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Economic Outlook and Policy Challenges

This years Economic survey suggests that shifts in Changes in the tax treaties with Mauritius
the underlying vision will be needed to overcome the and Cyprus,
major challenges ahead, thereby accelerating
growth, expanding employment opportunities, And the Income Disclosure Scheme.
and achieving social justice.
Demonetisation was also aimed at signalling a
This year has been marked by several historic regime change, emphasizing the governments
economic policy developments. determination to penalize illicit activities and the
associated wealth.
Goods and services tax (GST)
The public debate on demonetisation has raised
Demonetisation. three questions.

BrExit and the US elections. First, broader aspects of management, as

reflected in the design and implementation of
Demonetisation the initiative.
A radical governance-cum-social engineering
Second, its economic impact in the short and
measure was enacted on November 8, 2016.
long run.
The aim of the action was fourfold:
And, third, its implications for the broader
To curb corruption, vision underlying the future conduct of
economic policy.
To curb counterfeiting,
Chapter 3 addresses in detail the second question.
To curb the use of high denomination notes The broad conclusion is that demonetisation will
for terrorist activities create short-term costs and provide the basis for
long run benefits.
And to curb the accumulation of black
money, generated by income that has not Short-term costs
been declared to the tax authorities.
Inconvenience and hardship, especially those
Other Actions taken in the informal and cash-intensive sectors of
the economy who have lost income and
The action followed a series of earlier efforts to curb employment.
such illicit activities, including:-
However Survey notes that these costs are
The creation of the Special Investigation
transitory, and may be minimised in
Team (SIT) in the 2014 budget,
recorded GDP because the national income
The Black Money Act, 2015; accounts estimate informal activity on the
basis of formal sector indicators, which have
The Benami Transactions Act of 2016; not suffered to the same extent.

The information exchange agreement with Long-term benefits

in terms of reduced corruption,

greater digitalization of the economy,

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increased flows of financial savings, and (Jan Dhan-Aadhar-Mobile), as quantified in
last years Survey.
Greater formalization of the economy, all of
which could eventually lead to higher GDP Beyond these headline reforms were other
growth, better tax compliance and greater less-heralded but nonetheless important
tax revenues. actions.

These magnitudes will depend importantly on how The government enacted a package of
policy responds to the current situation. The needed measures to assist the clothing sector that
actions include- by virtue of being export-oriented and
labour- intensive could provide a boost to
remonetizing the economy expeditiously by employment, especially female
supplying as much cash as necessary, employment.
especially in lower denomination notes;
The National Payments Corporation of India
complementing demonetisation with more (NPCI) successfully finalized the Unified
incentive-compatible actions such as Payments Interface (UPI) platform. By
bringing land and real estate into the GST, facilitating inter-operability it will unleash
reducing taxes and stamp duties, and the power of mobile phones in achieving
digitalization of payments and financial
Ensuring that the follow-up to
inclusion, and making the M an integral
demonetisation does not lead to over-
part of the government's flagship JAM-Jan
zealous tax administration.
Dhan, Aadhaar, Mobile-- initiative.
The third question on the broader vision will
Further FDI reform measures were
also be critical to shaping the medium term
implemented, allowing India to become one
trajectory of the economy.
of the worlds largest recipients of foreign
Here the government has taken important steps over direct investment.
the past year.
Yet there is a gap between this reality of macro-
the transformational GST bill, which will economic stability and rapid growth, on the one
create a common Indian market, improve hand, and the perception of the ratings agencies on
tax compliance, boost investment and the other.
growth and improve governance; the GST
Are Credit Rating agencies reliable?
is also a bold new experiment in the
governance of cooperative federalism. In In recent years, the role of ratings agencies
addition, the government: has increasingly come into question.

Overhauled the bankruptcy laws so that the In the US financial crisis, questions were
exit problem that pervades the Indian raised about their role in certifying as AAA
economy--with deleterious consequences bundles of mortgage-backed securities that
highlighted in last years Survey--can be had toxic underlying.
addressed effectively and expeditiously;
Similarly, their value has been questioned
Codified the institutional arrangements on in light of their failure to provide warnings
monetary policy with the Reserve Bank of in advance of financial crisesoften ratings
India (RBI), to consolidate the gains from downgrades have occurred post facto.
macroeconomic stability by ensuring that
inflation control will be less susceptible to In the case of India, Standard & Poors in November
the whims of individuals and the caprice of 2016 ruled out the scope for a ratings upgrade on
the grounds of its low per capita GDP and relatively
governments; and
high fiscal deficit.
Solidified the legal basis for Aadhar, to
realise the long-term gains from the JAM

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The actual methodology to arrive at this rating was In contrast, Indias ratings have
clearly more complex, but are these variables the remained stuck at the much lower level
right key for assessing Indias risk of default? of BBB-, despite the countrys dramatic
improvement in growth and macro-
1. Consider first per capita GDP. It is a very
economic stability since 2014.
slow moving variable. Lower middle income
countries experienced an average growth of
2.45 percent of GDP per capita (constant
2010 dollars) between 1970 and 2015. At Structural Challenges in Indian Economy
this rate, the poorest of the lower middle
Chapter 9 discusses Indias extensive
income countries would take about 57 years
efforts at redistribution. The central
to reach upper middle income status.
government alone runs about 950 central
2. Consider next fiscal variables. The sector and centrally sponsored schemes and
practice of ratings agencies is to combine a sub-schemes which cost about 5 percent of
group of countries and then assess GDP with intrinsic limitations in terms of the
comparatively their fiscal outcomes. So, effectiveness of targeting.
India is deemed an outlier because its
Even on the GST, concerns about ensuring
general government fiscal deficit ratio of 6.6
low tax rates for essentials, risks creating
percent (2014) and debt of 67.1 percent are
an unduly complicated structure with
out of line with its emerging market peers.
multiple and excessively high peak rates,
But India could be very different from the thereby foregoing large services efficiency
comparators used by the ratings agencies. gains

Many emerging markets are struggling. On state capacity, delivery of essential

But India has a strong growth trajectory, services such as health and education,
which coupled with its commitment to which are predominantly the preserve of
fiscal discipline state governments, remains impaired.

Even if this scenario does not materialise, The competitive federalism has been a
India might still be able to carry much powerful agent of change in relation to
more debt than other countries because attracting investment and talent, it has
it has an exceptionally high willingness been less in evidence in relation to essential
to pay, as demonstrated by its history of service delivery like on health and
not defaulting on its obligations education there are insufficient instances of
good models that can travel widely within
India also compares favourably to other India and that are seen as attractive
countries on other metrics known to be political opportunities. Competitive populism
closely related to the risk of default. needs a counterpart in competitive service
Consider the contrast with China. In delivery.
2009, China launched an historic credit
expansion, which has so far seen the Political dynamic is still in ambivalence
credit-GDP ratio rise by an toward the private sector and property. This
unprecedented about 63 percentage ambivalence is manifested in:
points of GDP, much larger than the
stock of Indias credit-GDP o the difficulties in advancing
strategic disinvestment;
In December 2010, it increased Chinas
rating from A+ to AA- and it has never o the persistence of the twin balance
adjusted it since, at the same time, sheet problemover-indebtedness
Chinese growth has slowed from over 10 in the corporate and banking
percent to 6.5 percent. sectorswhich requires difficult
decisions about burden-sharing and

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perhaps even forgiving some facilitating public investment, this year that
burden on the private sector; important source of short-term dynamism
may be taken away as international oil
o The legacy issues of retroactive prices are now on the rise.
taxation, which remain mired in
litigation even though the The implied change in expectations of US
government has made clear its fiscal and monetary policy will impact on
intentions for the future; Indias capital flows and exchange rates.

o Agriculture, where the protection of The medium-term political outlook for

intellectual property rights, for globalization and in particular for the
example in seeds, remains a worlds political carrying capacity for
challenge; globalization looks weak. This changed
outlook will affect Indias export and growth
o Reform in the civil aviation sector, prospects.
where despite decades of failure
Developments in the US, especially the rise
there are still dreams of making a
of the dollar, will have implications for
world class airline by the
Chinas currency and currency policy. If
China is able to successfully re-balance its
economy, the spill over effects on India and
o In the fertilizer sector, where it is
the rest of the world will be positive. On,
proving easier to rehabilitate
the other hand, further declines in the
unviable plants in the public sector
Yuan, even if dollar-induced, could interact
rather than facilitate the exit of
with underlying vulnerabilities to create
egregiously inefficient ones;
disruptions in China that could have
frequent recourse to stock limits
negative spill overs for India.
and controls on trade in agriculture,
which draws upon the antiquated
Economic Outlook: The numbers that matter
Essential Commodities Act, and
creates uncertainty for farmers. Real GDP growth in the first half of the
year was 7.2% and the economy was
In each of these examples, there may be valid buoyed by government consumption as the
reasons for the status quo but overall they indicate 7th pay salary recommendations were
that the embrace of markets even in the modest implemented.
sense of avoiding intrusive intervention, protecting
property rights, disposing of unviable public sector Sector-wise, Agriculture showed
assets and exiting from areas of comparative non- improvement due to good monsoon.
advantage, and allowing economic agents to face
market pricesremains a work-in- progress. Retail inflation measured by CPI stood
at 3.4% for December 2016. There was fall
Global Challenges
in agricultural prices, especially of pulses
The impact of BrExit and the US elections due too bountiful monsoons and in part5
risk unleashing paradigmatic shifts in the due to demonetization.
direction of isolationism and nativism.
WPI was dangerously low in August 2015 at
Given that Indias growth ambitions of 8-10 -5.1%, bounced to 3.4% at the end of Dec
percent require export growth of about 15- 2016
20 percent, any serious retreat from
openness on the part of Indias trading CPI outlook for the whole year to be below
partners would jeopardize those ambitions. the RBIs target of 5%.

