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India’s q2 gdp clocks 7.1% growth; massive fall from 8.2% but still beats China

India clocked a 7.1% GDP growth in the second quarter of the financial year 2018-19, down from previous quarter’s stunning 8.2%. This, however, is still higher than China’s economic growth of 6.5% during the same quarter.

The Reuters polls had estimated a GDP growth of 7.4%, while Chief Economist of State Bank of India Soumya Kanti Ghosh said that the GDP growth in the second quarter had a favourable base effect. The Q2 GDP growth, despite moderation, is also higher than 6.3% recorded in the same quarter last year.

In the first quarter, India clocked an 8.2% GDP growth buoyed by the manufacturing sector growth, while the agriculture sector also showed improvement. Economists said that the GDP growth may have slowed down due to dismal consumption and investment trends following a liquidity squeeze in the non-banking finance companies.

“GDP at constant prices in Q2 of 2018-19 is estimated at Rs 33.98 lakh crore, as against Rs 31.72lakh crore in Q2 of 2017-18, showing a growth rate of 7.1%,” Central Statistics Office (CSO) said in a statement.

Farm distress: why PM Narendra Modi should focus more on rural economy

Prime Minister Narendra Modi should be a worried man. With less than six months to go for the general elections, he is faced with farmers’ protests in various parts of the country. More than a lakh farmers have gathered in Delhi demanding a special session of Parliament to discuss their problems including an increase in minimum support price and a farm loan waiver to tackle indebtedness in rural areas. Due to low income and increasing cost of agriculture, farmers have been pushed to the brink and they have resorted to protests.

Rural distress was an important election issue in the recently conducted elections for Madhya Pradesh, India’s second largest state in terms of area. And it was partly blamed for the less than expected performance of the BJP in Prime Minister’s home state Gujarat in last years assembly elections.

Although agriculture accounts for only 15.4% of the GDP, more than half of India’s population is dependent on agriculture for livelihood. It means that more than half of India’s population or nearly 65 crore people are competing for little over 15% the country’s income.

India’s development model has historically been loaded against farmers, pushing them into subsistence farming. Lack of health and educational infrastructure in rural areas leaves rural youth unprepared for the job market.

Another serious problem with Indian agriculture is the lack of adequate irrigation infrastructure, making farmers largely dependent on the south-west monsoon and failure of monsoon results in failure of farming, leading to mass suicides of farmers.

Other than the vagaries of weather, Indian farmers have historically been dependent on informal private money lenders to meet their short-term fund requirements. Failure of monsoon or failure of crop due to any other reason like floods or insects have often led to the suicides of farmers in a region.

RBI’s excess capital should be used to recapitalise banks, says Arvind Subramanian

In the midst of a government-Reserve Bank of India (RBI) tussle over utilisation of capital reserves of the central bank, former Chief Economic Advisor Arvind Subramanian strongly supports the government’s view, saying the RBI is holding excess capital between Rs 4.5 and Rs 7 lakh crore which should be used to recapitalise the banks.

However, he adds that deploying capital is a decision for the RBI to take which it must do “voluntarily and proactively without even the whiff of interference from outside”.

Subramanian says he realises that in making this suggestion he is up against all the eminent current and former RBI officials, who argue that the RBI actually needs all the capital it has, but they are wrong.

“These officials command the respect of the public, and for good reasons. I think they are wrong. As Margaret Thatcher used to say, ‘One man and the Truth is a majority’,” the noted economist says in his upcoming book “Of Counsel: The Challenges of the Modi-Jaitley Economy”, published by Penguin.

“It is almost certainly the case that more money will be needed to make banks healthy… It is possible that the government will need to provide anywhere between Rs 3-5 lakh crore — in addition to the amounts already spent — to restore the fundamentally viable public sector banks to health,” Subramanian says.

He adds that there is only one public-sector entity — RBI — that has a strong enough balance sheet to deploy this magnitude of resources.

