We are in a very worrisome place in India today. Growth has slowed considerably, the fiscal deficit is large, leaving little room to do something about growth, and there’s rising debt levels in many areas in the Indian economy, some of that distressed. India’s an economy which for 25 years has been growing at 7 percent; what we see today is much slower growth, and if we are to believe Arvind Subramanian’s work, perhaps even lower than the headline numbers that we see.

We were growing really fast before the Great Recession and then 2009 was a year of very poor growth, we started climbing little bit after it but since then, since about 2012, we’ve had a steady upward movement in growth going back to the pre-2000, pre-financial crisis growth rates and then since about early. And then since about mid-2016 we’ve seen a steady deceleration and now the latest numbers were 5 percent for the last quarter.

Investment has been falling steadily in the Indian economy ever since probably the global financial crisis, but it’s been falling steadily actually from a few years after that. Consumption has been relatively strong and holding up, but more recently consumption has also been falling. Most recently, consumption is falling rapidly.

Commercial vehicles are a good proxy for industrial demand and cars are good proxy for urban demand. You see all of them tanking; tanking to the extent of 30-40 percent levels of negative growth. A lot of it is because of a shortfall in credit availability to households as well as households themselves postponing consumption.

When you look at the trade balance – what you see is that in the years of strong growth, India’s exports were growing, in fact growing faster than GDP. Exports rose as a share of GDP. Over the last so many years, they have been growing slower than GDP growth and therefore falling as a fraction of GDP. This is true when you even take out oil – that’s the numbers on the right-hand side are non-oil exports and you see that has been falling.

The fiscal is also a source for concern. India’s fiscal deficit to GDP is officially 7 percent; that’s the sum of the state government’s fiscal deficit and the Central government’s fiscal deficit. But the reality is, this fiscal deficit conceals a lot. The headline number conceals a lot.

What is less noted, but something that the Auditor General has pointed out in India is, there’s a lot of borrowing which is going off-balance and which is not being counted in the fiscal deficit. For example, the Food Corporation of India is essentially a department of the government. The Food Corporations borrowing should be thought of as part of the fiscal deficit but is off-balance and you can see that’s skyrocketing over the last couple of years from about 0.7 percent of GDP to 1.1. Point four percentage points of GDP are buried in food corporation of India’s borrowing.

Similarly, the National Highway Authority of India – you see borrowing there go up from 0.2 percent of GDP to 0.7 percent of GDP; another 0.5 percentage points of GDP. Now, add these, you get one percentage point of GDP that is not counted in the fiscal deficit but is actually part of the fiscal deficit.

The rising non-performing assets means that banks need recapitalisations. You’re seeing the non-bank financial companies – they are in trouble and they may need some state support. You’ve got rising healthcare commitments. We have a whole new healthcare programe, Ayushman Bharat, which is being rolled out. As it rolls out, it will require more resource.

These are all contingent liabilities. We don’t account for them well in the budget, but they hit future budgets. Contingent liabilities are rising which leads respectable investment banks like JP Morgan to put the actual fiscal deficit as somewhere between nine and ten percent of the GDP. That’s a large number.

It’s especially large in India because we brought inflation down. In the past when inflation was available as the inflation tax, you could inflate away your debt and that helped make your finances look a lot healthier. Today, with inflation so low, it’s much harder to do that. You actually cannot inflate away your debt that easily, and therefore that’s a source of concern. Our fiscal is tighter than the similar numbers would be in the past.

Now, let me go on to debt and distress. One of the worrying things about the recent environment is that household savings are falling.

Households are saving less. Indian households are natural savers and the fact that they are saving less should be one source of concern. Why aren’t they saving more? Because after all, Asian economies grew on the basis of strong savings invested well. Savings are falling over the last few years, but increasingly, you’re seeing that also reflected in higher debt levels.

Household debt levels are increasing by about nine to ten percentage points of GDP over the last four or five years. Households are borrowing much more and saving less. That’s not a good combination. That means, they did not have a whole lot of debt earlier, so they started from a low base but they’ve borrowing quite rapidly and that has to be an additional source of concern.

You can see emerging signs of distress. For example on the corporate side, if you look at credit rating companies, credit rating companies will give you ratios of the number of credit upgrades to credit downgrades and so the lower this number is, the more stress your corporate sector has. This level of stress is at a six-year high.

In other words, the upgrades to downgrade ratio is at a six-year low. We’re as bad as we were at that point where we were starting to grow again. So, stress is piling up in the system probably as a result of ‘low demand slow earnings growth’ and difficulties in serving the servicing debt.

Let me talk a little bit about what the roots of the problem are. We’ve really had no significant continued reforms in India to propel economic growth since 2004. That is the year the NDA that under Atal Bihari Vajpayee lost the election.

We had first reforming Congress government in the early 1990s, followed by a number of coalitions followed by the BJP government. That 15-year period from the early 1990s to 2004 was a period of significant reforms where we cut down our tires, become a more real open economy and even did some privatizations under the budget by the Government. That was also a period where growth was not that strong, but it created the environment for really strong growth.

The problem with the Vajpayee government was that, even by the end of its term, we still hadn’t got to the spectacular growth we saw in the next three or four years afterwards. At least the experience of growth amongst the broader people was not that strong, and so the Vajpayee government’s campaign for re-election in 2004, which was based on India Rising simply didn’t catch hold and they lost narrowly to the Congress.

Congress came in with a coalition government which had the communists in it and really could not continue the reforms that the NDA had started, because simply there wasn’t that much consensus within the coalition partners. Nevertheless, there was an explosion in investment, and what you can see here is the rise in new projects announced as we go into three-four-five, just before the financial crisis you have a substantial explosion in projects announced. Strong growth and many of these projects were completed on time. There was strong infrastructure investment and strong growth.

The collateral effect of that sprung growth was, it put a lot of pressure on resource allocation, including the institutions to allocate resource: A lot more need for land, lot more need for iron ore, a lot more need for coal, lot more need for spectrum. One of the consequences of the strong growth was a series of corruption scandals which came to light in UPA to the second term of the UPA government.

