INDIAN ECONOMY & CONTEMPORARY TRENDS“Don’t read success stories, you will only get a message. Read failure stories, you will get some ideas to get success”. I believe the “Corporate”

I N D I A N E C O N O M Y &

B U S I N E S S

– C O N T E M P O R A RY T R E N D S

& E V E N T S

A M U S T R E A D F O R -

➢ S T U D E N T S P R E P A R I N G F O R M A N A G E M E N T ,

B A N K I N G A N D C I V I L S E R V I C E S E X A M .

➢ S T U D E N T S O F B U S I N E S S , F I N A N C E A N D

E C O N O M I C S .

➢ A L L R E C E N T G R A D U A T E S A N D O T H E R N O N -

F I N A N C E E N T H U S I A S T S .

INDIAN ECONOMY & BUSINESS

Page 2

Letter from the Author

Dear Readers,

It is matter of great pleasure for me to present this book to you. Briefly, I am an IIT Roorkee-IIM Calcutta graduate with over 20 years of professional experience. My professional life so far has been a struggle to find purpose of my life and this book is a culmination of that quest.

The book is a collection of articles analyzing the major Economy & Business events of the financial year 2016-17, a result of my conviction about utility and value of this source of knowledge. It owes its origin to my own difficulty in understanding business/economy/policy events during my MBA. The thought and my experience in research & writing prodded me to come out with this product providing simplified, yet insightful and engaging analysis of key developments in these areas.

The book attempts to reach out to all youngsters, particularly, those appearing in Management, Banking, Civil Services and similar entrance exams. I am sure this would go a long way in helping you prepare for GD/WAT/PI etc.

Apart from that, the book would also be an extremely useful read for those are already in various management institutes or studying Economics, Finance, Business etc. This would not only prepare you for your job interviews but also because it is important for you all to have a broad understanding of these issues to evolve as smarter professionals.

Other than the articles on Economy, Policy, Banking etc, the book also delves on corporate failures and decisions gone wrong (without getting into governance issues). As Former President, Late APJ Abdul Kalam had said, “Don’t read success stories, you will only get a message. Read failure stories, you will get some ideas to get success”. I believe the “Corporate” section can provide considerable insights on how things go wrong. Reminds


Page 3

me of what Nokia CEO said, “We didn’t do anything wrong, but somehow, we lost”…

This, together with the section on “Policy”, also throws light on practical aspects of business and policy decision making. This is a modest attempt to achieve what Honorable President Pranab Mukherjee said, “Adjunct faculty from the industry and research institutions can provide practical orientation to course modules”.

The endeavor is to keep the articles simple and focus on broad trends/ insights rather than on numbers. There may appear to be a bias towards policy issues as these are even more complex and less understood even though they have much larger ramifications.

So friends, here is the book for you. Would be happy to hear from you. My Mail id - [email protected].

Happy Learning and Take Care…

Cheers!

Ashish Agrawal


Page 4

Table of Contents

ECONOMY ............................................................................................... 9

Budget 2017-18 – From ‘Swachh Bharat’ to ‘Clean India’..! ................ 10

Budget – Revenue and Expenditure Analysis ......................................... 12

Budget – Understanding Deficit Terminologies ..................................... 14

(Image Source – Budget documents) ................................................ 15

Budget Trends – Increasing Tax/GDP Ratio and Capital Expenditure. . 16

Economic Survey Highlights .................................................................. 18

Indian Government Debt – An Overview. .............................................. 20

Analysing India’s External Debt ............................................................. 22

(Image courtesy – Ministry of finance, External debt report) ...... 23

Indian Rupee – Is It Appreciating or Depreciating..?? ........................... 24

Status of Employment in India ................................................................ 26

Towards Energy Security – India’s Strategic Oil Reserve ..................... 28

Government Subsidy –Where does the money go? ................................ 30

Agriculture Sector – Will It Get Its Due...?? .......................................... 32

Sick PSUs – Way forward… ................................................................... 34

Analyzing India’s Balance of Payment – I ............................................. 36

India’s Balance of Payment – (Part II) .................................................... 38

Corporate & Financial Sector Performance – RBI Report.. ................... 40

CPI and WPI Inflation- Making sense of numbers..!.............................. 42

Deciphering Core Sectors ........................................................................ 44

GST – Towards a National Market. (Part I)............................................ 46

Goods & Service Tax – Part II ................................................................ 48

India's Imports - Where does the money go..?? ...................................... 50

Paris Agreement and India’s Commitment – A brief ............................. 51


