Economy
State finances display worsening of fiscal consolidation and quality
Out of the 849 state level public enterprises, 30% are estimated to be incurring losses, and hurting state finances. Improvement in their performance is a prerequisite to improve state public finances, says a research report
 
The Reserve Bank of India (RBI) released a report "State Finances: A Study of Budgets of 2015-16", which is the primary source for disaggregated state wise fiscal data. The central bank says expenditure quality at the sub-national level in India has somewhat improved with the implementation of fiscal responsibility and budget management (FRBM) rules. However, while quality of spending is improving post FRBM, the fiscal positions of states have been worsening of late, says a research report.
 
In the note, Religare Capital Services Ltd, said, "There are 849 state level public enterprises (SLPEs) operating in India. Of these about 30% are estimated to be incurring losses, and hurting state finances. Thus, an improvement in their performance is a prerequisite to improve state public finances. Besides, an improvement in financial health of state power distribution companies (discoms) and rationalisation of centrally sponsored schemes would also help improve the situation."
 
The RBI had stated that the existing levels of high revenue and non-development expenditure in states' total spending is of concern as it can inhibit growth at the state level.
 
As per the RBI report, states have managed to contain growth in spending post the FRBM and the aggregate expenditure-to-gross state domestic product (GSDP) ratio has declined by 70 basis points (bps) to 17.1% post the FRBM, with as many as 13 of the 17 non-special category states being able to reduce the ratio. More importantly, the quality of spending by states has improved slightly over the last decade. Post the implementation of the FRBM, the aggregate capital outlay of states has risen to 2.4% of GSDP from 1.8% earlier, while revex has fallen by 100bps to 14.3% of GSDP. The improvement in capital outlay-to-GSDP ratio has been more stark in the low income category states of Uttar Pradesh (240bps), Bihar (190bps) and Madhya Pradesh (100bps).
 
Religare says, the fiscal positions of state finance have been continuously deteriorating over the past five years and the fiscal deficit has risen to 2.9% in FY2015 (revised estimate) from 1.9% in FY2012. "This has led to a sharp rise in market borrowings by states to Rs2.3 lakh crore in FY15 from Rs9000 crore in FY11. The fiscal deficit is budgeted to improve by 50bps to 2.4% in FY16. However, it may be noted that the report only considers the budgeted numbers for FY16 - the revised estimates of some states suggest that this improvement is unlikely to materialize. For instance, Rajasthan’s revised estimates for FY16 put the fiscal deficit number at 3.6% of GSDP (vs. a budget estimate-BE of 3%). If we include the impact of Ujwal Discom Assurance Yojana (UDAY), the ratio is much worse at 10%. Similarly, Bihar, UP, MP and Maharashtra’s revised estimates are also much higher than the budgeted number," it added.
 
Expressing concern over the quality of fiscal consolidation in recent years, the report says, as per the budgeted numbers for FY16, 50bps reduction in states fiscal deficit ratio is to be achieved primarily by a cut in developmental expenditures to 11.4% in FY16 from 12.2% of GSDP in FY15, even as non-developmental expenditures increase to 4.9% from 4.8% of GSDP during the same period.
 
The Central Government has eased the fiscal deficit cap for states for the remaining XIV Finance Commission award period (FY17-FY19) by up to 50bps from the current level of 3% of GSDP subject to the condition that the debt-to-GSDP ratio is less than 25% and the interest payments to revenue receipts ratio is less than 10% in the past two years. If the states meet only one of these two conditions, then they can exceed the fiscal cap by 25bps. Moreover, if a state is not able to fully utilise its sanctioned fiscal deficit of 3% of GSDP in any particular year, it can carry it forward to the next year. Similarly, if a state overshoots the upper limit in a year, then the following year the cap is reduced by the same amount. The move is in line with the 14th Finance Commission’s recommendation and is expected aid the fiscally better placed states to focus on capital expenditure, which are often lumpy. Among the states, Chattisgarh, Jharkhand and Orissa satisfy both the conditions and would be able to raise the fiscal deficit-to-GSDP ratios by 50bps over the 3% cap, the report concluded.

