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On the evening of November 8, 2016, Prime Minister Narendra Modi announced that the high denomination notes of Rs 500 and Rs 1000 would cease to be legal tender from midnight. These old currency notes – about 86% of the printed currency in circulation – could be exchanged for new ones until December 30, 2016.

A lot of data has been accumulated since the note ban was announced by Modi, but most of it is anecdotal and cannot be subjected to a rigorous statistical analysis. However, it does highlight the hit that the Indian economy had taken due to this policy change. Those outside the purview of the banking system were hit particularly hard. For these people, liquidity and budget are often the same since they cannot borrow to tide over a fall in income. Even for those who are relatively well off, there was a significant liquidity crunch.

Much has been written on the subject. Hence, I would pose a counterfactual question. How much of the subsequent damage that has been done to the economy could not have been anticipated by someone even with the basic knowledge of economics? Of course, a lot of the damage from the note ban was due to the manner in which the policy was implemented. For instance, if the new currency notes were available in sufficient quantities, then the magnitude of the inconvenience caused would have been less. The policy was flawed in its conception and exacerbated by an equally dismal implementation.

Demonetisation was meant to tackle multiple objectives. It was supposed to target those people who do not pay taxes and hold part of their wealth in cash. It was also meant to tackle the problem of counterfeit bank notes and terror financing. Later, the government added that it was also meant to move towards a 'cashless' – or less cash – economy.

The rationale was that in order to target accumulated cash on which taxes have not been paid, an element of surprise was required so that the targeted stock of currency is not disposed.

News source: Business Standard

Posted On Saturday, 25 February 2017 10:17

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It may simultaneously require a bank recapitalisation plan

The creation of a ‘bad bank’ will speed up resolution of stressed assets in the banking system, but it will also require significant capital infusion in the state-run banks to meet any shortfall, says a report.

The recent economic survey mentioned about formation of a bad bank that will purchase stressed assets and take them to resolution.

“The creation of a ‘bad bank’ could accelerate the resolution of stressed assets in country’s banking sector, but it may face significant logistical difficulties and would simultaneously require a credible bank recapitalisation programme to address the capital shortfalls at state-owned banks,” international agency Fitch Ratings said in a report.

It said the country’s banks have significant asset quality problems that are putting pressure on profitability and capital, as well as constraining their ability to lend.

It expects the stressed-asset ratio to rise over the coming year from the 12.3% as at end-September 2016, with the ratio significantly higher among state-owned banks.

More capital

The rating agency said the banking sector will require around $90 billion in new total capital by financial year 2018-19 to meet Basel III standard and ongoing business needs. This estimate is unlikely to be significantly reduced by the adoption of a bad-bank approach, and could even rise if banks are forced to crystallise more losses from stressed assets than currently expected, the rating agency said.

“We believe that the government will eventually be required to provide more than the $10.4 billion that it has earmarked for capital injections by the financial year 2018-19 — be it directly to state-owned banks or indirectly through a bad bank,” the rating agency said.

Centralised ARC

It said bad bank’s most likely form would be that of a centralised asset-restructuring company (ARC).

Bad bank’s proponents believe it could take charge of the largest, most complex cases, make politically tough decisions to reduce debt, and allow banks to refocus on their normal lending activities, it said.

News source: The Hindu

Posted On Saturday, 25 February 2017 09:35

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Economic affairs secretary Shaktikanta Das today rubbished reports of bringing back of Rs 1,000 notes, adding that the focus will be on boosting supply of Rs 500 notes.

Das' statement (on Twitter) came a day after reports claimed that the Reserve Bank of India (RBI) and the Centre have finalised plans to launch a new series of Rs 1,000 notes to replace the demonetised notes in November last year.
"No plans to introduce Rs 1000 notes. Focus is on production and supply of Rs 500 and lower denomination notes," he tweeted.
"Complaints of cash out in ATMs being addressed. Request everyone to draw the cash they actually require. Overdrawal by some deprives others," he said in another tweet.
The reports further claimed that redesigned Rs 1,000 notes were ready to be introduced in January itself but the government deferred the plans to push more Rs 500 notes.

