September 26 to October 2
The Indian Government affirms that the contract with the American conglomerate General Electric (GE) to build diesel locomotives at Marhowrah in Bihar is still on track. News reports had earlier asserted that the Indian Government’s decision to reduce dependence on diesel would hurt previous agreements with GE. In 2015 GE won a contract to supply 1,000 diesel locomotives. If India backed out of international agreements it would hurt India’s image with foreign investors and potentially impact the ‘Make in India’ initiative. Railway Minister Piyush Goyal, however, asserts that the diesel locomotives are still a project to be developed, although in the long-run India would like to move to electrification of its entire railways.
According to a report by global brokerage company Morgan Stanley, India is likely to become a $6 trillion economy in 10 years thanks to digitization. This would make India the third largest economy in the world. According to this report digitization would provide a boost of 50 to 75 basis points to India’s GDP growth, transforming India into an upper-middle income country by 2026-27. The consumer sector would also contribute by adding USD 1.5 trillion. Although the Global and Service tax (GST) may slow down economic growth and cause job losses in the short term, it is supposed to help reduce public debt and increase GDP in the long term.
India is ranked 40 in the list of more competitive economies in the world on the World Economic Forum's Global Competitiveness Index, for years 2017-18, losing one position to last year’s ranking. Private investors see corruption as the main problem to doing business in India, and there appears to be disconnect between innovative strength and technological readiness. This has resulted in a gap that has not allowed India to exploit its technological strength. India has, however, improved in its infrastructure, higher education and training, technological readiness and information and communication technologies scores. India remains the best ranked among the region followed by Bhutan (82), Sri Lanka (85), Nepal (88), Bangladesh (99) and Pakistan (115).
Experts are keenly awaiting the Reserve Bank of India’s (RBI) decision regarding the policy interest rate on October 4. Some experts expect a reduction in the rate due to slow economic growth caused by the GST implementation and demonetization, while inflation remains at an acceptable level. Other experts assert that the rate will not change as inflation has risen. The RBI reduced the repo rate by 0.25 percent in August, arguing a reduction in inflation risks. Morgan Stanley is one of those who has argued that the RBI should maintain the current rates as inflation is predicted to increase, so quantitative easing will not be a possibility in the future.
Revenue Secretary Hasmukh Adhia asserted that the government is open to reconsidering the Good and Service Tax (GST), in order to counteract its negative effects. One of the main problems is compliance, as companies do not correctly fill out tax forms. Therefore, ease of doing business has been affected.
The long-term aim of GST is to economically unify India and to create a stronger federal law.
India South Korea boost trade and investment pact:
India and South Korea are discussing the possibility of updating the existing FTA agreement, to increase investment and trade. The India-South Korea Free Trade Agreement (FTA) will be expanded, but despite the potential trade benefits, India is worried about the low demand of some professionals such as yoga and English teachers. This upgrade agreement is beneficial as it will bring more market access to Indian goods. Both countries aim to develop mutually recognized agreements and identify areas of high-end technology cooperation.
September 19 to 25
The Mumbai-Ahmedabad high-speed rail (MAHSR) project, launched by the Prime Ministers of India and Japan, aims to connect Ahmedabad to Mumbai in just two hours. This initiative will facilitate commerce by reducing the traveling time. However, critics remain skeptical as they affirm that the money could have been better invested in restoring the older Indian Railways, which has suffered various accidents and derailments in the past. There are also doubts about the convenience of a partnership with Japan, despite the various benefits it offers. The project has an estimated cost of $17-18 billion; 80% of the cost will be funded by Japan with a soft loan at 0.1% interest rate per annum. MAHSR is expected to be completed by December 2023.
Forex Reserves to boost economic growth:
A report by the Deutsche Bank affirms that India can boost economic growth by using part of the country’s forex reserves. India’s strong reserves make it possible to use a small portion of them as an option to fund public investment. This would increase the GDP and generate economic growth. The Deutsche Bank estimates that if USD 15 billion are withdrawn from the reserves and channeled towards public investment, the total reserves would be reduced by 3.5 percent and the GDP would grow by 0.6 percent.. With this reduction the forex reserve would still be above the comfort range estimated by the IMF.
Lower than expected tax collection is generating concern as government might have to cut its current expenditure on infrastructure. The new Goods and Services Tax (GST) system is responsible, as ambiguous filling rules and continuous changes in tax rates have increased business uncertainty, causing the companies to fail to register the tax. After a slow economic growth in the last quarter, the concern is that without public spending the situation will worsen.
World Bank forecast:
World Bank President Jim Kim affirmed that a country like India is growing pretty robustly while Japan and Europe are growing in a more healthy way, United States also continues to grow. Kim explained that “it used to be that commodity importers were doing much better than commodity exporters. So the growth is relatively more evenly distributed”. A strong global growth is expected this year and regarding indebtedness, the Bank is analyzing the debt-to-GDP ratio very carefully in every country.
