CA Saket Kumar Ghiria
India is a unique place having great diversity. It is probably the only nation in the world which contains within itself the greatness, civilizations and cultures of the ancient’s era as well as the wonders of the modern time. India accounts for approx. 17% of the population of the world while the landmass is equal to just 2-3% of the total landmass of the world. The pre-independence era of India was mainly dominated by Brits and they used to control the economy of the country in the way best suited the needs of the British Kingdom. After independence, India adopted the socialistic model of Soviet Union and as that model failed completely than India was forced to go for economic liberalization and privatization measures in 1990’s. Those measures proved a game changer and since than the average economic growth of the country remained above 5%. Our forex reserves became one of the highest in the world compared to the forex crisis in the pre-liberalization era. In just 26 years, India became one of the major economy and its decisions started impacting the politics of the world.
Is there any Domestic Turmoil
As we know that India is one of the youngest country in the world and there is a pro-growth government in the central. Now a question arises that how it can be said that there is some kind of domestic turmoil in the country as the existing government is the strongest one since the last 30 years and there could not be any concerns about the stability of the current government thanks to the number of seats in parliament being held by BJP and its alliances. So there seems no political turmoil at least. However from the last one year or so, the nation is consistently facing some strange kind of turmoil like ultra-charged debates on religious intolerance and the latest one being the Jawaharlal Nehru University (JNU) Row where, as per media, a group of students shouted anti-India and pro-Pakistan slogans. Another incidence which occurred very recently was very bloody and violent protest for the cast based reservation in the country. According to ASSOCHAM, that protest caused a loss of approx. ₹20,000 Crores and kept hijacked a big state for almost a week. Though the intensity of these events are not that intense that it will cause any kind of political instability in the country but such events really forces us to believe that everything is not in proper order in the country. So when we are hooked to non-core issues, there is some definite turmoil though not very much visible on the ground.
So what are the Core Issues?
Everybody have their own perspective of evaluating something. Same situation might be view in different ways by different persons engaged in different professions. As in India we are a bit more tilted and concerned towards politics, if we look the things from some economical aspect, following are the main core issues we should really be concerned about:
I. Falling Exports
II. Rising Trade Deficit
III. Falling Currency
IV. Rising NPAs & Bad Loans of State Run Banks
I. Falling Exports
Exports plays most crucial role for the sustainable development of the country as it is the single biggest source of earning huge forex on consistent basis. That earning then opens the door for the areas like foreign technology adoptions, mergers and acquisitions of the foreign companies etc. No other source is as big and as consistent as exports for earning forex. Exports not only earns the forex for the country but also creates large number of employment. If our neighbor Bangladesh managed to pull out millions of its citizens out of extreme poverty, this happened just due to the robust garment exports by the country. Now the exports of the country is falling continuously and came at a dangerous level particularly in the running fiscal year of 2015-16. As we can see from the image that the exports of the country was at $312 Billion in the financial year 2013-14 and at $311 Billion in the financial year 2014-15. But in the first 11 months of the financial year 2015-16, exports fallen dramatically and stood at $218 Billion. Despite all the best estimates, the exports of the running fiscal year is not expected to go beyond $260 Billion. This is a massive fall. A fall of almost 17% from the previous year level. There are some of the major reasons for this decline in exports. They are:
The central government has taken lot of steps to bring the exports of the country back on the track and biggest step towards that is ‘Make in India’ campaign. It is true that building a proper manufacturing base in any country takes significant time period. Make in India is a long term objective and it will yield returns over a period of time. As a more prompt measure for making the exports stable, government announced the establishment of Coastal Economic Zones (CEZs) in the country. As Modi Government kept in its core priority the linkages of the rivers of the country thereby having a alternate transportation mechanism in place. CEZs seeks to promote inland waterways, create a network linking roads, railways and ports. The main focus of CEZs are creating a water based infrastructure which is quicker and cheaper. As India has huge costal area, if country manages to develop a well-functioning costal trade route, it will create a massive infrastructure at a very low investment. However the decline trend in exports will not be reversed just by creating a Costal Economic Zone. India’s service exports are strong but country needs a strong merchandise export base. Finance Minister Arun Jaitley said during his budget speech that more support will be provided to exporters to give a boost to overseas shipments. “The duty drawback scheme has been widened and deepened to include more products and countries. The government will continue to take measures to support the export sector. So it is encouraging to see that the central is taking measures to curb the declining exports of the country.