The decline in oil had imparted dynamism The GDP growth in 2016-17 will dip to 6.5%
by increasing private consumption and down from 7.6% in 2015-16.

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Economic growth to rebound to 6.75-7.5% For the use of the fiscal windfall the PMGKY
in 2017-18. should be deployed to strengthening the
governments balance sheet rather than
Agriculture growth is expected to be at being used for government consumption,
4.1% in 2016-17 up from 1.2% in last especially in the form of programs that
fiscal. create permanent entitlements.

There will be windfall gain from In this light, the best use of the windfall
PradhanMantriGaribKalyanYojana would be to create a public sector asset
(PMGKY) and low oil prices. reconstruction company (discussed in
Chapter 4) so that the twin balance sheet
Fiscal deficit target of 3.5% of GDP will be
problem can be addressed, facilitating credit
met for this year.
and investment revival;
The state governments are struggling. Their
Or toward the compensation fund for the
consolidated deficit has increased steadily in
GST that would allow the rates to be
recent years, rising from 2.5% to 3.6% in
lowered and simplified; or toward debt
2015-16, partly because of the UDAY
reduction. The windfall should not influence
decisions about the conduct of fiscal policy
going forward.
External Sector

CAD declined to 0.3% in first half of 2016- The most important reforms to boost growth will be
17. structural.

Strategic disinvestments, tax reforms,

Foreign Exchange Reserves $360 billion can
subsidy rationalization, create a public
cover 12 months of imports comfortably.
sector asset reconstruction company.
Net FDI inflows grew 3.2% in second
Another area of reform relates to labour.
quarter of 2016-17
Given the difficulty of reforming labour laws
Trade deficit has declined by 23.5% in per se, the thrust could be to move towards
April-Dec 2016 due to contraction in affording greater choice to workers which
imports. But Software exports slowed and would foster competition amongst service
financial services declined in 2016-17. providers.

Net private remittances declined by $4.5 Choices would relate to: whether they want
billion due to oil prices decline which to make their own contribution to the
affected the inflows from the Gulf region. Employees Provident Fund Organisation
(EPFO); whether the employers
The macroeconomic policy stance for 2017-18
contribution should go to the EPFO or the
An economy recovering from demonetisation will National Pension Scheme; and whether to
need policy support. contribute to the Employee State Insurance
(ESI) or an alternative medical insurance
The banking system will benefit from a
higher level of deposits due to
demonetization. On the expenditure side, the results in Chapter 9
make clear that existing government programs suffer
Thus, market interest ratesdeposits, from poor targeting.
lending, and yields on g-secsshould be
lower in 2017-18 than 2016-17. This will One radical idea to consider is the provision
provide a boost to the economy. of a universal basic income.

Fiscal policy is another potential source of But another more modest proposal worth
policy support. embracing is procedural: a standstill on new
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government programs, a commitment to A UBI has the merit that it will not
assess every new program only if it can be necessarily be driven by take-up capability
shown to demonstrably address the from below but given from above to all the
limitations of an existing one that is similar deserving. In that sense, it is less likely to
to the proposed one; be prone to exclusion errors.

And a commitment to evaluate and phase And by directly transferring money to bank
down existing programs that are not serving accounts, and circumventing multiple
their purpose. layers of bureaucracy, the scope for out-of-
system leakages (a feature of PDS
Redistribution: Universal Basic Income (UBI) schemes) is low.
as a radical new vision
Two Risks to Indias Competitiveness
Chapter 9 discusses Indias extensive efforts at
redistribution. The central government alone runs Sharp rise in the dollar is expected with a
about 950 central sector and centrally sponsored corresponding decline in the currencies of
sub-schemes which cost about 5 percent of GDP with Indias competitors, notably China and
intrinsic limitations in terms of the effectiveness of Vietnam given Indias need for exports to
sustain a healthy growth rate, it is
Often the very districts that house the most important to track Indias competitiveness.
number of poor are the ones facing the
A second reason to review Indias
greatest shortfall in the allocation of.
competitiveness is the rise of countries
This misallocation has consequences: it such as Vietnam, Bangladesh, and the
results in exclusion of the deserving poor Philippines that compete with India across
from access to government welfare a range of manufacturing and services.
benefits, leakages to non-poor and benefits
But India has managed well to maintain export
to corrupt local actors.
competitiveness despite capital inflows and inflation
One of the key problems with many that has been greater than in trading partners.
Reflecting this, Indias global market share in
programs is that the take-up and
manufacturing exports has risen between 2010 and
effectiveness of targeting will be correlated
with a states institutional and
implementation capacity. Going forward, the policy implication is that if India
is concerned about competitiveness and the rise of
States such as Tamil Nadu and Andhra exporters in Asia, it should monitor an exchange rate
Pradesh, which do not necessarily have the index that gives more weight to the currencies of
largest number or proportion of poor avail competitors.
themselves of the program to a greater
Climate Change and India
extent than say Bihar which has many more
poor people and a higher poverty rate. This The Paris Agreement on climate change in December
is not an unusual phenomenon but almost 2015 has been one of the shining recent examples of
intrinsic to anti-poverty and social successful international cooperation. The focus will
programs. now shift to implementing the agreements.

In such cases, the risks of making There is universal agreement that a key component
exclusion errors- that is leaving out the to tackling climate change will be to price carbon.
How has India fared on this score?
really deserving and needy -- are high.
Steps taken by India to curb Carbon emission
For this and other reasons, the Survey (in Chapter 9)
argues that serious consideration be given to the Since June 2014, when international oil prices
new idea of a universal basic income as a more started declining, India has increased the petrol tax
effective way of achieving Mahatma Gandhis over 150 percent.
objectives of wiping every tear from every eye.
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In contrast, the governments of most advanced A rapid study conducted in 2016 by WASH Institute
countries have simply passed on the benefits to and Sambodhi for this Economic Survey provides
consumers, setting back the cause of curbing climate some insight.
The Disproportionate Burden on Women
As a result, India now outperforms all the countries
except those in Europe in terms of tax on petroleum Households without toilets: For the majority of
and diesel. households without toilets, the Rapid Survey
suggests some worrisome trends:
Indias reliance on fossil fuels remains well below
China (the most relevant comparator) but also below 76 percent of women had to travel a
the US, UK and Europe at comparable stages of considerable distance to use these
development. facilities.

33 percent of the women have reported

facing privacy concerns and assault while
going out in the open.
Lack of access to sanitation is widespread and well-
documented. In 2011, the Census reported that In the face of these considerable risks, the
more than half of the countrys population defecated number of women who have reduced
in the open. More recent data shows that about 60 consumption of food and water are 33
percent of rural households (Ministry of Drinking percent and 28 percent respectively of the
Water and Sanitation- 2017) sample.

There are disproportionate burden that falls on Apart from illnesses, disruptions and
women and girls due to deficiencies in sanitation deficiencies in the short -term, reduced
facilities. food and water intake also causes severe
This burden on women can take several forms: long-term debilitating impacts on health,
and impedes in cognitive development of
Threat to life and safety while going out for girls and infants.
open defecation,
Many studies (Singh et. al 2008; Curtis and
Reduction in food and water intake practices Minjas 1985) have similarly emphasized
to minimize the need to exit the home to use that women and men going out into the
toilets, open have to cope also with exposure to
natural elements, snake- bites, etc.
Polluted water leading to women and
children dying from childbirth-related Household with toilets:
In households with toilets, women report far
And a host of other impacts. greater use of these in-home facilities than
men, suggesting that there may be a greater
Womens personal hygiene is therefore important not demand amongst women.
just for better health outcomes but also for the
intrinsic value in conferring freedom that comes from Surveyors found a revealed preference for
having control over their bodies, a kind of basic right households to defecate in the open because
to physical privacy. Put differently, impeded access of a variety of factors (caste and soak pit
may well be creating gender-based sanitation latrines, especially).
women in households with toilets, 62 percent
reported use of the toilet always (only 52
Given this general lack of access, what percent men reported exclusive usage in
additional challenges do women face? such households).

Indias soon to recede Demographic dividend

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India, however, seems to be in a demographic sweet and a young India where providing
spot with its working-age population projected to education, skills, and employment
grow by a third over the same period; always opportunities must be the focus.
remembering that demography provides potential
and is not destiny. Of course, heterogeneity within India offers the
advantage of addressing some of these concerns via
Large working age populations relative to the
greater labour mobility, which would in effect reduce
overall population appear to benefit from this demographic imbalance.
greater economic dynamism.

Younger populations are more

entrepreneurial (adding to productivity
growth); tend to save more, which may also
lead to favourable competitiveness effects.

It gives a larger fiscal base because of

economic growth and because there are
fewer dependents (children and elderly) for
the economy and government to support.

Distinctive Indian Demography

Indias demographic cycle is about 10-30

years behind that of the other countries,
indicating that the next few decades
present an opportunity for India to catch up
to their per capita income levels.

India will remain close to its peak for a

much longer period than other countries.

India is the large heterogeneity among the

states in their demographic profile and
evolution. There is a clear divide between
peninsular India and the hinterland states.

The peninsular states exhibit a pattern that

is closer to China and Korea, with sharp
rises and declines in the working age

In contrast, the hinterland states will

remain relatively young and dynamic,
characterized by a rising working age
population for some time plateauing out
towards the middle of the century.

