Indian Economy - Current Affairs for October, 2017

India is likely to overtake Japan and Germany to become the third largest economy in the next 10 years, HSBC Holdings Plc said in a September report. According to HSBC's estimates, India will be a $7 trillion economy in 2028. This is compared to less than $6 trillion and $5 trillion for Germany and Japan, respectively. Presently, India's gross domestic product (GDP) is around $2.3 trillion (fiscal 2016-17). HSBC: Know More

• HSBC Holdings plc is a British multinational banking and financial services holding company, tracing its origin to a hong in Hong Kong.
• It is the world's seventh largest bank by total assets and the largest in Europe with total assets of US$2.374 trillion (as of December 2016).
• It was established in its present form in London in 1991 by The Hongkong and Shanghai Banking Corporation to act as a new group holding company.
• The HSBC name is derived from the initials of the Hongkong and Shanghai Banking Corporation.
• The company was first formally incorporated in 1866.
• The company continues to see both the United Kingdom and Hong Kong as its "home markets".

India is set to become the third largest aviation market the International Air Transport Association (IATA) said in a report on Tuesday. IATA, which represents about 85% of the global airline traffic, projects India to overtake the UK to become the third largest air passenger market by 2025. China will be the top market, followed by the US. In a similar report last year, IATA had projected India to overtake the UK by 2026. The biggest driver of demand will be the Asia-Pacific region. The region will be the source of more than half the new passengers over the next two decades. The point at which China will displace the US as the world's largest aviation market (defined as traffic to, from and within the country) has also moved two years closer since last year's forecast. By 2036, India will have about 478 million airline passenger traffic, which will be more than that of Japan (just under 225 million) and Germany (just over 200 million) combined. India's current passenger traffic is about 141 million. The most critical number will, however, be the doubling of overall passenger traffic globally from 4 billion to nearly 7.8 billion passengers in 2036 on a 3.6% compound annual growth rate (CAGR). All indicators lead to growing demand for global connectivity. The world needs to prepare for a doubling of passengers in the next 20 years. Indian airlines have over 800 planes on order and in the next five years alone are set to add 350-400 aircraft. All Indian airlines put together have a fleet of around 500 aircraft currently.

As much as 418 km of national highway and State highway stretches in Kerala figures in the 6,005-km economic corridors, inter-corridors, feeder routes, and national corridors being developed to improve the efficiency of freight movement under the Bharatmala Pariyojana. According to the NHAI, these corridors are proposed for development to at least four-lane access controlled (fully access control for economic corridors). However, the DPR for access controlled six-laning and eight-laning may be required on certain stretches, depending on the traffic. Keeping in view a futuristic approach, it has been decided that the land for any 4/6-lane highway road will be acquired with a right of way (RoW) of 60 m irrespective of the width of the carriageway. INR 6.92 trillion has been allocated for building an 83,677 km road network over the next five years. The largest ever outlay for road construction comes in the backdrop of the National Democratic Alliance (NDA) government implementing the goods and services tax (GST). The road construction push includes the Bharatmala Pariyojana with a INR 5.35 trillion investment to construct 34,800km of roads. In addition, INR 1.57 trillion will be spent on the construction of 48,877km of roads by the state-run National Highway Authority of India (NHAI) and the ministry of road transport and highways. To expedite the Bharatmala projects, apart from ministry of road transport and highways and state-run firms-NHAI and National Highways and Infrastructure Development Corporation Ltd (NHIDCL)-even respective state public works departments (PWDs) will be roped in for timely execution. This in turn will generate 142 million man-days of jobs, the government said. Measures today will boost infra spending in a big way. Funding Bharatmala

• To fund the marquee Bharatmala scheme, INR 2.09 trillion will be raised as debt from the market, while iNR 1.06 trillion in private investments is being targeted through public private partnerships.
• In addition, INR 2.19 trillion will be provided from Central Road Fund (CRF), Toll-Operate-Maintain-Transfer (TOT) projects and toll collections of NHAI.
• Projects such as Sagarmala and Bharatmala will prepare a strong base for infrastructure development, enabling a person to travel across the country on a single road.

The Asian Development Bank and the Government of India signed a $300 million loan to continue a series of fiscal reforms in the State of West Bengal to improve the quality of public service delivery. The Second West Bengal Development Finance Program targets a further increase in public investment through reduction of unproductive expenditure, and savings from efficiencies in revenue collections. The Program will build on earlier intervention under Phase I of the project through the $400 million Program that targeted a comprehensive fiscal consolidation program in the state. The new Program will create the fiscal space necessary to sustain higher public investment in the State which could put the state’s finances on a balanced and sustainable path. The program agreement was signed by Mr. Parwez Ahmad Siddiqui, Secretary, Finance Department, Government of West Bengal. ADB’s first Program focused on augmenting public investments that reached almost 1.3%, as a percentage of gross state domestic product, in FY2016 from 0.5% in FY2012 while the fiscal deficit reduced to 2.2% from 3.4% in the same period. The new Program will not only target public investment but would also support private investments more directly by creating an infrastructure facility to support project preparation, development, and appraisal, with emphasis on public-private partnerships in health and education. It also seeks to simplify the registration and licensing procedure for micro, small and medium enterprises. Spread over two years, the Program will also carry forward reforms such as linking medium term expenditure plans to actual budgets, supported by strengthening internal audit system, and enhancements in the integrated financial management system (IFMS). Other activities under the program include improved tax monitoring and continued support for information technology systems in strengthening tax and land administration.