2. Rising Trade Deficit
Trade deficit is an economic term of a negative balance of trade in which a country’s imports exceeds the exports of the country. A trade deficit represents an outflow of domestic currency to foreign markets. Trade deficit is usually related to a particular period like monthly, quarterly or annually. Now for us trade deficit is nothing new as India hardly seen any financial year with some concrete trade surplus. However in recent years, the level of trade deficit increased and it is getting wider. In the previous two financial year, the trade deficit of the country stood at $139 Billion and $137 Billion. In the first 11 months of the financial year, this gone to $143 Billion which translates to approx. 7% of the Gross Domestic Product of the country. Economists have their own arguments about whether a trade deficit is good or bad but one thing is sure that this continuous and widening trade deficit can never prove good for the future of any nation. Understand the trade deficit in a layman’s way. A trade deficit means that I’m buying more goods and services from the world than what I’m selling to the world. It means that more currency is flowing out of India than what is coming to India. Now it depends upon the nation having the trade surplus with India that how it is going to use that extra money. Some of the possible uses of that money is to invest in the corporate sector of the country through foreign direct investments or loans etc. Other possible use is to buy the bonds issued by the government of that country. Sometimes the country with trade surplus starts investing in the real estate sector of the country thereby causing an artificial boom in the real estate market of the country having trade deficit. As we know that nothing comes for free, the continuous trade deficit of a country against another country restricts the international policy of the country significantly which is not good from a long term perspective. India incurs largest trade deficit with China. Trade deficit between India and China has increased to $44.7 Billion during April-January period of 2015-16, where India’s exports to China stood at $7.56 Billion during the period and imports has jumped to $52.26 Billion in April-January. In 2014-15, the deficit was aggregated at $48.48 Billion. So in this way, the one third of our trade deficit is attributable to China. Now the question is how to deal with that. China is the biggest merchandise exporter of the world and if India wants to keep its trade deficit with China in balance, it must have to focus on:
Trade deficit with China will not disappear overnight. It will take systematic planning and execution both on the part of Central Government & State Governments.
3. Falling Currency
The weakening Indian currency might be good for some industries which are mainly export oriented like IT (Information Technology), Pharmaceuticals etc. but as India is an importing country which needs to import a lot than what it exports, a weak currency causes a price escalation of all imported stuffs. So in this way the advantages due to the additional exports generated through the weak currency might be wiped out due to the price rise of imported good. The very fundamental principle of the global business is that the currency of any country should be strong enough and stable from a long term perspective as it helps businesses to plan for the future but if we talk about the Indian Currency (INR), we can see that in the last 10 years, our currency fallen from INR 44 per dollar to INR 68 per dollar. So in this way, Indian currency lost almost 50% of its value to American Dollar (USD). Now as we know that world has become a global village and economic hub, it is impossible for any country to make its currency artificially stronger i.e. without having any tangible base. So in the same way, our economic fundamentals has to be strong only than our currency will become stable in the long term.
4. Rising NPAs & Bad Loans of State Run Banks
As per the Master Circular issued by Reserve Bank of India, a non performing asset (NPA) is an asset, including a leased asset, becomes non- performing when it ceases to generate income for the bank.
A non performing asset (NPA) is a loan or an advance where;
i. Interest and/ or instalment of principal remain overdue for a period of more than 90 days in respect of term loan,
ii. The account remains ‘out of order’, in respect of an overdraft/cash credit,
iii. The bill remains overdue for a period of more than 90 days in the case of bills purchased and discounted,
iv. The instalment of principal or interest thereon remains overdue for two crop seasons for short duration crops,
v. The instalment of principal or interest thereon remains overdue for one crop season for long duration crops,
vi. In respect of derivative transactions, the overdue receivables representing positive mark-to-market value of a derivative contract, if these remain unpaid for a period of 90 days from the specified due date for payment.
In short a Non Performing Asset or NPA is something from which recovery is almost impossible. As we know that the loans and advances given by the banks are shown in the asset side of the balance sheet of the banks as the assets of the banks but what if those assets are in reality worthless i.e. the loans given by the bank is almost non recoverable. A small portion of such non recoverable loans and advances is of concern and nothing new as it is very common but in India these NPAs got accumulated to some very dangerous level in the past. The growing bad-loan problem has been inflated by increased scrutiny of the accounts of the banks. The RBI conducted an intense asset-quality review on banks’ accounts last quarter and reclassified many loans that were previously considered viable as either NPA or bad loan. Now it is very important for any nation to have a very broad based and very healthy banking system as banks injects the money into the economic system and acts as a biggest intermediary for channelizing the funds from the savers to the borrowers. A big rise in NPAs and bad loans may stop the flow of cash to the economy, will reduce the new employment opportunities and ultimately affect growth of the country. The rise in bad loans should be a major cause of concern for the country as it affects the confidence of all stake holders into the system.
So we see four main areas which needs regular attention not only from government but also from entire political class of the country. Now we will look at some of the areas which is causing international turmoil.