Demographically speaking, therefore, there are two

India, with different policy concerns:

a soon-to- begin-ageing India where the

elderly and their needs will require greater

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The Economic Vision for Precocious, Cleavaged India


Since 1980, we have escaped from the so called The The result of all these reforms over the past 25 years
Hindu rate of growth, and Indias growth has been a remarkable transformation of India from
performance has been robust, especially for a a largely closed and listless economy to the open and
democracy. Yet, there are serious challenges that thriving economy.
might impede further progress which result in part
from the fact that India started out as a poor Measuring Indias progress
democracy with deep social cracks. These long The countrys progress is not only qualitative. It is
standing challenges can be classified as ambivalence also measurable.
about property rights and the private sector,
deficiencies in state capacity, especially in delivering Consider, for example, four standard measures:
essential services, and inefficient redistribution.
1. Openness to trade;
The Economic Survey calls India a "precocious and
cleavaged" democracy. 2. Openness to foreign capital;

Meeting these challenges is not just a matter of 3. The extent to which public sector enterprises
overcoming vested interests; it may also require dominate commercial activities;
broader societal shifts in ideas and narratives.
4. And the share of government expenditure in
overall spending.
Indian policy can be divided into two phases.
Openness to trade (trade-to-GDP ratio)
1. Socialism for 50 years:- First came nearly
half a century of socialism, During those In general, the large countries tend to trade less
years, the public sector occupied the than small countries because the benefits of trading
with the outside world would be very low relative to
commanding heights and the government
trading within the country.
intruded into even the most micro-decisions
of private firms: their investing, producing, The opposite is true for small countries: lacking an
and trading. This framework was rejected internal market, their benefits of trading with the
after 1991. world are relatively large and hence they tend to
have higher trade-to-GDP ratios.
2. The Socialist vision replaced with something
similar to Washington Consensus: open Following are some of the facts about Indias trade
trade, open capital, and reliance on the position:-
private sector, adopted a development model India trades far more than what would be
followed by the East Asian countries. There expected for a country of Indias size.
has also been a great effort to reduce the
costs of doing business and create an Indias trade-to-GDP ratio has also been
environment friendly to investment, both rising very sharply, it doubled to 53% from
domestic and foreign. 2002-2012

The recovery from the global financial crisis

in 2008 has been fastest. So, Indias ratio is
now more than China.

Openness to Foreign capital

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Despite significant capital controls, Indias This achievement is even rarer, because
net inflows are, at par with other emerging India at independence was a very poor
economies. democracy. In fact, India was one of the
poorest nations, regardless of political
FDI is running at an annual rate of $75 system.
billion, which is not very less from that of
what China was receiving at the height of its Also central to understanding Indias
growth boom in the mid-2000s. economic vision is the fact that it has
followed a unique path way to economic
Size of the PSUs success, what might be called Precocious,
Indias PSUs were exceptionally large in the Cleavaged India.
past, but since India has allowed private
Indian society was highly divided at the time
sector entry into, amongst others, civil
of Independence, when compared to other
aviation, telecommunications, and financial
countries. India was divided on language,
services reduced the share of the public
scripts, religion, region, caste, gender and
India is now squarely in the middle of the
Thus India had both high levels of poverty, and deep
emerging market pack.
social fissures and still emerged as an economically
successful democracy at an early age, therefore the
Size of the government
India is often accused of having a bloated
Ambivalence about Property rights and private
government. But when the size of the
sector in India
government expenditure is considered with
respect to the per-capita GDP, India sits on All over the world, the basic objective of private
the regression line, indicating that it spends enterprises of maximizing profits doesnt always
as much as can be expected given its level of coincide with any nations broader social concerns,
development such as the publics sense of fairness.

But the Ambivalence in India about the private

In sum, the standard measures suggest that India is
sector and property rights has been greater than
now a normal emerging market. The pursuit of the
elsewhere right from the beginning.
standard development path has paid off in terms of
growth. Private Sector
Why is Indias growth particularly remarkable? As a promising but fractured democracy that
started out poor, India was certain to
Indias reforms started in the mid-1980s and since
then India has grown at about 4.5 percent per capita distrust the private sector. This was
for thirty seven years, which is an impressive reinforced by the prevailing intellectual air of
achievement. This achievement is particularly socialism.
remarkable because it has been achieved under a
fully democratic political system. The founding fathers of India wanted to build
the country by developing industries that
India has remained democracy continuously would make India economically independent
ever since it got independent which is rare in along with political independence. The
the post-war economic history, and private sector had failed to do this under
successes are rarely democracies. colonial rule, giving rise to doubts that if it
could do so.
The only other countries that have grown
rapidly in the period and have been In contrast, there was the example of Soviet
democratic are Italy, Japan, Israel and Union, which had transformed itself from an
Ireland. agricultural nation to an industrial
powerhouse in few decades suggesting that
rapid development was indeed possible, if
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the state would take control of the economy The Right to property was inscribed as a
and direct resources into priority areas. fundamental right in the Constitution, but was later
downgraded in the Constitution via 44th CAA in 1978,
The distrust is surviving even today, which is evident to that of a legal right. The ramifications of this
in the difficulty of privatizing public enterprises, even decision continue to be felt even to this day in issues
for firms where the economists have made strong such as retrospective taxes.
arguments that they belong to the private sector.
Even though the government has made it
There are several examples for that. clear that the it would not act retroactively
on tax and other issues, it seems politically
1. In civil aviation sector, there is still the
difficult to uphold a widely shared and
commitment to make the perennially
judicially endorsed- principle against
unprofitable public sector airline world
expropriation and retroactively because of
class. Policy reform in the sector has been
the fear of the fear of being seen as favoring
animated as much by an interventionist as
the private sector. This is true in number of
liberalizing spirit, reflected in restrictions on
case like Vodafone, Monsanto.
Where do the weaknesses lie in India?
2. In banking sector, discussion of disinvesting
the governments majority stake in the PSBs All the emerging market economies started off with
is often difficult in part because of the view weak state capacity at independence. But as their
that they are legitimate instruments for the economies developed, the state capacity improved.
state to allocate and redirect resources. But in India, by contrast, this process hasnt
3. In the fertilizer sector, rife with distortions,
Indian state has low capacity, high
public policy finds it easier to rehabilitate
levels of corruption, clientelism
public sector plants than to facilitate the exit
(patronage based on social order),
of egregiously inefficient ones.
unwanted rules and red-tape.
4. The reluctance to privatize, the ambivalence
The competitive federalism has been
towards the private sector is manifest in
a powerful change agent in attracting
many other ways too in agriculture sector
investment and talent, but it has
The agriculture sector is tangled in the been less evident in relation to
regulations, a living legacy of the era of essential service delivery like health
socialism. The producers in many states and education where there no good
are still required by the APMC to sell only models to follow. Except for
to specified middlemen in authorized Chhattisgarh in PDS, incentivization
mandis only. Though some states have of agriculture in MP, kerosene free
shown progress by taking the perishables drive in Haryana, power sector
out of the list, but there is a long way to reforms in Gujarat.
Instead, we see competitive
When this system still generates price populism where few good and
increases which are considered services are handed out for free.
excessive, the Essential Commodities Act
Redistribution by the government is
is invoked to impose stock limits and
far from efficient in targeting the
controls on trade that are typically pro-
cyclical, thereby exacerbating the
The founders of India wanted to
build the country by developing
industry that could make India
Property Rights economically, as well as politically,
independent. The private sector had
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conspicuously failed to do this under especially when compared to other countries,
colonial rule. and this ratio has risen over time.

A poor country with weak state But India had to redistribute because its
capacity like India when confronted state capacity was particularly weak, using
with the pressure to redistribute had blunt and leaky instruments.
necessarily to redistribute
inefficiently, using blunt and leaky Given the pressing need to redistribute, India
instruments. did not invest sufficiently in human capital
ex: public spending on health was meagre
The policy making in certain areas has been heavily 0.22% of GDP in 1950-51. This has risen to
constrained, as a way of ensuring that decisions only 1% today, well below the world average
dont favour vested interests. The result thus of 5.99%.
obtained is two-fold.
Thus, currently redistribution is far from efficient in
1. There is now adherence to strict rules- for targeting the poor.
example auctions of all public assets that
may not necessarily be optimal public policy. MNREGA, SarvaShikshaAbhiyan, ICDS, etc.,
In telecommunications, it may be socially suffer from gross misallocation.
optimal to sell spectrum at lower-than-
auction prices because of the beneficial Districts with most poor suffer from the
effects stemming from increased spread of greatest shortfall of funds.
communication services but it could be
Over the past two years, Indian government has
perceived as favouring particular parties and
made considerable progress toward reducing
hence not feasible.
subsidies, especially related to the petroleum
products. Subsidies have been eliminated in two out
2. There is abundant caution in bureaucratic
of four petroleum products; there is also a carbon
decision making which favours the status-
quo. In the case of twin balance sheet
problem, senior managers in public sector Conclusion
banks are reluctant to take decisions to write
India has come a long way in terms of economic
down loans for fear of being seen as
performance and reforms. But there is still a journey
favouring corporate interests.
ahead to achieve both dynamism and social justice.
Dilemma of redistribution One tentative conclusion is that completing this
journey will require a further evolution in the
The history of the Europe and the US
underlying economic vision across the political
suggests that typically states provide
spectrum as India moves along on the next stage of
essential services like education, health,
its economic journey.
infrastructure etc., first before they take on
redistribution role. One such is that further reforms are not just a
matter of overcoming vested interests that obstruct
That sequencing is no accidental. Unless the them. Broader societal shifts in underlying ideas and
middle class in society perceives that it vision will be critical.
derives some benefits from the state, it will
be unwilling to finance redistribution.

