The Impact of RBI rate cut

Atleast in this bi-monthly announcement, the whole country was expecting a rate cut by Reserve Bank of India (RBI) due to macro-economic trends. But, the extent to which the Central Bank would reduce the key rates was a real suspense. Expecting a 50 bps rate cut, the Nifty 50 appreciated in the morning, but after the announcement, it flattened out and lost 33 points in a single day. The impact on home and car loans may also be substantial as the banks may take a cue from the RBI and pass on the benefit to retail customers. On the other hand, the Rupee appreciated to a two year high (Rs.63.7) partly due to global trends and largely due to RBI announcement.

Plummeting of retail inflation was the impending reason to lower the interest rates. Consumer Price Index (CPI) is at three month low both by including and excluding Food & Fuel. Expectations of normal monsoons for the next quarter is another reason. However, there are many factors on which RBI is cautious. It stated that the structural and infrastructural bottlenecks which drive inflation are still elusive. So, this is the main reason for not cutting the interest rates by 50 bps. Also, the private investment in the infrastructure is still at a meager pace. Apparently, the India Inc. is not satisfied with the extent of the rate cut. They wanted a 50bps cut to further their investments in the infrastructure. The reason why the NIFTY50 flattened out by the end of the day.

However, foreign investors are pleased by the extent of the rate cut. Compared to other developing countries, the interest rates in India are relatively high. So, the investors began buying rupee by selling the dollars. In a single day, the rupee appreciated from Rs.64.08 to Rs.63.7. Which is heartening news for importers on whom India is majorly dependent. Also, the yield on bonds should come down as the interest rates have been decreased. This should significantly increase the price of the bonds. But the market moved in opposite direction as the 25bps cut was already factored. The bond yield closed at 3bps higher than its previous close.

There is no clarity on the further decrease of rate cuts. RBI is expecting a rise in inflation due to Seventh Pay Commission and other structural bottlenecks. RBI is not sure when the states hike their employee salaries following the seventh pay commission. It is also cautious about the extent to which banks will cut the interest rates given their burgeoning NPAs. In another study, it has been proved that only the segments in which there is a huge completion, banks would lower the interest rates. Low-interest rates in the home and car loans is a relevant example. Overall, it is a welcome move by the RBI but its still short of making the market happy.

Bihar Political Dynamics: Morality v/s Opportunism

In a single day, the politics of Bihar turned upside down. Nitish Kumar resigned as Bihar Chief Minister (CM) just to get back to the realm within a day. The reason stated for steeping down as CM is far from believable. As Tejaswi Yadav, son of Lalu Prasad Yadav, was not explaining the corruption charges against him, he resigned on moral grounds. The relationship between the both is Mahagathbandhan alliance which was ruling the state. Janata Dal(U), led by Nitish Kumar; Rashtriya Janata Dal(RJD), led by Lalu Prasad Yadav and Congress formed alliance in 2015 to contest elections. Now, the relationship was strained due to corruption charges on Tejaswi Yadav and Nitish Kumar had to face the heat.

It was alleged that in 2004, Lalu Prasad Yadav and Tejaswi Yada were involved in land-for-hotels case. Three acres of land was given as a bribe to Yadav’s family to secure a licence to run a hotel. But, Tejaswi Yadav accuses BJP of false charges as he was just 14 year old in 2004. Though the case is not yet closed, the damage is already felt in terms of erosion of ruling party credibility. Nitish Kumar’s move sounds morally correct but forming the government with BJP just doesn’t sound well. Nitish Kumar fielded himself as Narendra Modi’s competitor for Prime Ministership in 2014. Also, he won 2015 Assembly elections by projecting BJP as Hindutva party and his party as secular. Now, forming a government along with BJP looks opportunistic.

Present JU(U)-BJP government has 129 seats out of 243 Assembly seats. Earlier the Mahagathbandhan alliance had a whopping 178/243 seats. So, the opposition still wields greater power. Looking forward, the new alliance would be more beneficial to BJP than JD(U). JD(U)’s base was slowly eroding as they were unable to stand on their election promises. On the other hand, BJP was gaining more foot on the ground given the popularity of the Modi and his landmark reforms. So, now the BJP is in dictating terms both in the government and for the 2019 general elections. BJP could also propagate its ideology into the masses without much hindrance. There are also chances that BJP could completely erode JD(U)s popularity.

Of course, opposition would not sit idle watching all these moves. Congress would also think about continuing with RJD, given its notorious background. However, the options for congress are limited, especially when it is not in power at Centre. JD(U) should now be aware of every single move taken by the BJP or Congress given its vulnerability in the state. With these changing dynamics, people of Bihar should assert themselves for the development they deserve.

