’t build on existing economic data or even on real-world situations. The scenarios they create are invented, like a lab, whereas the real world is messy.

Third, randomised controlled trials focus on a narrow set of questions that almost always have to do with individual choice: why do nurses choose not to come? Most often the questions asked are about the supposed faults of the poor: why don’t they save? Why don’t they forego cups of tea and eat only rice? Why don’t they buy expensive farm equipment? Why so irrational?

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This is where the gravest criticisms come in: a randomised controlled trial approach like Banerjee’s simply ignores empirically established explanations for poverty that are supported by a wealth of data. Instead, Banerjee’s work focuses on the individual causation of poverty, providing explanations of the type that 2015 Nobel Laureate Angus Deaton has called “fairy stories”.

Structural factors ignored
In the United States where Banerjee lives, the government spent 18% of the per capita GDP on healthcare (and the citizens are demanding more). By contrast, India spends 0.8% of its GDP per capita on healthcare for each citizen. Banerjee clearly knows what development looks like and what causes it in America. Yet in India and other poor countries, his research ignores large structural factors and tinkers with small, usually insignificant ones. It’s clear that this approach will not solve poverty and ismore a donor-pleasing gimmick than a scientific gold standard.

A child is weighed by health workers in Madhya Pradesh's Shivpuri district. Credit: Adnan Abidi/Reuters
People in India are wasting away and dying of curable diseases, thanks to the dramatic underfunding of the healthcare system. People are illiterate because the public school system has been made defunct. People have low incomes because there are no effective labor laws and hardly any jobs that pay enough. If this is how we understand the poverty problem, the solutions needed are much simpler to figure out – and much more difficult to fight for. Once we see that the task is to fight for a pro-people economic policy regime, it becomes clear that economists like Banerjee are part of the problem.

Experts who are not beholden to market fundamentalism tell us that investing in public goods is the best defense against poverty. Instead, Banerjee’s take is that even the existing investments should be scaled back. Before heralding him as a pro-poor champion, we need to remember that his version of the Universal Basic Income recommendation comes along with recommendations to sell and cut state services. Banerjee’s call to pay wages under the National Rural Employment Guarantee Act, a law meant to provide ruralfamilies households 100 days of work a year, similarly comes with the understanding that the Act itself should be gutted in the long run.

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Striking inequality voice of reason in light of the ongoing crisis, was the champion of the pro-wealthy liberalisation policies of 1991. That disastrous economic restructuring laid the groundwork for the current fiasco of joblessness (which is being cast as a consumption problem), unregulated shadow banking and tax evasion – a situation where the government’s only possible response seems to be to sell bits and pieces of itself to the private sector for petty change.

The crisis in India today is not that the GDP is falling because of demonetisation and the Goods and Services Tax. Periods of GDP growth are themselves a crisis for the vast majority of Indians. After decades of economist-led growth, the top 1% of Indians own more than half the country’s wealth while the bottom 60% own less than 5%. As incompetent as Modi’s Bharatiya Janata Party seems to be, they did not create this situation. This is not to exonerate Modi for his failed economic governance, but to also implicate his supposed rivals – liberal economists – in that failure. It is foolish to expect that the same people who created this crisis will now rescue us from it.

Abhijit Banerjee’s Nobel-worthy contribution wasn’t asking for NREGA wages to be paid: it was to remove discussions about inequality and public goods from the poverty-alleviation agenda.Indeed, many others have long advocated for NREGA wages being paid, not least of all NREGA workers themselves. Economist Jean Dreze, who has collaborated with two different Nobel prize winners, has been calling for wages to be paid for years while at the same time vigorously resisting the propagation of Aadhar (a biometric unique identification project rife with privacy concerns) and of Universal Basic Income (a proposal to replace most public investment with a nominal, recurring cash-transfer to the poor). Dreze is also against the Modi government while still calling for those crucial public provisions which demonstrably reduce poverty. Why is Dreze not evoked as someone to be proud of? Why has Banerjee been picked?

Having blind faith in experts while paying lip service to free and critical thinking is not enough.

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[paste:font size="4"]Democratic scrutiny
Instead of replacing the authority of the BJP with the authority of economists, and replacing a Hindutva agenda with a GDP growth agenda, for true change the pedestal of authority itself needs to be brought down by democratic scrutiny and debate.

The exemplary coverage of the Nobel win by NDTV’s Ravish Kumar shows that this can be done. Faced with the opportunity to uncritically use Banerjee as a symbol for his ownanti-Modi politics, Kumar instead used the Nobel win as a peephole into a raging political and intellectual debate on poverty alleviation, inviting a dissenting expert to comment on Banerjee’s work and bringing in a rebuttal as well.

Let’s not jump because someone won the Nobel, he cautioned, or else we’ll be left again with the sweet words of the politicans and a laddoo in our hands.We would do well to heed that warning.

Aparna Gopalan is a writer and educator pursuing her Ph.D. at Harvard University. Her research focuses on the reproduction of inequality and poverty in rural India.

Support our journalism by subscribing to Scroll+ here. We welcome your comments at letters@scroll.in.

• Abhijit Banerjee
• Narendra Modi
• Randomised Control Trials

 

[Fawadqasim1]

It's just tip of the iceberg not just for India but the world at Large.

