Volume I - Wealth Creation

2020-06-16 07:19:46

Volume I - Wealth Creation

The hand of trust to support invisible hand strengthened:

equal opportunities, fair competition, EODB, Policy intervention, trade for job creation, Scale up banking sector

WEALTH CREATION WC

Sensex has increased not due to base effect but due CAGR.
Importance of WC :
- More benefits to workers, RM procured help suppliers
- Capital Expenditures help manufactures of capital equipment
- Forex rev check CAD, Tax rev help Gov spend more on welfare
opening of sectors led to :
- More credit in bank sector, MF sector
- Increase cargo vol in small ports, Same for Cement and steel
- Passenger traffic in Open sector Roads vs Closed Railways

Instruments of WC

inc in number of cumulative entrepreneurial firms - GDP growth
Fair competition - Pro-Business while more influence of already estd players - pro-crony
Price intervention in ar like pharma formulation has seen less supply than unregulated pharma formulations
integrating Assemble in India to Make in India will create 4 crore jobs by 2025, imp resource allocation
Pace of EoDB reform inc. IN lack in starting new business, Registering property, paying taxes etc.
Authorized Economic operators scheme has smoothened the process of registered electronics importers and exporters.
Efficient Financial sector ex as in US, Japan, China
PSBs see 70% of total market share but they are inefficient
Tracking the health of shadow banking sector
Disinvestment - inc market capitalisation, value of shareholder’s equity
12 coys constituting 25% NPA defaults
Gobal Crisis, large NPA defaults - trust deficit
Info asymmetry can inc NPAs, info repositories help warn about impending NPA in companies to banks/NBFCs
Market malpractices like financial misreporting, wilful defaults and suboptimal supervision viz low manpower in our regulators should be checked

Entrepreneurship and Wealth Creation at the Grassroots

2020-06-16 10:01:30

Entrepreneurship + GDP :

IN has 3rd largest entrep ecosys in world per WB
growth rate from 2014-2018 of new firms has been 12.2%.
Growth most in services
10% inc in reg of new firms has led to an inc in 1.8% inc in GDDP
Entrepreneurship dispersed, dominated by peninsular IN is lacking in NE states
Impact of entry of new firms most in mfg sector, can help IN close productivity gaps
Entrep in Agri sector not geographically localised spread evenly
Highest mfg entrep activity in states w/ flexible labour laws like RAJ, PUN
Transition of labour and resources from less productive to more productive sectors is required
Delhi, Mizoram, UP, Kerala, Andaman and Nicobar have highest activity in Services sector.

Determinants of Entrep :

Social infra like the education level, no. of colleges etc
Physical infra like proximity to large population centre, access to technology and finance.
Other : access to local markets, proximity to population centre when goes beyond a point increases hyper competition and decrease new firms

Policy measures to fast track entrep, wealth creation

Increase literacy levels, privatising educational institutions
Investment in road and connectivity in such a way that it does not discourage new firms through hyper competition
EoDB, flexible labour laws especially in mfg sector

ProBusiness Vs Pro Crony

2020-06-17 08:43:11

Pro-business, creative destruction and wealth creation

Sensex did not undergo revisions in listings during the initials years till 1991
New firms entered and older ones left post 1991, creative destruction - broadening of sectors listed that was earlier dominated by manufacturing - bridging gap b/w market cap of big and small companies.

Image unavailable in web version: Figure 11: Difference between pm-business and pro-crony policy Pro-business •Firms compete on a level playing field •Resource allocation in the economy is efficient •Citizens’ welfare is maximized Pro-crony •Some incumbent firms may receive preferential treatment •Resource allocation in the economy may not be efficient •Citizens’ welfare may not be maximized

Politically connected firms give more returns in a pro-crony environment but hamper overall economic growth
- 26% of roads completed under PMGSY are not mentioned in census suggesting they were never built but money for them was disbursed
- Allocation of resources instead of auctioning them - dec in overall growth of coys
Wilful defaulters make distresses opaque, make large loans to third parties, wrongly allocate shares leading other borrowers away from market

Undermining Market : Govt Intervention Hurts More than it Helps

2020-06-21 09:39:34

IN is shackled economy
Index of Economic Freedom (given by Heritage Foundation) ranks India 129th
Index of Global Economic Freedom (given by Fraser Institute) ranks India 79th among 162
Economic freedom positively affects wealth creation
Gov intervention distorts supply-demand equilibrium
Essential Commodities act
- Ensures affordability, restricts hoardings
- But creates market distortion, no distinguishes b/w genuine hoardings and malicious ones, leads to diff b/w wholesale retail is increasing, long term dis-incentivises storage infra - volatility in price, harassment of traders
- Suggests - strengthening Price Stabilisation Fund, Dev of effective forecasting mechanism, stable trade policies, integration of ari market
- Drugs Cosmetics Act under ECA
  - Ensure access, regulated through NPPA DPCO,
  - Price of regulated drugs inc,
  - Repeal ECA replace w/ DBT
FCI purchases stores transports distributes and sells food grains, NFSA 75% rural 50% Urban should get food, Gov procures 40-50% of surplus
- high cost food grain economy, investment is negatively correlated, disconnect b/w demand supply, discourages private investment
- Suggestions - Crop neutral direct investment subsidies, restrict NFSA coverage to bottom 20%, Conditional Cash Transfers
Debt Waivers - full waivers consume save and invest less are less productive, share of formal credit dec, helps only when beneficiaries genuinely distressed, -ve impact on credit market, destroys credit culture
- Certain changes already made were repealing of FERA, MRTP, Urban Land Ceiling act, Capital Issues act
- NeedSubsume Factories act by Occupational safety code, repeal Sick Textile Undertaking, Recovery of Debts act 1993

