H I G H L I G H T S
• A lower fiscal deficit for 2020-21, thanks to higher tax revenues
• March pick-up in exports helps reduce full year’s trade gap
• GST collections recovery reflects improved procedures
• No change in inflation targeting regime, but prices up
• Economy tracker: Covid surge shows a deceleration in activity
• Three relaxations that impacted India Inc and banks
• Extending deadline on e-mandate on recurring payments
• Enforcement of Labour Code deferred, ball in states’ court
• Apex court order to expedite recognition of bad bank assets
• Savings rate down, while household debts go up
• Summer crop acreage sees a 15 per cent increase
• India files appeal against Cairn verdict
• Draft e-commerce policy causes concern to players
• Haryana job quota law upsets industry
A lower fiscal deficit for 2020-21, thanks to higher tax revenues
The Union government’s fiscal deficit for 2020-21 is expected to be a little lower than the earlier projection of 9.5 per cent of gross domestic product (GDP). This has become clear from the latest government accounts released for the first eleven months of 2020-21 and the tax revenue numbers for the full year. The Controller General of Accounts disclosed on the last day of March that the Centre’s fiscal deficit at the end of February 2021 was about Rs 14.1 lakh crore, only 76 per cent of the revised estimates for that year. Given the revenue trends and the expenditure commitments in the last month of the year, there is a clear possibility of the fiscal deficit climbing down to a less daunting figure of 8.8 per cent of GDP. According to ICRA, a rating agency, the actual fiscal deficit during the full year of 2020-21 would be Rs 17-17.2 lakh crore against the Budget’s revised estimate of Rs 18.5 lakh crore. Such hopes of a reduced fiscal deficit have been fuelled by two factors. One, the tax revenue collections have been more than they were earlier estimated. Direct tax revenues for the full year are expected to be Rs 9.5 lakh crore, against the revised estimate of about Rs 9 lakh crore. GST revenues also have exceeded expectations with the robust March numbers. On the other hand, there would be some expenditure slippage. But it would not be enough to entirely neutralise the increase in the revenues. Expect therefore a better fiscal deficit number for 2020-21, when the actuals are released later in the year.
March pick-up in exports helps reduce full year’s trade gap
Economic activity spurted in March. Exports in March 2021 were estimated at $34 billion, a jump of 58 per cent over the same period of 2020. The healthy increase in shipment of merchandise goods in the last month of the 2020-21 financial year was attributed to a recovery in demand and an improvement in the pace of economic activity. Even when compared with exports of $21.41 billion in March 2019 (a pre-pandemic month), the exports growth in March 2021 is substantial. Confirming that there was some recovery in demand, imports in March also went up by 53 per cent to $48.12 billion. The increase in exports and imports (excluding petroleum products, gems and jewellery) in March also showed a similar robust pick-up. For the full financial year of 2020-21, however, exports at $290 billion contracted by over 7 per cent and imports fell by a higher margin of 18 per cent to $389 billion. This reduced the overall merchandise trade deficit to just about $99 billion, a sharp drop compared to the deficit of over $153 billion in 2019-20.
GST collections recovery reflects improved procedures
Reflecting a similar recovery in economic activity, the government’s collection of the goods and services tax (GST) reached a record high of Rs 1.24 lakh crore in March 2021. In March 2020, GST collections were estimated at Rs 97,590 crore and a year before that, in March 2019, these were estimated at Rs 1.06 lakh crore. Thus, the March 2021 GST revenues indeed reflected an impressive rise in collections and this was not just attributable to a low-base effect. To be sure, GST collections in March reflect the pace of economic activity that took place in the previous month of February. GST payments are made a month after the actual transactions take place. The March collections are significant also because it marked the sixth consecutive month when GST collections were above Rs 1 lakh crore. The increase in March 2021 is also attributed to an improvement in the GST procedures including closer monitoring of fake bills, usage of deep-data analytics and an improved technology for data and tax collection. This suggests that the early glitches in the system of GST collections are now a thing of the past.
