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IASbaba’s Daily Current Affairs – 14th July, 2016

  • July 14, 2016
  • 1
IASbaba's Daily Current Affairs Analysis, IASbaba's Daily Current Affairs July 2016, UPSC
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IASbaba’s Daily Current Affairs – 14th July, 2016

 

ECONOMICS

 

TOPIC: General Studies 3

  • Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment.

 

Indian Accounting Standards

In news: SEBI extended the deadline for some listed companies to file their results for the quarter ending June 2016, to give them additional time to comply with new ‘Ind AS’ rules.

The companies now have the time till September 14, 2016 to declare their quarterly results with the new accounting standards.

Ind AS?

What: The Indian Accounting Standards or Ind AS

To:

  • govern the accounting
  • recording of financial transactions
  • presentation of statements such as Profit and Loss account and Balance Sheet of the company

What are ‘financial statements’?

  • Structured representation of financial position and performance of an entity
  • Shows the results of the management of the entity that are entrusted with resources
  • Gives information about assets, liabilities, income and expenses, cash flow, etc.

Sectors to be affected: Metals, telecoms, oil & gas, and real estate are likely to be impacted most post the implementation of Ind AS.

Background

Who: National Advisory Committee on Accounting Standards (NACAS) recommended Ind AS standards to the Ministry of Corporate Affairs (MCA)

For: Commercial Banks (Banks), Insurance Companies (Insurers) and Non-Banking Financial Companies (NBFCs)

Earlier: India was following accounting standards from GAAP prior to adoption of Ind AS.

Applicability: mandatorily to be followed by companies having net worth of Rs. 500 crore (US$74 million) or more from 1 April 2016

International Accounting Standards

The globally accepted format is International Financial Reporting Standards (IFRS) for company accounting.

To: Design a common global language for business affairs so that company accounts are understandable and comparable across international boundaries.

Why: IFSR are progressively replacing the many different national accounting standards. They are the rules to be followed by accountants to maintain books of accounts which are comparable, understandable, reliable and relevant as per the users internal or external.

India’s stand: Firms resisted the shift to IFSR stating drastic changes in numbers. Thus, Ind AS chosen as a middle path to harmonise Indian accounting rules with IFSR

Importance of Ind AS

Changes the way companies present their position; either increase or decrease profits/losses of the firm

Pre- Ind AS Post- Ind AS
Incentives, discounts or rebates given to customers could be shown as part of advertising, sales promotion or marketing expenses. This was cost to company. Incentives, discounts or rebates given to customers will have to be deducted from sales (revenues).
Excise duties taken away from revenues to show ‘net sales’ Excise duties will now come under ‘expenses’
Intangible assets like goodwill were amortised or written off as expenses over a period of time. Intangible assets like goodwill has indefinite life and hence needn’t be amortised. This can increase profit of the firm which carry sizeable goodwill in books
Investments by a company in government securities or mutual funds is shown at the lower of cost or market value. Advocates the ‘fair value’ method of accounting

Will have to be necessarily be captured at fair value.

For firms which have legacy or undervalued investments, this revaluation can expand the balance sheet size

Companies reported their segment-wise performance based on a broad product/service grouping or even geographical segments (within India, Outside India). Segments reported to investors are the same as the firm uses for the purpose of assessing performance and allocating resources.

Promises clearer disclosures to investors in certain cases

Dynamics of Ind AS—

  • Higher disclosure requirements contained in Ind AS can help make more informed decisions about its investment worthiness
  • In the coming quarterly results, compliance with Ind AS rules could lead to blips in profits earned by listed firms, due to a change in the method of accounting. (Profit blips don’t mean a banking crisis)
  • May take some time for analysts to get used to the new format.
  • Markets could even beat down stocks whose earnings don’t meet expectations.

Connecting the dots:

  1. ‘The new Indian Accounting Standards are expected to bring in global best practices of accounting’—Critically examine

 

ECONOMICS

 

TOPIC: General Studies 3

  • Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment.
  • Inclusive growth and issues arising from it.