 

Unprecedented moves by the Indian Presidents

One of the most complicated relationships in the Indian History is between Indian President and the Prime Minister. Several courts intervened to solve the issues raised and they were successful to some extent. There have been many events which challenged the constitutional norms and questioned the existence of democracy. The President is Nominal Head and the real power lies in the hands of the Prime Minister. But, few Presidents, to protect the Constitution, have asserted their power. From our first President Dr. Rajendra Prasad to the People’s President Dr. A.P.J. Abdul Kalam, everyone had one or the other issue with the government. Critical events are discussed below.

In June 2006, then President Dr. A.P.J. Abdul Kalam shockingly refused to give his assent to the Office-of-Profit Bill. Indian Constitution bars Member of Parliament (M.P) from holding few offices and they are referred to as Office of Profit. Sonia Gandhi has just resigned her position as Chairman of National Advisory Council, which was assumed as Office of Profit. However, the Membership of around 43 MPs and 100 M.L.As were at stake. So, Congress government hurriedly passed Prevention of Disqualification (Amendment), Bill, 2006 to protect the People’s representatives. Abdul Kalam boldly sent his displeasure by not giving his assent to the Bill. But, according to the law, if the same Bill is passed by the Parliament and sent to President, he has no other choice but to approve the Bill. However, the impact was already felt in the form of embarrassment to the government.

Similarly, in 1986, Rajiv Gandhi government tried to pass Indian Post Office Amendment Bill but President Giani Zail Singh refused to give his assent. If passed, the Bill would provide the government with extraordinary powers to intercept any Post Office sent among the Indian Citizens. Also, Indian Constitution is silent on the time frame in which the President should give his assent. So, Mr. Zail Singh sat on the Bill till his term ended notwithstanding the simmering tensions between President’s office and Prime Ministers Office(PMO). This act of ‘not acting’ is also referred to as the use of Pocket Veto. This was the only case when the Indian President has used his Pocket Veto. On the lighter note, it is said that Indian President has the largest Pocket as he could hold the Bill for unlimited period of time.

Another incident was in the early 1950s when Dr. Rajendra Prasad expressed reservations to the Hindu Code Bill. The reason for their contention was their ideologies. Nehru supported a modern society with the focus on development and giving minimal emphasis to the religion. Whereas Dr. Rajendra Prasad, on the other hand, asserted the coexistence of religion along with development. So, they exchanged heated arguments in the form of letters. After many amendments, the Hindu Code Bill was passed including both the views. This Bill was seen as the present day Uniform Civil Code.

Thus, many Presidents tried to protect the Constitution using their powers. Let’s see what’s in store for Mr. Ram Nath Kovind.

Hello Corporates !! It’s time to pay your taxes at the Right place

All through the decades Big Corporates escaped paying taxes by operating from tax havens. This process is called Base Erosion and Profit Sharing (BEPS), wherein the Multi-National Companies (MNCs) could exploit the variations in tax structures across nations. Organisation of Economic Cooperation and Development (OECD) and G20 have been rigorously working to prevent this phenomenon using BEPS project. One of the outcomes of these efforts is Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Sharing (Multilateral Instrument or MLI).

MLI also prevents abuse of bilateral treaties by the third parties. The abuse is basically done in the form of Treaty Shopping by the MNCs. I would explain this with an example. Suppose, India and Mauritius have entered into a bilateral treaty to prevent double taxation. If this treaty is used by Chinese citizen for tax savings in capital gains, then it comes under Treaty Shopping. To prevent this, MLI has introduced the Principle Purpose Test (PPT) and Limit of Benefit (LoB) clauses. So, if a bilateral treaty is signed under PPT, then that treaty will be implemented under MLI. It restricts the usage of bilateral treaty to particular country citizens. Also, if the treaty is utilises for anything other than the intended purpose (spirit) of the treaty, then that transaction comes into question. Thus, the abuse of bilateral treaties could be prevented.

This landmark Convention was signed by 68 countries including India. India deferred implementation of General Anti-Avoidance Rules (GAAR) from 2015. At this particular juncture, it is unclear whether it would go ahead with GAAR or MLI. GAAR provisions are more stringent compared to MLI. It may also have a huge dent on Foreign Portfolio Investors (FPIs). Each and every International transaction can be traced in case of GAAR whereas the MLI allows questioning of those transactions which are in conflict with underlying treaties. India is yet to decide on the same.