The UPA got what it thought was a boost at the end of its first term to a massive farm loan waiver. My suspicion is, populist measures were an important factor in their re-election and so when UPA 2 came into power. Further reforms were stymied despite their ability to do further reforms by the fact that they really believed it was not from growth, but from these populist policies, that they had gotten re-elected, and the emphasis was much more on populist policies in UPA.

The net effect was right through UPA 1 and UPA 2, they were relatively few of the growth enhancing liberalising reforms, especially because in UPA 2 even the reforms they wanted to do like the goods and services tax (GST) were stymied by opposition protests which grew louder and louder as some of these corruption scandals came to light. So, UPA 2 was essentially a period where we didn’t have significant growth enhancing reforms – we had a lot more spending, especially on distribution of stuff such as food security, and inflation started going through the roof.

Inflation started going through roof in part because of strong demand but in part also because we saw increasing supply bottlenecks being created in the economy. Because land acquisition got much harder, many of the bureaucrats, because of corruption scandals, became much less willing to put out for fear that they would be held up by investigative authorities.

The bankers who were really quite willing to lend in the phase before the financial crisis when projects were doing really well, now became a little more risk-averse also for fear that if loan went bad, they get hauled up by the investigative authorities. So, essentially, the economy started slowing down considerably post-financial crisis. Macro-stability was a great concern at this time and India had basically all the bats – high levels of inflation, high physical deficits and not-so-strong growth.

At which point there was a course correction in the Congress government. It started the process of fiscal consolidation. Chidambaram came back to the finance ministry.

India was one of the fragile five that time and we lost capital very quickly. The government listened at that time and transformed to focus much more on macro stability: Bring the fiscal deficit down, try and enhance growth, try to whatever reforms were possible. At that time, I think the Reserve Bank of India also joined in to bring down inflation into making that a focus.

Move forward from the UPA 2- to Modi One. As it came in, it started implementing some important reforms on the macro side, on the sectoral side, and to some extent, on the household and populace side. We brought inflation down in India from the double-digit levels.

Unfortunately, it has been a mixed bag. It has been a mixed bag because, on the one hand, we haven’t been able to revive investment. We haven’t brought investment back. A lot of the promoters who started projects in the past are now highly stressed with high levels of debt. They simply cannot start new projects and banks are anyway not interested in lending to them.

Even old projects haven’t been brought down significantly. The reason they are stalled is because promoters have lost interest. Now, one of the successes of both the old UPA government as well as the NDA government was essentially giving the RBI a free hand to bring down inflation. That has been a success.

Inflation is low and has stayed low for a considerable period of time. The RBI also undertook a series of reforms- for example, opening up branching, licensing, improving retail electronic payments. We now have a state-of-the-art payment system of retail payments called the Universal Payment Interface which actually is better than many places in the world. These were all small level reforms.

But one of the big concerns was, as projects initiated fell, there were also a whole lot of old projects which were stalled and getting into distress.

Bad loans started building up in bank balance sheets. That’s what you see here. The NPAs of public sector banks started rising. The problem with banks when they start seeing bad loans is there’s a temptation hide them, to push them under the carpet, especially if the bank CEO has a short horizon.

Now, the classic way of dealing with this is: force them to recognise, force them to start dealing with these loans and working them out with the promoter so that they can be put on track. In the meantime, recapitalize the banks so that they have enough capital to make few loans where lending is necessary. Now, bank recapitalization has been halting. The government has taken some measures but typically been a little behind the curve.

What the government did which was very important was pass the Insolvency and Bankruptcy Act. One of the problems in India in the past is, some of you in India know is that it’s very hard for a lender to recover money from a borrower because there’s no way of essentially forcing the borrower to pay up. We had a bunch of Acts passed. But every time we had an act passed, it worked initially. The Insolvency and Bankruptcy Act was an attempt to try and force the borrower to repay their lenders and not have the lenders go from pillar to post in trying to look for their money. Initially it worked in putting the fear of God in borrowers and forcing them to repay.

More recently, however, it seems as if it’s going the way of the old Acts. The promoters have figured out how to end-run the banks, and the judiciary has also intervened in a way as to make it longer and longer and possibly impossible. So, unless we do something about the Insolvency and Bankruptcy code, it will go the same way as the older reforms. It will be essentially gamed to ineffectiveness.

What also has happened in India and the financial sector is that, we’ve had the public sector banks getting into trouble. Because they got into trouble, their lending started slowing down significantly. The private banks and non-bank financial companies have lent much more.

The private banks have been relatively careful about their loans. A lot of their loans are retail loans. The non-bank financial companies were also generally careful about retail loans, but one source of lending has been a lot more problematic for them – which is they lend to developers who built out some of these projects.

Those developers have gotten into trouble because of the slowdown in the retail sector and as a result, the non-bank financial companies also had incipient loan losses on their balance sheet. This came to a head when a big non-bank financial company IL&FS essentially imploded in September 2018, and as a result of that, non-bank financial companies found it hard to get credit. A lot of them have gotten into deep trouble since because not only do they have little access credit, but they have loans building up on their asset side which are going from bad to worse.
So, this is broadly legacy problems piling up. We’re not able to clean up the projects that are stuck, we’re not able to clean up the banks fully but that process is underway, non-bank financial companies have filled the breach but are also starting to get into a little bit of trouble.

Two big actions also happened over this time which created significantly more problems for the system. The first is, out of the blue, India demonetised 87.5 percent of the currency. Now, essentially what happened was the government said that Rs 500 note and Rs 1,000 note are no longer valid. What happens when you demonetised 87.5 percent of the currency? Basically, people don’t have currency to do transactions. Some of it was replaced; but it was replaced slowly. It took 3-4 months to replace it entirely.

In that period, the informal sector basically didn’t have money to do its transactions. These are people who don’t use credit cards, don’t have checks and essentially a whole lot of them got into trouble. It’s hard to measure the damage that was done to the informal sector because we really don’t collect statistics of them, but the anecdotal evidence is, a lot of people went out of business and there are actual studies which show it now that especially new rural areas.

Real estate is one sector that is especially focused in cash and this sector was weakening. With demonetisation, it got into trouble. That also spilled over to the developers who had built this real estate and then further to the non-bank financial companies. Measures of how much the set back growths vary from 2 to 3 percent of GDP for a couple of quarters to 2 to 3 percent of GDP on an annual basis.