 

Can India achieve 8% GDP growth for 2016-17?

Indian Economy Scenario

The Central Statistics Office’s (CSO) provisional estimates for the Indian economy for 2015-16 show that the Indian economy growing at 7.6 per cent in 2015-16 and predicts that 8 per cent growth is around the corner.

In 2016-17, the upbeat view is that we can expect a boost to growth in the coming year from three sources:

  1. rural consumption (thanks to better monsoons),
  2. urban consumption (thanks to the impending Seventh Central Pay Commission award), and
  3. increased government capital expenditure projected in the Budget for 2016-17

Global Economic Scenario

  • Ever since the global financial crisis broke (2007-08), the economy has not behaved the way economic textbooks prescribe.
  • Economic policies are proving to be singularly ineffective in reviving the global economy.
  • Governments have failed to control running levels of fiscal deficits and public debt.
  • Central banks have been experimenting with unorthodox policies such as quantitative easing, zero interest rate and now negative interest rate policy.
  • However, all these efforts and policies have failed to revive the economy.

Why 8% growth is difficult to happen?

  • First, manufacturing has grown at 8.1 per cent at current prices. This is not matched by the growth in the Index of Industrial Production (IIP), which is only 2.4 per cent.
  • Second, it is hard to explain how manufacturing growth has been so strong when exports as a whole have contracted.
  • Third, as the Centre for Monitoring Indian Economy has pointed out, a big chunk of the growth in 2015-16 has come from an item called discrepancies’ in the CSO’s statistics (in plain language, an item about which we know little).

I.e. of the growth of 7.6 per cent in 2015-16, 2.4 percentage points were accounted for by ‘discrepancies’.

Continued weakness in the world economy, problems in our banking sector, the ongoing fiscal consolidation and the falling investment rate mean a return to 8 per cent growth may not happen anytime soon.

  • Also, a key factor boosting India’s growth in 2015-16 was the decline in world oil prices. Lower oil prices translate into higher private consumption.
  • Now both the estimates of Central Statistics Office and Economic Survey are based on the assumption that this benefit (low oil prices) would continue to accrue to the economy in 2016-17. (CSO estimated that oil prices to be $50 per barrel and Economic Survey assumes it to be $35 per barrel) – However which may not happen L
  • This assumption seems wrong as oil prices have already moved up to $50 per barrel. If they stay at this level, there is every prospect that the gains in 2015-16 on account of falling oil prices would be absent.

Some mixed signs for the economy

  • The Pay Commission hike could contribute about 0.6 per cent of the GDP depending on how much of it is fully paid out in 2016-17.
  • A better monsoon could add about 0.3 percentage points.
  • However, the recent rise in oil prices could thus overwhelm potential gains from better monsoons and the pay hike.
  • Given global uncertainties, export demand will improve only marginally.
  • Most analysts predict that increase in government spending might improve the aggregate demand, but increased public expenditure may lead to fiscal deficit.
  • The fiscal deficit factors in not just increases in capital expenditure but also declines in other government expenditure as well higher taxes. Fiscal consolidation planned for 2016-17 means that demand will shrink by 0.4 percentage points of the GDP.
  • Lastly, we cannot expect private investment to pick up given that corporate balance sheets are stressed and real interest rates very high.

Conclusion:

  • Adding up all the pluses and minuses estimated above, we get a fall in GDP growth. This means that growth is likely to end up closer to 7 per cent in 2016-17.
  • And this is without factoring in the potential for upheaval arising from Brexit, a rise in U.S. interest rates and a further slowing down in China.
  • Raising the growth rate to over 8 per cent in the next two or three years is a huge challenge. It’s a challenge that certainly cannot be overcome as long as the government operates within the present straitjacket of fiscal consolidation and inflation targeting; policies that tend to reduce growth in the medium-term.

Connecting the dots:

  1. The Central Statistics Office’s (CSO) estimates for the Indian economy predicts that 8 per cent growth is around the corner. Do you agree? Critically analyze why raising the growth rate to over 8 per cent in the next two or three years is a huge challenge.

 

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