However, Mauritius and Singapore are yet to sign the treaty. Investments from these two countries are huge and needs to be tracked and traced back for effective implementation of any anti-tax abuse policy. With the recent changes to Double Taxation Avoidance Agreement signed between Singapore and Mauritius, there have been even more investments. Tracking them is crucial for India’s development. We should wait and watch to see which way the ball would roll.

Reasons behind Indo China face-off

It’s shocking for every Indian that the nation which adhered to ‘No Offense Policy’ all through the decades, has sent its troops across Chinese border. Though there are few specific reasons for the present stand-off, many unsolved issues have been simmering for the past few years. Imminent reason being the focus of Chinese government on the Infrastructure in Bhutan. China is building a road in the Donglang area (Dokalam area as India calls it). India and Bhutan claims the land to be in Bhutan territory. But, China assumes that the area is in it’s border and has full rights over the construction. Donglang area is strategic in nature. If Chinese could build good infrastructure over there, it could easily capture the Chicken’s Neck, which is the connection between mainland India and North East. So, Indian troops are just protecting our close ally-Bhutan’s border.

However, the whole issue could have been diplomatically resolved. But, there were strong reactions from both the sides. This is expected due to other happenings across the border. First being the restriction of Indian pilgrims to Mansarover through Nathu la pass in Sikkim. China protested that the Indian pilgrims ad troops are entering its border in the name of pilgrimage. But, the underlying reason takes us to the second issue. China strongly countered the visit of Dalai Lama to Arunachal Pradesh. China claims a part of Arunachal Pradesh and hates Dalai Lama due to his opposition of Chinese intrusion into Tibetan border. Dalai Lama has taken shelter in India and China is absolutely unhappy about it.

Thirdly, India has off late become closer to USA. Trump has been opposing every move of China and he began to hinder global aspirations of China. Indian closeness to USA irks China and it may want to demonstrate that USA doesn’t come into India’s rescue when the latter is in trouble. There are also rumours that Pivot to Asia principle of USA is being rejuvenated. And the fourth issue being the India’s opposition to the $50 Billion Chinese One Belt One Road project. India strongly believes that the projects built by China are unsustainable and leave governments with a huge debt. Hambantota project in Sri Lanka is an example.

So, solving these issues one after the other is the impending duty of these two countries.

Modi visit to USA solved American concerns and not Indians

Mr.Narendra Modi’s visit to U.S.A has improved the bonhomie between Mr.Trump and India. However, it fell short of addressing India’s concerns. Major focus was on Infrastructure, Energy, Trade and Terrorism. Other key areas such as Climate change, H1B visa, Nuclear reactors, USFDA sanctions on pharmaceutical companies were kept out of the discussion. The joint statement issued by Mr.Modi and Mr.Trump contained more words than numbers. Absence of numbers indicates that no substantial discussions have taken place.

In the ever changing world political dynamics, Modi’s visit to USA has larger significance. Recent survey from Pew Research Centre showed that the trust on Mr.Trump is sinking. America’s image is also going down after Mr.Trump has assumed the Presidency. And at this particular moment, Mr. Modi visits America and got their work done in the form of Energy and Defence deals. Maybe he should have bargained more to push our interests. USA has would not provide further funds to India in the form of Green Climate Fund. A fresh deal across these lines would have been beneficial to India.

Of course, we could not expect wonders to happen in the first meeting. Sensible chemistry was clearly visible between the two leaders. Modi’s invitation to Trumps’s daughter, Ivanka Trump, for an Entrepreneurship summit is a smart move. She is one of the power centres in the White House. Engaging her in the negotiations will have wider and positive influence on Trump towards India. He also engaged First Lady Melania. It all looks like a good beginning. In the words of Trump, the relationship between India and USA were never better and stronger. The strength of his words is yet to be seen.

Why Tesla needs to enter India

A series of tweets by Elon Musk over the months have excited as well as disappointed fans over the entry of Tesla in India. Let’s take a look at why Tesla needs to enter the Indian market

Tesla is an American automobile manufacturer known for its electric-powered vehicles. The company is also known for power backup systems for homes and businesses. The whole excitement over Tesla’s entry began when Elon Musk replying to a tweet, about a question over Tesla’s India entry, Musk said, “Hoping for summer this year.”

Later, Elon Musk tweeted that the roadblock to entering the country was India’s sourcing requirements. However, the Government responded with the “Make in India” twitter account quickly clarifying that the country’s foreign direct investment (FDI) policy does not mandate manufacturers to comply with any minimum local component sourcing norm.

