1. India’s GDP fall, in perspective

Relevant for GS Prelims & Mains Paper III; Economics

On Monday, the Indian government released its latest estimates of economic growth for the last financial year that ended in March 2021. India’s Gross Domestic Product (GDP) contracted by 7.3% in 2020-21. To understand this fall in perspective, remember that between the early 1990s until the pandemic hit the country, India grew at an average of around 7% every year.

There are two ways to view this contraction in GDP.

One is to look at this as an outlier — after all, India, like most other countries, is facing a once-in-a-century pandemic — and wish it away.

The other way would be to look at this contraction in the context of what has been happening to the Indian economy over the last decade — and more precisely over the last seven years, since the Prime Minister Narendra Modi-led government just completed its seventh anniversary last week.

Seen in this context, the latest GDP data suggests that it is not an outlier. Instead, if one looked at some of the most important variables in the data, India’s economy had been steadily worsening during the current regime even before the Covid-19 pandemic.

So has the Indian economy fared better during the seven years of the present government?

Perhaps the best way to arrive at such a conclusion is to look at the so-called “fundamentals of the economy”. This phrase essentially refers to a bunch of economy-wide variables that provide the most robust measure of an economy’s health. That is why, during periods of economic upheaval, you often hear political leaders reassure the public that the “fundamentals of the economy are sound”.

Let’s look at the most important ones.

Gross Domestic Product

Contrary to perception advanced by the Union government, the GDP growth rate has been a point of growing weakness for the last 5 of these 7 years.

Let us look at Chart 1, provided in the Reserve Bank of India or RBI’s Annual Report for FY21 that was released on May 27. The chart maps the turning points in India’s growth story.

  Chart 1

 Source: RBI staff estimates

Two things stand out. After the decline in the wake of the Global Financial Crisis, the Indian economy started its recovery in March 2013 — more than a year before the present government took charge.

But more importantly, this recovery turned into a secular deceleration of growth since the third quarter (October to December) of 2016-17. While RBI does not state it, the government’s decision to demonetise 86% of India’s currency overnight on November 8, 2016 is seen by many experts as the trigger that set India’s growth into a downward spiral.

As the ripples of demonetisation and a poorly designed and hastily implemented Goods and Services Tax (GST) spread through an economy that was already struggling with massive bad loans in the banking system, the GDP growth rate steadily fell from over 8% in FY17 to about 4% in FY20, just before Covid-19 hit the country.

In January 2020, as the GDP growth fell to a 42-year low (in terms of nominal GDP), PM Modi expressed optimism, stating: “The strong absorbent capacity of the Indian economy shows the strength of basic fundamentals of the Indian economy and its capacity to bounce back”.

As an analysis of key variables suggests, the fundamentals of the Indian economy were already quite weak even in January last year — well before the pandemic. For example, if one looks at the recent past (Chart 2), India’s GDP growth pattern resembled an “inverted V” even before Covid-19 hit the economy.

 Chart 2 and 3

GDP per capita

Often, it helps to look at GDP per capita, which is total GDP divided by the total population, to better understand how well-placed an average person is in an economy. As the red curve in Chart 3 (above) shows, at a level of Rs 99,700, India’s GDP per capita is now what it used to be in 2016-17 — the year when the slide started. As a result, India has been losing out to other countries. A case in point is how even Bangladesh has overtaken India in per-capita-GDP terms.

Unemployment rate

This is the metric on which India has possibly performed the worst. First came the news that India’s unemployment rate, even according to the government’s own surveys, was at a 45-year high in 2017-18 — the year after demonetisation and the one that saw the introduction of GST. Then in 2019 came the news that between 2012 and 2018, the total number of employed people fell by 9 million — the first such instance of total employment declining in independent India’s history.

As against the norm of an unemployment rate of 2%-3%, India started routinely witnessing unemployment rates close to 6%-7% in the years leading up to Covid-19. The pandemic, of course, made matters considerably worse.

What makes India’s unemployment even more worrisome is the fact that this is happening even when the labour force participation rate — which maps the proportion of people who even look for a job — has been falling.

With weak growth prospects, unemployment is likely to be the biggest headache for the government in the remainder of its current term.