 

[Yaseen1]

i think one major cause is bad treatment of minorities in india and increase of intolerance and hindu extremism which is creating fear among foreign investors,india will end soon if rss influence continues

 

[Chakar The Great]

The crisis in India today is not that the GDP is falling because of demonetisation and the Goods and Services Tax. Periods of GDP growth are themselves a crisis for the vast majority of Indians. After decades of economist-led growth, the top 1% of Indians own more than half the country’s wealth while the bottom 60% own less than 5%. As incompetent as Modi’s Bharatiya Janata Party seems to be, they did not create this situation. This is not to exonerate Modi for his failed economic governance, but to also implicate his supposed rivals – liberal economists – in that failure. It is foolish to expect that the same people who created this crisis will now rescue us from it.

Strong words.

 

[d00od00o]

Indian GDP growth may slip further to 5% in FY20, says CLSA
Analysts at CLSA believe India's fiscal deficit may worsen to 4.3% in FY20
New Delhi
The gloom surrounding the Indian economy is likely to get worse in the months ahead. If analysts at CLSA are believed, the growth in real gross domestic product (GDP) for financial year 2019-2020 (FY20) could slip to 5 per cent with risks to the downside. Their worst-case scenario is 50 basis point (bps) lower than this projection at 4.5 per cent.

“India is in the middle of a severe credit contraction that started with the liquidity squeeze triggered by the crisis in the non-bank finance companies (NBFCs), which has now spread to deposit-taking companies as well. India is growing below historical trend and there will be some pressure on broad consumption aggregates. Modi’s corporate tax cuts are bold but will take time to gain traction. India’s recovery will be postponed to late 2020,” said Eric Fishwick, chief economist at CLSA.

The recent economic data, too, has been worrisome. Index of Industrial Production (IIP) contracted by 4.3 per cent in September, the lowest in nearly eight years. The fall was steeper than the 1.4 per cent cut seen in August.

Another problem, Fishwick says, is the global financial markets are seeing the slowing growth in India as an isolated, easy-to-fix problem. “When you see the entire banking system becoming risk-averse, the reversal in slowdown and a change in sentiment takes a long time to fix. That said, we expect India to grow above-trend in FY21. That said, we rule out a V-shape recovery in FY20,” Fishwick adds. CLSA pegs GDP growth at 7.6 per cent in FY21.

Amid this and a worsening fiscal deficit, CLSA expects the Reserve Bank of India (RBI) to be aggressive in cutting rates and sees a 100 bps cut in repo rate from the current level of 5.15 per cent – 50 bps in the remaining part of FY20 and the balance 50 bps in early FY21. The government had estimated the fiscal deficit at 3.3 per cent in Union Budget for FY20.

“India is becoming more fiscally constraint. Government’s revenues are falling quite sharply and the recent cut in corporation tax adds to the concerns. The relief to the real estate sector will also not be instantaneous. All this will put pressure on the RBI to be more accommodative than what the most are expecting. As things stand, the government should borrow to provide more fiscal stimulus. We expect FY20 fiscal deficit at 4.3 per cent of GDP and can even inch higher,” said Anthony Nafte, senior economist at CLSA.

CLSA forecasts 2019 global growth at 2.2 per cent, down from 2.9 per cent in the previous year, and slipping to a mere 1 per cent in 2020 before bouncing back to 2.2 per cent in 2021. The US Federal Reserve (US Fed), it says, is likely to cut rates four times in 2020.

“Weakness elsewhere means that the global economy is reliant on the US to drive growth. World trade growth has fallen to the lowest level since the Global Financial Crisis (GFC) with the US economy slowing from 3 per cent-plus growth in mid-2018 to 2 per cent today. We have cut our 2020 growth forecasts for those AxJ (Asia, ex-Japan) economies that are export driven. The world economy is facing clear headwinds and these will get worse,” Fishwick says.

 

[d00od00o]

Three years after demonetisation: Lot of sound and fury signifying nothing
The growing chorus questioning demonetisation may have faded with fresh concerns on slowdown, but it has left an indelible scar on the Indian economy.
Koustav Das

Cash is back in full circulation in the country, India is yet to become a cashless economy, black money circulation remains unchecked and counterfeiting of notes has not stopped yet. Rings a bell?

These were some of the key goals outlined by the Narendra Modi-led government with respect to note bandi, the desi term coined for demonetisation.

When Prime Minister Narendra Modi announced demonetisation on November 8, 2016, the exercise was aimed at primarily at cracking down on black money hoarders, eliminating fake currency, curbing terror funding and ultimately making the economy more transparent.

The goalpost was again adjusted by the government a few months later when it said demonetisation was the first step towards making India a "cashless economy".

PM Modi announced demonetisation on November 8, 2016. (Photo: Reuters)

Three years down the lane, it seems the idea behind demonetisation has failed in achieving any significant change with respect to economic growth or transparency. Rather, it made matters worse. We'll talk about it later but let's first take a stroll down the 'DeMo' lane.

DOWN THE DEMO LANE

"Let us ignore the temporary hardship, let us join this festival of integrity and credibility, let us enable coming generations to live their lives with dignity, let us fight corruption and black money," said Modi in his iconic demonetisation speech.

The Modi government's note bandi move, which rendered old Rs 500 and Rs 1,000 notes invalid, eliminated 86.4 per cent of the total currency in circulation, initially triggering panic among citizens.