This is all using stuff we can measure. What is harder is to think about the stuff we can’t measure. If you look at employment numbers, for example, put out by the Centre for Monitoring Indian Economy (CMIE), unemployment went up significantly possibly close to demonetising.

The second big blow was the Goods and Services Tax. Demonetisation was introduced without substantial preparation. I say substantial because we know there wasn’t enough currency printed to replace the currency that was taken out. You had to print it full speed for the next four months. Typically, you don’t do such things. You typically when you demonetise, have the money ready to roll out on the day you demonetise. That was not done suggesting the timing was chosen for other reasons than everybody was fully prepared.

That leads to the next issue which is, we had the rollout of the Goods and Services Tax. This is a wonderful concept. Demonetisation was misguided in concept. It was not a thing which either affected its aims — which was to bring down black money or what became a later aim which substantially increased the level of electronic payments or substantially formalise the economy. What it did was, create a lot of pain in a very short period of time especially for the poorer informal segments of the economy. It was brilliant politically though, because the government won the UP election. It was sold politically very well but it was not an economically well-thought-out idea.

The goods and services tax was the next big reform and it is something that the UPA government has been pushing and gone through because the BJP had opposed it then. The BJP took it on and to its credit managed to push it through as a constitutional amendment. It was a sound concept but again, initiated without enough preparation. The computers weren’t ready for the volume of transactions which means right off the bat you had to say “Don’t do this. Don’t do that. We are going to simplify the forms”.

There is a lot of back-and-forth which essentially undercut compliance, and the constant fiddling with the rates, I would presume, also created uncertainty. One could argue that some of the recent fall in demand, for cars for example, is because people are still trying to figure out. Are they going to reduce the tax? The goods and services tax on this from 28 percent in order to enhance demand? If so, I don’t want to buy now, I want to wait till they’ve reduced it.

The issue of trade and investment has been a focus of the Modi government, a good and necessary focus. However, what trade and investment needs really is an increase in the ease of doing business because, ultimately, you get more trade if you have more efficient firms who are able to produce both for the domestic economy and internationally. Here again, what one would want for is a slashing in some of the old regulations that holdback firms and focusing on improving the ease of doing business.

There’s been some attention but largely focused on the World Bank indicators of the ease of doing business rather than the actual conditions in India on what prevents businesses from working easily. So, as a result, we haven’t got that significant boost so far in business opening because in fact it may not have become that much easier for businesses to operate in India. One of the recent concerns has been on tariffs and taxes.

If you want more trade, you should bring down your tax, because today the way trade happens is through global supply chains moving goods back and forth. In order to move goods back and forth across borders, you need low and stable tariffs. Instead, what we have is high in fluctuating tariffs in certain areas; not all areas but certain areas. And that becomes a concern for business.

What will the tariff be next month? If in fact I open a business here, India is not part of any significant global supply chains and that makes it a problem if India wants to increase its exports. Similarly, taxes, the recent cut in corporate taxes is beneficial in attracting firms to India, but what firms worry about is not just the level but the changes. Is this going to change? Am I assured that when I put my investment in India, it will stay at 15 to 17 percent?

Unfortunately, in India, we have a history of going back and forth, some of which was reflected in the recent budget in taxes on foreign investors. So, we need to have a process where if we stabilise rules and regulations and taxes and tariffs, if we want to attract new companies into India.
That is one reason why if you look at the level of foreign direct investment, despite the emphasis on ‘Make in India’, you see in the last four years the level of foreign direct investment hasn’t changed very much. We get about $40 billion. In comparison, Brazil gets $90 billion in FDI.

We are starting to assemble more cell phones in India, and this has gone up. If you look at the cell phone imports, they have come down significantly and that’s not because we are buying fewer cell phones, but because we’re importing that. And if you look at exports, that have gone up. So, India is starting to export cell phones that it assembles in India.

The problem, however, is, it’s largely just assembly because one of the counter parts to the increasing cell phones is the fact that you look at electronic components, we’re importing far more. In other words, we are doing assembly now that’s not to be sneezed at we did do assembly before and doing assembly today is a good thing but it’s not value-added assembly. It’s basically importing the components and putting them together.

China is moving out of textiles. Who is taking its place? India has moved up from about 3 percent of world exports in textiles to 3.3 percent. But it’s over a period of nearly 20 years. On the other hand, if you look at Bangladesh, it’s gone from 2.6 to 6.4 percent. If you look at Vietnam, it’s gone from 0.9 to 6.2. So, Vietnam and Bangladesh are absorbing the textile market while we have plenty of people to work and we’re not getting any of the textile market. That suggests we are still not seen as an export friendly place. Our businesses are not doing as well as they should.

When a country grows richer, the taxes actually go up because people move into higher tax brackets and can pay more and especially with all the reforms this government has done, we should see higher taxes instead real taxes actually have actually fallen as have nominal taxes of this period. So, that’s something of concern, basically, signs of deep malaise: Growth is significantly lower, the fiscal space is narrowing, debt and distress is growing, India is losing its economic way. The reason is, we are centralising power without a persuasive economic vision, and if we do this, we risk wasting the demographic dividend.

Courtesy: Counter View

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Image: Economic Times
 
The Special Investigation Team (SIT) of the Maharashtra Police had apprehended one Sameer Gaikwad, a Sadhak of the Sanatan Sanstha on September 15, 2015 for the murder of Pansare and filed a charge sheet against him on December 14, 2015. In Dabholkar’s case, the CBI, brought in following directions from the Bombay High Court, had arrested one Dr Virendra Tawde, an ENT specialist and a member of the Hindu Janajagruti Samiti (HJS), a splinter of the Sanatan Sanstha in Pune in June 2016 on charges of arranging weapons and logistics. Recently (on June 17, 2017), Gaikwad managed to get bail from the Kolhapur district and sessions court, which was rejected earlier by the same court as well as by the High Court, and effectively demolished the hope of getting justice to these martyrs. His two accomplices, Vinay Pawar and Sarang Akolkar, both Sanstha members are still at large. There is absolutely nothing happening in Kalburgi’s case. The Karnataka government, as though to cover up its inaction, has now given a state funeral to Gauri.
 