Madhya Pradesh has achieved third position in milk production in the country, the state's animal husbandry ministry said. Due to sustained efforts, the state has achieved third position in milk production in the country. It was at sixth or seventh place 10 to 12 years back and last year it was at the fourth place, Moreover for products, the new packaging is totally safe, leak-proof, made from food-grade plastic and there is no scope of any adulteration in it as its seal cannot be tampered with. The state government is committed to doubling the farmers' income by 2022 and in it the state's veterinary department has a major role to play. Milk producers were this year paid INR 200 crore, which is maximum by the state government so far.

The contribution of Prepaid Payment Instruments (PPI) will rise to 30-40 percent over 5 years from less than 10 percent now on the Reserve Bank push, as per PCI. RBI came out with the third set of reforms in PPI yesterday to make it interoperable with all existing payment instruments, on par with acceptance of debit/credit cards in a phased manner. This would ensure that PPIs contribution to digital payments from current share of less than 10 percent can move to 30-40 percent in the next 5 years. The Council praised the regulator for a progressive and positive set of guidelines. It however said a concern is that even the low usage wallets with limited merchant transaction functionality are required to do a KYC beyond 12 months. "This adds friction to customers and costs to issuer. In line with international guidelines, a framework of proportional KYC could have been adopted," it said. PCI is the representative body of PPI issuers. RBI guidelines mark the 10 year anniversary to the industry and seem to be a true reflection of a collaborate approach for the industry.

India’s GDP may slow from 8.6% in 2015 to 7.0% in 2017 because of disruptions by demonetisation and the GST, the World Bank has forecast and warned that subdued private investment due to internal bottlenecks could put downside pressures on the country’s potential growth. The International Monetary Fund also lowered India’s growth projection to 6.7 % in 2017, 0.5 percentage points less than its previous two forecasts and slower than China’s 6.8%. India’s economic momentum has been affected by disruptions from the withdrawal of banknotes and uncertainties around the Goods and Services Tax (GST), the World Bank said in its South Asia Economic Focus, a biannual economic update. As a result, growth is expected to slow from 8.6% in 2015 to 7.0% in 2017. Sound policies around balancing public spending with private investment could accelerate growth to 7.3% by 2018, it said. While sustained growth is expected to translate to continued poverty reduction, more focus could be made to help benefit the informal economy more, said the report released here ahead of the annual meeting of the International Monetary Fund and the World Bank. A slowdown in India’s growth rate, the bank said, has also affected the growth rate of South Asia. As a result, South Asia has fallen to second place after East Asia and the Pacific. Real GDP growth slowed to 7.1 % in 2016, from 8 % in 15/16, and further to 5.7 % in Q1 FY2017. On the one hand, public and private consumption gained pace: after implementation of the 7th central pay commission recommendations; and due to the revival in rural demand after normal monsoon and agricultural impetus. However, overall demand slowed as public investments started to wane. According to the bank, the GST is expected to disrupt economic activity in early 2018, but the momentum may pick-up. Evidence suggests that post-GST, manufacturing and services contracted sharply. The growth activity is expected to stabilise within a quarter - maintaining the annual GDP growth at 7.0 % in 2018. Growth is projected to increase gradually to 7.4 % by 2020, underpinned by a recovery in private investments, which are expected to be crowded-in by the recent increase in public capex and an improvement. This is in the present investment climate (partly due to the passage of the GST and Bankruptcy Code, and measures to attract the FDI). The most substantial medium-term risks are associated with private investment recovery, which continues to face several domestic impediments such as corporate debt overhang, regulatory and policy challenges, along with the risk of an imminent increase in US interest rates. If the internal bottlenecks are not alleviated, subdued private investment would put downside pressures on India’s potential growth. Downside risks to the global economy - and accordingly to export growth and capital flows - are also substantial given the possibility of monetary policy normalisation in the USA and risks of protectionism.