“Conservative estimates (as well as cross-country comparisons) based on our internal analysis suggest that if the RBI were to adopt the practices of most major central banks around the world in deciding how much capital is necessary, it would find that it has about Rs 3-4 lakh crore of excess government capital, some of which it could deploy for the clean-up,” he says.

Subramanian adds that RBI is an outlier among major central banks, holding about 28 per cent in capital, which is the fifth-largest amongst all major central banks, with two of the four above India in this ranking being oil exporters, which are special cases being highly vulnerable to the swings in the price of petroleum.

He says the RBI calculates risk based on a sample that almost no other central bank does and has set for itself a risk tolerance that is “ultra, ultra conservative, almost bordering on paranoia”.

“Whereas other central banks want to cushion against events with one per cent probability of occurring, the RBI wants to cushion against events that can occur with .001 per cent probability.”

“…Prima facie, then, it seems that the RBI is holding too much capital… Our estimate is that the RBI is holding excess capital between Rs 4.5-7 lakh crore… This excess capital should be redeployed, shifted from where it is not needed and put instead where it is needed urgently, namely, in public-sector banks,” he says.

However, he warns that any redeployment of RBI capital must be seen not as a government demand but as a voluntary commitment of the RBI for the greater good, and should be done only after extensive consultation.

“If there is one strong balance sheet and one weak, there is no good reason the former should not come to the rescue of the latter. We build up strength in balance sheets not for strength’s sake but to use that strength. Savings are meant for rainy days and when rainy days come, savings should be run down.

“During and after the global financial crisis, major central banks across the world have lent the heft of their balance sheets to pull economies out of dire economic circumstances,” the former CEA says.

He adds the legitimacy of central banks is enhanced when they take actions to address serious problems. “When reputations and strong balance sheets are put on the frontline in service of the economy, these assets, far from getting depleted, are actually replenished.”

 

Commerce minister Suresh Prabhu met several sovereign wealth funds to attract investments

Commerce and Industry Minister Suresh Prabhu has held a series of meetings this week with global sovereign wealth funds including those from Australia, Canada, Singapore, and Korea to attract investments in India, an official said. “In the last two days, the minister separately met global pension funds, sovereign wealth funds and other large funds from Australia, Canada, Singapore, Korea, Japan, Norway and the European Union and the US.

All are looking at India for good investment opportunities,” the government official added. Last month, the minister met the chairman of Abu Dhabi Investment Authority (ADIA), the largest sovereign wealth fund in the world, and sought investments in various sectors including infrastructure. ADIA has shown interest in setting up an India desk, and the ministry is facilitating this initiative. “On December 7, the ministry is also organising a meeting of global funds in Goa,” the official added.

Over 350 delegates are expected to participate in the meeting in Goa. According to the data of the Department of Industrial Policy and Promotion (DIPP), foreign direct investment in 2017-18 grew by 3 per cent to USD 44.85 billion. Foreign direct investment (FDI) is important as India would require huge investments in the coming years to overhaul its infrastructure sector to boost growth. Overseas inflows help maintain pressure on the country’s balance of payments and value of the rupee.

‘42% SMES in India find accessing finance difficult’

For small and medium enterprises (SMEs), accessing finance is the most difficult part and most of them rely on traditional bank loans to run their businesses. A global survey by American Express underlines that 42% of Indian respondents find access to finance to grow business difficult, as compared to a third of their global peers. The survey says that 82% of all SMEs plan to use bank loans. However, with rising borrowing costs, Indian SMEs are taking a hard look at their finance options. In fact, 69% of the fast growing ones say they will tap other sources of funding such as public equity. Managing expenses effectively is a key focus area for Indian SMEs who are now placing equal priority on expense management as much as on increasing revenue.

Saru Kaushal, vice-president and general manager, Global Commercial Services, American Express Banking Corp, India says: Small enterprises are balancing revenue growth with efficiency improvements and leveraging innovation and strong customer relationships. The American Express Global SME Pulse 2018 survey highlights that time-consuming application process, high interest rates and hidden fees are the top pain points for SME entrepreneurs.