No change in inflation targeting regime, but prices up
Even as the Government decided to maintain the existing inflation mandate for the Reserve Bank of India (RBI) for the next five years, the monster of inflation continued to trouble both the Centre and the central bank in March. The new inflation mandate retained the inflation target at 4 per cent, measured by the Consumer Price Index (CPI), with a tolerance band of 2 per cent on the lower side and 6 per cent on the upper side. The latest CPI-based inflation rate for February was measured at 5.03 per cent, largely because of a sharp rise in petrol and diesel prices. Even the wholesale price index (WPI)-based inflation rate rose to a 27-month high of 4.17 per cent in February due to the same reasons of hardening prices of fuel, food and manufactured goods. Since the retail inflation is closer to the upper tolerance band of the inflation targeting mandate, which has been continued for another five years, the RBI’s Monetary Policy Committee will be debating if there should be any reduction in the policy interest rate. The Committee will be reviewing the situation in the first week of April but given the inflation situation, it is unlikely that the stance will change or the interest rates would be lowered to boost economic growth.
Economy tracker: Covid surge shows a deceleration in activity
As the Covid-19 pandemic began yet another surge, particularly in Mumbai and Delhi, the country’s financial and political capital, respectively, the pace of economic activity in these two cities as also in other parts of the country also slowed down. For instance, traffic congestion, which in Mumbai and Delhi had reached around 80-90 per cent normalcy in the first two months of 2021, slipped below the normal levels by about 46 per cent and 22 per cent, respectively. Similarly, emission levels in Delhi went down by 24 per cent and in Mumbai emission levels were lower by 15 per cent. Interestingly, Google data for the last week of March showed that people were spending more time at home than they were in pre-Covid times. Note that the pace of economic activity has been slowing with every passing week in March. In the third week of March, traffic congestion was 15 per cent below normal in New Delhi and 37 per cent below normal in Mumbai, according to data from global location technology firm, TomTom International. Emission levels in Mumbai and New Delhi began falling in the third week of March, reflecting a slower pace of economic activity. Workplace visits also fell and even freight loading volumes and earnings saw a decline. Clearly, fears of an adverse impact of yet another surge in Covid-19 infections on the pace of economic growth in the coming months are not exaggerated.
Three relaxations that impacted India Inc and banks
Three developments in March cheered Indian banks and India Inc, in particular. First, the deadline for e-mandate for recurring payments through online transactions was extended by six months. The deadline was to end on March 31 and the extension came at the proverbial eleventh hour, giving rise to serious apprehensions and uncertainty for the country’ e-businesses dependent on online payments for their services. Two, the enforcement of the new wage code, earlier decided to take effect from April 1, was deferred indefinitely. The new wage code would have required companies to restructure the wages of their employees significantly. Three, the country’s apex court ruled that the interim relief granted earlier to not declare the accounts of borrowers as non-performing assets should stand vacated. This order put an end to the blanket ban on the classification of non-performing assets or NPAs. The banks were hugely relieved by the order issued in the middle of March.
Extending deadline on e-mandate on recurring payments
The extension of the deadline for e-mandate for recurring online payments was only a partial relief. The proverbial Damocles’ sword continues to hang over the entire industry that relies on recurring online payments against the services it renders. Such service providers included telecom firms receiving their payments for phone services, various online entertainment companies using the Over The Top (OTT) platforms for supply of content and other utility companies. The Reserve Bank of India had put the onus of compliance on banks operating the credit cards or debit cards. Its circular had required the banks to obtain prior permission from the account holders before such recurring payments could be processed. Failure to obtain that prior permission meant a penalty of Rs 5 lakh. The banks had argued that they did not have the technological capacity to secure prior permission for each of the recurring payments on such online transactions. Hence, they decided to send messages to all such customers from the last week of March informing them of the disruption of such recurring payments. With the extension of six months, the RBI hopes that the banks and the businesses would work out a system to avoid a disruption in the services. But it is unclear if the banks would be able to resolve the payment imbroglio, unless they improve their technology bandwidth and introduce a more viable system. The RBI extension has only postponed the crisis for now.
Enforcement of Labour Code deferred, ball in states’ court
The indefinite postponement of the Labour Code has meant a temporary relaxation for salaried employees and has allowed the companies for the time being to continue with the current wages structure for their employees. On the last day of the financial year of 2020-21, the government announced that there would be no change in the Labour Code, under the new labour legislation already passed by Parliament. The reasons cited for the postponement reflect the nature of the challenges that still have to be overcome in this critical area of reform. Many states are yet to introduce necessary labour law changes to align them to the provisions in the Centre’s Labour Code. Labour laws fall under the Concurrent List of the Indian Constitution. Both the Centre and the states can frame labour laws, but in case of any differences or conflicts, the laws framed by the Centre prevail over those introduced by the states. The Centre’s expectation now is that all the states would introduce the necessary changes and the enforcement in the whole country could await those modifications. Another reason cited for the postponement is the ongoing Assembly elections in the country. Whatever be the actual reason for the postponement, the relief for employees or the companies should be temporary. The government is expected to enforce the new Labour Code as soon as the Assembly elections get over and states come on board.