A chaotic three-month period followed after demonetisation, which triggered acute monetary problems for a large section of the Indian population.

Read: 25 deaths in a week: PM Modi's demonetisation drive takes a toll on aam aadmi

Some even took the extreme step of committing suicide after failing to exchange old notes while a few died standing in serpentine queues outside banks and ATMs to exchange their old currency.

In response to the chaos, the government only gave a glimmer of hope to India's billion-plus citizens: That short-term pain due to note bandi will lead to better economic gain.

As the situation got out of hand with each passing day, the government urged people to become a "cashless economy".

"Don't waste your time standing outside bank branch or ATM. Use E-wallet and E-banking on mobile, which is your bank now," Modi said while addressing a rally on December 10.

CASHLESS TO LESS-CASH

The cashless economy model found success as digital payment companies like Paytm, a leader among digital payments players, raked in billions in revenue from operations and registered well over 100 per cent growth.

Though digital payments helped a chunk of the urban population in India battle restrictions on cash withdrawal, it hardly made any difference to those living in remote areas with poor internet connectivity and no knowledge of how digital payments worked.

Paytm, which is now a full-fledged financial services company, was one of the top gainers of government's note bandi move. (Photo: Reuters)

When prominent economists spoke about the dilemma, the government said cashless economy would be a turning point in the first against black money.

Also Read: 9 simple reasons why India can't go cashless

Though later, the goal of note bandi again shifted and many leaders from the ruling party said the purpose of demonetisation was to achieve a 'less-cash economy'.

However, recent data shows that despite improving internet in India and higher digital payment options, people still prefer using cash, especially small-scale retailers and merchants.

There are multiple studies that prove that digital payments still have a long way to go in India, where half of the population is still dependent on cash transactions. A 2018 study shows that cash transactions in India are expected to reach $2.45 trillion by 2021, up from $1.5 trillion in 2016.

While digital payments have become a crucial part of daily life for India's thriving urban population, a deeper dive into rural areas and scores of ground reports indicate that it still remains a less-explored segment in India's rural belts.

INDIA REMONETIZED, SCARS REMAIN

By the first anniversary of demonetisation, November 8, 2017, almost 99.3 per cent of the demonetised currency was back in the banking system, showed RBI data.

On the contrary, the government expected at least 3 lakh crore worth black money to be permanently eliminated from circulation.

A year later, RBI's annual report said only Rs 10,720 crore did not reach the banks out of Rs 15.41 lakh crore demonetised currency.

New Rs 2,000 notes were printed after demonetisation, following which government introduced new Rs 500 notes. (Photo: Reuters)

This translates to just 0.7 per cent of the total demonetised currency, which is even less than the total cost of the demonetisation exercise. The RBI spent close to Rs 13,000 crore to print new notes that replaced the old Rs 500 and Rs 1,000 notes.

In-depth: Demonetisation: What India gained, and lost

The central bank's report also showed that there was, in fact, a jump in total banknotes in circulation by early-2018.

When demonetisation was announced, the total circulation of banknotes in the system was Rs 17.97 lakh crore. By March 2018, total cash circulation in India's banking system jumped to Rs 19.38 lakh crore-almost 10 per cent more than pre-demonetisation levels.

This proves that demonetisation failed its primary goal of flushing out black money and counterfeit notes.

What it did achieve or aide, however, was a higher unemployment rate due to increased job cuts and a systemic deceleration of India's impressive growth rate at the time.

A 2019 research paper by Gabriel Chodorow-Reich of Harvard and Gita Gopinath of the International Monetary Fund (IMF) says that demonetisation came as a severe shock to businesses and led to huge job losses.

The study said demonetisation also played a major role in the internal demand slowdown India is currently facing.

Titled "Cash and the Economy: Evidence from India's Demonetisation", the study says demonetisation lowered India's economic growth and led to a 2-3 per cent reduction in jobs in the quarter of note ban.

It also showed that India's economic activity declined by 2.2 per cent in November and December 2016.

A report by the Centre for Monitoring Indian Economy (CMIE) showed that 1.5 million jobs were lost during the first four months of 2017. These estimates are based on consecutive Waves of CMIE's Consumer Pyramids Household Surveys (CPHS).

"About 1.5 million jobs were lost during January-April 2017. The estimated total employment during the period was 405 million compared to 406.5 million during the preceding four months, September-December 2017," it said.

Lakhs of daily wage labourers from the unorganised sector lost their livelihood after demonetisation. (Photo: Reuters)

A 'State of Working India 2019' report by Azim Premji University's Centre for Sustainable Employment showed that almost 50 lakh people had lost their jobs after the Modi government announced demonetisation in 2016.

India's GDP growth started slowing down in the fourth quarter of 2016-17 as it fell to 6.1 per cent from seven per cent in the previous quarter. It was even higher at 7.3 per cent in the quarter before demonetisation.

While the economy slightly recovered in 2017-18, it could not cope with the losses incurred after demonetisation.

Lower productivity due to job losses and lack of liquidity broke the cash-based economic model in India-something which crippled the unorganised sector.

Though demonetisation helped in achieving higher tax revenue, the combined losses incurred after the move have left a deep scar on the Indian economy.