Creating Jobs and Growth by Specializing to Exports in Network Products

2020-11-01 12:04:12

Integrating Assemble in In w/ Make in IN create 4 crore well paid jobs by 2025, raise export share to 3.5%
IN has low participation of Global value chains, diversification of product, small scale op, driven by capital and skill intensive product, low market penetration in high income countries
IN needs to conc on textiles, clothing, footwear, toys ie traditional unskilled labour intensive industry,
Network Products - 10% of IN export mostly road vehicles, can help 25% towards $5 tril economy
FTAs - IN has 14 FTAs
Way Ahead - create ecosystem, reduce import tariffs on intermediate products, implementation of factor market reforms - flexibility, enabling environment for lead firms, low service link cost
IN has succeeded in making compact cars, mobile phones 2nd largest producer after CN

Targeting Ease of Doing Business

2020-11-01 13:16:25

WB EoDB ranking 142 trails in Starting Business, Registering Property, Paying taxes, enforcing contracts
Challenge in complexity of IN governance including large no of statutory/ legislative compliance
12-16 licenses required to open restaurant, 4 in CN
Most mfd units cannot scale up vis a vis VTE, CN
Cross Border Trade
- More time, high cost of documentary compliance esp in cross border trade, most delays in port and border handling
- Suggest increased digitisation, seamless integration of multiple agencies into 1 platform
- Authorised Economic Operator AEO - by WCO Safe Framework of Standards, inc international supply chain security and facilitate movt of legitimate goods.
Case study - importing carpets better than exporting ones, process of exports in airport much easier needs to be replicated in sea ports

Golden Jubilee of Bank Nationalisation

2020-11-01 13:43:21

IN banks disproportionately small, credit growth declined significantly, need 6 banks in top 100 for 5TE, Share dec from 91% in 1980 to 70%
Benefits -
- Rural bank branches inc 10x
- Credit to rural areas inc 20x
- Credit to Agri inc 40x
PSBs account for 93% bank frauds, 80% of total NPAs, low return on investment
Way Ahead - leverage demographic dividend, modern digital infra, GST structure, use Fintech, employee stock ownership at all levels, better recruitment practice
Wilful defaulters show low value of collateral can be deterred by Geo Tagging, fixing GPS devices, Creating Integrated Data
Use of Fin Tech in PSBs
- Pre requisites are local market insights, long operating histories, vast geographical footprint, availability of large data, data analytics, modelling skills, specialist human capital
- Use Machine Learning - dec operating cost, disjointed process flows, subjective decision making

Financial Fragility in NBFC Sector

2020-11-01 14:47:16

ILFS and DHFL defaults - decline in equity prices, dec capacity to raise funds, dec overall credit growth, dec in GDP growth
Rollover Risk - frequent refinancing of debt causes higher financing cost
- Arises due to mismatch in asset liabilities, liabilities are over dependent on short term wholesale funds viz the LDMF(Liquidity debt Mutual Fund) sector if there is liquidity crunch here rollover to NBFC would be affected
Fin resilience is measured by Commercial Paper as % of borrowings, CAR, provisioning policy
Operating resilience are by cash as % of borrowings, loan quality and operating expense ratio

HFCs	Retail NBFCs
Longer duration of assets	Hold medium term assets
Less exposed to short term wholesale funding	More exposed
ALM risk dominates	Interconnected risk dominates
Fin and Operating resilience are dominating	same

Survey suggest a health score to use as early warning system with metrics like short term volatile capital, asset quality, short term liquidity, provisioning policy, CAR, OPEX ratio
- Monitors NBFC, suggest corrective measures, can direct capital infusion, set prudential thresh holds on extent of wholesale funding

Privatisation and Wealth Creation

2020-11-04 12:29:08

Performance of CPSEs suggests strategic disinvestment - Gov should discontinue its engagement in producing goods where private sector are prominent
Various disinvestment policies are : through minority stake sale, Listing PSEs, Strategic D, Buyback of shares, merger and acquisitions, launch ETFs, Monetisation of select assets of CPSEs
Post P CPSEs perform better than their peers in net worth, net profit, RoA, RoE, Gross revenue etc
Suggests aggressive disinvestment will promote profitability, efficiency, competitiveness, professionalism
Corporatisation of Disinvestment - Gov can transfer stake in listed CPSEs to separate corporate entity managed by independent board, lend professionalism and autonomy to disinvestment program

Is IN GDP Growth Overstated?

2020-11-04 12:46:13

Estimates effects investor sentiment
Obs made over older models
- Mis-estimated growth for over 51 other countries, variables used had unstable correlations w/ GDP estimate, assumption of parallel trend does not account statistical risk
Suggestions
- Macro variables should be synergistically viewed w/ micro level evidence,
- Lauded the setting up of Standing Comm on Economic Statistics SCES

Thalinomics

2020-11-04 13:00:06

Analysed veg and non veg thalis in 25 states/Uts including fuel price
Reform measures like PM AASHA, PMKSY, PMFBY, Soil Health Card, e NAM, NFSM, NFSA have helped
Daily wages have been compared w/ price of Thali
Observations
- Absolute prices of veg thalis have dec, affordability has inc,
- prices of all components been lower to projected prices,
- Thali inflation has cyclical nature,