Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment.
General Studies 2
Government policies and interventions for development in various sectors and issues arising out of their design and implementation.
The Slowing Economy
No doubt, India’s growth momentum has slowed down as advanced GDP estimates and gross value added (GVA) for the current fiscal year from the Central Statistics Office clearly revealed the extent of the slowdown.
The GDP growth is now pegged at 7.1%, as compared to 7.6% in 2015-16.
The GVA is forecasted to expand at 7.2% in 2016-17 as compared to 7.2% last year.
From the key areas of economy:
Mining and quarrying is estimated to shrink 1.8% in 2016-17 after expanding 7.4% last year.
Utility services like electricity, gas, water supply and others — collectively an indicator of broader economic activity — is slowing to 6.5% from 6.6%.
Manufacturing and services, the two key engines of economy, are losing momentum, faster than anticipated.
The growth projections for services such as financial, insurance and real estate is at 9% compared to last year’s 10.3%. Other services such as trade and telecommunication will grow 6% as against 9% last year.
Manufacturing will grow 7.4% versus 9.3% previous fiscal.
Construction – the biggest creator of jobs – will grow at 2.9% against 3.9% last year.
It is the lowest growth forecast in three years.
However, there is some hope as the data predicts that ‘normal monsoon’ shall expand ‘agriculture, forestry and fishing’ sector at 4.1% this fiscal compared with the previous period’s 1.2%.
FM had projected in April that growth could accelerate this year to 8-8.5% subject to normal monsoon. It stemmed from the reversal in downturn trend wherein
Excise duties jumped 46% as against the target of 12%
Corporation tax was up by 21% as against budgeted 9%.
Service tax was high by 27% against the conservative target of 10%.
The projections have been made based on data from April to October only and don’t take into account the post-demonetisation impact.
Why only till October?
The policy of demonetisation brought lot of volatility in the figures in that time period, especially in sectors of financial, insurance, real estate and professional services.
Hence, it was better to not factor in the post demonetisation growth period which saw mostly predictions and not actual ground level data.
For example, there has been growth in VAT collections in November 2016 in many states. Counting in on such extreme data may not provide a true picture.
Also, the budget is going to be presented earlier, hence, there was a need to bring in early the GDP growth data forecast.
Reasons for slowdown
The slump is mainly due to slowdown in manufacturing, mining and construction sectors where the manufacturing sector has been under-performing for nearly two years now.
There has been sluggish environment of investments, especially private investments.
Shortfall in revenue from disinvestments as only Rs. 23,529 crore were raised against expectation of Rs. 56500 crore.
The farm output was low due to past two drought years.
Higher subsidy expenditure on food, petroleum and fertiliser, right from the beginning of fiscal year.
Additionally, the global economy is also facing a slowdown and India is not insulated from its effects.
Preliminary rabi data show that the total area sown under the rabi crop as on January 6 stood at 602.75 lakh ha, up 6.5% from last year. If farmers can pass over the acute cash shortage and ensure that the sowing translates to strong growth in output, the increase in rural consumption can provide some moderation from the slowdown.
Also, the rise in indirect taxes might provide cushioning effect to absorb the shock to the economy due the disruption caused by demonetisation.
The overall growth rate of over 7% is predicated on enhanced public expenditure (12.8%, against 6.6% in 2015-16), manifested in pay panel payouts.
However, most private economists have pared India’s growth forecast to 6.3-6.4% for the 2016-17 fiscal year, citing the impact of the government’s demonetisation move, which they reckon would linger for one more year.
As a worst-case scenario, India could be back to the 6% growth levels of 2014-15 this fiscal, with the effects of the downturn dragging into 2017-18.
This could happen in the event of weak consumer and investor sentiment dragging each other down with the consumer holding on to cash (precautionary demand for money).
Therefore, the economy may not bounce back to normal even after bank has sufficient currency and the RBI lowers the repo rate. Instead, the banks should finally be willing to lend rather than park funds in G-Secs. On the demand side, job uncertainties could dampen demand for credit even if rates fall.
The Centre must prepare for a spending push in the Budget, both in physical and social infrastructure, to redress the demand compression.
The GDP estimate is a vital input for finance minister’s budget on February 1. Until last year, the government’s statisticians would wait for GDP data for the quarter through December before putting out full-year estimates. But the announcement of the GDP estimates had to be made early keeping in mind the advanced budget in 2017.
The CSO will revise numbers when the second estimate is released in end February. However, momentum is expected to stabilize into FY17-18 to 7.6%, on easing cash shortage, lower borrowing costs, constrained demand and higher public capex spending.