Inflation rate

In the first three years, the government greatly benefited from very low crude oil prices. After staying close to the $110-a-barrel mark throughout 2011 to 2014, oil prices (India basket) fell rapidly to just $85 in 2015 and further to below (or around) $50 in 2017 and 2018.

On the one hand, the sudden and sharp fall in oil prices allowed the government to completely tame the high retail inflation in the country, while on the other, it allowed the government to collect additional taxes on fuel.

But since the last quarter of 2019, India has been facing persistently high retail inflation. Even the demand destruction due to lockdowns induced by Covid-19 in 2020 could not extinguish the inflationary surge. India was one of few countries — among comparable advanced and emerging market economies — that has witnessed inflation trending consistently above or near the RBI’s threshold since late 2019.

Going forward, inflation is a big worry for India. It is for this reason that the RBI is expected to avoid cutting interest rates (despite faltering growth) in its upcoming credit policy review on June 4.

Fiscal deficit

The fiscal deficit is essentially a marker of the health of government finances and tracks the amount of money that a government has to borrow from the market to meet its expenses.

Typically, there are two downsides of excessive borrowing. One, government borrowings reduce the investible funds available for the private businesses to borrow (this is called “crowding out the private sector”); this also drives up the price (that is, the interest rate) for such loans.

Two, additional borrowings increase the overall debt that the government has to repay. Higher debt levels imply a higher proportion of government taxes going to pay back past loans. For the same reason, higher levels of debt also imply a higher level of taxes.

On paper, India’s fiscal deficit levels were just a tad more than the norms set, but, in reality, even before Covid-19, it was an open secret that the fiscal deficit was far more than what the government publicly stated. In the Union Budget for the current financial year, the government conceded that it had been underreporting the fiscal deficit by almost 2% of India’s GDP.

Rupee vs dollar

The exchange rate of the domestic currency with the US dollar is a robust metric to capture the relative strength of the economy. A US dollar was worth Rs 59 when the government took charge in 2014. Seven years later, it is closer to Rs 73. The relative weakness of the rupee reflects the reduced purchasing power of the Indian currency.

These were some, not all, of the metrics that often qualify as the fundamentals of an economy.

What’s the outlook on growth?

The biggest engine for growth in India is the expenditure by common people in their private capacity. This “demand” for goods accounts for 55% of all GDP. In Chart 3, the blue curve shows the per capita level of this private consumption expenditure, which has fallen to levels last seen in 2016-17. This means if the government does not help, India’s GDP may not revert to the pre-Covid trajectory for several years to come. It is for this reason that the latest GDP should not be viewed as an outlier.

Source: The Indian Express

2. Amid Covid pains, MGNREGA employment figures take a nosedive, fall 36% in May

Relevant for GS Prelims & Mains Paper III; Economics

In a worrying development, there has been a huge fall in employment provided under the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA). This figure declined by 36% in May to 21.7 crore person days compared with 34.1 crore person days in April. This came despite the fact that demand for work remained almost at the same level. April 2021 saw 4.02 crore individuals demanding work under MGNREGA.  This figure rose to 4.06 crore in May.

Authorities dragging their feet!

According to critics, the push seen last year in expanding MGNREGA scheme, has largely been missing this year. They have complained that gram panchayats have not received adequate sanctions under the scheme. As a consequence, payments too, have been held up for long.

This is evident from the fact that while the funds available with the states under MGNREGA currently stands at Rs. 10,150 crores, the expenditure till date is Rs. 14,786 crores. It suggests that there is a widespread delay in making payments. As per data from the rural development ministry, over 47,000 gram panchayats showed nil expenditure under the scheme.

This is nearly 1/5th of the 2.5 lakh gram panchayats in the country. Worryingly, this is happening despite the fact that rural communities are in despair. Migrants who have returned from the cities are presently facing severe cash crunch. It must be noted that due to the rise in Covid infections in rural India, employment work under MGNREGA has lately stopped at many places.

2020, when it all went well!

Around 3.7 crore households had sought work under MGNREGA in May 2020. This figure further jumped to 4.4 crore households in June, as more migrants returned home due to Covid lockdown in the cities. The Centre, too, responded by increasing MGNREGA expenditure by a record Rs 40,000 crore to over Rs 1.1 lakh crores.