Like Manmohan Singh, the man behind India's economic liberalisation, said, "Demonetisation was organised loot and legalised plunder."

DEMO HANGOVER

Three years have passed since demonetisation was announced on this day. India is now battling to resolve a deep economic crisis, part of which was aided by demonetisation, according to top economists.

Former RBI governor Raghuram Rajan has said it too often. In 2018, Rajan said, "The two successive shocks of demonetisation and the GST had a serious impact on growth in India. Growth has fallen off interestingly at a time when growth in the global economy has been peaking up."

"What happened in 2017 is that even as the world picked up, India went down. That reflects the fact that these blows (demonetisation and GST) have really really been hard blows...Because of these headwinds we have been held back," he added.

Former RBI governor Raghuram Rajan had expressed concern about deomnetisation on many occasions.

Abhijeet Banerjee, the Indian-American economist who won the Nobel Prize for Economics recently, also warned the government about demonetisation.

Must Read: Nobel laureate Abhijeet Banerjee's recipe to revive growth

As India steps into 2020 in a month, the current economic indicators do not look good for the country.

Unemployment rate is rising, India's GDP growth has contracted to 5 per cent and is likely to slow down further in the July-September quarter, core sectors have registered negative growth and even tax collections are down. The list goes on.

The growing chorus questioning demonetisation may have faded with concerns like liquidity crunch, failing PSU companies and slowing demand emerging as top issues. The government, too, has mellowed down on demonetisation stand, evident from the fact that hardly any leader from the ruling party mentions it during public addresses.

From the magazine: Need to Spend, But Where is the Money? | Tax Shortfall

But as many experts pointed out, demonetisation coupled with faulty GST implementation played as a catalyst in slowing India's growth, open up doors to a host of fresh economic hazards.

It may be a coincidence that Moody's Investors Services cut India's growth outlook to negative exactly on the third year anniversary of demonetisation, but social media has pounced on the opportunity to slam the governmentfor its note bandi move three years ago.

Though the government rejected Moody's stand on India's economic outlook, it should learn from its past economic adventures (read: misadventures) and work on crisp reforms that address single issues, unlike demonetisation which became a pitch of shifting goalposts.

 

[d00od00o]

Rupee Slips Below 72-mark Against USD Amid Ongoing Economic Crisis
The Indian currency was trading 57 paise lower at 72.04 against the US dollar at 1548 hours.
Mumbai: The Indian rupee dropped below the 72-level against the US dollar in intra-day trade on Wednesday amid growing concerns over the country’s poor economic indicators.

The Indian currency was trading 57 paise lower at 72.04 against the US dollar at 1548 hours.

On Monday, the local unit had closed at 71.47 against the US dollar. Forex market was closed on Tuesday for “Guru Nanak Jayanti”.

Forex traders attribute the weakness in the forex market to weak factory output numbers and weak global cues.

Showing signs of sluggishness in the economy, industrial production shrank by 4.3 per cent in September, registering the weakest performance in seven years due to output decline in manufacturing, mining and electricity sectors, as per official data released on Monday.

According to the Central Statistics Office data, 4.3 per cent contraction is the lowest in 2011-12 series of Index of Industrial Production (IIP), which was unveiled in May 2017. The IIP had declined by 0.7 per cent in April, 2012.

Factory output, measured in terms of IIP, had expanded by 4.6 per cent in September 2018.

On the global front, investors remained concerned over uncertainty in US-China trade deal.

For breaking news and live news updates, like us on Facebook or follow us on Twitter and Instagram. Read more on Latest News on India.com.

Published Date: November 13, 2019 4:32 PM IST

 

[d00od00o]

How the collapse of Punjab and Maharashtra Cooperative Bank left thousands in distress
The virtual collapse of Punjab and Maharashtra Cooperative Bank following grave financial irregularities has left thousands of depositors in distress. Gautam S. Mengle reports on the crisis and the ongoing fight for justice
Gautam S. Mengle
It was late September when Andrew Lobo, 71, was brought home from a hospital in Mumbai after undergoing treatment for lung infection. Andrew had no reason to be relieved, however. He had come home to the devastating news that Punjab and Maharashtra Cooperative (PMC) Bank, where he had an account, had been placed under ‘directions’ of the Reserve Bank of India (RBI) for six months, after irregularities had been found in lending. This meant that the RBI was practically taking over the bank’s operations. Crucially, it meant that customers like Andrew could withdraw only up to ₹1,000 of the total balance in any account they had in the bank.

The infection had already weakened Andrew’s lungs; he needed oxygen machines to breathe. While his family had managed to pay for his treatment, they had been relying on four fixed deposits in PMC Bank to buy the oxygen machines needed to pull him through. Each of the machines cost ₹49,000. With no access to the fixed deposits, Andrew could not recuperate. On October 31, he became the seventh account holder of PMC Bank to lose his life.

“He had no children of his own. All of us — the children and grandchildren of his siblings — were his family,” said Chris Lobo, Andrew’s nephew. “It was hard to see him suffer. He was a strong and independent person. Just as we were talking about withdrawing the fixed deposits he had in PMC Bank, we saw the news that restrictions had been placed on the bank’s transactions. We had no other money to pay for the oxygen machines, because not just Andrew uncle, but even my father and all of our close friends had accounts in PMC,” he said.