The government is expecting a revival in consumption demand in the last three months of the year once there’s more cash available with households, and also on the manufacturing sector regaining some of the lost momentum.
Connecting the dots:
Evaluate the first CSO data released on growth forecast of Indian economy.
ECONOMY / ENVIRONMENT
TOPIC: General Studies 3
Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment.
Environment Conservation, environmental pollution and degradation, environmental impact assessment.
Green Bonds – Emergence and Significance
What are Green Bonds?
A bond is a debt instrument with which an entity raises money from investors. As a result of the transaction, the bond issuer gets capital while the investors receive fixed income in the form of interest and once the bond matures, the money is repaid. Green bonds are issued by multilateral agencies such as the World Bank, corporations, government agencies and municipalities.
In case of a green bond, the issuer publicly states that capital is being raised to fund ‘green projects’, which typically include those relating to renewable energy, emission reductions and so on. The main aim is to finance environmentally friendly businesses and assets. Lately green bonds have emerged as one of the key financing mechanisms for the global economy’s to move towards a greener and sustainable future.
Emergence and Growth of Green Bonds
The first green bonds were issued in 2007 by World Bank and European Investment Bank. Ever since the first issue the green bond market has grown exponentially and is currently pegged at over $180 billion. This mode of raising funds has seen extensive participation from corporates and financial institutions, including sovereign and municipal bodies across the world in both developed and developing economies.
2015 was a big year for green bonds as world markets witnessed currency green bonds, innovative structuring and also various nations coming up with their with first green bond issue. Asia has emerged as a top destination for green bonds because of market-driven state policies and rapid growth of green bonds in India and China.
India and Green Bonds
The Exim Bank of India issued a five-year $500 million green bond, which was India’s first dollar-denominated green bond. Yes Bank also raised Rs 1,000 crore via green bond issue.
A growing number of corporates and financial institutions have resorted to this innovative mechanism to raise capital and even for attracting foreign investments.
India also received investment through its first Green Masala Bond (rupee-denominated bond), with the International Financial Corporation raising an off-shore rupee bond on London Stock Exchange for investing in Yes Bank’s green bond. This was a fine example of how innovations in emerging markets can capture global attention.
Green bond issuance in the country has witnessed a manifold increase and India is now the seventh largest green bond market globally.
These bonds have been crucial for raising capital for sunrise sectors like renewable energy. It has assisted India in sustainable growth.
Various sectors which have received investment through the green bonds are the low carbon transport sector and low carbon buildings. However, sectors such as water management and waste management have not been successful enough to raise money through green bonds due to sector-specific issues and also because the projects are smaller in size and geographically dispersed.
Indian regulators have shown exemplary foresight in recognising green bonds as a key tool towards financing the nation’s climate change targets and in guiding the development of the green bond market through necessary policies and reforms.
In January 2016, the Securities and Exchange Board of India (SEBI) published its official green bond guidelines and requirements for Indian issuers.
The Reserve Bank of India also passed regulatory reforms for strengthening and expanding India’s corporate bond market.
Conclusion – Tapping the Real Potential
India’s green bond market has not been tapped completely. It has a limited number of issuers so far. However, because of increasing interest from the government and market regulators, 2017 can expect a further growth in raising capital through the green bonds and also more policy and regulations for the green bond market.
For greater success, one very important step that needs to be taken is the clear classification of and a formal definition of green projects or green bonds to ensure understanding across sectors.
India, in the next few years, is also set to introduce the Blue Bond issuance. Blue bonds are those bonds which are specifically used to finance water infrastructure. Globally, the blue bond issue has crossed $10 billion. It is imperative for India to utilise such innovative mechanisms for water infrastructure augmentation as well.
Other innovative mechanisms such as securitisation can also be promoted. Many standalone green projects such as roof top solar, energy efficiency and rural water supply still remain unattractive to institutional investors owing to the smaller scale and vast geographical spread. Aggregation and securitisation of such projects will give them the much needed push.
With the focus of urbanisation and infrastructure development in India growing consistently in the policy sphere, the green bonds are expected to witness a huge growth for financing water supply projects in cities such as Pune and Hyderabad and even development of smart cities.
Collective participation of regulators, policymakers, corporate and financial institutions is also important to utilise the green bonds in addressing climate change.
Connecting the dots
What are green bonds? How can these bonds be instrumental in giving a push to infrastructural development while giving due regards to sustainable growth and the challenges of climate change?