“At present it takes around 30-40 days for small entrepreneurs to get loan from banks because of documentation process and credit evaluation. But with new technology solutions, the process can be done faster and entrepreneurs can get quick access to funds,” Kaushal says. Over three quarters of Indian SMEs say that customers are demanding more new or tailored products and services, and some 44% plan to apply new technology to help them redesign products or services.

‘Saubhagya not sole reason for high AT&C losses’

The electrification of new households under the Central government’s Saubhagya scheme is not the only cause for a few major states recently reporting high aggregate technical and commercial (AT&C) losses, power minister RK Singh said on Thursday. The minister was speaking to the media after reviewing the progress of the states in the 100% household electrification scheme on Thursday.

“All the new connections under Saubhagya are metered, reducing the scope for theft, but the billing and collection efficiency need to be improved,” Singh added. FE recently reported that states such as Uttar Pradesh, Bihar, Chhatisgarh and Jharkhand, which have electrified households at the fastest rate under Saubhagya have reported AT&C losses of more than 30% at the end of September.

It was pointed out at the meeting that if 100% household electrification is to be achieved within December, 2018, about 2.96 lakh houses are to be electrified every day from the ‘30 days moving average’ speed of about 70,000 per day. About 97.7 lakh households are left to be electrified in the country. The largest number of unelectrified households are in Uttar Pradesh, Assam, Rajasthan, Jharkhand and Odisha.

Projects worth Rs 13,526 crore have been sanctioned under Saubhagya, out of which Rs 2,868 crore have been disbursed till date. Out of this, Uttar Pradesh has received Rs 1,124 crore. Prime Minister Narendra Modi had launched the Saubhagya scheme on September, 2017. The power ministry had reported the electrification of India’s all 5,97,464 inhabited villages in April this year. When the Modi government took over, there were 18,452 unelectrified villages in the country.

The minister said that few states have been facing supply issues for equipment like meters, poles and transformers. To enthuse power distribution companies (discoms), Singh has also announced rewards of Rs 100 crore to the entities which achieve electrification targets first.

As FE reported earlier, Uttar Pradesh has regularised a significant portion of the 35 lakh illegal connections in the state, but a lot of consumers are not willing to take new Saubhagya connections. Assam is anticipating further challenges in erecting poles in the paddy fields during the harvesting season. Rajasthan’s progress was impeded as it had to re-tender projects with the rise in average expenditure per household after deciding to connect more households through ‘off-grid’ mechanism.

RBI eases norms for NBFCs to securities loan books

The Reserve Bank of India (RBI) Thursday relaxed norms for NBFCs to securitise their loan books, a move likely to ease the stress in the sector facing a crisis of confidence. As per a notification of the RBI, non-banking financial companies (NBFCs) have been permitted to securitise loans of over five-year maturity after holding them for six months on their books.

“In order to encourage NBFCs to securitise/assign their eligible assets, it has been decided to relax the Minimum Holding Period (MHP) requirement for originating NBFCs, in respect of loans of original maturity above 5 years, to receipt of repayment of six monthly instalments or two quarterly instalments …,” RBI said. The central bank has also prescribed certain Minimum Retention Requirement (MRR) for NBFCs for availing the relaxed norms.

The relaxed dispensation, RBI added, will be applicable to securitisation/ assignment transactions carried out during a period of six months. Commenting on the RBI’s move, Vibhor Mittal, Group Head (Structured Finance), ICRA said the relaxation in MHP criteria would primarily benefit housing finance companies and NBFCs offering mortgage loans where the loan tenure is typically more than five years. “A greater proportion of their loan book would now become eligible for securitisation,” Mittal.

Accordingly, these entities can raise more funds through the securitisation route, which will provide them with additional liquidity, Mittal added. NBFCs and HFCs are facing a crisis of confidence following the default by IL&FS in late-August, which led to its takeover by the government last month. This, in turn, led to a liquidity crunch for the sector.

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