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Towards Energy Security – India’s Oil Hunt..! ...................................... 53

The “Surgical Strike” on Black Money..! ............................................... 55

Demonetisation – How does it affect government finances..?? .............. 57

Demonetisation Impact – Understanding Co-operative Banks.. ............ 59

Demonetisation – Absorbing the Excess Liquidity… ............................ 61

Demonetisation – Will It Improve Tax/GDP Ratio..?? .......................... 63

Demonetisation – Towards Less-Cash Economy ................................... 65

Demonetisation – Success or Failure..?? ................................................ 67

Foreign Capital Inflows – India’s Performance ...................................... 69

Understanding Universal Basic Income (UBI) ....................................... 71

Strengthening Manufacturing – Case of Apparel and Leather

Industries… ............................................................................................. 73

The Giant Leap for India..! ...................................................................... 75

POLICY & REGULATIONS ................................................................. 77

Gold Monetization Scheme (Part I) ........................................................ 78

Gold Monetization Scheme (Part II) ....................................................... 79

Insolvency and Bankruptcy Code - II ..................................................... 82

Mauritius Treaty Amendment -A brief… ............................................... 84

E-NAM – A game changing initiative..! ................................................. 85

Regulating Large borrowers – RBI Proposal.. ........................................ 86

Monetary Policy Committee – What it entails ........................................ 88

Gas Pricing Policy - Power Sector… ...................................................... 89

Civil Aviation Policy – A brief… ........................................................... 91

Restructuring SDR…! ............................................................................. 93

Telecom Spectrum Auction – A brief.. ................................................... 95

Fertilizer units Revival – A transformational initiative..! ....................... 97

Telecom Sector – The SUC muddle........................................................ 99

Government e-Marketplace – A Gem indeed..! .................................... 100


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Untangling Corporate Bond Market….................................................. 102

Boosting Corporate Bond Market.. ....................................................... 104

Understanding Public Debt Management Agency.. .............................. 106

UDAY – Will the Discoms Rise Now..??! ........................................... 108

Understanding GAAR (General Anti-Avoidance Rules) ..................... 110

Understanding Shell Companies… ....................................................... 112

Towards an efficient Electricity market… ............................................ 114

BANKING & FINANCE ...................................................................... 116

Banks NPA – A Primer (Part I) ............................................................. 117

Banks NPA (Part II) .............................................................................. 118

NPAs – Sectoral Analysis ..................................................................... 120

Punjab National Bank - Why this provisioning..? ................................ 122

India’s Financial Sector – Understanding the structure.. (Part I) ......... 124

India’s Financial Sector... (Part II) ........................................................ 126

Understanding India’s Insurance Sector.. ............................................. 128

Asset Reconstruction Company – From Slag to Cement..! .................. 130

NBFCs – An Overview.. (Part I) ........................................................... 132

NBFCs – An Overview… (Part II) ....................................................... 133

Money Supply – Understanding the Different Forms.. ........................ 135

Banks Loan Composition – An Overview… ........................................ 137

Banking Sector Interconnectedness… .................................................. 139

Bank Recapitalization… ....................................................................... 141

‘Bank’ing on Consolidation.. ................................................................ 143

INDUSTRY ........................................................................................... 145

Survey of Indian Industries – The government paper.. (Part I) ............ 146

Survey of Indian Industries – Part II ..................................................... 148

Nuclear Power – The demonised resource… ........................................ 150


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Power Sector Consolidation – The Rationale.. ..................................... 152

Corporate Investment – Is there a turnaround?? ................................... 154

Towards Efficient Electricity Market… ............................................... 156

Industry Analysis – Shipping Industry .................................................. 158

Solar Power in India – An Overview.. .................................................. 160

Industry Analysis – Steel Industry.. ...................................................... 162

Natural Gas Market in India – An Overview.. ...................................... 164

Power Sector – Results and Overview .................................................. 166

Cement Industry – Results and Overview ............................................. 168

Automobile Industry - Results and Overview....................................... 170

Petroleum refining sector – Results and Overview ............................... 172

Wind Power – Gain with the Wind…! .................................................. 174

CORPORATE ....................................................................................... 176

Vijay Mallya – The great chase..! ......................................................... 177

Tata Steel Corus buy – What went wrong… ........................................ 179

GMR Energy – Is the divestment enough… ......................................... 181

L&T and Tata Steel – A tale of two companies..! ................................ 183

Ultratech Jaypee deal – Lenders take all..! ........................................... 185

HCC – Too old to fail..! ........................................................................ 187