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SBI chief counters RBI governor’s theory on sharp increase in cash with the public
The Governor attributed it to elections. The SBI Chief points out that past data doesn’t say so
 
In what may be perhaps for the first time, the Chairman of State Bank of India (SBI) has trashed the Reserve Bank of India (RBI) governor Dr Raghuram Rajan’s theory on increase in currency with the public. The governor has attributed the current surge in currency to elections. The SBI Chairman, Arundhati Bhattarcharya, has openly trashed this theory. 
 
In a report in Times of India, the SBI Chairman was quoted as saying, "We have seen even bigger elections in earlier years but the increase in currency with the public has not been that high. This time it is hurting our deposit growth." She told the newspaper that the reason for the cash surge was still a mystery. Some have attributed it to the jewellers' strike, which is preventing cash deposits. However, the strike was recent and the increase in cash has been seen for some time, she added.
 
The same report quoted the RBI governor as saying, "We see some possibility that around election time, cash with public increases. You can guess the reason why. We can also guess."
 
Ajit Ranade, an economist, in his column in Mumbai Mirror, also expressed surprise at the increase in currency in circulation. As per the RBI data, over the past 12 months, the total currency in circulation increased by Rs2 lakh crore or by 15.2% to Rs16.6 lakh crore. 
 
"Why is it so high? With the proliferation of digital wallets like PayTM and electronic payments, aren't we supposed to be moving to less cash usage, and toward a cashless society? If GDP growth is only about 7.4%, then why did cash in circulation grow by 15.2%? (It grew by only 10.7% in the previous year)," Mr Ranade wrote in his column.
 
SBI in its Ecowrap research report, has stated that election may be a small reason, but the bigger reason could be the trend in demonetisation. "There are suggestions in public domain and even analysis that are suggesting that higher denomination notes may be replaced. We believe, as a result of that people may be using more of high value currency to purchase safe haven assets. This apart, there has been an increased overdraft of nearly Rs170 crore that has been provided by the banks to the Pradhan Mantri Jan-Dhan Yojana (PMJDY) account holders which may also be responsible for this sudden spurt in currency," it says.
 
According to the report, there is an incremental increase in currency with the public. During the last fiscal (till 18 March 2016), it witnessed a jump of 48% over incremental increase in FY2015. It says, "The common perception is that FY17 being an election year people are hoarding cash. However, had this been true, even FY14 should have shown the similar trend. In fact, that year witnessed a decline."
 
 
"In fact, in FY12, when Punjab and Uttar Pradesh went to polls, currency in circulation actually witnessed a significant decline. Are we to believe that elections in Punjab and Uttar Pradesh are relatively more transparent than say other states like Bihar (reason for possible increase in currency in 2015)? It is hard to believe so. With state elections happening in almost all fiscals, the elections can’t thus be blamed all the time for increase in public currency holding," SBI Ecowrap says.
 
There has been suggestion that is doing the rounds that higher denomination notes of Rs1,000 and Rs500 be demonetized. This is expected to yield the following benefits:
  1. Demonetizing Rs500 and Rs1,000 currency notes will bring a huge amount of the funds kept in these denominations into the banking channels and will facilitate a reduction in domestic black money transactions.
  2. As holding cash in small denominations is cumbersome, the informal services payments made in day to day life, people will shift towards electronic modes of payment thereby making it increasingly easier to track financial transactions, thereby leading to better service tax and income tax collections.
 
However, SBI Ecowrap says there are logistical challenges for this. It says...
 