Elon’s Tweet on 2nd June 2017 “India commits to sell only electric cars by 2030. It is already the largest market for solar”, drew instant response even from Anand Mahindra, executive chairman of Mahindra & Mahindra group. He replied by tweeting with a challenge “Time you got out here Elon. You don’t want to leave that whole market to Mahindra do you? The more the merrier — and greener.” According to his latest tweet, Tesla is in discussion with the Indian Government about temporary relief from import penalties/restrictions for Tesla until a local factory is built.

There is still no clarity on whether Tesla is planning to enter the Indian market with cars or battery packs. If Tesla plans to enter the highly competitive Indian market, they have to ensure that customers will have access to service support and charging infrastructure to the last mile. They will also have to tackle issues with pricey import duty on vehicles from other countries. Many top companies including General Motors have failed on understanding the Indian automobile market and it’s imperative that Tesla does some ground work before investing in India.

Mahindra is the only automobile manufacturer in India producing electric cars and has managed to sell only 1,100 electric cars last year. They currently manufactures 2,000 electric cars a year and targets 5,000 units by 2018. Thus, there is a substantial need for high demand for electric cars in India and Tesla should be prepared for it. By 2030, India plans to sell only electric cars. With Air pollution a major problem in all Indian cities, people will eventually shift to electric vehicles but the transition is expected to take time.

Tesla had a disappointing run in China when it entered the market in 2014 and the company will hope not to repeat the mistakes in India. It’s unlikely that Tesla produces cars in India any time soon, but Tesla has a huge opportunity in India to build a Gigafactory that can produce lithium-ion batteries for PowerWall and cars. With the government making huge bets on solar energy – India is committed to increase the amount of electric power from clean energy resources to 40% by 2030, Tesla’s PowerWall might find its success in India. There is a huge demand in India to store energy generated from Solar panels and Tesla’s PowerWalls will have the capability to store energy that can power an entire village.

It’s also an opportunity of Tesla to build their network of SuperChargers in the country, before selling cars. The future of solar power and electric vehicles (EV) in India are closely interdependent and Tesla must be ready to make its way to make in India.

The Indian Farmer

Farming in India is not a profession but an emotion. The ongoing crisis in Maharashtra (MH), Madhya Pradesh (MP) and Rajasthan (RJ) has sparked that sensitive emotion. By the time, government understood the gravity of issue, upheaval has spread across India. Disenchanted farmers have taken to the streets of cities with the crops they have grown. Though the growth of Agricultural sector was relatively high in the MP, MH and RJ, the farmer has not been benefitted all through the years. The underlying issues and possible solutions are discussed below.

Main reason for protest is the lack of reasonable price for the produced farm. Due to an average rainfall in the previous year, there was a bumper crop. Most of the benefits of the crop are reaped by the middlemen. Farmers are only able to enjoy minimal proportion of their work. Government is still struggling with age old Agricultural Produce Market Committee (APMC) Act to regulate the middlemen and protect the farmers. But, APMC Act cannot accommodate all the category of farmers. For rich farmers, who could produce in large amounts, selling through ‘Mandis’ is counter-productive. Whereas the small and marginal farmers need a more stringent APMC Act to prevent middlemen from exploiting them. So, a more comprehensive Act is the need of the hour.

Another contentious issue is Lack of Infrastructure. Around 90 crore worth of food produced is wasted due to lack of storage. It would be even more in the previous year due to bumper crop. Cold storage facilities are being extensively built by the government but are only confined to Major food parks. The penetration is very low. Though there are few cold storages, operated by private players in rural areas, they are not affordable by a marginal farmer. The subsidies provided by the government are mostly appropriated by the rich farmers who could build them without the need of government support. I have myself seen these types of mismanagement in the southern parts of Andhra Pradesh. For these subsidies to be utilised effectively, they have to be utilised by farm cooperatives. Only then, farmers could afford storage facilities and have better bargaining power.

Through the decades, subsequent governments are working on the accessibility of credit for the farmers. Several initiatives such as Regional Rural banks, Micro Finance Institutions and other institutions such as NABARD are put in place. However, most of the banks are still struggling with their birth pangs. Even the implementation of Pradhan Mantri Fasal Bhima Yojana, is not in full swing. We need not require new schemes for the farming sector, but the need of the hour is their effective implementation. And the need of farm waivers at this particular period cannot be side-lined for marginal farmers. The step by Maharashtra on these lines is a welcome move.

