The ABC of remonetisation: India's China moment

lcafanboy

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The ABC of remonetisation: India's China moment

To succeed you must have a Plan B in case Plan A fails. And to super succeed you must have a Plan C.

The government seems to have Plan A, B & C on Remonetisation as under.

Plan A was based on the hope that a big chunk of black money will not return to the banking system. Hence, the government, by appropriating unreturned money, could have funded massive infrastructure development to accelerate GDP growth. While the RBI is yet to reveal how much cash has returned, one can safely assume that majority of cash has returned to the banking system making Plan A ineffective.

Plan B which is currently operational is to ensure that cash deposited in bank passes through the tax net. Eighteen lakh accounts are being targeted to expand the tax net. It is likely that between Rs 50,000 crore and Rs 1,00,000 crore can be recovered in additional taxes through Plan B between the Pradhan Mantri Garib Kalyan Yojna and normal tax route.

Plan C is 'India's China Moment'. In 1980 India and China were almost equal in GDP. By 2016 India has become less than 20% of China. There are many reasons why China has leapfrogged India. One of the main reasons is China's credit expansion.Their credit to GDP ratio is officially about three times higher than India's. It could be more than four times higher if we include shadow banking of China.

We failed to create adequate credit to support rapid growth. Our cash to GDP ratio was 12% on Nov ember 8, 2016. Velocity of cash is between 1-2 times depending upon distance from election periods. Velocity of bank money is averaging between 5 and 7 times for the last few years.Obsession of Indians to keep higher cash has cost the country dearly in terms of lower growth, higher poverty and poor infrastructure. The RBI is unlikely to print currency to the same level of November 8.

These will transfer about 3-3.5% of GDP from cash in tijoris to the banking system. This has the potential of creating multiplier effect of 15-17.5% of GDP as additional deposit and credit over next few years through higher velocity of bank money over cash. These credit flow can create an additional GDP of 15-25% depending upon where and how it is deployed. This is India's China moment and has the potential to erase the past omission of not creating sufficient credit to support rapid growth.

For money multiplier to work, we need to set three things in order: 1) Banks need to extend credit 2) Borrowers need to borrow loans 3) The credit expansion should not create bubble or non-performing assets ( NPAs).

One can see that the government is taking steps to make Plan C operational in all the three aspects. PSU banks are seeing appointments at senior levels to ensure speedier decision making. However, there is an urgent need to tackle NPAs and recapitalise PSU banks to ensure that they can accelerate lending. We expect the government to facilitate creation of a large asset reconstruction company in public, private and foreign partnership to tackle NPAs. A few more steps will be required to tackle NPAs.

Besides, to recapitalise banks, the government will have to think of unconventional approaches like: Surplus with custodian under Enemy Property Act, unclaimed deposits of banks being treated like Unclaimed Dividend and use part of the FX reserves as well as balance sheet of RBI.

Borrowing is unlikely to be led by corporate borrowers. Retail borrowers will have to be targeted to push credit. The government has unveiled interest subventions of up to 6 lakh for housing loans up to Indian borrower will borrow housing loan at a rate cheaper than an American borrower for Rs. 6 lakh. There is also a subvention available on housing loans up to Rs. 18 lakh. There are more than 3.76 crore members of Employees Provident Fund Organisation. They are now permitted to withdraw up to 90% of their corpus for buying a house. These steps are capable of inducing consumers to borrow for housing. A targeted campaign like opening of Jandhan account can be created to push retails loans to consumers.


The government seems to be focused on affordable housing to ensure that accelerated credit flow doesn't create a bubble or NPA.The definition of affordable housing has been changed from builtup area to carpet area to include bigger projects. Profit on affordable housing is given tax exemption. Tax on notional rent for unsold finished inventory for builders has been given exemption for 12 months holding. Cheaper fi nancing is made available with infrastructure status to affordable housing sector. Prefab is being encouraged to cut construction time. Speedier building approvals are being targeted in certain areas to create benchmark for others.The government can consider similar measures in few other industries like textiles especially garmenting and travel and tourism to create growth and jobs.



A lot is happening on the ground to ensure that India can pump credit to support next level of growth. Few more steps needs to be taken to ensure maximum benefits in a shorter period of time.Today's PSU banking system is constrained by issues related to human resources. Their compensation at senior level is poorer to private peers. External influence on decision making especially related to credit impacts quality of decision making.



Ease of doing business has to increase manifold to sustain such rapid growth and unleash animal spirit of entrepreneurs. We think it is not possible to change the country overnight. It is possible to create a role model like Green Revolution in a small area for rest of India to adopt.


Remonetisation has provided a tremendous opportunity to India to change the orbit of GDP growth by shifting cash in Tijori to bank account and use the velocity of money to multiply credit to support rapid growth.

http://economictimes.indiatimes.com...-indias-china-moment/articleshow/57847220.cms

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Kshatriya87

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Last couple of weeks, INR is gaining on USD. Good sign? Hope so.
 

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