The family said stress had caused Andrew’s health to deteriorate further. He couldn’t believe that he had no access to his own money. He refused to eat. Andrew’s family could only watch helplessly as he began wasting away in front of their eyes. “On October 31, all of a sudden, he started breathing heavily. Within five minutes he was gone. He had suffered a cardiac arrest,” Chris said.

Andrew was among the hundreds of depositors with PMC Bank who suddenly found themselves financially crippled, for no fault of theirs. Ironically, the same bank that customers had trusted to safeguard their money had become responsible for their misery.

Questionable dealings
PMC Bank is a multi-State scheduled urban cooperative bank with operations in Maharashtra, Delhi, Karnataka, Goa, Gujarat, Andhra Pradesh, and Madhya Pradesh. Started in 1984 as a single branch bank, it now has 137 branches.

It is alleged that PMC Bank had been hiding bad loans for a long time. Addressing a press conference soon after the RBI barred the bank from carrying out its routine transactions, the suspended Managing Director of PMC Bank, Joy Thomas, admitted that ₹2,500 crore of exposure to the Housing Development and Infrastructure Limited (HDIL) group had been left unnoticed in the annual audit of RBI. Thomas was arrested days after the press conference.

But how did the fraud come to the surface? The RBI said a complaint had been filed by PMC Bank against its officials and borrowers associated with the financial irregularities in the bank and manipulation of its books of accounts. Based on this, the Economic Offences Wing (EOW) of the Mumbai Police registered an FIR against officials of the bank as well as the HDIL group. Shortly thereafter, the Enforcement Directorate, too, registered a separate offence under the Prevention of Money Laundering Act, 2002.

The directions imposed by the RBI in September, under sub-section (1) of Section 35A of the Banking Regulation Act of 1949, also barred the bank from extending any new loans or making any investments, except in government securities. The bank was allowed to pay salaries to the staff and also rent, as well as renew term deposits of customers on maturity.

The restrictions triggered a huge public outcry as customers were unable to withdraw their savings. This prompted the RBI to gradually increase the withdrawal limits. On September 26, the deposit withdrawal limit was increased to ₹10,000, and on October 3, to ₹25,000. On October 14, the limit was raised to ₹40,000, and on November 5, further to ₹50,000. With withdrawal limits raised to ₹50,000, 78% of the depositors of the bank can now withdraw their entire account balance.


The move by RBI came as a surprise at first because PMC Bank’s financials were not in a bad shape. The bank has made a net profit of ₹99.69 crore in 2018-19 as compared to ₹100.90 crore in the previous year. The net non-performing asset ratio of the bank was 2.19% as of end-March 2019, which is much lower than many public sector banks. The deposit base of the bank was ₹11,617 crore as of end-March 2019, a growth of 17% a year, while advances growth was 13% to ₹8,383 crore. The police, too, has confirmed that the bank’s finances were not in troubled waters.

“Inquiries have revealed that there was a systematic effort to hide the loans advanced to HDIL in the bank’s annual audit. Crucial information about the borrowings of HDIL was kept suppressed, and falsified records were furnished to the RBI, with the Chairman, MD, and members of the loan committee all being involved. More people opened accounts with the bank as a rosy picture was projected. According to our investigations, HDIL’s accounts should have been declared as non-performing assets in 2013 itself,” an EOW officer, who is part of the investigation, said.

According to the EOW’s estimate based on the documents examined so far, the outstanding debt of HDIL stands at ₹4,635.62 crore as of August 2019.

Seizing assets
The EOW found 21,049 accounts that were in the name of fictitious parties, which had been used to replace the 44 actual accounts of the HDIL group in the bank’s records. The amount advanced to the HDIL group was spread out evenly in the fictitious accounts. This was why the outstanding balance on paper was significantly lower than the actual balance.

As with any economic offence where a large number of people have lost — or stand to lose — their money, one of the top priorities of the police was to try and ensure that the depositors were compensated.

From September 30, when the FIR was filed, to date, the EOW and the Enforcement Directorate have collectively attached assets belonging to Rakesh Kumar Wadhawan and his son Sarang Wadhawan, promoters of the HDIL group, worth ₹3,800 crore. The EOW has also filed an application in the court, seeking permission to release the assets, so that they can be auctioned off and the depositors compensated. The assets include large tracts of land in Thane district, high-end cars, speed boats, and a private aircraft. The auction is supposed to begin within 14 days of the assets being released, with the RBI overseeing the process of using the proceeds of the auction to reimburse the depositors.


The RBI has appointed an administrator along with the three-member advisory committee for speedier resolution. It was on the administrator’s recommendation that the plea seeking discharge of the assets was filed. The Wadhawans, through their lawyer, have already conveyed to the Enforcement Directorate, the EOW and the RBI that they have no objections to their assets being sold off to compensate the customers. “We urge the Enforcement Directorate and the EOW to take timely action by disposing of the assets to get the fair market value for the same. We further give our unconditional consent for the appropriation of the money received from the sale of these assets to be adjusted and appropriated towards the principal loan amount procured by us,” a letter signed by them on October 16, 2019, stated.

The customers, however, are not convinced. “What is the guarantee that someone will even buy the tainted assets?” Kishore Modsingh, a customer who banked with the PMC’s Santacruz branch, said. Modsingh is a cancer survivor who has been unemployed for the last two years due to his illness and was completely dependant on the money he had saved. His wife is a home-maker and his daughter, a student.