While the world is aghast at the impunity with which these murders are being committed, the prime minister does not feel worth his while even to say a word of concern. On the contrary, he follows the bunch of hindutva bigots who openly celebrated killing of Gauri, abusing her in filthiest terms on social media. Some of them are even rewarded with plum posts within the BJP. As a matter of fact, perhaps there is nothing indecent or vulgar when it comes to the partisan behavior of the Modi government. All the culprits of the Gujarat carnage and the accused in several acts of the Hindu terror stand acquitted and on the contrary, those like Teesta Setalvad are harassed and the late Hemant Karkare maligned. As this bullet trail continues unhindered pushing India into dark abyss of bigotry and backwardness, Modi has an ego trip on a bullet train to project India’s forwardness. What is common to both these seemingly dissimilar acts is the impunity and unscrupulousness of the current ruling dispensation.
 

Terror Tracks
 
Why did they kill Gauri? She was surely opposed to the communal politics and the cultural mumbo-jumbo of the Hindutva forces but that is unlikely to have been the sole reason because there were scores of others who were more intensely opposed to them than her or previous three in the trail. All of them –rather– reflected a liberal outlook and still spoke unambiguously against the hindutva overtures. This could communicate to the common people more effectively than the radical voice of the diehard opponent of the hindutva forces. It is meant not just to eliminate an individual but to terrorise many others who might follow in their footsteps. Being the least of the suspects, these individuals, moreover, become relatively soft targets.
 
The outfit that is linked by the investigation is the Goa-based Sanatan Sanstha run by a Ericksonian hypnotherapist Jayant Athawale, who is said to transform his subjects into human automatons to make them commit any crime. The Sadhaks of this Sanstha were arrested earlier in four bombings in Vashi, Thane, Panvel (all in 2007) and Goa (in 2009). The Maharashtra ATS had filed a 1,020-page charge sheet against six of them and others of Sanstha affiliate, the HJS, for these blasts in 2008. However, Ranjit Patil,  Maharashtra’s minister of state for home (The Asian Age, October  8, 2015), the Karnataka CID, Mohammed, Akram (The New Indian Express, July 22, 2016), and none other than chief minister of Goa, Laxmikant Parsekar (Times of India, September 24, 2015) and Minister of state for home for Government of India spoke out against banning the Sanatan Sanstha.
 
Why ? Largely because the investing agency had established that the weapon used (7.65 mm country-made pistols) and the modus operandi of all these murders was similar and directly and circumstantially pointed to the people connected with the Sanatan Sanstha. The CID in Karnataka is also on the lookout for Rudra Patil, another Sanatan sadhak who is an accused in the 2010 Goa blast case. Athavale, however, remains untouched although an array of crazy violent rants of his books and proclamations of “war for righteousness” can be directly linked to these heinous acts.

His publications have been openly exhorting its members that violence against durjans (evil) is not actually violence at all. His timetable for a successful Dharmayudh, against “evil-doers” (rationalists, Muslims, Christians and Hindus who don’t follow their dictates) in order to establish a “Divine Kingdom” runs as follows: 1997-1999: Impressing the minds of people that destroying evil doers is part of spiritual practice. 2000-2006: Actually performing the act of destroying evil doers. 2007-2022: Learning how to run Divine Kingdom. And 2023-2025: Commencement of the Divine Kingdom. One wonders whether the coherence of this time line with what Modi and his cohorts have begun speaking of 2022-23 just incidental? These details had come into the open through a Public Interest Litigation (PIL) filed against the Sanstha by Vijay Rokade in 2011, much before Dabholkar was murdered. While it was heard until 2013, since then, it has not come up for hearing.
 
High speed Hera-Pheri
 
While the bullet trail eliminated select individuals, the bullet train, born out of Modi’s megalomaniac obsession, will saddle entire coming generations with huge debt. Ironically, the bullet train is announced in the backdrop of 193 deaths from train derailments in 2016-17, the highest in a decade.[1] As many as 1,394 train accidents were reported over the last decade, of which 51% or 708 were due to derailments. They are mainly caused by excessive traffic and neglect of investment in maintenance of rail infrastructure. The other priority sectors like education and healthcare have accumulated huge backlogs and are further made to suffer in Modi era. The healthcare spend came down to 1.2% of the GDP, the lowest in a decade as against the global average of 5.4%. Education likewise stagnated at 2.7% of GDP, with increasing push to privatization. The agrarian distress is further deepened due to continued starving of investment. In such a context, the profligate idea of having a bullet train, relevant at the most to 4% of people should be nationally distasteful. But it is being justified widely including the bankrupt opposition that lost its coherence against Modi’s onslaught.

The cost of the Mumbai-Ahmadabad High Speed Railway (HSR) project is estimated at $17 billion (Rs 1.1 lakh crore) of which Rs 88,000 is coming as Yen-denominated loan from Japan at 0.1 % interest rate, with moratorium of 15 years payable over 50 years period. Obviously, Rs 22,000 crores is to be contributed by India to create this white elephant. This money could have been better spent to improve safety of railways for the average Indian or by providing with 140,000 bio-toilets in 55,000 trains to do away the national shame of having manual scavengers in the employ of the government. The government of India — that paradoxically spends crores of rupees on Amitabh Bachchan –to canvass for Swacchh Bharat is actually an offender by employing persons into manual scavenging an act that is now illegal after the enactment of the 2013 law. This once again, exposes how the BJP can jeopardise national interests to score brownie points for its petty electoral gains.

Railway Projects Supported by the World Bank in China[2]
 

 
Any public mega project of such magnitude has to have a competitive bidding backed by a feasibility study. Neither have been conducted for Modi’s bullet train. The BJP shamelessly dodges the question by saying that Japanese being the smartest investors must have done performed a efasibility study before investing into this project! The study by the professors of IIM, Ahmedabad had almost concluded that the project was infeasible. Prima facie, the CAG should object to it as irregular.
 