Tata Docomo JV – A deal gone wrong.. ............................................... 189

Grasim – Aditya Birla Nuvo Merger

– Towards Group Consolidation.. ......................................................... 191

Cairn – Vedanta Merger. Deal Explained.. ........................................... 193

Tata Group – Reading Cyrus Mistry’s mind..! ..................................... 195

ABG Shipyard – From Boom to Doom ................................................ 197

Rosneft - Essar Deal - A New Beginning

for Indian Refining Industry .................................................................. 199

Reliance ADAG – Realigning Businesses… ........................................ 201


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Mistry’s exit – A disastrous succession… ............................................ 203

Impairment Charges – Tata Steel Europe ............................................. 205

Understanding RIL-ONGC Gas Migration Dispute ............................. 207

Tata Sons & Group Companies – Understanding the Board Structure..

............................................................................................................... 209

Vodafone – Another case of costly acquisition and write-off… .......... 211

Understanding ONGC – GSPC Gas Block Deal .................................. 213

Vodafone-Idea Merger Proposal – The Rationale ................................ 215

Understanding “Compensatory Tariff” ................................................. 217

INTERNATIONAL ............................................................................... 219

Brexit…! ................................................................................................ 220

No end to hunger yet – FAO report.. .................................................... 222

Explaining Negative Interest Rate – Japan’s case.. .............................. 224

How bad is Global debt overhang – IMF Report. ................................. 226

Chinese Economy – Challenges of Transition… .................................. 228

Understanding Hyperinflation – Economy of Zimbabwe..................... 230

End of Globalisation..??? ...................................................................... 232

Understanding Greece Debt Crisis… .................................................... 234

Global Trade – An Overview… ............................................................ 236

IMF World Economic Outlook ............................................................. 238

ETCETERA ........................................................................................... 240

Inland Waterways – Tapping the potential.. ......................................... 241

Ken Betwa river linking – A tough, ambitious project… ..................... 243

The Legacy of Raghuram Rajan… ....................................................... 245

Chabahar Port agreement… .................................................................. 247

Startups – The Churn Continues ........................................................... 249

End Note - .............................................................................................. 251


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ECONOMY


Page 10

Budget 2017-18 – From ‘Swachh Bharat’ to

‘Clean India’..!

The union budget for the year 2017-18 made no big bang announcements but the undercurrent was loud and clear. The society – individuals and corporate – has to become more transparent and more accountable; in FM’s words, a move towards ‘clean India’. The Finance Minister announced a series of measures to weed out black money including political funding, making individuals pay for unaccounted income and so on. Other than the usual thrust on rural economy and infrastructure, sops for MSME and tax reduction for low income bracket stand out. A look at some of the highlights..

The budget gives a damming figure on deposits after demonetization. Amount

between Rs 2 lakh and Rs 80 lakh were deposited in more than one crore

accounts. Further, deposits of more than Rs 80 lakh was made in 1.5 lakh

accounts. Total amount deposited in these accounts stands at a staggering Rs 10.4

lakh crore, more than two-thirds of total amount demonetized..! The budget gives

thrust to get these people into the tax net and the result seems to be showing.

Advance income tax for the current year so far has recorded growth of as much as

35%.

Income tax for smaller companies with annual turnover of up to Rs 50 crore has

been reduced from 30% to 25%. This is to correct the anomaly of more than 4%

higher tax paid by MSME sector as compared to large corporate. It may be noted

that MSME segment accounts for larger share of employment generation and

higher available profits can give a considerable boost to employment generation.

A far reaching announcement is computerization of all Primary Agriculture

Credit Societies (PACS). PACS provide the last mile connectivity in the rural

sector financing, yet, mired in inefficiency due to inadequate regulatory

oversight. The move would go a long way in reducing this deficit.

Real Estate continues to face one blow after another, probably repentance for

past excesses. Builders will now have to pay tax on notional rental income for

flats/building one year after the completion certificate is received even if it is

unsold. This again, is a smart move, which would penalize builders for holding

on to inventory and should add to the supply in the market, thereby, bringing

down prices.


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In terms of aggregate fiances of the government, FM has projected total revenue

of Rs 17.8 lakh crore, growth of 5.5% over current year. There is tight leash

proposed on expenditures which are projected to reach Rs 21 lakh crore.

Excluding interest outgo, this implies an increase of only 5.3% (against projected

12.3% increase in the current year). However, the projection can suffer, primarily

from global uncertainties such as crude oil prices, decline in exports with de-

globalization etc.