“All I had was the money I had deposited in PMC Bank. All my treatment was being funded by it, and my household expenses taken care of. Then, suddenly, the RBI placed restrictions on it and I am left with nothing. Every day is a struggle. Those responsible for our condition are getting home-cooked food with the court’s permission while in jail, and we are fighting for two square meals,” Modsingh said.

Eleven account holders with various branches of the bank have lost their lives due to various medical problems since the crisis broke. Apart from pacifying the depositors, whose anger mounted with every life lost, the police also had its hands full trying to dispel the rumours surrounding the issue.


One such instance was on October 11, when Nivedita Bijlani, who had over ₹1 crore in the bank, committed suicide in her Andheri residence. Thanks to WhatsApp, the news of her death went viral within an hour. The police found themselves besieged with phone calls, and senior police officers quickly passed down orders instructing the Versova police to get to the bottom of the matter. By evening, the police found that while she was indeed a PMC bank account holder, there was no evidence of her death being linked to the ongoing crisis.

“The deceased had been suffering from depression and was under treatment for the same. She had had two failed marriages and had recently moved back from the U.S. to stay with her father in Andheri after her second marriage,” Additional Commissioner of Police (West region) Manoj Kumar Sharma said.

Meanwhile, the EOW arrested Sarang and Rakesh Wadhawan; former chairman of PMC Bank, Waryam Singh; former PMC Bank Managing Director, Joy Thomas; and Director Surjit Singh Arora in connection with the case. All of them are in judicial custody and are lodged in the Arthur Road central jail.

With the process of compensating the depositors under way and some of the key accused under arrest, the next task for the EOW was to pinpoint culpability on the part of all the parties involved, including the auditors who conducted the audits.

Auditors face the music
The EOW identified two auditors, Jayesh Sanghani of Ashok Jayesh and Associates, and Ketan Lakdawala of Lakdawala and Co. Both were brought in for questioning on November 11 and grilled for hours. They were confronted with the financial records of the bank. The results of the sustained questioning yielded evidence of not only wilful negligence but also signs of a larger conspiracy.

The EOW first asked both of them to explain how the gross irregularities in HDIL’s loans alone had managed to slip through their scrutiny year after year. When they could not provide satisfactory explanations, they were placed under arrest.


“We also found that the two auditors had been appointed by Thomas and Singh on specific instructions from the Wadhawans. This is not only a contravention of the Multi-State Co-operative Societies Act, but also indicates that the whole fraud was planned well in advance by the Wadhawans and the PMC Bank officials. Both of them have been functioning as auditors of the bank for more than two decades,” the EOW officer said.

The EOW’s application seeking custody of Sanghani and Lakdawala also mentions that the agency has received information about both the auditors having had other business dealings with the Wadhawans in the past. The EOW is now trying to find evidence, either in the form of documents or testimony, to establish this beyond doubt. Both the auditors are also facing a separate inquiry by the Institute of Chartered Accountants. A third auditor, Anita Kirdat, was arrested on November 13. She was a concurrent auditor and used to conduct monthly audits.

Meanwhile, the other directors have all gone underground. An EOW team is at present in Punjab, working on a tip-off that two of the directors, Daljit Singh Bal and Gurnam Singh Hothi, might be hiding there. Bal, like Arora, was a director of the bank and on the loans committee till the time its affairs were taken over by the RBI.

Two other directors, Parmeet Sodhi and Surjit Singh Narang, filed anticipatory bail applications, which were rejected by the Sessions Court on November 11.

Protests across the city
The PMC Bank crisis has sparked off protests across Mumbai. On November 6, a group of protesters stood outside the RBI building in the Bandra Kurla Complex for hours till an official came out to talk to them.

“All that we were told was that everything is being done to ensure justice. But no one is telling us exactly how that justice is going to come. The Finance Minister has already passed the buck, saying that the matter comes under the RBI’s purview, while the RBI won’t even entertain us,” Modsingh said.


The depositors have also been staging protests outside the court every time an accused is produced for remand or other purposes. Around 150 depositors have now hired their own lawyers to oppose any applications for bail that the accused file.

“The crisis is a case of gross negligence not just by the bank but by the RBI. Those concerned should also be booked and arrested. The Indian banking system will not improve unless such strict steps are taken, and account holders will continue to suffer. What happened amounts to criminal negligence,” advocate Nitin Satpute, who is representing the depositors, said. Satpute filed independent applications on November 6 opposing the anticipatory bail pleas submitted by Sodhi and Narang.

Earlier, on September 30, another group of depositors, filed petitions before the Bombay High Court seeking withdrawal of the restrictions on the bank’s transactions. The court has sought a formal reply from the RBI regarding the steps taken so far to protect the interests of the depositors.

“You are the banker’s bank. We are not inclined to interfere or dilute your authority. We just want to know what you are doing,” Justice S. Dharmadhikari, who was hearing the petition along with Justice Riyaz Chagla, told the RBI’s lawyer at a hearing on November 4.

The grievance against the RBI has also been voiced repeatedly by depositors in several meetings that Mumbai Police Commissioner Sanjay Barve had with them at the Mumbai Police headquarters in Crawford Market. The meetings were held to apprise the depositors of the progress in the case and more than one of them lamented that there has been no coherent response from the RBI so far.