The corollary is that, if the states role is

predominantly redistribution, the middle
class will seek to exit from the state.

One sign of exit is fewer tax payers which is

evident in case of India. India has fewer tax
payers relative to the voting age population,

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Demonetization: To Deify or Demonize?

INTRODUCTION 1. Broader aspects of management, as reflected

Survey describes Demonetization as in the design and implementation of the
"A radical governance-cum-social engineering
measure, radical and unprecedented step with short 2. Its economic impact in the short and medium
term costs and long term benefits where the aim of run.
the action was: to curb corruption, counterfeiting,
the use of high denomination notes for terrorist
3. Its implications for the broader vision
activities, and the accumulation of black money
underlying the future conduct of economic
and to signal a regime change, emphasizing the
governments determination to penalize illicit
activities and the associated wealth.
This Survey is not the forum to discuss the first
Survey called this move as unconventional question and the third is discussed in Chapter 1.
monetary policy because, in the wake of Global
This chapter focuses on the second question.
Financial crisis (GFC) advanced economies used
monetary policy to stimulate growth like negative BACKGROUND FACTS
interest rates and "helicopter drops" (referring to
expansion of money supply) of money. This move What motivated demonetisation move?
was reverse of it, it has reduced the cash supply,
Indias currency to GDP ratio rebounded after
hence it could be considered "helicopter hoover"
2014-15 to 12 percent when inflation
Indias action is not unprecedented in its own declined. The value of high denomination
economic history: there were two previous instances notes of 500 and 1000) relative to GDP has
of demonetization, in 1946 and 1978, the latter not also increased in line with rising living
having any significant effect on cash standards

The action was taken as follow-up step to a series of

Second, Indias economy is relatively cash-
earlier efforts to curb such illicit activities.
dependent, even taking account of the fact
1. Creation of the Special Investigation Team that it is a relatively poor country.
(SIT) in the 2014 budget;
2. The Black Money Act, 2015; This might seem to suggest that some of the
3. The Benami Transactions Act of 2016; cash holdings were not being used for
4. The information exchange agreement with legitimate transactions, but perhaps for other
Switzerland; activities such as corruption.
5. Changes in the tax treaties with Mauritius
The presumption is especially strong because
and Cyprus; and
across the globe there is a link between cash
6. The Income Disclosure Scheme.
and nefarious activities: the higher the
amount of cash in circulation, the greater the
The public debate on demonetisation has raised
three sets of questions. amount of corruption, as measured by
Transparency International

In this sense, attempts to reduce the cash in

an economy could have important long-term

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benefits in terms of reducing levels of a tax on unaccounted private wealth
corruption. maintained in the form of cash black
money; and
How high were Indias high denomination
notes in terms of their use for transactions a tax on savings outside the formal financial
relative to store of value? system.

The most conclusive evidence on the extent

to which Rs 500 and Rs 1000 notes are used
for transactions comes from data on soil BENEFITS
rates, that is the rate at which notes are
1. Tax on black money
considered to be too damaged to use and
have been returned to the central bank. The Demonetisation scheme included a screening
mechanism, aimed separating white income from
RBI data show that in India low
black. Cash holdings arising from income that had
denomination notes have a soil rate of 33 been declared could readily be deposited at banks
percent per year. In contrast, the soil rate and ultimately exchanged for new notes. But those
for the Rs 500 note is 22% and the Rs 1000 with black money faced three difficult choices.
just 11%.
They could:
One way to estimate black money is to
declare their unaccounted wealth and
assume that all these notes should soil at the
pay taxes at a penalty rate;
same rate, if they were really being used for
transactions. This would yield an estimate of continue to hide it, not converting
money that is not used for transactions at their old notes and thereby suffering
Rs. 7.3 lakh crores. a tax rate of 100 percent; or

Using relative soil rates for the US $50 Launder their black money, paying a
and $20 notes and applying them to cost for converting the money into
comparable Indian high denomination notes, white.
yields an estimate of the amount not used
for transactions, and hence potentially black, Anecdotal evidence suggests there was, indeed,
of about Rs. 3 lakh crore. This is substantial, active laundering.
as it represents about 2 percent of GDP.
One laundering mechanism seems to have
been to re-time the accrual of income, by
constructing receipts that made it seem as
Analytics if the black money had just been earned in
the period immediately before November
8th, 2016. Such schemes might have allowed
Understanding the benefits and costs of black money to have been deposited in bank
demonetisation requires spelling out the analytics of accounts -- but only if the income was
demonetisation, which are rich and complicated. reported and taxes paid on it. In this way,
demonetisation would have brought black
money into the tax net.
Analytically, demonetisation should be seen as
comprising the following: Other schemes would have required black
money holders to pay a percentage to
a money supply contraction but only of one
private intermediaries as a price for
type of moneycash;
converting it into white. For example, some
holders reportedly paid individuals to queue
up at banks to exchange or deposit money
for them.
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again, as the cash withdrawal limits are eased and
the note supply improves. But some of the new
In all these cases, black money holders still suffered deposits will surely remain in the banks, where they
a substantial loss, in taxes or conversion fees. will provide a base for banks to provide more loans,
Moreover, bank accounts are still being screened for at lower interest rates.
suspicious a transaction, which means that those
who engaged in laundering run the risk of punitive In the longer-term, if demonetisation is successful, it
taxes and prosecution, in addition to the fees or will reduce the equilibrium cash-GDP and cash-
taxes already paid. deposits ratio in the economy. This will increase
financial savings which could have a positive impact
on long run growth.
The taxes thus received could be used in productive
ways to retire government debt, recapitalize
banks, or even redistribute back to the private
sector. In addition, one needs to add the taxes
collected on money declared under disclosure Early Evidence of Potential Long-term benefits:
scheme (PradhanMantriGaribKalyanYojana, PMGKY),
as well as the taxes paid to intermediaries who
laundered money. There are some signs pointing to change.

1. Digitalisation

2. Tax compliance One intermediate objective of

demonetisation is to create less-cash or
Demonetisation can also be interpreted as a regime
cash-lite economy, as this is a key to
shift on the part of the government. It is a
channeling more saving channeled through
demonstration of the states resolve to crack down
the formal financial system and improving
on black money, showing that tax evasion will no
longer be tolerated or accepted as an inevitable part tax compliance.
of life.
Currently, India is far away from this
These two sanctions financial penalty and objective: the Watal Committee has
social condemnation could have a powerful recently estimated that cash accounts
and long-lasting effect on behavior. for about 78 percent of all consumer
In this case, evaders might decide in the years to
come that it would be better to pay a moderate
Cash transactions are also anonymous,
regular tax, rather than risk having to pay a sudden
helping to preserve privacy, which is a virtue
penal tax. Corruption and compliance could be
as long as the transactions are not illicit or
permanently affected.
designed to evade taxation.
Demonetisation could also aid tax administration in
another way, by shifting transactions out of the cash Digital transactions help bring people into
economy and into the formal payments system. With the modern wired era. And they bring
large denominations eliminated, households and people into the formal economy, thereby
firms have begun to shift from cash to electronic increasing financial saving, reducing tax
payment technologies. evasion, and leveling the playing field
between tax-compliant and tax-evading firms
As a result, the tax-GDP ratio, as well as the size of
(and individuals).
the formal economy, could be permanently higher.

3. Tax on informal savings

In the wake of the demonetisation, the government
Beyond reducing tax evasion, demonetisation could
has taken a number of steps to facilitate and
have other far- reaching effects. For example, it will
incentivize the move to a digital economy. These
channel savings into the formal financial system.
Without doubt, much of the cash that has been
deposited in the banking system will be taken out
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a. Launch of the BHIM (Bharat Interface For
Money) app for smartphones. This is based
Adverse impact of demonetization
on the new Unified Payments Interface (UPI)
which has created inter-operability of digital It is first important to understand the analytics of the
transactions. demonetisation shock in the short run.
Demonetisation is potentially:
b. Launch of Aadhaar Merchant Pay, aimed at
the 350 million who do not have phones. an aggregate demand shock, because it
This enables anyone with just an Aadhaar reduces the supply of money and affects
number and a bank account to make a private wealth (especially of those holding
merchant payment using his biometric unaccounted money and owning real estate);
identification. Aadhar Merchant Pay will soon
an aggregate supply shock to the extent
be integrated into BHIM and the necessary
that cash is a necessary input for economic
POS devices will soon be rolled out.
activity (for example, if agricultural
c. Reductions in fees (Merchant Discount Rate) producers require cash to pay labour); and
paid on digital transactions and transactions
an uncertainty shock because economic
that use the UPI. There have also been
agents face confusion related to the impact
relaxations of limits on the use of payment
and duration of the liquidity as well as
wallets. Tax benefits have also been provided
further policy responses causing consumers
for to incentivize digital transactions.
to defer or reduce discretionary
d. Encouraging the adoption of POS devices consumption and firms to reconsider
beyond the current 1.5 million, through tariff investment plans.