  1. First of all - demand for banknotes and coins increased in FY15, notwithstanding the use of technology driven non-cash modes of payment.
  2. Notes of denominations of Rs500 and Rs1,000 together accounted for about 85% of the total value of banknotes in circulation at end March 2015 while together they accounted for 22% of the volume at end March 2015.
  3. Despite the presence of high denominations, RBI had spent Rs37.62 billion in printing notes in 2014-15. If the notes of these two denominations are withdrawn, the cost of printing notes for RBI would also multiply. 
  4. At the branch level, the cost of handling cash would zoom and there would be complete chaos as the funds kept in these denominations will be flushed into the banking channels. With higher amount of notes in circulation, the soiled/ mutilated notes will also increase. In India, the smaller notes have a life of less than a year. An Rs100 bill stays around for about three-four years. The Rs500 and Rs1,000 notes keep going for about five to seven years. Currently there are around 5,000 currency chests across the country with the Banks that are used for storing notes. The capacity of these chests would need to be expanded five times to enable storing of enough supply of currency to the public. Construction of these chests, which have specialized steel walls and doors, would take time, as well as, substantial investment.
  5. Operators of automated teller machines say that demonetizing Rs500 and Rs1,000 notes will throw up huge challenges as ATM machines will hold lesser amounts than their current capacity. An ATM machine typically holds 10,000 bills and if these were to comprise only notes of Rs100 the rate of replenishment would go up. This will increase costs and inconvenience to customers. Besides, transaction time at machines would also rise because maximum amount that can be withdrawn at one go would be Rs4,000 since machines are designed to dispense only 40 notes at a time.
  6. Along the entire supply chain for supply of cash, banking system will bear the highest cost primarily because of high fixed costs of ATM machines, counting, recounting, recycling, transport and storage of larger volumes of cash.
 
 
The news of the demonetization of currencies of denomination 500 and 1000 has been doing the rounds for a while, and this may be a plausible reason for increase in currency with public. The rationale for this is that people are taking out cash and buying other assets such as gold so that when the currency is demonetized they do not face a problem.
 
"Our considered view, therefore, would be that should demonetisation be seriously contemplated, a road map needs to be created. It needs to be done in steps and be balanced with creation of necessary electronic and digital infrastructure in the country coupled with creating awareness and financial literacy for ensuring that the man on the street is not put to undue hardship," the report from SBI Ecowrap concluded.

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COMMENTS

Hemen Parekh

8 months ago

Election Season is Rumour Season

You may also call it a season for cash-distribution !
Business Line ( 06 April ) quotes RBI Governor Raghuram Rajan as follows :
" Money in people's hands has gone up by over Rs 60,000 crore which is not normal and needs to be looked into
Around election time , cash with the public does normally increase ... You can guess as to reasons why ; we can also guess
You see some ( spike ) not just in the State going to elections , but also in the neighbouring states . There is something..We need to understand it better "
According to the latest data released by the RBI, there was a 48 % increase in the currency in circulation at Rs 2 lakh crore for the fortnight ended March 18
Now Times of India ( 08 April ) talks of a report released by the State Bank of India , which says :
" It is rumours of demonetization of Rs 500 and Rs 1000 notes that is possibly driving people to withdraw cash in order to deploy them in safe assets
There are suggestions in public domain and even analysis that are suggesting that higher denomination notes may be replaced
Demonetizing Rs 500 and Rs 1000 currency notes will bring a huge amount of funds kept in these denominations into the banking channels and will facilitate a reduction in domestic black money transactions
But this would also be a headache when it comes to logistics "
MY TAKE :
* It is much better to have a headache than a heart attack !
* You can have the pie and eat it too , if , instead of outright
" Demonetization ", we just replace the existing paper notes ( of Rs 500
and Rs 1000 ) , with PLASTIC notes of same denomination , but embedded
with RFID micro-sensors ( 50th of a hair thickness ) , which can be tracked
through a GPS enabled technology platform ( consisting of a Mobile App )
* Any accumulation of Rs 10 lakh worth of such notes , within an area of
ONE square meter , will show up on a Google Map on the mobile app !
* This will not only allow people the convenience to continue using Rs 500 /
Rs 1000 plastic notes for their daily usage / purchases but it will, at same
time ensure that goods / services valued at a few thousands of rupees ,
will always get paid thru banking channels , since no seller of goods or
service would want an accumulation of even 1000 note of Rs 1000 , in his
table drawer / bank locker !
* And which candidate contesting any election would want his brief-case or
car trunk to show up on the Mobile App of ACB / ED / IT , as a red
balloon , with caption, " Find Five Crore Here " ?
What do experts have to say about CASH ?
* Mark Barnett, the boss of MasterCard ( UK ), believes that in five years cash will be practically extinct in Britain . At the Money 2020 conference in Copenhagen last week , he said :
" By the time we get to another generation , 30 years down the track, will there be any cash ? I very much doubt it . It will seem as antediluvian as carrying a pouch full of gold "
Marching towards the goal of a " less cash " society , yesterday , Shri Raghuram Rajan launched United Payment Interface ( UPI ) , which is independent of any payment platform ,bank or telecom service provider
One can use mobile based ( just one click ) UPI app for :
* Paying for delivery of goods from online shopping web sites
* Paying of utility bills
* Over the counter payments
* Bar code based payments
* Donations / School fees
* Any type of payment ! All without revealing your bank details !