Barve, who also has a banking background, confirmed that the whole crisis arose from a criminal breach of trust on part of the bank, an institution that is supposed to safeguard the interests of the depositors but did exactly the opposite.

Not all the depositors, however, have much faith in protests.

“I attended a protest a month ago but only saw political leaders taking the opportunity to further their own agendas. I have seen enough protests happening over the issue to know that they are bringing no results. The system will take its own time and maybe, someday, we can have full access to our own money again,” Chris Lobo said.

Chris and his friends, who had accounts in the PMC, have now taken it upon themselves to keep the issue alive and ensure that no development goes unnoticed. All the account holders in Thane and nearby towns are now connected via WhatsApp groups where all updates are regularly shared. With the establishment showing scant regard for their problems, all they can do is to stand with each other.

(With inputs from Manojit Saha)

 

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India’s Politics and Economics Reflect a Simmering Crisis of Confidence and Mistrust
From RCEP to the real estate bailout, and Maharashtra to Ayodhya, how does mistrust in the political system affect our economic trajectory?
The last few weeks have caused a few ripples in India’s political and economic landscape, reflecting the various shades of problems that our governance system is currently facing.

From the economic point of view, the government, acknowledging a state of crisis, announced yet another set of sector-specific measures. This time it was a Rs 10,000 crore relief package in the form of a ‘special window fund’ to revive India’s real estate industry, one of the worst affected sectors by the current slowdown.

There is little doubt that the real estate sector, which was once responsible for creating a massive number of jobs, is now witnessing an enduring liquidity-crunch. Some of this is likely due to the shock delivered by demonetisation. Nevertheless, the liquidity crunch has seriously impacted job creation in the construction sector, especially in the segments of residential and affordable housing.

The real estate’s poor performance over the past few years has also added to the deteriorating asset quality of India’s NBFCs, which has exacerbated the NPA problem. At the same time, due to a fall in demand for mid-income and affordable housing, credit demand for loans by property investors also dropped, resulting in a twin balance sheet problem for the banks.

A worsening bank crisis, evident in the collapse of IL&FS and PMC, has to some extent sparked fear amongst people who occupy the low and middle-income categories. This, in turn, brings down deposit holdings and limits the banking system’s credit creation powers.

With banks affected by a crisis of confidence, a problem that will involve some recovery time, it remains unclear how effective a supply-side measure like a special window fund can do to revive the real estate sector completely on its own. Especially considering this special measure is, by one estimate, likely to help less than 10% of the country’s stalled real estate projects. A wholesome, full-time solution requires a more constant credit-channel from India’s banks.

On the political side, in Maharashtra, we are seeing the Shiv Sena-BJP pre-poll alliance in almost on the verge of collapse. While the former was exploring an alternative political combination i.e. with NCP and Congress, to form a state government, president’s rule was imposed in the state. In Haryana too, the BJP’s vote share, to its own surprise, significantly declined due to the lacklustre economic conditions – massive job loss and agrarian distress – in the state.

Police stand at a PMC bank branch in Mumbai. Photo: The Wire

The Ayodhya judgment

Amidst all these scenarios came the long overdue Ayodhya judgment by the Supreme Court which settled the 2.77 acre disputed land title case in favor of Ram Lalla and the Hindus to construct a temple there, while granting Muslims a 5 acre land allocated by the UP government for a mosque to be constructed elsewhere.

The judgment, even though decided and announced by India’s Supreme Court, needs to be viewed as a major ‘political event’ that is principally aligned with the current ruling party’s vision to have a Ram temple constructed in Ayodhya at all costs. For Hindu fundamentalists, the judgment brings an actualisation of a major historical struggle for establishing religious precedence. It is hard not to see this in the larger context of the apex court announcing this at a time when its own credibility remains in serious doubt (we still haven’t had one hearing on the constitutionality of the Indian government’s action in Kashmir).

Also Read: Maharashtra Slips into President’s Rule Even with Hours Left of NCP’s ‘Deadline’

For now, in terms of its outlined manifesto goals, the BJP has so far emerged successful in achieving two of its three vital national objectives: the dilution of Article 370; having a Ram temple constructed at the disputed site in Ayodhya, with the third goal now, of creating a Uniform Civil Code (UCC), left to fulfil.

In the international scenario, India’s trade negotiations cohort (led by the prime minister himself), in an eleventh-hour decision, pulled out of joining the Regional and Comprehensive Economic Partnership (RCEP), citing its discontent with the nature of underlying trade agreement that failed to accommodate India’s principal concerns. This move was observed as a surprise by many commentators, considering how the minister of commerce and other members of the trade negotiators expressed a strong desire for India to be part of the plurilateral trade forum in the months leading up to the official meet in Bangkok.

New Zealand’s PM Jacinda Ardern, Narendra Modi, Chinese Premier Li Keqiang and Thai PM Prayuth Chan-Ocha shake hands at the 3rd RCEP summit. Photo: Reuters/Athit Perawongmetha

A common underlying link

But, what seems to be a common underlying link emerging across some of these political and economic events in India’s recent past?