National Payments Corporation of India (NPCI) show

Short-term costs of Demonetization
that RuPay-based electronic transactions increased
by about Rs. 13,000 crore in case of POS
transactions and about Rs. 2,000 crore in e-
commerce, an increase of over 300-400 percent. Inconvenience and hardships- especially of
those in the informal sectors and cash
intensive sectors of the economy who may
have lost income and unemployment.
2. Real estate
Reduction in consumption there by Growth
slowed, as demonetisation reduced demand
Demonetisation could have particularly (cash, private wealth), supply (reduced
profound impact on the real estate sector. In liquidity and working capital, and disrupted
the past, much of the black money supply chains), and increased uncertainty.
accumulated was ultimately used to evade
taxes on property sales. Job losses, decline in farm incomes, social
disruption, especially in cash-intensive
To the extent that black money is reduced sectors
and financial transactions increasingly take
place through electronic means, this type of Uncertainty increased, as firms and
tax evasion will also diminish. households were unsure of the economic
impact and implications for future policy
An equilibrium reduction in real estate prices Investment decisions and durable goods
is desirable as it will lead to affordable purchases postponed.
housing for the middle class, and facilitate
labour mobility across India currently Demonetisation could also affect supplies of
impeded by high and unaffordable rents. certain agricultural products, especially milk
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(where procurement has been low), sugar Agriculture sowing has increased for wheat
(where cane availability and drought in the and pulses when compared to last year by
Southern states will restrict production), and 7% and 10.7% contrary to fears, probably
potatoes and onions (where sowings have because of good monsoon and favorable
been low). weather conditions.

Indirect tax revenues have increased,

probable because the dues were allowed to
Macroeconomic consequences of
be paid in demonetized notes.
Passenger cars and two wheeler sales have
After the demonetization move, bond yields have
increased in almost all major economies, but it Credit growth has weakened
decreases in India by 32 basis points. (for ex, US
bonds increased by 58 basis points.) Real estate prices have seen a drop in all the
major cities.

The Macro assessment is made on five broad

factors:- Clearly, the cash crunch must have affected the
informal economy, which depends heavily on bank
notes for its transactions and has been estimated to
Agriculture (rabi) sowing account for nearly half of the overall economy. This
may even be an underestimate if consumer payment
Indirect Tax revenues - as a measure of transactions were in any way indicative of the extent
production and sales of cash-dependence of the economy in production.

Auto Sales-as a measure discretionary

consumer spending Equally clearly the cash crunch would have had little
direct impact on the formal economy, which depends
Real Credit growth instead on the banking system, where liquidity has
actually improved.
Real estate prices

A final and important point to make is that the Demonetisation will affect the fiscal
adverse impact of demonetisation on GDP accounts in the following ways.
growth will be transitional. Once the cash
supply is replenished, which should largely be Wealth gain: The RBI/government
achieved by end-March 2017, the economy may receive some gains from the
should revert to normal. unreturned cash.

Short-term flow impact: Income

taxes could go up as black money was
deposited in bank accounts. There are
REDISTRIBUTION TO THE GOVERNMENT also reports of increases in tax
payments at state government levels
and accelerated payments to Discoms.
The most important redistributive effect is that
it will shift resources from the private sector to
the government. The impact on the overall Against this are three negative effects:
economy will then depend on how the
government responds. Costs of printing new notes over and
above normal replacement.

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The costs of sterilizing the surge in 4. To the extent that demonetisation has
liquidity into the banking system via also raised the costs of non-
issuance of Market Stabilization compliance with indirect taxes, we
Scheme bonds. should also expect to see an increase
in registration under the service and
If nominal GDP growth declines, excise taxes and under the states
corporate and indirect tax revenues of VATs. These should drift up steadily in
the centre could decline but so far the future.
there is no clear evidence.

Maximizing Benefits and Minimizing costs

Overall, the total cost will be clear at the end
of the full year.
The faster remonetisation takes place,
the shorter and less severe will be the
MARKERS OF SUCCESS overall impact of demonetisation.

Supply of currency should follow actual

Demonetisation can have long term benefits. demand and not be dictated by official
They may not necessarily become manifest in estimates of desirable demand. In
the next six months but evidence should start other words, the RBI should re-
trickling in over a one-year horizon and establish internal convertibility,
beyond. guaranteeing to give the public the
amount of currency that the latter
And it is not difficult to identify the future
markers of success. The early elimination of withdrawal
limits will help build confidence.
1. Changes in the use of digital payment
methods across the three categories of There should be no penalties on cash
digital access identified earlier, withdrawals, which would only
namely, smart phone users, regular encourage cash hoarding.
phone users and the phoneless,
respectively. The early signs are
Internal convertibility is bedrock of every
single financial system in the world, unless
2. The cash-GDP ratio, which should
people have confidence that money deposited
decline as more saving, is channeled
in bank accounts is freely convertible into
through the formal financial system
cash, and vice versa, they will be reluctant to
and black money falls. On one
deposit their cash in the first place. Instead,
estimate of black money, the cash- they will hoard it, starving the formal financial
GDP ratio could decline permanently system of resources and the informal economy
by about 2 percentage points. of the currency it needs for transactions. And
this would affect the poor most, not just
3. The most important marker of success because they are more likely to work in the
will be taxes. The number of new informal economy, but because the affluent
income tax payers as well as the will likely corner the limited currency available.
magnitude of reported and taxable
income should go up over time.
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Meanwhile, the government windfall CONCLUSION
arising from unreturned notes should
Above all, ensuring that demonetisation
be deployed toward capital-type
indeed proves a catalyst for long-run changes
expenditures rather than current ones.
in behavior will require measures to
complement demonetisation with other non-
And since the windfall will be one-off
punitive, incentive-compatible measures that
its use should be one-off and not lead
reduce the incentives for tax evasion.
to entitlements that create
permanently higher expenditures.

In the medium term, the impetus

provided to digitalization must continue.
Demonetisation was a potentially powerful
stick which now needs carrots as
complements. A five-pronged strategy could
A few principles must guide this effort going be adopted:
a GST with broad coverage to include
activities that are sources of black
money creationland and other
Digitalisation is not a panacea, nor is
immovable propertyshould be
cash all bad. Public policy must
balance benefits and costs of both
forms of payments.
individual income tax rates and real
estate stamp duties could be reduced;
The transition to digitalisation must be
gradual; take full account of the
The income tax net could be widened
digitally- deprived; respect rather than
gradually and, consistent with
dictate choice; and be inclusive rather
constitutional arrangements, could
than controlled.
progressively encompass all high
incomes. (After all, black money does
To the extent that digitalisation must
not make fine sectoral distinctions);
be incentivized-- and the incentives
favoring cash neutralized--the cost
the timetable for reducing the
must be borne by the public sector
corporate tax rate could be
(government/RBI) and not the
accelerated; and
consumer or financial intermediaries.
Tax administration could be improved
Incentivization should be strictly time-
to reduce discretion and improve
bound because as volumes increase
digitalisation should become privately
profitable. Finally, it is imperative that the effort
to collect taxes on newly disclosed
To increase trust in digital payments,
(and undisclosed) wealth does not lead
cyber- security systems must be
to tax harassment by officials at all
strengthened considerably.
rungs of the hierarchy.
One key need is to ensure inter-
operability of the payment system,
which will be at the heart of increasing There must be a shift to greater use of data,
digitalisation going forward, building smarter evidence-based scrutiny and audit,
upon the newly created UPI. greater reliance on on-line assessments with
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correspondingly less interaction between tax
payers and tax officials.

At a time when the GST will be providing so

much more data on individual transactions,
greater information sharing between the direct
and indirect tax departments at the centre,
along with coordination with the states, could
lead to greater compliance through non-
punitive means, not just in relation to indirect
but also direct tax collections.

Big Data and the digital age, and the promise

they offer, should also be embraced by the tax

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The Festering Twin Balance Sheet Problem

Introduction monitored did not earn enough to pay the
interest obligations on their loans.
In February 2016, Banks reported that nonperforming
assets had soared, to such an extent that provisioning It proved that India was suffering from a twin
had overwhelmed operating earnings. As a result, net balance sheet problem, as both the banking
income had plunged deeply into the red.
and corporate sectors were under stress.
Indias NPA comparison with other countries
Investors fled from public sector bank shares
At its current level, Indias NPA ratio is higher than any
It brought the prices of public sector bank other major emerging market (with the exception of
shares to very low levels. Russia), higher even than the peak levels seen in Korea
during the East Asian crisis.
What were the reasons?
Then why Indias economy didnt collapse?
RBIs Asset Quality Review
Contrary to East Asian crisis, Indias economy
Normally, non-performing assets (NPAs) soar kept on rising with a brief period of interruption.
when there is an economic crisis, triggering
This happened because Indian companies and
widespread bankruptcies.
banks had avoided the boom period mistakes
But there was no such thing in India; instead made by their counterparts abroad.
GDP was growing at good pace.
They were prevented from accumulating too
Initially it was said that the reason was the much leverage by 2 measures:-
RBIs Asset Quality Review (AQR), following
which banks cleaned up their books, clearing o While prudential restrictions kept bank
the large amount of accumulated NPA over credit from expanding excessively during
many years. the boom.

o Capital controls prevented an undue

Other reasons
recourse to foreign loans.
But as the NPA kept on rising, later it became
clear that the AQR was not the only factor at On the other hand, bulk of the problem has
work. been concentrated in the public sector banks,
which not only hold their own capital but are
While, more than four-fifths of the non- ultimately backed by the government, whose
performing assets were in the public sector resources are more than sufficient to deal with
banks, where the NPA ratio had reached almost the NPA problem. As a result, creditors have
12 percent. retained complete confidence in the banking
On the corporate side Credit Suisse reported
that around 40 percent of the corporate debt it