Finance Minister Arun Jaitley though have always denied remonetisation of Rs 1000 notes.

Last week, Finance Minister Arun Jaitley said the remonetisation situation with regard to replenishing the scrapped currency is "almost normal" now and the Reserve Bank is monitoring the supply on a daily basis.

The government had announced withdrawal of old Rs 500 and Rs 1,000 currency notes on November 8, 2016, with an aim to check black money, counterfeit notes and terror financing. However, introduction of Rs 2,000 notes was criticised heavily by the opposition - a move they claimed would benefit black money hoarders more.

News source: Economics Times

Posted On Wednesday, 22 February 2017 10:30

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NEW DELHI: India will make a pitch for a global agreement to make it easier to travel for work across borders at international fora like the G-20 and BRICS even as increasing protectionism in the West has unsettled the country's services industry.  The commerce ministry plans to reach out to other countries and get potential partners to support its proposed paper on Trade Facilitation in Services (TFS) that seeks to remove unnecessary regulations on trade in services, a ministry official said. "G-20 (Group of 20 major economies) and BRICS (association of emerging economies of Brazil, Russia, India, China and South Africa) are the right fora to build advantage of coalitions," the official said.  Services sector accounts for about 60 per cent in the country's gross domestic product (GDP) and 28 per cent of total employment.

Indian IT industry — which gets 62 per cent of its revenues from the US — is under pressure from Washington's' increasingly protectionist stance on outsourcing work amid rising unemployment in the US. Hence New Delhi's bid to garner international support for free movement of professionals.
The commerce ministry along with the World Bank plans to hold a workshop on TFS next month to support awareness building and better understanding of the issue. "Officials from the OECD will also be part of the workshop," said a person aware of the programme.
The ministry has already organised two sets of seminars with industry chambers to garner support for its proposal.

India had submitted the concept note on reducing regulations involved in trade in services in September last year to the World Trade Organisation (WTO). The note is currently being legally vetted.

India wants TFS to be part of the WTO ministerial meeting in Argentina in December. Incidentally, Argentina will also chair the G-20 summit in 2018.
India's proposal envisages a liberalised visa regime with multiple entry visas, visa-free travel for foreign tourists and long-term visas for business community, among other things.

"The legally vetted paper will be out anytime. We should allow the process to go rather than be afraid of what comes on the table. Let the reactions happen," the commerce ministry official said.

News source: Economics Times

Posted On Wednesday, 22 February 2017 10:15

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NEW DELHI: Coca-Cola, World Bank’s private investment arm International Finance Corporation (IFC) and DCM Shriram have helped raise sugarcane yields in Uttar Pradesh, and corporate executives say the budget’s announcement of a model law on contract farming will help farmers significantly. The companies are already working in rural areas to get proper farm inputs, which helps farmers deal with poor soil health and water availability to increase productivity, executives said.  “Working with our suppliers and their suppliers, we are ensuring that we get long-term more reliable supplies of sugarcane and in the process, we ensure that prices are affordable, the yields continue to improve,” said Venkatesh Kini, president at Coca-Cola India.

DCM Shriram engages with about 1.5 lakh farmers in Uttar Pradesh and trains them to help increase their produce, which the company buys from them. The company is Coca-Cola’s supplier and has four sugar mills in Uttar Pradesh and engages with farmers around them. DCM Shriram is already working with the farmers on a contract basis, where it buys all the sugarcane yield from them. “We welcome FM’s announcement in the budget on a model law on contract farming as sugarcane is a threefour years crop and needs stable laws/policies,” said Roshan Lal Tamak, executive director at DCM Shriram.
“It will definitely help the cane farmers, as sugarcane farmers have largely small and marginal land holdings, and hence, they are not in a position to invest in adoption of technologies, better techniques, mechanization etc, while contract farming will enable easy adoption of the same, resulting in better incomes and productivity for the farmers.”

News source: Economics TImes

Posted On Wednesday, 22 February 2017 10:10
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