In the whole of FY21, 11 crore individuals got work under MGNREGA, the highest, since the scheme was started in 2006. Around 3.9 billion person-days of work were generated in all which was also the highest ever. With the lockdown getting lifted last July and migrants returning to the cities, there was a gradual decline in the number of people seeking work under the scheme.

3. What does the RBI’s latest circular on cryptocurrencies mean?

Relevant for GS Prelims & Mains Paper III; Economics

Days after some leading banks cautioned people against dealing in cryptocurrencies, the Reserve Bank of India (RBI) Monday said banks and other regulated entities cannot cite its April 2018 order on virtual currencies (VCs) as it has been set aside by the Supreme Court of India in 2020.

What did the RBI say and what was the trigger?

“In view of the order of the Supreme Court, the circular is no longer valid from the date of the Supreme Court judgement, and therefore cannot be cited or quoted from,” the RBI said in a notification to banks.

The RBI clarification came after State Bank of India and HDFC Bank cautioned their customers against dealing in virtual currencies such as Bitcoin citing the April 2018 order of the RBI. Banks also warned customers that failure to adhere to the advisory may lead to cancellation or suspension of their cards. “The RBI has no option but to allow it after the Supreme Court lifted the banking ban last year. So, the RBI intervened and asked banks to stop being notorious. But why they did such an act in the first place raises a lot of unanswered questions,” said Hitesh Malviya, Cryptocurrency Expert, founder of http://www.itsblockchain.com.

Does it clarify the policy position for cryptocurrency holders?

The clarification from the RBI, which is developing its own virtual currency, is expected to give some relief to customers who have invested in cryptocurrencies. As many Indians have invested in cryptocurrencies like Bitcoin and Ethereum, the RBI move will be a big respite for them and their money – estimated to be around Rs 10,000 crore — won’t be blocked.

“It has come to our attention through media reports that certain banks and regulated entities have cautioned their customers against dealing in virtual currencies by making a reference to the RBI circular dated April 8, 2018,” the RBI said. “Such references to the RBI circular by banks and regulated entities are not in order as this circular was set aside by the Supreme Court on March 4, 2020 in the matter of writ petition (Civil) No.528 of 2018 (Internet and Mobile Association of India vs Reserve Bank of India),” the RBI said.

What are banks expected to do now?

Banks, as well as other entities addressed above, may continue to carry out customer due diligence processes in line with regulations governing standards for Know Your Customer (KYC), Anti-Money Laundering (AML), Combating of Financing of Terrorism (CFT) and obligations of regulated entities under Prevention of Money Laundering Act, (PMLA), 2002 in addition to ensuring compliance with relevant provisions under Foreign Exchange Management Act (FEMA) for overseas remittances, the RBI said. In other words, banks can’t take action against investors in virtual currencies following the court and RBI directives.

What’s the RBI’s position?

The RBI’s 2018 position was more restrictive. “In view of the associated risks, it has been decided that, with immediate effect, entities regulated by the Reserve Bank shall not deal in VCs or provide services for facilitating any person or entity in dealing with or settling VCs,” the RBI had said in its April 2018 circular. “Such services include maintaining accounts, registering, trading, settling, clearing, giving loans against virtual tokens, accepting them as collateral, opening accounts of exchanges dealing with them and transfer / receipt of money in accounts relating to purchase or sale of VCs,” the RBI had said. The RBI had said regulated entities which already provide such services should exit the relationship within three months from the date of the circular.

However, the RBI which is against other virtual cryptocurrencies has warned people against such currencies several times in the past. RBI has indicated it’s “very much in the game”, and getting ready to launch its own digital currency. “Central bank digital currency is a work in progress. The RBI team is working on it, technology side and procedural side… how it will be launched and rolled out,” Governor Shaktikanta Das said recently.

Source: The Indian Express

4. Legal issues involved in bringing Mehul Choksi back to India

Relevant for GS Prelims & Mains Paper III; Economics

Fugitive jeweller Mehul Choksi, key accused in the Rs-13,000-crore PNB loan fraud case, was recently arrested in Dominica by authorities there after he was found to have illegally entered the country from Antigua, where he had been staying since 2018. India has now sent a team of eight officials, including from the CBI and the Ministry of External Affairs, to secure Choksi’s deportation to India. A private jet is said to have reached Dominica on May 28 to ferry him back to India. But the matter is now facing a legal hurdle with the jeweller’s lawyers approaching Dominica’s Supreme Court, which has stayed his movement out of the country and is set to hear the matter on Wednesday.