Modi bragged to the public that it was coming free. Really?
It is well known that the Chinese have an edge in HSR technology at the least cost. As the data in table shows that its unit cost varied between $ 18.66 to 13.5 Million per km. As against this, the cost of the Japanese bullet train works out to $ 27.44 Million per km. That means the investments are inflated by a factor of 1.45 to 2. Indians have been misled by the low interest rate but they are not told that the Japanese interest rate has been sub-zero. Therefore, from Japanese viewpoint 0.1% interest is quite profitable. The effective rate, moreover, would be substantially high in view of the expected appreciation of Yen against Rupee. For example, the yen appreciated by 64% against the rupee in the last ten years (from Ye-Rupee exchange of 0.3517 on September 17, 2007 to 0.5786 on 15 September, 2017.) With the Japanese economy expected to look up, this appreciation may still be higher. Additionally, Japanese strategic interests need to be taken into account in selling their “Shinkansen” for which there has not been any taker for years. Notwithstanding the technology transfer embedded in the agreement, there shall be demand for their wares for many years to come. It may be simply summed up as follows: We bought a thing of questionable value to us for Rs 88 that may be just worth 44 spending Rs 22 upfront to be paid for by future generations with an uncertain escalation.
 
Modi maintains a holy silence over the bullet trail of Hindutva fringe as though in tacit approval of their project of  slaying ‘demons’ to establish the kingdom of angels, a la hindu rashtra, but turns very vocal over ‘development’ that is rightly depicted by the bullet train syndrome. Both are hugely injurious to the people of India.
 
(A version of this also appears in the Economic and Political Weekly  has been shared with us by the author)

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Thailand. Roberto Trombetta/Flickr. CC (by-nc)

A Thai woman sits alone behind the blinds in a brothel in a forest in Northern Denmark. She’s waiting for customers. She’s been selling sex in Denmark for two years now. She has no legal papers. It’s hard and lonely work, but she earns well. When a car drives up the gravel track behind the house, she looks out through a crack in the blinds. She keeps an eye open for the police. She’s scared of being discovered and deported to Thailand.

Migration and migrant sex work very often are long-distance debt restructuring.

In her two years in Denmark, she’s taken her family out of a 20-year-long mire of debt. A hospital admission for her father suffering from cancer, a failed maize-farm project, a tractor, a new roof and gambling debts have resulted in one loan after the other.

I have known her family for several years and I drove around with her mother and brother in north-east Thailand as part of a research project about irregular migration of women to Europe. I saw how they could finally repay the family’s old and crippling debts with money earned by the daughter at the brothel in Denmark. There was also enough left over to buy a flat-screen television and a large new sofa. From Denmark, the daughter proudly followed our journey via Facetime.

Debt is the villain, not smuggling

Of course it’s true: human smuggling and trafficking can be brutal. Both can be violent, even deadly, and are good business in the migration market created by the EU migration policy. Smugglers earn money because in order to finance the journey to Europe and to repay the old loans, many migrant families take out yet more loans to pay for the smuggling.

Yet, although debt is a powerful motive for migration, debt is completely absent from the migration debate. Debt seems dry and boring compared with sensational stories of gruesome human smugglers and sex slaves. Nevertheless, the reality is that migration and migrant sex work very often are long-distance debt restructuring. Here we are talking about the millions of families in the global south trapped in a vicious circle of debt, not those fleeing bombs and conflict.

We’ve only got one life

Private debt – both related and unrelated to migration – has grown among the migrants who, as an anthropologist and migration researcher, I have been following for 15 years.

“Why do you borrow money?” I asked a young woman in Benin City, southern Nigeria, from where many make the journey to Europe to sell sex. “We haven’t got time to wait and save up like my grandparents in the olden days”, she explained. “We’ve only got one life and we want to get the most out of it”.

The frustrating problem is that not even the educated, yet unemployed middle classes in Nigeria can borrow money from a bank to start so much as the smallest of projects. In Thailand, I interviewed the manager of the local branch of one of Thailand’s largest banks. “We don’t lend money for migration. It’s an uncertain investment”, he said. “Neither do we lend money to people with seasonal work, day workers or the unemployed. They’re all unreliable payers”.

Yet, millions of people in the global south are seasonal workers, day workers, without a contract and unemployed. Therefore, when serious illness, a new roof, an essential scooter, or a business start-up demands cash, they have to resort the “no-questions-asked” policy in the private market; with interest rates of up to 100% and brutal debt collection methods. In Thailand, people watch in terror when the young men in anonymous crash helmets arrive at the village on their motorbikes. Everyone knows that they’ve come to collect unpaid debt.

The Microfinance Barometer 2016 confirms that private debt due to informal quick-loan companies, local big men, rich landowners, mafia, wealthy families and middle-men is growing explosively in the global south. The World Bank is also concerned. As it wrote in 2015, approximately 70% of micro, family-run businesses to slightly larger businesses have no access to borrow money on a formal and reasonable market. Therefore, they resort to private and black-market loans at extortionate rates of interest. The problem is particularly serious in Asia and Africa, from where most migrants to Europe originate.

Selling sex to keep the land

 “My body will get my family out of debt”, explains a Thai woman with false papers on her way to Denmark via Spain to sell sex. Her family owes money, but they still have a small piece of land. They could easily sell the land and repay all the debt. But, she continues, “it’s better to keep the land than to use it to repay our debt … My body is like a piece of land that I can take with me, but it’s falling in value all the time. Land in Thailand doesn’t”.

“My body will get my family out of debt”

If we are to understand migration, and perhaps implement more innovative policies in the area, we have to examine tiny details and rationalities like these. We have to understand the reasoning behind these pragmatic, at times seemingly cynical choices, when money is tight and interest rates are extortionate.

Migrants are taking ever greater risks to release themselves or their families from the clutches of debt. The deeper underground a woman lives, for example working alone in a brothel so that she can have all the customers for herself, the more she earns. Working in Europe’s red-light district means avoiding the police and keeping below the radar. If you owe money and are afraid of being deported, you have to earn as much as possible and as fast as possible; before things go wrong. Even if this means sitting alone in a brothel in a forest or crossing the Mediterranean in an unseaworthy boat.

Debt policy is migration policy

What does other people’s debt have to do with us? We’ve got enough debt ourselves, and they made their own choice to borrow the money in the first place. Unfortunately, families’ debt in the global south increasingly has a lot to do with the EU, the United States and other migrant receiving countries. Debt and migration are linked, as is more than apparent when migrants cross the border to sell sex in a brothel in a forest somewhere in Europe.