In just four decades China became the second largest economy of the world from nowhere. How rapidly China made progress can be seen from the diagram that in 1980, an average American used to be 42 times richer than an average Chinese but in 2015, an average American is just 4 times richer than an average Chinese. Chinese exports is highest in the world despite the fact that its Gross domestic Product is almost 50% of that of United States. China is the largest trading partner for most of the nations of the world and the biggest consumer of crude oil, major metals like iron, copper zinc, aluminum etc. and most of the other commodities. As China is the second biggest economy, any slowdown in China causes a global slowdown. It may surprise some of you but interesting thing is that China is the largest market for some of the major American and European companies like Apple, GE, Daimler AG and countless others. So the slowdown in China will impact these companies which in turn affect the stock prices in their home countries thus causing another crisis. Now if China slows, India can’t remain unaffected. The slowing China will hit India in both direct and indirect way. The direct way is that slowing demand of Indian goods and services in the Chinese markets and the indirect way is that slowing demand of Indian goods and services in those nations which are the big exporters of China. For example China accounted for 25% of South Korea’s total exports, and 20% of Japan’s total export. So these are really big numbers.
Falling Crude & Commodity
India is basically a net crude and commodity importer from the world so the falling prices of crude and commodities must be seen as a Gift of God to India. Not really. As we know that everything has a chain effect so if prices of crude and commodity fallen at historic lows and more than 50% of the GDP of the world is accounted by the crude and commodity exporting countries, the decline in the prices of crude and commodity has largely been seen as a negative factor for the world economy. However as far as India is concerned, the falling crude and commodity prices has both positive and also negative impact on India. One of the biggest advantage of the price decline is that it will help Indian Government to manage its budget deficit situation which was ranging above 4% for quite some time. However following are the possible negatives which may cause impact on India:
So these two are the major reasons of international economic turmoil. However it is disasters which leads the way of prosperity and growth.
The Road Ahead – India The Next Investment Destination
First we have to understand what the meaning of ‘Investment Destination’ is. A country becomes an investment destination when the world invests money in that country in expectation of safe and long term returns. As emerging economics have joined the game late, they can come into the main league only when they attract sufficient capital from the world as capital brings the latest technologies, methods, processes, extremely capable human resources and whole lot other goodies for the country which otherwise could have taken many decades to develop internally. So the global investors continuously looks for the sources where they can invest money. In the table, we compiled some data which shows the amount of cash being held by the corporates of the major economies. These cash are either kept idle or invested in some very low yielding assets like treasury bonds of the government etc. For the last few decades or so, the central banks around the world has kept their policy rates either zero or very close to zero. Purpose is to encourage the corporates to invest more and more money into various economic activities. As the zero interest rate policy was not showing much result, central banks adopted another tool called ‘Quantitative Easing’. This was another tool of pumping the money into the system. Very recently the Bank of Japan (Central Bank of Japan) adopted something very unusual at least for our country called “Negative Interest Rate Policy“. As per this policy, The Bank will apply a negative interest rate of minus 0.1 percent to current accounts that financial institutions hold at the Bank. It will cut the interest rate further into negative territory if judged as necessary. So for example City Bank Japan puts ¥100,000 in the current account with Bank Of Japan, at the end of the period it will get just ¥99,900. The main purpose of this step by BOJ is to bound the financial institutions to lend more money thereby causing more money injected into the system which will then trigger more economic activities. In line with the Negative Interest Rate Policy of the Bank of Japan, the yield on 10 years bond of Japanese Government fallen below zero and became negative (see the image). It means that if I invest in the 10 years bond of Bank of Japan, I will get negative returns. More or less the same thing is happening with the bonds of many European Nations and America also. With Trillions in Cash, Negative Yielding Bond returns, Negative Interest Rate Policy adopted by the central banks etc,it can be easily concluded that the world is looking for the next investment destination just like they selected China, Taiwan, Korea etc. few decades earlier. Because the most fundamental principle with money is that money gives highest retuns only when it is being put to the use where it is needed the most. So the main question is can India be the next investment destination? Now this depends upon lot of factors but India has lot of features which makes it the most suitable candidate for the next investment destination. Some of them are:
Though there are lot of factors which makes India the most perfect choice for the long term investment but how much we can actually turn the potential investment into the real investment depends upon us.
India is a nation with huge cultural and political diversity. Things will take some time in getting into proper order. As we know that the ICAI is the single largest organised professional body in India and second largest accounting body in the world, the role of ICAI became more crucial in the sustainable development of the country. ICAI is not only creating a huge pool of manpower having expertise in the fields like accounting, taxation, economy and finance etc. but also actively involving itself in other areas like ‘Make-in-India’, Clean India Mission, Railways Accounting etc. With the combined efforts of all, India will surely overcome all the obstacles and will achieve its true potential.
Disclaimer: This article is my original work. I have sourced data from the websites like Wikipedia and Economic Times. You can always write your comments and feedbacks at firstname.lastname@example.org.