On a certain level, as Pratap Bhanu Mehta pointed recently, despite “the pantomime optimism” that the government and the media are trying to display, it is gradually “becoming impossible to disguise the sense of gloom surrounding the Indian economy”. The growth numbers and estimates at this point reflect exercises of statistical-fudging that mislead facts and fail to represent or forecast an authentic picture for India’s growth trajectory.

The connecting link, on a deeper level, points towards the fact that we are at a crossroads as with regard to the Indian government’s ability to lead the nation towards a progressive economic future. The political economic landscape, especially in the last five to six years has institutionalised this crisis of ‘confidence’ where institutional credibility remains seriously doubted, whether of the RBI or the Supreme Court, as each action seems aligned with the propagandist agenda of the state or guided entirely by political goals rather than democratic or market principles.

A state election (like in Maharashtra) happens with two parties clearly declaring a pre-poll alliance but then parting ways right after the election. This event, of course, isn’t new in the history of Indian politics. Parties do break up after an election cycle. However, a culture of political inconsistency combined with normalisation of eroding voter-faith is almost becoming a norm, which will have serious impediments on how people vote (or don’t vote) in elections down the road.

On a larger international plank too, India’s own position and foreign image, as Ram Guha recently argued, has significantly been damaged post-New Delhi’s act to downgrade Jammu and Kashmir’s status into two Union Territories and read down Article 370. This damage can be assessed in terms of India’s weakening democratic credentials – a point echoed across US Congressional meetings, its presidential election announcements and in the foreign press.

The last-minute decision to pull out of the RCEP too doesn’t augur well with India’s diplomatic and economic policy push towards an Act East outlook. And, without a suitable alternative, this decision warrants a closer assessment in terms of India’s weakening trade competitiveness levels and diplomatic ability to negotiate agreements based on mutually beneficial market principles (after all this trade negotiation process was on for almost six years).

A crisis of confidence

In the context of the domestic economy too, a crisis of confidence is clear by observing levels of business and investor confidence. In fact, a recent data point indicates how there has been an increase in outward foreign direct investment levels from the private sector at a time when domestic demand remains dismally low along with the consumption demand. A higher outward FDI level in a weak domestic demand scenario simply indicates that the private sector players trust their investment abroad more than they do within India.

There is substantial economic evidence that argues how an atmosphere of systemic mistrust combined with a lack of confidence can adversely impact an economy’s growth rates by negatively impacting investment levels and business cycles. The logic is simple, as echoed by the Nobel Laureate Robert Shiller, who argues: “An atmosphere generated by a steady flow and variety of lies is like a dark cloud over the facts. Businesses can’t plan effectively when they don’t know who or what can be trusted.”

Also Read: #RightSideUp: Ayodhya, Judgment Day

Mistrust in political functioning or leadership isn’t only affecting India but even countries like the US. In a recent article for the New York Times, Shiller explains how conditions of a persistent threat to American press amalgamated with the political dangers surfacing from a culture of lying under President Donald Trump, who feels free to attack all press against him as “fake news”.

In India’s political landscape, a deep social polarisation on political action or events is a mirror reflection of this phenomenon. Being on the receiving side on this, I have personally observed a clear pattern of this, emerging from the “anti-national” labelling of anyone with contrarian views or opinions to state-policy. This was even more explicit with all the chatter created right after New Delhi’s action on Kashmir. Some of the reactions on social media platform presented deeply troubling and resentful views not only against the Kashmiris but against anyone who advocated for the rights of Kashmiris.

BJP workers celebrate the government’s decision to revoke Article 370, in Amritsar, August 5, 2019. Photo: PTI

Entrenched mistrust

Mistrust is further entrenched in society (and normalised) when the leadership promotes it. An illustration would be to recollect the demonetisation speech by the PM in November of 2016, and how right after, in another speech he passionately remarked: “I have asked the country for just 50 days. If after December 30, there are shortcomings in my work or there are mistakes or a bad intention found in my work, I will be prepared for the punishment that the country decides for me.” With the shock-move clearly failing and choking India’s growth engine, there hasn’t been any apology or official word on this since then.

At the same time, a form of violent verbal attitude – shaped by a rhetorical axis of ‘for or against’, ‘us vs them’ – is seen dividing a citizenry on key social, economic and political issues that have ramifications for the nation as a whole. And this has serious consequences for India’s own future and its credentials as a large democratic, market economy. It was ‘trust’ in these very credentials which provided greater clarity and consistency to business communities – within and outside India, to invest in India’s market (as do so in a severely authoritarian regime like China).

Watch | The Wire Business Report | India’s Job Crisis: Behind the Numbers with Mahesh Vyas

Trust and confidence are factors that are extremely difficult to measure or quantify. They have a social multiplier effect that drives an entire citizenry to work towards collective progress or regress. One needs to closely study and understand this effect: how a rise in mistrust or lack of confidence levels which is multiplying as a social phenomenon across countries like India, the US (to name a few) is affecting the citizenry at large?

There are deeper questions involved here about the political and economic psyche of an average citizen and how vulnerable she can be made when a strong state, as a matter of policy or law, pursues a polarising political agenda.

At the same time, from purely an economic lens, a fragile confidence in a political system will cause economic growth to fall. This is something that we perhaps are already seeing in India.

Deepanshu Mohan is Associate Professor of Economics at O.P. Jindal Global University. He is a Visiting Professor to the Department of Economics at Carleton University (Ottawa).