In other words, debt and bank policy are migration policy. Without addressing the former the root causes of the latter cannot be altered. Intercepting the smugglers and planning an anti-trafficking awareness campaign only treats the symptoms. Even criminalising the purchase of sex has a negligible effect on the prevalence of migrant prostitution. Why? These surface-level initiatives don’t even attempt to reach the root cause of the phenomenon: unemployment and debt.
Some programmes in Thailand, for reasons of migration or otherwise, do target debt. In order to avoid the clutches of fast consumer loans, the very poorest can take out interest-free loans from the government to buy agricultural machinery and sowing seed. So far this has been small-scale and the effects cannot easily be measured, but it does show that the home countries are well aware that debt is often a trigger.

Looking at migration as a consequence of debt in a variety of scenarios raises many questions. Could we work out large-scale, debt-restructuring models for migrant families that avoid the pitfalls of micro-loans? Could states foster better migration policies and healthier loans in the areas migrants originate, serving as state guarantor so people without long term job contracts could borrow money at non-extortionate rates?

Could the EU bring as much weight to bear against unscrupulous loan sharks in Europe and overseas as it has against human smugglers since 2012? The millions of Euros spent on surveilling smugglers might be put to better use investigating illegal money lending and, in the worst cases, protecting witnesses to break the cycle of fear, intimidation and even violence that trap families in debt and migration. Asking how we might change the structural factors constraining migrants’ lives, such that they may choose to migrate but have viable alternatives to doing so, puts migrants’ well-being centre stage while fostering healthier migration policies at the same time.

Private debt is often kept secret; it is complex, shameful and sometimes criminal. Therefore, to deal with debt and migration in tandem will require nuanced, sensitive, and innovative solutions. Because debt migration won’t go away on its own. As a Thai woman explained: “We’re getting much better at paying back our debt, because more of us are going to Europe”.

Dr. Sine Plambech is a Researcher, Anthropologist and Film Director working on irregular migration, trafficking, sex work, and documentary filmmaking.

This story was first published on openDemocracy.
 

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Narendra Modi came in as chief minister of the state in October 2001 and when he stepped into the state’s chief ministership post, Gujarat's debt stood at roughly 53,000 crore rupees. When he left his post, elevated to become prime minister, the public debt of the state of Gujarat was 165,000 crores.

That is, the state he led was several thousand crores more deeply in debt. Much of the spending was and is on showpiece infrastructure projects, while spending on health and other social sectors were and are low. Now it's appears that it’s India's turn to sink as we follow the same pattern of public borrowing and call it a successful ‘model.’

Earlier this year, then Gujarat state finance minister, Saurabh Patel, replying to a written question by MLA from Lunawada, Hirabhai Patel had, in the state assembly on February 25, 2016 stated that to date, the state of Gujarat owes Rs 1,65,742 crores in public debt, the Economic Times reported this. Today, after the Dalit Una agitation the state finance minister’s portfolio has been handed over to Nitin Patel. Saurabh Patel had also said that the government had paid a cumulative and whopping amount of Rs 54,349 crores as interest and principle during last three financial years.

In 2012-13, the state government has paid Rs 10,883 crores as interest and Rs 6,537 crores as principle amount against the loans taken by the state, the Minister said. In 2013-14, state has paid Rs 11,916 crores as interest and Rs 6,204 crores as principle. In 2014-15, the amount was Rs 13,297 crores and Rs 5,512 crores respectively, Patel said. In March 2012, when Gujarat's actual debt was Rs 1,38,978 crores and projected to touch Rs 1.76 lakh crores in 2013-14, was preceded by only two other states: West Bengal (Rs 1.92 lakh crores) and Uttar Pradesh (Rs 1.58 lakh crore), according to these figures.

These figures put into shadow the much acclaimed and not critically assessed ‘Gujarat Model of Development.’ Huge social upheavals among Gujarat’s Dalit (7 per cent of the state’s population and the Patels (Patidars) have exposed this model of development, though much showcased, as making hollow claims.

This report in Counterview (Gujarat's total debts or liabilities cross 2.1 lakh crores, up by 10.19% in a year) revealed how, the Reserve Bank of India (RBI) Study of state budgets(2015) has revealed that Gujarat’s outstanding liabilities, also identified as “total debts”, have crossed Rs 2 lakh crore in 2014-15, reaching Rs 2,100.4 billion, or a little above Rs 2.1 lakh crore, up from Rs 1,886.4 billion in 2013-14, a 10.19 per cent rise. 

While critics consider this a very “heavy debt burden” on the state coffers, Gujarat government officials do not think there is anything alarming here, as one should look at the ability of a state to pay debts instead of talking of debts in absolute terms.

Market borrowings topped appear to have topped Gujarat’s “total debts” for the year 2014-15. These include internal debts, which were to the tune of Rs 1,613.8 billion, followed by state development loans (SDLs) of Rs 1,058 billion. Other “outstanding liabilities” include power bonds, national small savings funds, loans from banks and financial institutions, loans from the Centre, provident fund, and so on.

By calculating outstanding liabilities, the RBI believes that there is a need to take a “broader” view of debts. It says, “In assessing fiscal sustainability, it is important to focus attention on a broader concept of debt. Sustained efforts by the states are required to keep debt levels from rising.” According to the RBI, earlier calculations, which only took into account public debt, was limited in definition, underling, “Conventional debt does not include the governments’ risk exposure to PSUs due to government guarantees, off-budget borrowings and accumulated losses of financially weak PSUs.”

The states which have higher outstanding liabilities than Gujarat are Maharashtra with Rs 3,387.3 billion, followed by Uttar Pradesh (Rs 2,936.2 billion), West Bengal (Rs 2,804.4 billion), and Andhra Pradesh (Rs 2,204.5 billion). All other non-special category states have much less amount of outstanding liabilities than Gujarat’s.

Significantly, despite a high debt burden, Gujarat’s outstanding liabilities as percentage of Gross State Domestic Product (GSDP) – which is considered the yardstick for calculating whether a state has capacity to pay the loans it taken – remains well within the permissible limit. Identified as debt-GSDP ratio, it was 25.3 per cent in 2011-12, and in 2014-15 it is 23.7 per cent. The “permissible limit”, as worked out by the Finance Commission, in 2011-12 for Gujarat was 31.9 per cent, while it was 19.1 per cent in 2014-15.