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As Indias TBS experience still remains deeply As the companies were taking on more risk,
puzzling, this chapter attempts to answer four things started to go wrong.
sets of questions:
Costs soared far above budgeted levels, as
What went wrong and when did it go wrong? securing land and environmental clearances
proved much more difficult and time consuming
How has India managed to achieve rapid
than expected.
growth, despite its TBS problem?
At the same time, forecast revenues
Is this model sustainable?
collapsed after the GFC; projects that had
What now needs to be done? been built around the assumption that growth
would continue at double-digit levels were
For some years, it seemed possible to regard TBS as a suddenly confronted with growth rates half that
minor problem, but it has become clear that the level.
problems of the stressed firms might actually imperil
growth. In addition to this firms that borrowed
domestically suffered when the RBI increased
To avoid this outcome, a formal agency may be
interest rates to quell double digit inflation.
needed to resolve the large bad debt cases like
the East Asian countries employed after they And firms that had borrowed abroad when the
were hit by severe TBS problems in the 1990s. rupee was trading around Rs 40/dollar were hit
In short, the time may have arrived to create a hard when the rupee depreciated, forcing
Public Sector Asset Rehabilitation Agency. them to repay their debts at exchange rates
closer to Rs 60-70/ dollar.
What went wrong?
Higher costs, lower revenues, greater financing
The origins of the NPA problem dates back to
costs all squeezed corporate cash flow,
the decision taken during the mid-2000s.
quickly leading to debt servicing problems.
During this period for the first time in the
What Explains the Twin Balance Sheet Syndrome
countrys history, everything was going right:
with Indian Characteristics?
corporate profitability was amongst the highest
in the world, encouraging firms to hire labour There is a difference in situations of the economies
aggressively, which in turn sent wages soaring. which collapsed in the pressure of TBS in contrast to
India, which stand still even in the pressure of TBS
Firms made plans accordingly. They launched
new projects worth lakhs of crores, particularly Unusual structure of the economy
in infrastructure-related areas such as power India even during the boom of 2000s was
generation, steel, and telecoms, setting off the suffering from the severe supply constraint,
biggest investment boom in the countrys there was ample room for economy to grow
history. even as the infrastructure investments
Within the span of four short years, the
did not prove financially viable.
investment-GDP ratio had soared by 11
percentage points, reaching over 38 percent by In comparison, the US boom was based on
2007-08. housing construction, which proved far less
useful after the crisis. And the US never
This time saw extraordinary increase in the debt
suffered from severe supply constraints.
of non-financial corporations.
Response of Financial institutes towards crisis:-
Implications of soaring debt

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In other countries, creditors would have a. Plant load factors (PLF, actual electricity
triggered bankruptcies, forcing a sharp production as a share of capacity) are
adjustment that would have brought down exceptionally low and they are falling.
growth in the short run.
b. Meanwhile, merchant tariffs for electricity
While the strategy adopted by India was to purchased in the spot market have slid to
give time to time, meaning to allow time for around Rs 2.5/kwh, far below the breakeven
the corporate wounds to heal. rate of Rs 4/kwh needed for most plants, let
alone the Rs 8/kwh needed in some cases.
Although difference in size of bad loans, both
India and China provided generous amounts of As a result, cash flow for most private power generation
bank financing to allow highly levered companies falls far short of what is needed to service
corporations to survive. And in both countries their interest obligation.
this strategy has proved successful so far in
Other problem
allowing rapid growth to continue.
Countries with TBS problems tend to have low
How this strategy be made sustainable? investment, as stressed companies reduce their
For financing strategy to be sustainable, two new investments to conserve cash flow, while
scenarios would need to materialise: stressed banks are unable to assume new
phoenix scenario and containment lending risk.
This seems to be happening in India, as well.
Under the phoenix scenario, accelerating Private investment, which had been soaring at
growth would gradually raise the cash flows of the height of the boom, slowed sharply to a 5
stressed companies, eventually allowing them percent growth rate and Public investment has
to service their debts. still not been sufficient to arrest a fall in overall
Under the containment scenario, the NPAs
would merely need to be limited in nominal Effect of TBS
terms. Once this is done, they would swiftly At least 13 of these banks accounting for
shrink as a share of the economy and a approximately 40 per cent of total loans are
proportion of bank balance sheets, since GDP is severely stressed.
growing at a nominal rate of more than 10
percent. With such a large fraction of their portfolios
impaired, it has become extremely difficult for
But the containment scenario doesnt look possible now them to earn enough income on their assets to
as by the end of 2015 earnings had diminished to Rs cover their running and deposit costs.
20,000 crore per quarter. By September 2016 they had
fallen to just Rs 15,000 crore per quarter. Steps taken by RBI
Their interest obligations are mounting and if they RBI has deployed several mechanisms to deal with the
borrow more, this will only cause the gap to widen stressed asset problems, 3 of these mechanisms are
further. particularly notable:-
Illustration of the problem Establishment of private Asset Reconstruction
Companies (ARCs)
The situation in the power sector illustrates the more
general problem. To cover costs, these companies need Many ARCs have been created, but they have
to sell all the power they are capable of producing at solved only a small portion of the problem,
high tariff rates. But the opposite is happening: buying up only about 5 percent of total NPAs.

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The problem is that ARCs have found it difficult Difficulty in sorting out issue of over-
to recover much from the debtors. Thus they indebtedness
have only been able to offer low prices to
The large, over-indebted borrowers are particularly
banks, prices which banks have found it difficult
difficult to resolve, for several deep-seated reasons:
to accept.
Severe viability issues: - At this point, large
Strategic Debt Restructuring (SDR) scheme write-offs will be required to restore viability to
Under thiscreditors could take over firms that the large IC1 companies (those companies
were unable to pay and sell them to new whose earnings do not even cover their interest
owners. obligations).

Sustainable Structuring of Stressed Assets (S4A) Acute coordination failures: - Large debtors
have many creditors, who need to agree on a
Under this, creditors could provide firms with strategy. This is often difficult when major sums
debt reductions up to 50 percent in order to are involved.
restore their financial viability.
Serious incentive problems: - Public sector
Analysis of the schemes bankers are even more cautious in granting
debt reductions in major cases, as this may
Success of schemes, however, has been limited. There
attract the attention of not only the
are several reasons why progress has been so limited:
investigative agencies, but also the wider
Loss recognition: - The Asset Quality Review public.
(AQR) was meant to force banks to recognise
the true state of their balance sheets but bank Insufficient capital: - Debt write-downs in the
keep on evergreening loan. case of the large debtors could quickly deplete
banks capital cushions.
Coordination: - The RBI has encouraged
creditors to come together in Joint Lenders The new bankruptcy system is not yet fully in
Forums, where decisions can be taken by 75 place, and even when it is, the new procedures
percent of creditors by value and 60 percent by (and participants) will need to be tested first on
number. But reaching agreement in these smaller cases.
Forums has proved difficult, because different
The alternative in the form of PARA
banks have different degrees of credit exposure,
capital cushions, and incentives. In other words, for the big firms the road is not only
littered with obstacles but seems to be positively
Proper incentives: - The S4A scheme blocked.All of this suggests that it might not be possible
recognises that large debt reductions will be to solve the stressed asset problem using the current
needed to restore viability in many cases. But mechanism.
public sector bankers are reluctant to grant
write-downs, because there are no rewards for Instead a centralised approach might be needed. One
possible strategy would be to create a Public Sector
doing so.
Asset Rehabilitation Agency (PARA), charged with
To address this problem, the Bank Board working out the largest and most complex cases.
Bureau (BBB) has created an Oversight Functions of PARA
Committee which can vet and certify write-down
proposals. There are many possible variants, but the broad
outlines are clear. It would purchase specified
Capital: -The government has promised under loans (for example, those belonging to large,
the Indradhanushscheme to infuse Rs 70,000 over-indebted infrastructure and steel firms)
crores of capital into the public sector banks by from banks and then work them out, either by
2018-19. But this is far from sufficient. converting debt to equity and selling the stakes
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in auctions or by granting debt reduction, The third issue is pricing. If loans are
depending on professional assessments of the transferred at inflated prices, banks would be
value-maximizing strategy. transferring losses to the Rehabilitation Agency.
As a result, private sector banks could not be
Benefits of PARA allowed to participate and then co-ordination
issues would remain while private capital
Such an approach could eliminate most of the
would not want to invest in the Agency, since
obstacles currently plaguing loan resolution.
PARA would make losses.
It could solve the coordination problem, since
debts would be centralised in one agency;
The Economic Survey 2015-16 emphasized that
It could be set up with proper incentives by
addressing the stressed assets problem would require 4
giving it an explicit mandate to maximize Rs: Reform, Recognition, Recapitalization, and
recoveries within a defined time period; Resolution.

And it would separate the loan resolution One year on, how much progress has been made?
process from concerns about bank capital.
From where will the funding of PARA come? This is the second time in a decade that such a
1) Government issues of securities: -This would large share of their portfolios has turned
increase the debt stock, but could actually strengthen nonperforming - unless there are fundamental
the governments financial position if establishing PARA reforms, the problem will recur again and again.
hastens the resolution of the stressed asset problem.
2) Capital Market: - A second source of funding could
be the capital markets, if the PARA were to be After years of following a financing strategy,
structured in a way that would encourage the private banks have realised that the financial position of
sector to take up an equity share. the debtors has deteriorated to such an extent
that many will not be able to recover.
3) RBI: - The RBI would (in effect) transfer some of the
Accordingly, following the RBIs Asset Quality
government securities it is currently holding to public
Review, banks have recognised a growing
sector banks and PARA. As a result, the RBIs capital
number of loans as non-performing.
would decrease, while that of the banks and PARA
would increase.
Challenges that need to be resolved
Because of NPA banks will need to be
But three major issues have bedevilled other agencies, recapitalised the third R -- much of which will
and would need to be resolved to ensure a PARA would need to be funded by the government, at least
actually work as intended. for the public sector banks. But recapitalisation,
for all its importance and attention received in
First, there needs to be a readiness to confront
the public discourse, is not the need of the
the losses that have already occurred in the
banking system, and accept the political
consequences of dealing with the problem. Resolution

Second, the PARA needs to follow commercial Rather, the key issue is the fourth R:
rather than political principles. To achieve this, Resolution. For even if the public sector banks
it would need to be an independent agency, are recapitalised, they are unlikely to increase
staffed by banking professionals. It would also their lending until they truly know the losses
need a clear mandate of maximizing recoveries they will suffer on their bad loans. The question,
within a specified, reasonably short time period. then, is how to speed up resolution.