Apex court order to expedite recognition of bad bank assets
The relief for banks, however, was major, with the Supreme Court vacating its earlier order barring the declaration of loan accounts as non-performing assets irrespective of their repayment record. In other words, if loans were not paid back within the stipulated period, there would be no bar on banks to declare them as non-performing assets. In September 2019, the Supreme Court had directed that accounts which were not declared NPAs as at the end of August 31, 2020 should not be classified as NPAs. That order has now been vacated, thereby rejecting the petition from many sections of industry pleading for the continuation of the September 2020 order. This was a boon for banks as they could now initiate the process for recovering their loans through the existing legal routes available to them including the invocation of the Insolvency and Bankruptcy Code.
Savings rate down, while household debts go up
In what appears to be an indication of a gradual return to normalcy, financial savings of households have once again begun falling. This has been captured in the Reserve Bank of India’s bulletin released in March. Typically, households increase their financial savings when they perceive a looming economic emergency or find the scope for spending getting narrower. The Covid-19 pandemic and the economic lockdown gave rise to fears of a financial crisis and reduced the opportunities for normal spending. Thus, the financial savings of households during April-June 2020, when the pandemic and the lockdown were at their peak, rose to 21 per cent of gross domestic product (GDP). But in the second quarter of 2020-21 (July-September 2020), the same ratio fell to 10.4 per cent of GDP. Clearly, households began to spend more during the second quarter of the 2020-21 financial year, signifying a steady recovery in economic activities. This also coincided with a slightly worrying rise in the households’ liabilities (or net savings minus liabilities) to 37.1 per cent of GDP in the second quarter of 2020-21, compared to 35.4 per cent of GDP in the first quarter, 33.8 per cent in the January-March quarter of 2020. The RBI Bulletin noted that “this reversion is mainly driven by the increase in household borrowings from banks and NBFCs accompanied by a moderation in household financial assets in the form of mutual funds and currency.” It further added that “some constituents of consumption, particularly discretionary, picked up after a quarter-long dormancy, which, in turn, led to the moderation in financial savings of households.”
Summer crop acreage sees a 15 per cent increase
An interesting insight into the nature of the impact of the ongoing farmers’ agitation on agricultural operations in the economy was available from the latest numbers on the acreage of summer crops this year. Summer crops are sown in the period intervening between the Rabi and Kharif seasons and their sowing starts in March and the crop is harvested in June just before the onset of the south-west monsoon. Data for the sowing of summer crops (including pulses like moong, coarse cereals, paddy and a variety of vegetables) till March 19 show that over 5.09 million hectares of land was covered with sowing, an increase of over 15 per cent compared to the same season last year. While the summer crops account for a small share in total annual agricultural output, their importance has increased over the years as they provide an additional source of income for farmers and the country’s overall crop availability in a year increases. The higher acreage for summer crops has dispelled fears of an adverse impact of the ongoing farmers’ agitation on agricultural output during 2021-22. Data on harvesting of the rabi season reveal that harvesting has been completed by as much as 21 per cent of the wheat crop and 65 per cent of pulses and oilseeds. Even though thousands of farmers are still camped in the outskirts of Delhi, these data on sowing and harvesting would indicate that neither of the activities has been adversely impacted by the agitation.