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Budget – Revenue and Expenditure Analysis

The Budget for year 2017-18 projects a total shortfall of Rs 5.5 lakh crore with total expenditure projected at Rs 21.5 lakh crore against receipt (excluding states’ share) of Rs 16 lakh crore . A look at the different components of the budget.

Receipts are classified as revenue receipt or capital receipt. Revenue receipt are further classified as tax revenue or non-tax revenue such as dividends, interest receipt etc. Capital receipt are primarily disinvestment income, spectrum sale etc. However, the primary source of receipt is tax revenue (75% share), further classified as direct and Indirect taxes revenue. Direct taxes comprise of individual income tax and corporation tax which is the taxes paid by companies on their profits. Budget for 2017-18 projects a sharp increase of 25% in income tax at Rs 4.3 lakh crore whereas corporation tax is projected to reach Rs 5.4 lakh crore, growing at 9%, nearly the same as in the current year. The sharp increase projected in income tax, which has grown at 35% in the current year as so far, assumes significance on account of large increase in bank deposits post demonetization. The government could even be modest in its calculations as this number may end up even higher than this.

Indirect taxes consist mainly of Customs, Excise and Service tax. Budget projects total indirect taxes to reach Rs 9.3 lakh crore, an increase of 9% against 20% increase in the current year. The lower projections are probably a result of anticipated loss due to transition to GST. While the total tax revenue works out to Rs 19.1 lakh crore, about 35% of this has to be shared with the state government, leaving Rs 12.3 lakh crore for the central government.

An important trend in revenue collection is shift towards direct tax, which are levied on income, from indirect taxes which are levied on production which could go towards consumption, exports or investments. Direct taxes formed only about 26% of revenue collection (direct plus indirect) in FY00 which has now gone beyond 50%. Although there are gaps in the hypothesis, yet, direct taxes are considered more efficient method of collection since it targets rich more than the poor.


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Other than tax revenue, budget projects Rs 2.9 lakh crore of non-tax revenue receipt and 0.8 lakh crore of capital receipt. Even though the sick PSUs give sufficient bad name to the government, there are a large number of profit making PSUs which together should provide Rs 1.4 lakh crore of dividends. Capital receipt is the number prone to maximum deviation as disinvestment targets are often missed.

The expenditure side shows interest payments as the biggest block accounting for as much as Rs 5.4 lakh crore, more than 40% of tax revenues. While this may look like a middle class household paying a large part of the salary for housing EMI, its share has actually come down from more than 60% of tax revenue in FY00. Among other items, Pension & other government expenditure, Defence expenditure, Railways and food subsidy are projected to cost about Rs 2.2 lakh crore, Rs 1.8 lakh crore, Rs 1.8 lakh crore and Rs 1.5 lakh crore. Other than the share of tax revenues, central government also provides a significant grant-in-aid to the states which is projected at Rs 3 lakh crore during the year.

Excluding there items, totaling about Rs 16 lakh crore, which are largely permanent in nature, government is left with Rs 5.5 lakh crore for actual developmental work. Of this, Rs 1.1 lakh crore would be spent in rural area for program such as MGNREGA, crop husbandry etc. whereas nearly the same amount would be spent on social services such as education, employment, medical, housing etc.


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Budget – Understanding Deficit Terminologies

The most important and the first number any economist looks at while analyzing the budget is the fiscal deficit which has been projected to be 3.2% of GDP for 2017-18. However, other than that, budget also throws up other deficit numbers such as primary deficit, revenue deficit and effective revenue deficit..! So what all are these deficits and their importance?? A brief look..

Fiscal deficit (FD) is the highest of the deficit which is the difference between the sum total of all receipt minus the total outgo from the government accounts. The difference is what government has to borrow to keep itself going. FD has high significance because this determines the amount of money government borrows from the market. A high FD leads to ‘crowding out” of private investment, primary reason why economists focus on this number, since the total lending capacity of the economy is fixed.For FY18, budget projects total expenses of Rs 21.5 lakh crore against a receipt of Rs 16 lakh crore, leaving a deficit of Rs 5.5 lakh crore. However, not all of this has to be borrowed from the market as government also receives significant amount as loan from National Small Savings Funds (NSSF) (Rs 1.0 lakh crore), provident fund etc.

The next in the budget statement is revenue deficit (RD) which is the difference between revenue receipt and revenue expenditure. Thus, it removes capital items – both on the receipt and expenditure side since

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INDIAN ECONOMY & CONTEMPORARY TRENDS“Don’t read success stories, you will only get a message. Read failure stories, you will get some ideas to get success”. I believe the “Corporate”