But if Shri Raghuram Rajan wants UPI to catch like wild fire , all that he has to do is to replace existing notes ( not demonetize ) as suggested above
Sanjay Sarma ( MIT ) who has written 75 research papers on RFID sensors,
wrote to me :
" I think it is a matter of time before it happens.
I do agree with your idea "

-------------------------------------------------------------------------------------
hemenparekh.in / blogs
12 April 2016

Nifty, Sensex In No-man’s Land – Weekly closing report
The absence of any trigger – positive or negative – will keep Nifty drifting sideways
 
Last week we had mentioned that Sensex, Nifty may give up some gains. We had anticipated Nifty to head lower, if it closes below 7,570. This week Nifty was down 2%, with most of the loss coming on Tuesday when the Reserve Bank of India cut repo rate by 25 basis points. The weekly trends of the major indices are given in the table below:
 
 
This week which began on a positive note saw Nifty closing in the positive on three trading session. A positive close to the US markets previous Friday and stable Asian market on Monday made the indices back home close in the green on Monday. The market looked ahead for the new fiscal's first bi-monthly monetary policy review due on Tuesday where it was widely anticipated that RBI Governor Raghuram Rajan may cut interest rates by at least a quarter of a percentage point. Nifty closed at 7,759 (up 0.59%).
 
On Tuesday the indices suffered a major correction. Nifty closed at 7,603, falling 2%. Negative global cues, along with profit booking and weak crude oil prices, plunged the Indian equity markets. In line with market anticipation, RBI cut its key lending rate by 25 basis points (bps) resulting in the repurchase rate to be lowered to 6.5% from 6.75%. The reverse repurchase rate, or the short-term borrowing rate, has been adjusted upward to 6% from 5.75%.
 
On Wednesday after a range bound session Nifty closed marginally higher at 7,614 (up 0.15%). The market moved cautiously ahead of the FOMC (Federal Open Market Committee) minutes which was to be released on late Wednesday evening and the start of the fourth quarter (Q4) results.
 
On Thursday Nifty closed at 7,546, down 0.89%. A rebound in global crude oil prices was wiped off by selling and unwinding of long positions ahead of the fourth quarter (Q4) results season dented sentiments. On Friday Nifty witnessed a listless session, even the negative cues from FOMC (Federal Open Market Committee) minutes released late on Wednesday evening led to a selloff in the US markets. Occasionally the index moved into the red but did not remain there for long. Nifty closed at 7555 (up 0.12%). Overall the positive move was supported cues from the European market. On Thursday European Central Bank officials' expressed their willingness to launch fresh stimulus.

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