Arun Jaitley, Minister of Finance and Corporate Affairs, affirms that the government is preparing a special strategy to lift the economic growth, as GDP growth rate follows a decreasing trend since the beginning of the year, and investment has not improved, despite the efforts of the government in the last three years. Experts remain skeptical of the ability of the government to develop a plan, due to the limited budget, the low spending as percentage of the GDP and the ability to collect the target tax revenue.
United Nations General Assembly:
Minister for External Affairs of India Sushma Swaraj outlined in the United Nations General Assembly’s seventy-second session that India’s priority is poverty eradication. The government is planning to increase empowerment by investing in the poor so that they are job creators instead of job seekers. This proposal includes the Jan Dhan plan where more than 300 million Indians who had never opened a bank account now have one, and several initiatives to provide bank credit to start small businesses, as well as government plans to eradicate black money. Swaraj affirmed that the Sustainable Development Goals achievement by 2030 is key in the fight against poverty.
The Government disqualified more than 1 lakh (one hundred thousand) shell company directors that had association with black money. The target of the operation was to improve public confidence in the government by demonstrating that they were fighting money laundering. According to the Ministry of Corporate Affairs, this is also expected to create a better investment environment in India.
The government also closed 2.10 lakh shell companies. The operation included tracking the bank operations of these companies, and identifying the directors and other corporate members, to help uncover more businesses involved in money laundering.
One of the government’s main objectives in this sector is the implementation of the Basel III Norms that regulate and monitor the Banking system. The international rating agency Fitch affirmed that an additional USD 65 billion inversion is necessary to increase the existing banking loans, a requirement to achieve the Basel III norms by the end of FY2019. Apparently, asset rationalization and “weaker- than-expected” loan grown are causing the problem, as State-run banks are not raising capital as fast as anticipated (the estimations counted on 95% of the capital coming from state banks).
This has led banks to be dependent on state support, which translates into an investment of more than twice of the expected amount. The government’s original budget for this operation was USD 11 billion, which has almost all been invested, and only USD 3 billion is left to spend on fresh equity for 21 State banks by FY18 to FY19.
India renegotiated a price cut on liquefied natural gas (LNG) with the company ExxonMobil Corp. This negotiation aims to increase the volumes of natural gas bought by India’s larger natural gas importer Petronet LNG, but at lower prices than previously agreed. The volume would increase by a third to 2.5m per annum for 20 years.
This could trigger profound changes in oil prices and lead other nations’ major buyers (such as Korea, Japan and China) to negotiate oil prices with producers. Further, if production costs increase, producers will not be able to reflect these changes in the price as they are fixed, so they would have to incur the loss.
Prime Minister Abe’s India visit:
During PM Abe’s second visit to India since PM Modi took over, the two prime ministers expressed desire to boost bilateral trade between the two countries. The joint statement mentions “enhancing free, fair and open trade” and some of the agreements include investment in the Promotion Road map between DIPP and METI to accelerate investment from Japan to India, and cooperation in infrastructure for boosting the ‘Make in India’ program. The signed agreements include other areas such as development, science, technology, sports, connectivity, among other areas.
Furthermore, a partnership between the two countries will be implemented, to create a Hybrid Industrial Park. This area will be provided by the State Government of Gujarat, and will promote industry development, as it will have the infrastructure, legal capacity and rights to facilitate Japanese companies to establish in India. Other locations have already been adapted for development of Industrial Townships in Gujarat, Rajasthan, Andhra Pradesh and Tamil Nadu. Each Industrial Township is “well equipped with world class infrastructure facilities, plug-in-play factories and investment incentives for Japanese companies”.
As per Reuters latest annual earnings data corporate debt rose, and a fifth of India’s largest companies did not earn enough to pay the interests on their loans. Businessmen attribute the situation to the high interest rates of commercial banks, despite the fact that the Reserve Bank of India cut two percentage points on the policy interest rate. If companies are in debt they will not invest, at least in the short term, negatively impacting gross capital formation.
Social Security Legislation:
The Union Cabinet approved the introduction of Payment of Gratuity (Amendment) Bill, 2017 to the Parliament on September 12. The previous amounts of the Payment of Gratuity Bill presented a ceiling of Rs. 10 Lakh. For central government employees the amount is Rs. 20 Lakhs, since they are covered by the Central Civil Services Rules. The amendment keeps in mind inflation and wage increase for those who don’t work for the government, but are covered by the 1972 Payment of Gratuity Bill. It aims to improve the social security legislation by increasing the gratuity to 20 lakhs.
The Department of Agriculture, Cooperation and Farmers Welfare published the Annual Report for 2016 and 2017. The report shows that production of fruits and vegetables has increased 4.8% since last year, with a total production of approximately 300 million tones. Onion and potato are two of the vegetables that have shown the most impressive growth rate. However, prices of some of these vegetables have increased despite the increasing supply.