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East Asian example Sustainable Structuring of Stressed Assets (S4A)

After the 1990s crisis, East Asian countries were Under this arrangement, introduced in June 2016, an
able to resolve most of the large cases within independent agency hired by the banks will decide on
two years. One reason, of course, was that the how much of the stressed debt of a company is
East Asian countries were under much more sustainable. The rest (unsustainable) will be
pressure: they were in crisis, whereas India has converted into equity and preference shares.
continued to grow rapidly.

But a second reason why East Asia was able to

clean up its problem debts so quickly was that it
had more efficient mechanisms.

India has been pursuing a decentralised

approach, East Asia adopted a centralised
strategy, which allowed debt problems to be
worked out quickly using the vehicle of public
asset rehabilitation companies.

A brief overview of the RBI schemes

The 5/25 Refinancing of Infrastructure Scheme

Under this scheme lenders were allowed to extend

amortisation periods to 25 years with interest rates
adjusted every 5 years.

The scheme thus aimed to improve the credit profie and

liquidity position of borrowers, while allowing banks to
treat these loans as standard in their balance sheets,
reducing provisioning costs.

Private Asset Reconstruction Companies (ARCs)

ARCs were introduced to India under the SARFAESI Act

(2002), with the notion that as specialists in the task of
resolving problem loans, they could relieve banks of this

Strategic Debt Restructuring (SDR):

The RBI came up with the SDR scheme in June 2015 to

provide an opportunity to banks to convert debt of
companies (whose stressed assets were restructured
but which could not finally fulfil the conditions attached
to such restructuring) to 51 percent equity and sell
them to the highest bidders, subject to authorization by
existing shareholders.

Asset Quality Review (AQR)

Resolution of the problem of bad assets requires sound

recognition of such assets. Therefore, the RBI
emphasized AQR, to verify that banks were assessing
loans in line with RBI loan classification rules.

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Fiscal Framework: The World is Changing, Should India Change Too?

Introduction Does India need a fiscal activism?

Since the government came to power, there has been a Indias situation differs from that of the advanced
steadfast commitment to fiscal consolidation, reflected economies (AEs) in some important ways.
in the steady decline in the fiscal deficit from 4.5
percent of GDP in 2013-14 to 4.1 percent, 3.9 percent, Indian growth rates are substantially higher, while
and 3.5 percent over the successive three years. inflation rates are also substantially greater, reducing
the need for fiscal activism.
The trend of the recent time shows that monetary
easing has run its course, attention has increasingly Because inflation is already relatively high, counter-
turned to the role of fiscal policy. cyclical policy has to be much more sensitive to
triggering higher inflation.
But there has been a shift in the conventional
understanding over use of fiscal policy articulated most 2 previous experiences are useful as counter arguments
clearly recently by Jason Furman of President Obamas against use of countercyclical fiscal policies:-
Council of Economic Advisers1, comprises the In the early 1980s, there was an expansion in
spending and deficits in response to
Fiscal policy can legitimately be used for accelerating growth. The inability to rein in
counter-cyclical policy. these deficits played a key role in undermining
Indias external situation, which led to the
It is particularly effective when monetary policy balance of payments crisis of 1991.
is at the zero lower bound, because at that
point multipliers are large, close to 1.5 In other case, boom-financed spending since
2005-06 combined with the sharp stimulus 4
And because fiscal policy is effective in percent of GDP in the wake of the Global
increasing GDP, it will lead to significant Financial Crisis, which was then not withdrawn
increases in tax revenue, meaning that fiscal adequately or on time, led to the financial-
activism can partly pay for itself currency near-crisis in the autumn of 2013.

In any event, estimates of sustainable debt In other words, Indias fiscal stance has an in-built bias
levels should be revised upwards, because toward higher deficits, because spending rises pro-
interest rates will remain low. cyclically during growth surges, while revenue and
spending are deployed counter-cyclically during
What is counter cyclical policy? slowdowns. This pattern creates fiscal fragility.

A 'countercyclical' fiscal policy refers to the opposite Fiscal rules, insofar as they can be effective and
approach: reducing spending and raising taxes during a binding, must therefore aim to prevent spending surges
boom period, and increasing spending/cutting taxes during booms and constrain counter-cyclicality during
during a recession. downturns.

The case for activist fiscal policy in the advanced India and the World: Stocks
economies (AEs) rests ultimately on two pillars:
India also appears to have a stock problem, in that its
Weak economic activity debt-to-GDP ratio is higher than many other emerging
markets. But such a mechanical comparison is not an
And the inability to address this problem appropriate way of assessing Indias fiscal strength: the
through monetary policy. true problem is much more subtle.

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a. Fiscal commitment Conclusion

India shares with advanced economies the experience Back in 2003 there was common agreement
of not having defaulted on its domestic debt either de that fiscal policy should be aimed at medium-
jure or de facto (through long periods of high inflation). term objectives such as reducing the stock of
debt rather than shorter-term cyclical
In the recent past, Indias highest level of debt has considerations.
been 83 percent of GDP and it has made sure that its
debt service obligations have been conscientiously met. Now, advanced countries have moved away
When doubts about Indias ability to meet its debt from these principles toward greater fiscal
service obligations to foreign creditors arose in 1991, activism, giving counter-cyclical policies much
the government took extreme measure like pledging more of a role and giving correspondingly less
gold to reassure creditors that it had no intention to weight toward curbing the debt stock.
But Indias experience has reaffirmed the need
b. Debt dynamics for rules to contain fiscal deficit because of the
proclivity to spend during booms and undertake
The basic equation for debt sustainability is: stimulus during downturns.

It has also highlighted the danger of relying on

rapid growth rather than steady and gradual
fiscal and primary balance adjustment to do the
heavy lifting on debt reduction.
In short, it has underscored the fundamental
dt refers to the debt/GDP ratio in period t;
validity of the fiscal policy principles set out in
pdt, the primary deficit in period t; the FRBM.

gt, the nominal GDP growth rate; and But the operational framework of FRBM
designed in 2003 will need to be modified to
rt, the nominal effective rate of interest (borrowing
reflect the India of today, and even more
cost) on government debt.
importantly the India of tomorrow. This, then,
This equation shows that if a government is running a will be the task of the FRBM Review Committee.
primary deficit, pd, then nominal growth must exceed
the nominal interest rate ([g - r] must be positive) to
keep debt from increasing. In contrast, if the primary
balance is positive, then debt ratios can remain steady
even if [g - r] turns negative.

This vulnerability in India is the countrys primary

deficit, i.e. the shortfall between its receipts and its
non-interest expenditures. Put simply, Indias
government (centre and states combined) is not
collecting enough revenue to cover its running costs, let
alone the interest on its debt obligations.

There is nothing extraordinary about running a primary

deficit, per se. Most of the other large emerging
markets do so after Global Financial Crisis. But at such
rapid rates of growth, substantially greater than those
of its peers, Indias primary deficit should have been
much lower than others; instead it has been
significantly greater.
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Chapter 6 - 6

Fiscal Rules: Lessons from the States

Introduction was not allowed to exceed 3 percent of
GSDP at any point, while the revenue deficit
Fiscal Responsibility and Budget Management (FRBM)
was to be eliminated by 2008/9 (later
Act was adopted by the centre in 2003. This Act was
extended to 2009/10).
mirrored by Fiscal Responsibility Legislation (FRL)
adopted in the states since states account for roughly
The 12th Finance Commission allowed
half the general government deficit.
states to borrow directly from the market,
At first blush, the FRL seem enormously successful. The in the hope that investors would also
financial position of the states improved considerably exercise some discipline, by pushing up
after 2005, based on any measure. interest rates on states whose fiscal position
had not improved.
The average revenue deficit was entirely eliminated,
while the average fiscal deficit was curbed to less than Finally, broad public discipline was
3 percent of GSDP, just as the FRL had mandated. The enhanced by introducing new reporting
average debt to GSDP ratio accordingly fell by 10
requirements. States were required to
percentage points to a mere 22 percent of GSDP in
publish annual Medium-Term Fiscal Policy
But the deficit reduction was not only because of FRL
but owes much tofavorable exogenous factors:

An acceleration of nominal GDP growth helped The fiscal deficit target was relaxed temporarily because
boost states revenues by about 1 percent of of Global Financial crisis but by FY 2010, the targets
GSDP. were set to the original FRL level of 3 percent.