What is the legal hurdle?

Choksi’s legal team has asserted that contrary to claims made by Antiguan authorities, the jeweller did not flee Antigua but was abducted by laying a honey trap. The legal team has claimed Choksi was befriended by a woman over the last six months, called to an apartment in Antigua on May 23, and abducted by a group of men from there. He was then allegedly beaten up and forced into a yacht before being ferried to Dominica.

While Antiguan PM Gaston Brown has told media that Choksi can be deported to India from Dominica itself, Choksi’s lawyers have argued that he cannot be sent back to India as he is not an Indian citizen anymore. Choksi acquired Antiguan citizenship in 2017, just over a month before he fled India in January 2018, and has even surrendered his Indian passport.

What is India’s case then?

Sources in Indian agencies pursuing Choksi say he may have surrendered his passport, but India has not accepted this and a certificate of surrender of passport has not been issued. More importantly, they say Interpol has issued a Red Notice against Choksi for financial crimes committed in India, and this would be argued in court. India has already sent all relevant case papers to Dominica.

What does the law say?

As far as Choksi’s citizenship is concerned, the law is very clear: India does not allow dual citizenship. According to Section 9 of the Indian Citizenship Act, 1955, any Indian citizen who acquires foreign citizenship ceases to be an Indian citizen.

“Any citizen of India who by naturalisation, registration, otherwise voluntarily acquires, or has at any time between the 26th January, 1950 and the commencement of this Act, voluntarily acquired the citizenship of another country shall, upon such acquisition or, as the case may be, such commencement, cease to be a citizen of India,” Section 9 says.

The only exception when this law does not apply is when the two concerned countries are at war with each other.

Neither the Act nor the Citizenship Rules of 2009 specify any procedure required for termination of citizenship in case of acquisition of foreign citizenship. Legal experts say the law is clear that Indian citizenship will cease to exist the moment one acquires foreign citizenship.

So, for all practical purposes, Choksi remains an Antiguan citizen even though the government there has begun a legal process to revoke his citizenship; this has been challenged in an Antiguan court by the jeweller.

What about his Indian passport?

According to the Ministry of External Affairs, as per the Passports Act 1967, it is mandatory for all Indian passport holders to surrender their passports to the nearest Indian Mission/Post immediately after acquisition of foreign nationality. Misuse of Indian passports constitutes an offence under Section 12(1A) of the Passports Act 1967. “The Indian Citizenship Act, 1955, does not allow dual citizenship… The Government of India has prescribed imposition of penalty on a graded scale, depending on number of trips made on Indian passport after acquiring foreign nationality, for the violation of Passport Rules and retention of Indian Passport for more than three years after acquiring of foreign nationality,” the Ministry says on its website.

Sources, however, said the law’s intent is to prevent a person from using an Indian passport for travel after acquiring foreign citizenship. “Some countries, which do not allow dual citizenship, insist on surrender of the Indian passport before formalising citizenship of their country. However, this is not the case with Antigua. In any case, it is immaterial whether you have surrendered your Indian passport or not. If a foreign country has granted you citizenship, under Indian law you cease to remain an Indian citizen,” said a former official of the Ministry of External Affairs who has dealt with passport issues.

What can India hope for then?

India’s best chance of getting Choksi back to India is to convince the Dominican court that it has a strong legal case against him and that he is a fugitive. Sources said India would also argue that his sole intention of acquiring Antiguan citizenship was to escape the clutches of the law in India.

“That he has an Interpol notice against him is good enough ground to hand him over to India. As far as the issue of his being beaten up is concerned, it is not associated with us. We don’t know who has beaten him up,” an official said. Another official argued that even Christian Michel, accused in the VVIP helicopter case, was brought to India from the UAE where he was staying as a British citizen. There, however, India followed extradition proceedings in court that dragged on for over a year. India does not have an extradition treaty with Dominica.

The Indian team could face hurdles in the face of Choksi’s legal team alleging human rights violations and suggesting a planned extra-judicial extraction on part of Indian and Antiguan authorities. Wide media coverage of the entire episode and serious injuries sustained by Choksi could also play a part in court.

Source: The Indian Express