The Forgotten Promise

Dear Indian,

68 years ago, all your elders consensually promised each other to abide by a set of rules and regulations. And created me as an embodiment of that promise. After they achieved Independence from British, it was essential to set a few common grounds for better and harmonious society. So, they enacted me, to remind next generations of the grand old promise. To accommodate all the ideologies, religions, races, castes and sex, I was made the largest in the world. I am made up of 448 Articles spread across 25 Parts and 12 Schedules. Of which, only the part III, which consists of Fundamental Rights is mainly reiterated and the rest is almost forgotten. Especially, Part IVA, consisting of Fundamental Duties, is being buried in the ground.

When created, I was considered as a ray of hope for millions of citizens. Celebrations were being conducted all over the country. I was overwhelmed with the respect and love showered upon me. Nevertheless, no one reminds me, except on my Birthday – The so called Republic Day. You cannot walkaway form me, saying and push the responsibility towards you politicians. Every time, when you vote, when you utilize the public resources, when you enjoy the freedom provided by me, do remember that you are obligated to me. The obligation is to abide by the rules written. But, now it’s a latest fad among youth, to Break those Rules. Not to mention the demise of the son of A.P. Educational Minister while he was speeding on a Benz. I feel petty, when you lose your valuable life just for the sake of fun. And pettier when that life is taken away even while clicking selfies.

Unlike your neighbour, who prioritized Islam above everything, you made a right choice by accommodating all the religions. You even made a promise to show compassion for other living creatures (Article 51A(g)). But, some of you shamelessly cut the legs of cattle for easy transportation. And when government tries to mitigate these problems, you again reiterate your Fundamental Rights overlooking all your promises. This is not a matter of religion, just another mistake of humanity. Hope you strive hard to improve your values and thereby the surrounding environment.

I urge you to always remember those words from the most beautifully worded Preamble in the world, “We the people of India, having solemnly resolved to constitute India into a Sovereign, Socialistic, Democratic, Republic and to secure among them all Equality, Liberty, Justice and to promote Fraternity.” It’s your responsibility to keep up this promise.

When it comes to myself. I was assured the protection from The President of India. None of them, except Dr. A.P.J. Abdul Kalam could keep upto my expectations. I miss him.

Yours Sincerely,

Indian Constitution

Inflation: Part – 2

Video: Raghuram Rajan uses ‘dosa economics’ to explain inflation (Source: YouTube)

Let me continue from where I left. When the government prints excess money, the value of the money comes down. Let us take a real life example. After the World War I, to reconcile from the war and to fight inflation, Austria had run the printing press almost 24 hours, thinking that the offset can be made by just giving hot cash. The prices rose non-linearly, and at one point in time, the inflation had crossed way beyond 100%. 500,000 Crone was a denomination! This is called hyperinflation which is an inflation spiral and everything will be in tantrums. How to resolve the issue of inflation then? The answer is not that simple and has various approaches.

One way is by Government intervention. During inflation, there is an underlying excess of money circulation. To plug that the Government raises the deposit rates. So instead of spending, people would intend to save. Another approach is to control the prices of other commodities in the basket. In our example of a pen, let us say the price of food grains has come down substantially. So, the increase in the price of wheat can be transferred to the price of other food grains which have fallen below the expected value. The above solution could only be possible, if both the grains that are being are in surplus with the host country and both are complementary. The above solution is complex and hence would be avoided in most cases. There are two indices for the measurement of inflation called CPI and WPI, which will be dealt separately. Someone now may ask, what if the Government does not intervene and allow the market to stabilize on its own. This will be in the third article separately.

Another major problem, of inflation is that the supplier/manufacturers would not be able to gauge the markets to a large extent. The fluctuations can also take them on a ride and inventory management would be a difficult task. The instability will penetrate to the bottom of the economy with great viciousness.

The other major issue of inflation is the fall in exports. This is very futile and the Current Account can go for a toss. Note: Current Account Surplus/Deficit= +_ (Exports – Imports). The Current Account value may not sound impactful to some of you. Let me elaborate. The Governments borrows money from other governments for various purposes such as investments and bonds. One of the main indicators of the same is the Credit Ratings. The more instable the country is, the more hopeless the credit rating. Inflation can be a curse and hence the investments to the home country can reduce. This causes a cut down in growth and job opportunities go bust and entire economy comes to a standstill. No FDI and FII. The magnitude of the problems due to inflation is unimaginably impactful.

Dr. Rajan used “Dosanomics” (YouTube link provided below) to explain inflation to help people understand the gravity of the issue. Inflation is measured YOY (Year on Year) and this impacts the calculation of GDP. Let me not get too technical to bore further!! The main question of whether the Government has to intervene or not? Consequences of the same? Will be discussed in the last article on inflation.