The RBI notes in the study titled “State Finances: A Study of Budgets of 2014-15”, states, “Setting the consolidated debt-GDP ratio of states on a declining trajectory is crucial to improving their finances.” It adds, “Halting the deterioration in the GFD-GSDP ratio that took place in 2013-14 is also critical in the context of fiscal consolidation.”

The RBI quotes other studies to say that a gradual fiscal consolidation based on a mix of revenue and expenditure measures can support growth, while reducing public debt. Higher initial levels of debt may also increase the probability of government pursuing successful fiscal consolidation.”

The RBI study further reveals that 52 per cent of Gujarat’s debts are more than seven years old, 24 per cent between 5 and 7 years old, 19.6 per cent between 3 and 5 years old, 2.5 per cent between 1 and 3 years old, and just about 1.8 per cent less than a year old. The percentage of loans of less than a year old is lowest among the 18 “non-special category states”.

As of 2014 figures when the political transition took place in the state, Reserve Bank's data shows that Gujarat received $9 bn in Foreign Direct Investments (FDI) between April, 2000 and December 2013, adding that Maharashtra received the highest FDI during the said period ($65 billion), followed by Delhi ($38.8 bn) and Chennai ($12.6 bn).  In 2011, Narendra Modi had claimed during the famed Gujarat summit that that the state had finalised FDI agreements worth $450 bn.“Just add it (the numbers). This was a ludicrously high figure since it is five or six times higher than what all of India had received in total FDI until 2014. http://finmin.nic.in/the_ministry/dept_expenditure/plan_finance/DEbt/state-fiscal-debt-liab.asp
 
Background:

Debt Obligations of Gujarat Government Crosses Rs 50000 Crores Mark

Gujarat Economy in Doldrums, Ensuing Government Will Find Itself in Trap

With every passing year, the public debt of Gujarat government is soaring high and high. Not only this, towards payments of interest on this debt Gujarat government has to rely on its revenue receipts and fresh loans. The state, which surpassed the statutory limit on overdrafts last year, finds its economy in sorry state. Economists have pressed their advice that if the government fails to act on timely repayment of its debts and interest payments there on, it will affect a severe blow to treasury. Sources in the finance ministry had then said that the total fiscal liabilities of Gujarat government has crossed Rs 50000 crores mark. If the state remains gripped by the debt trap in years to come, the ensuing government will have to face a critical situation. On the other hand, national and international financial institutions will hesitate to give grants and loans to Gujarat government.

The state economy should ideally follow the cardinal principles of sustainability and non-vulnerability. Taking into account its Gross Fiscal Liabilities and Gross Domestic Product as well as Revenue Receipts suggest that the state is sinking under mounting debts. At the same time the Revenue receipts from its own taxes has not witnessed any noticeable increase, thus lending it into vulnerable position. During the last five years (1997-2002), the rate at which its interest payments rose, surpassed the rate of growth in its Gross Domestic Product, suggesting violation of sustainability principle.

The high level of gap between the total fiscal resources against its total fiscal liabilities suggest that without giving a thought to its resource mobilisation capacity, the state indulged in increasing liabilities indiscriminately. Comptroller and Auditor general of India has also pointed out in its report that the state is using a large part of its revenue receipts to repay its debts and towards interest payments, which suggests a negative trend for the state government. The report submitted by Indian Institute of Management, Ahmedabad, director Prof. Bakul Dholakiya in April 2003 suggests that the Gross Fiscal Deficit of the state is rising at the rate of 6.00%. The said report warns that if the state government wants to sustain its economy, this deficit has to be brought down to 3.50%. Gujarat state finds itself in 15^th position amongst the 16 heavily indebted states. The report notes that while the burden of interest payment on debt was 16.9% of GDP in 1996-'97, it has become 46.6% of GDP in 2001-'02.

So, when looked from a retrospective angle, within last twelve years, the public debt has witnessed eight fold increase. Financial experts and sources in finance ministry suggest that at the end of the current financial year, the government will have to pay, merely as interests on it outstanding debts, the amount which equals to what it raises from its own sales tax.

From 1991-'92, how the total fiscal liabilities have increased by leaps and bounds is suggested in following table:
 

           
According to sources the interests paid by the government on this mounting debt is as follows:
1999-'00: Rs 2808.00 crores
2000-'01: Rs 3100.00 crores
2001-'02: Rs 4200.00 crores

Sources also informed that the public debt of the state government has reached Rs 52000 crores mark, at the end of 2002-'03.

During the year 2001-'02 the state had paid back debts worth Rs 18510.44 crores. Out of this repayment on Government of India loans was Rs 742.24 crores, whereas to Reserve Bank of India it was Rs 17563.18 crores. Due to such damning resource crunch, the state government had to rely on overdraft eight times last year and paid Rs 2.17 crores as the interest on these overdrafts only. During the years 2000-'01 and 2001-'02 also it had to take overdrafts, 11 times and 10 times respectively. The highest amount generated from overdraft last year was Rs 589.30 crores.

Central government has warned the state that if it fails to minimise its debt obligations and restore economic sustainability, the Centre will have to think twice before giving it any grants or loans.

(Source: Gujarat Samachar, Baroda edition, June 28^th, 2003. Page 16.Translated by : Himanshu Upadhyaya)

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The government has set up a cell to manage India's public debt and expects better results than those achieved by the Reserve Bank and the Finance Ministry.

Image: Reuters

If debt is bad, taking new loans to pay back old ones has all the makings of a debt trap and the Indian government seems to be doing just that. India owed Rs 57,75,685 crores to internal and external lenders in the financial year 2014-2015 – a whopping 46% of the country’s gross domestic product. And it turns out that 77% of all long-term borrowings made by the government were actually used to pay back interest and principal on earlier borrowings rather than being spent on development expenditure.

Part of the reason for this is deficient forecasting and management of public debt, which is usually the responsibility of the Reserve Bank of India and the Ministry of Finance. Both these authorities have been considering ways to improve India's debt management and they seem to have finally found a way.

Last week, the government announced the setting up of a public debt management cell that will be converted into an independent authority in two years with a mandate to manage India’s public debt and forecast requirements well in advance and find ways to fund them at a desirable interest rate.