Subsequently, the 14th Finance Commission (FFC)

Increased transfers from the centre of about 1
recommended that fiscal deficit limits were to be
percent of GSDP both because of the 13th
relaxed by 0.5 percentage points for states which meet
Finance Commission recommendations and the three conditions:
surge in central government revenues.
1. Zero revenue deficit in the previous year;
Reduced interest payments of about 0.9 percent
of GSDP on account of the debt restructuring 2. Debt to GSDP ratio lower than 25 percent; and
package offered by the centre; and
3. Interest payments to GSDP ratio less than 10
Reduced need for spending by the states as the percent of GSDP.
centre took on a number of major social sector
expenditures under the Centrally Sponsored Assessment Methodology
Schemed (CSS). One reason why figures on fiscal progress since 2005
give a misleading impression of the impact of the FRL is
Summary of the Fiscal Responsibility Legislation that not all states adopted FRL in that year.
The FRL aimed to impose fiscal discipline through a Some states enacted their legislation even before the
number of mechanisms: central government did so in 2003. Many others
Fiscal targets were established, which were adopted FRLs in 2005/6, while in a few states legislation
did not fall into place until 2010.
the same for all states: the overall deficit

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During this period, many other developments occurred By their very nature, these off-budget items are difficult
that had a profound impact on fiscal positions viz. value to measure since the instruments may vary by state,
added taxes (VAT), 6th Pay Commission, 12th and 13th are difficult to quantify and are not centrally compiled
Finance Commissions and also this was a period of high and accounted. These expenditure channels undermine
nominal GDP growth. the power of fiscal rules.

So a second challenge is to distinguish the impact of the Following 2 data provide the clarity about situation:
FRL in imposing fiscal discipline from the impact of
these concurrent policy changes and macro-economic Prior to the FRL states added guarantees worth
trends. on average 0.9 percent of GSDP each year. But
in the first three years after FRL adoption the
Impact on Deficits flow of explicit guarantees actually turned
The first thing to note is that states essentially
achieved the fiscal targets right away, years in
Borrowing by state utilities also fell after the
advance of the target year of FY 2008
FRL from 4.3 percent of GSDP to 3.4 percent of
(extended to 2009/10 due to the financial

These reductions in deficits mask considerable

variation across states. The caveat remains that these measures do not provide
a complete picture as spending may have shifted to
The largest reductions in fiscal deficits came other unobserved channels Budget Process.
from states like Orissa, Punjab, Madhya Pradesh
and Maharastra which lowered their deficit by Budget process
more than 3 percentage points. These states Another area of positive impact was on the states
also showed some of the largest reductions in budgeting process.
revenue deficit.
After the FRL, there is sharp drop in the magnitude of
the revenue forecast errors in the budgeting process.

Another indication that the FRL had a significant Assessment

impact is that states kept a tight rein on wage
FRLs clearly made an important difference, both
and salary expenditure. Instead, they expanded
in terms of outcomes and behaviour.
more discretionary spending, which would be
easier to scale back if needed to achieve the States kept their average fiscal deficit at 2.4
deficit targets. percent of GSDP in the 10 years after the FRL,
well below the prescribed ceiling of 3 percent of
At the same time, the path of primary deficits
hints at an underlying problem.
And there was also a striking change in
A decade into the FRL, the average primary
behaviour: budget forecasting procedures
deficit was just as large as it was before the law
improved, and there was a more cautious
and the only reason this slippage hadnt
approach to guarantees, a build-up of cash
shown up in the other deficit figures was that
balances, and a reduction in debt.
interest payments had fallen sharply, in large
part due to the centres debt relief. But another reality is that rather than
encouraging states to tighten their belts, the
Implications of fiscal rules
role of the FRL may really have been to prevent
A crucial concern with any fiscal rule is that it would them from spending all of their windfall.
encourage governments to shift spending off budget.
A few years after the FRL, all indicators of fiscal
performancedeficits, expenditures, and
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especially off-budget activitiesstarted

It is possible that the Centre has also prevented

this deterioration by exercising Article 293 (3)
of the Constitution. Under this clause, States
must take consent of the Centre for additional
borrowing since they all had borrowing
outstanding throughout the post-FRL period

Lessons for Future Fiscal Rules

As the fiscal challenges mount for the states

going forward because of the Pay Commission
recommendations, slowing growth, and
mounting payments from the UDAY bonds,
there is need to review how fiscal performance
can be kept on track.

The Fourteenth Finance Commission (FFC)

attempted to shift toward incentives by relaxing
some of the FRL limits for better-performing
states. But there was an element of tension in
its recommendations.

o On the one hand, the relaxation itself

was an incentivizing mechanism;

o On the other, the Commission abolished

entirely the other more broad-based
incentive mechanism deployed by the
Thirteenth Finance Commission (TFC) of
allocating resources across states (the
so-called horizontal criteria) based on
states own fiscal performance.

There may be considerable merit in going back

to such an important incentive mechanism.

In addition, greater market-based discipline on

state government finances is imperative.

Highly indebted states would have to offer a

higher yield to make their bonds attractive.
Instead, there is a flat relationship between the
spread and the indebtedness of states states
are neither rewarded nor penalized for their
debt performance.

Similarly, there is no relationship between the

coupon rate and the fiscal deficit of states.

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Clothes and Shoes: Can India Reclaim Low Skill Manufacturing?

Creating jobs is Indias centralchallenge. The space vacated by Chinais fast being taken
over by Bangladesh andVietnam in case of
India needs to generate jobs that are formaland apparels; Vietnam andIndonesia in case of
productive, provide bang-for-buck interms of leather and footwear, India needs to act fast if it
jobs created relative to investment,have the is to regaincompetitiveness and market share in
potential for broader socialtransformation, and thesesectors.
can generate exportsand growth.
The apparel and leather andfootwear sectors
meet many or all of thesecriteria and hence are India still has potential comparative advantage
eminently suitablecandidates for targeting. in terms of cheaper and more abundant labour.

Why Clothes and Shoes? The Apparel and Leather sectors face a set of
common challenges: logistics, labor regulations,
In the successful East Asian and tax & tariff policy, and disadvantages
economies,countries where GDP growth emanating from the international trading
boomsaveraged between 7-10 per cent, environment compared to competitor countries.
growthin the exports of these two sectors
wasexceptional. In addition, the leather and footwear sector
faces the specific challenge relating to policies
In its take-off phase of growth, India that prevent converting its comparative
hasunderperformed relative to the East advantage abundance of cattleinto export
Asiancompetitors. The Indian opportunities.
underperformance,has been particularly marked
in the leathersector. Logistics:

Jobs, especially for women The costs and time involved in getting goods
from factory to destination are greater than
Apparels and Leather sectors offertremendous those for other countries.
opportunities for creation ofjobs, especially for
women. Further, few very large capacity containers
(VLCC) come to Indian ports to take cargo so
India has an opportunity to promoteapparel, that exports have to be transshipped through
leather and footwear sectors becauseof rising Colombo which adds to travel costs and hence
wage levels in China that hasresulted in China reduces the flexibility for manufacturers.
stabilizing or losing marketshare in these
products. Labor regulations

India is well positioned totake advantage of The problems are well-known: regulations on
Chinas deterioratingcompetitiveness minimum overtime pay, onerous mandatory
becauseage costs in mostIndian states are contributions that become de facto taxes for
significantly lower than inChina. low-paid workers in small firms that results in a
45 per cent lower disposable salary.

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There are strict regulations for overtime wage Indian leather exports also face high tariffs in
payment as the Minimum Wages Act 1948 partner country markets in exports of leather
mandates payment of overtime wages at twice goods and non-leather footwear with
the rate of ordinary rates of wages of the considerable added disadvantage in Japan.
Sector Specific Challenge Leather and Footwear
Indian apparel and leather firms are smaller Sector
compared to firms in say China, Bangladesh and
Comparative advantage in cattle
However, despite having a large cattle
Tax and Tariff Policies population, Indias share of global cattle
On the one hand, high tariffs on yarn and fiber population and exports of cattle hides is low and
increase the cost of producing clothing. India declining.
imposes a 10 percent tariff on man-made fibers
This trend can be attributed to the limited
vis a vis 6 percent on cotton fibres.
availability of cattle for slaughter in India,
To some extent this need not affect export thereby leading to loss of a potential
competitiveness because drawback for tariffs comparative advantage due to underutilization
paid on inputs is available. But drawbacks are of the abundantly available natural resource.
not provided for purchases of domestically
Policy response and Conclusions
produced yarn that will reflect the high tariffs,
adding to clothing costs. Apparel exporters will be provided relief to
offset the impact of state taxes embedded in
On the other hand, domestic taxes also favor exports, which could be as high as about 5 per
cotton-based production rather than production cent of exports.
based on man-made fibers with 7.5 per cent tax
on the former and 8.4 per cent on the latter. Similar provisions for leather exporters would
be useful. This is not a subsidy but really a
The global demand for footwear is shifting away drawback scheme that should be WTO-
from leather footwear and towards non leather consistent because it offsets taxes on exports.
Textile and apparel firms will be provided a
India traditionally has been an exporter of subsidy for increasing employment.
leather footwear. Its share of leather footwear
exports in the world market is more than double This will take the form of government
the share of non-leather footwear Efforts are contributing the employers 12 per cent
required to promote non-leather footwear to be contribution to the Employee Provident Fund
able to effectively capture world market share (EPF) (the Government is already committed to
particularly in view of Chinas slowdown of contributing 8.3 per cent; so the new measure
exports. will be additional to that).

Discrimination in export markets Based on recent inhouse analysis in 2016, it is

estimated that an FTA with the EU and UK can
Indias competitor exporting nations for
lead to 108029, 23156, and 14347 additional
apparels and leather and footwear enjoy better
direct jobs per annum in the apparel, leather
market access by way of zero or at least lower
and footwear sectors respectively.
tariffs in the two major importing markets,
namely, the United States of America (USA) and The introduction of the Goods and Service Tax
European Union (EU). (GST) offers an excellent opportunity to
rationalize domestic indirect taxes so that they
do not discriminate in the case of apparels
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against the production of clothing that uses
man-made fibers; and in the case of footwear
against the production of non-leather based

A number of labor law reforms would overcome

obstacles to employment creation in these

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