India files appeal against Cairn verdict
In an expected turn of events, the Indian government has filed an appeal against the verdict of the arbitration panel at The Hague. In December 2020, the government had lost the arbitration case to Cairn Energy, a global energy giant, over the retrospective tax legislation amendment made in 2012. The case pertained to the Rs 24,500-crore tax demand (including interest and penalty) on capital gains made by Cairn Energy from the manner in which it restructured its India business in 2006-07.The Permanent Court of Arbitration at The Hague had earlier held that the Cairn Energy tax issue was not a tax dispute, but a dispute over tax-related investment. This was the basis on which it had argued that the case fell under its jurisdiction. The appeal filed by India in March challenges this assertion made by the arbitration committee. It also defended India’s right as a sovereign to tax entities doing business under its jurisdiction and to prevent tax avoidance by companies. The filing of the appeal takes place in the wake of Cairn Energy putting pressure on the Indian government to comply with the verdict of the arbitration committee. Already the company has filed cases in the US, the UK, the Netherlands, Canada, France, Singapore, Japan, the United Arab Emirates and Cayman Islands pressing for the implementation of the order passed by the arbitration committee in December 2020. The objective is to secure a favourable order from any of the courts in these countries to allow it to identify commercial Indian assets which can be seized by the energy major and recover the dues from the tax case. Commercial Indian assets could include aircraft or ships. Cairn Energy had earlier argued that the award of Rs 24,500 crore could be enforced against India-owned assets in over 160 countries that have signed and ratified the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards. The Indian government will take at least three months before it can secure a stay against the verdict of the arbitration panel. With Finance Minister Nirmala Sitharaman having declared recently that it was the government’s duty to appeal in cases where the nation’s sovereign authority to tax was questioned, the battle over retrospective taxation is not going to end anytime soon. The Indian government has already filed an appeal against the verdict against it on the Vodafone taxation case. The next few months would be crucial for the fate of India’s retrospective taxation efforts that started in 2012.
Draft e-commerce policy causes concern to players
In a policy paper, the government has proposed to make the operational conditions for e-commerce companies a little more stringent and restrictive. The new draft policy suggests that online retailers must refrain from adopting algorithms aimed at prioritising a few vendors on their platforms. The draft paper has been prepared by the department for promotion of industry and internal trade or DPIIT. In an attempt to make competition fair, the draft policy requires the e-commerce entities to ensure equal treatment of all sellers and vendors on their platform and formulate transparent policies on discounts for different products and suppliers. It envisages that the government will put in place principles for usage of data for the development of any industry, e-commerce, consumer protection, national security, economic security and law enforcement. There will be safeguards to prevent misuse and access of data by unauthorised persons. Accordingly, registration with an authority to be identified by the government will become mandatory for all e-commerce players.
Significantly, the draft policy has favoured a preferential treatment for Indian retailers on the platforms of e-commerce giants. "In the interest of the Indian consumer, and the local start-up ecosystem, the government will aim to ensure that there are more service providers available, and that network effects do not lead to creation of digital monopolies misusing their dominant market position," the draft policy has noted. Such a policy stance may please the domestic retailers lobby groups like the Confederation of All India Traders (CAIT), which has been demanding government action against e-commerce giants like Amazon and Flipkart on the ground that they have been flouting the norms mandated under the government’s policy on foreign direct investment in this sector. But the move will also upset the e-commerce giants as they would be subjected to greater compliance and will, therefore, be required to modify the way they structure their existing arrangements with the various sellers on their platforms. There is a fear that the policy will be used to favour the Indian e-commerce giants in preference to the foreign players in this sector like Amazon and Flipkart. The policy is now being debated internally within the government and a final version would be available soon. After the deliberations by an inter-ministerial committee, the policy would be sent to the Union Cabinet for its approval. Till such time, the foreign e-commerce giants are keeping their fingers crossed.
Haryana job quota law upsets industry
Even as the Centre is planning to relax and reform the labour laws through its proposed Labour Code, many state governments have begun introducing regressive laws that seek to reserve jobs in their states for local residents. The latest such move has come from the government of Haryana, which has Gurgaon as a large technology and manufacturing hub where several big companies including some multinationals have located their factories and offices. The Haryana government gave assent to its new legislative proposal to provide 75 per cent reservation in the private sector for job seekers from the state. The job reservation for state residents will apply to all jobs offered by private companies, societies, trusts and partnership firms with a salary of less than Rs 50,000 a month and will initially be in force for a period of 10 years. A local person to qualify for enjoying the reservation facility will have to be domiciled in the state of Haryana for at least 15 years. The new law will have an impact on over 150,000 information technology jobs in the state, according to an industry association survey report. The bill to reserve jobs was passed late last year by the Haryana Assembly in fulfilment of a poll promise made by one of the alliance partners of the BJP-ruled government. In March 2021, the Haryana Governor gave his assent to the bill. The new law will have to be notified, but it has already been challenged by a private company in the high court. Similar job reservation laws in other states like Andhra Pradesh and Karnataka have failed to make much headway. Hopefully, the law in Haryana too will meet a similar fate.
(The views expressed are personal)