Assam Finance Minister Himanta Biswa Sarma heads the group of ministers (GoM) of state finance ministers that have been set up to look into various issues pertaining to a scheme for small taxpayers under the Goods and Services tax (GST), also known as the composition scheme. The GoM will also look into the proposal to reducing GST rates on air-conditioned restaurants from 18 percent to 12 percent. Deputy Chief Minister of Bihar Sushil Modi, Jammu & Kashmir Finance Minister Haseeb Drabu, Punjab Finance Minister Parminder Singh Dhindsa and Chattisgarh's Commercial Taxes Minister Amar Agarwal will be a part of the GoM. Composition scheme is an alternate method of taxation, which allows small businesses with annual turnover up to INR 75 lakhs, to pay tax at a concessional rate, as well as reduce the compliance cost. The revenue threshold is INR 50 lakhs for dealers across nine states such as Arunachal Pradesh, Nagaland, Tripura, among others. The enrolment into the plan is however, optional. On Friday, the GST Council headed by Finance Minister Arun Jaitley decided to raise the annual turnover threshold on the scheme to INR 1 crore and reopen its registration for the third time till March 31, 2018. Under the scheme, traders, manufacturers and restaurants can pay tax at 1, 2 and 5 percent, respectively. The move to widen the turnover threshold is aimed at easing the compliance burden for taxpayers as they will have to file returns only once in a quarter as against monthly returns that needs to be filed by other normal taxpayers. However, dealers cannot avail input tax credit, unlike a normal taxpayer. Input credit means at the time of paying tax on output, a producer, trader or service provider can reduce the tax already paid on inputs. The committee of GoM will take crucial decisions related to the scheme such as if the plan can be extended to taxpayers making inter-state supplies of goods, which was earlier not allowed. The officials will examine whether turnover of exempted goods under GST can be excluded from the total turnover threshold for levying tax under composition scheme. Apart of rationalising tax structure of different categories of restaurants, the committee will also examine if input tax credit (ITC) can be made available to registered taxpayers under GST from dealers who have opted for composition scheme. Initially, the response for the composition scheme was lukewarm, with only 10.24 lakh dealers opting for it over a span of one and half months, starting July 1. Last month, the Council decided to reopen registration for the scheme from September 17. This time, however, more than 5 lakh dealers opted for the scheme over just 13 days, taking the total number of assessess to 15.43 lakhs.

The Reserve Bank of India (RBI) on Oct 4 kept the key interest rates unchanged, as was widely expected. Repo rate - the rate at the which the central bank lends short-term money to banks- thus continues to stay at 6 per cent. The RBI had cut repo rate by 25 basis points (bps) in August. RBI has also cut the economic growth forecast for the current fiscal to 6.7 per cent from earlier projections of 7.3 per cent. The decision of the Monetary Policy Committee (MPC) is consistent with a neutral stance of monetary policy in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4 per cent within a band of +/- 2 per cent, while supporting growth. SLR or statutory liquidity ratio was, however, cut by 50 basis points to 19.5 per cent with effect from October 14. Banks are required to invest certain percentage of their deposits in specified financial securities like Central Government or State Government securities. This percentage is known as SLR. However, with adequate liquidity in the system, the SLR cut is unlikely to have much impact on banks. The announcement which came at the end of a two-day meeting of the MPC of the RBI, is in sync with what the experts had predicted. Inflation, which in August reached a five-month high of 3.36 per cent, is being billed as the reason behind RBI's decision to maintain status quo. The RBI decision of increasing inflation forecast from 4 per cent to a range of 4.2 to 4.6 per cent for the October to March half backs this proposition. Analysts expect inflation could continue to quicken, given food prices tend to rise during the winter. Reverse repo rate - the rate at which the central bank borrows money from commercial banks- was also left unchanged at 5.75 per cent. Industry body CII (Confederation of Indian Industry) had pitched for a rate cut of 100 bps while Assocham too had written to the MPC. The slowing down of private investments being one of the major reasons behind the slump in growth, industry was hopeful of a rate cut, in order to provide a booster shot to the economy. The central bank said it is imperative to reinvigorate investment activity which, in turn, would revive the demand for bank credit by industry as existing capacities get utilised and the requirements of new capacity open up to be financed.

Global cotton output is likely to rise 10 per cent to 25.4 million tonnes in 2017-18 marketing year on expected production increase in India and the US, a global body has said. The production may go up mainly because of expansion in acreage by 3 million hectares to over 32 million hectares across the world, according to International Cotton Advisory Committee (ICAC). The worldwide output of the cash crop stood at 23.05 million tonnes(MT) last year. India's marketing year runs from October to September. The acreage has increased due to better cotton prices in 2016-17 and higher cotton price ratio to other competing crops during this year, ICAC said in a report. China, India and the US are the world's top three cotton producing countries. As per ICAC, the global cotton consumption is projected to increase 2.7 per cent to 25.22 MT this year from 24.56 MT last year. Mill use in China is projected to grow 1.5 per cent to 8.1 MT. Cotton mill use is also projected to grow moderately in India, Pakistan, Turkey, Bangladesh, Vietnam and Brazil. As far as cotton trade is concerned, it is likely to be stable at 8 MT in 2017-18 marketing year. The US will remain the largest exporter accounting for 40 per cent, or 3.1 MT of the world's shipments. Bangladesh will remain the largest importer in 2017-18 accounting for 18 per cent, or 1.4 MT of the global imports. Since global production is projected to edge over mill use during 2017-18, ending stocks could increase moderately and reach 18.7 MT with stocks to use ratio remaining little changed at 75 per cent. "However, ending stocks in China are projected to decline by 1.7 MT during 2017-18, while outside China stocks are projected to increase by 1.85 MT," the report noted. ICAC is an association of governments of cotton producing and consuming countries.