The Reserve Bank has been doing this job for the government so far in cooperation with the Department of Economic Affairs, and the results have not been great. Many believe the move to set up a public debt management cell will dilute the central bank's role in the country’s money management. But the idea behind it is something the Reserve Bank itself has pushed since 1997 through the Working Group on Separation of Debt Management from Monetary Management. And multiple committees, including the one headed by former Reserve Bank Governor Raghuram Rajan, have endorsed the view.
 

Ending conflict of interest

The formation of a new agency, experts said, would remove the alleged conflict of interest the Reserve Bank faces while deciding on monetary policy through interest rates and then making borrowing decisions for the government.

“There is a conflict of interest between the RBI being the debt manager and targeting inflation," said Radhika Pandey, an economist at the National Institute of Public Finance and Policy. "As a debt manager, the central bank would aim at lowering interest rates, but this would come in conflict with its inflation management mandate."

Rajan, however, said last year that the public debt management cell must remain equidistant from both the government and the Reserve Bank to actually remain independent.

“If that agency is too close to the government, then we should be careful… Government owns a number of entities in the economy today, public sector banks, LIC, etc, so that same conflict that existed in the RBI should not be transferred to an entity that has closer links with the government,” he was quoted as saying in the Hindu.

With the constitution of the new cell – which would be housed at the Reserve Bank's office in Delhi – the conflict of interest would be gradually removed. The government expects the cell to monitor its finances and arrange cash as and when needed through cheap interest rates and instruments such as government securities.

The formation of such a public debt management authority is also in line with the recommendation of the Comptroller and Auditor General, which in a report to Parliament in July had pointed out the dismal state of public finance management in the country.
 

Broken system

As the chart above shows, India’s borrowings have continuously grown alongside its GDP over the last four years, but the percentage of public debt as percentage of GDP has risen marginally from 40.2% in 2011-'12 to 40.7% in 2014-'15. Moreover, much of this debt is internal as external debt and other liabilities together make up for a mere 11.6% of the government’s total liabilities.

The problem, however, lies in the fact that most of the short-term and a substantial part of the long-term borrowings are being used to service debt already taken, implying that little of the amount is left to spend on constructive development projects. For instance, India’s debt servicing liability for short-term borrowings was 101% of total receipts in borrowings in the year 2014-'15 while the corresponding figure for long-term borrowings was a high 77%.

The report of the Comptroller and Auditor General took note of this and said that debt servicing liabilities should not become larger as they undermine development expenditure, which is presumably the major reason behind government borrowings in the first place.

“In 2014-'15, 77% of long-term internal borrowings and 73% of external borrowings were utilised for debt servicing, implying that a larger percentage of debt was being used for debt servicing, which in turn meant lower percentage of debt taken was available for meeting development expenditure to promote growth, which is one of the reasons for contracting debt,” the report noted.
 

Inefficient forecasting

In its response to the government auditor, the Reserve Bank said it had been “discharging its functions effectively and efficiently".

A closer scrutiny of the numbers, however, casts doubts on this claim. For instance, the audit noted that expected cost of debt was not being projected forward efficiently and stress tests were not being conducted, both vital to ensuring the government has the ability to pay back its liabilities on time.

The Department of Economic Affairs, however, stated that most of the external debt was concessional and backed by bi/multi-lateral cooperation agreements between two or more countries. Hence, it did not bracket it under the category of “borrowings” – effectively excluding it from the government’s debt management strategy.

The Comptroller and Auditor General discovered that borrowings from the International Bank for Reconstruction and Development and the Asian Development Bank accounted for nearly 31% of total external borrowings by the end of the financial year 2015, and these were not on concessional terms.

“Further, whether concessional or not, [debt] is subject to exchange rate risk that needs to be managed through a well thought out strategy,” said the auditor.

The chart above shows how widely the government’s estimates and its actual borrowings varied in the last few years, ranging from a negative 33% to a positive 225%.

“Thus, it appeared that the system of preparation of budgeted estimates and revised estimates in respect of external debt was not robust,” said the auditor.

A similar trend was seen in forecasting estimates of the government’s cash needs. The Reserve Bank is tasked with forecasting weekly inflows and outflows in the government of India account, which needs to maintain a balance of Rs 100 crores on each reporting Friday. However, there were at least 40 weeks in each year when the variation between the projected cash balance and the actual cash balance was more than Rs 1,00,000 crores.
 

Data maintenance 

“The purpose of the forecast was to ascertain the possible position of cash so that appropriate steps could be taken to bridge the gap between projected cash management and projected cash availability, if any," the Comptroller and Auditor General said. “A wide variation between the projected and actual cash balance defeated the purpose of this projection.”

That is not all. The government should ideally have a robust internal monitoring system with near-real-time data of its borrowings and forecasts that are shared between the Reserve Bank and the finance ministry. But this is not the case. The auditor observed that E-Kuber, a platform used by the central bank for internal debt auctions, and the Integrated Computerised System, which it used to maintain various ledgers and registers, did not have any analytical functions as needed.

The Reserve Bank, in its reply, stated that it used Excel-based tools for its debt management strategy and the Department of Economic Affairs used spreadsheets too.

“The RBI stated that all data was available as a system of maintaining physical registers also existed in parallel and there was no risk of data loss, and [it] accepted that there might be issues with the report generation," the auditor said in its report.

All these deficiencies in the country's public debt management system led to huge cash outflows that could have been prevented. For instance, India paid more than Rs 600 crores in the last six years as commitment charges for withdrawing loans at a later date rather than the one it had earlier agreed upon.

“The need for payment of commitment charges points towards inadequate planning of loans/credits without proper linkages, with the requirement leading to avoidable payment of commitment charges,” the auditor noted.

With all that is going wrong with India's public debt management, the importance of a specific agency has become more pronounced, and economists hoped the government’s step to set up the public debt management cell would improve its financial condition and reduce the debt burden steadily.

“This move is timely as now the government has given the RBI the mandate to target inflation,” said Radhika Pandey of the National Institute of Public Finance and Policy. “The new cell would typically also require a liquid bond market so that it is able to raise finances for the government at the lowest cost. All this augurs well for the economy. This is not dilution of the RBI’s powers as the RBI will be able to focus on its core job of inflation targeting."

This article was first published on Scroll.in
 

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