Sree Iyer: Namaskar, hello and welcome to PGurus Channel, this is your Daily Global Insight Episode number 88. We are going to talk about the Indian budget and many other things. As always welcome to be PGurus channel, Sridhar Chityalaji, namaskar.
Sridhar Chityala: Namaskar and good morning to everybody on a bright snowing morning here in New York. You get a chance you may be able to gleams of it, in the back of my screen.
Sree Iyer: Absolutely. It’s continuing to snow as a great backdrop to have. First, of viewers, everybody looked at the budget in India as to what is in it for them is it going to increase their expenditure or is it going to give them some break? We are not going to look at the Nitty Gritty details. What we are going to do is look at the big picture. What is the plan that the Finance Minister has laid out? How does it impact India over the next two-three years and to know all these things Sridharji is going to give us his view on how he sees the budget and we will look at some of the specific line item, where it will affect the common man that will come right after this. So, Sridharji, quickly your thoughts.
Sridhar Chityala: Great. Thank you so much, sir for so first and foremost, I think congratulations to Nirmala Sitaramji and Prime Minister Modi ji and the finance team of Sanjeev Sanyal and KV Subramanian. I think they’ve done an outstanding job and of course, the Central Bankers as well and probably the other people in the finance ministry to complete the sentence. Congratulations to all the members. I think it’s one of the most what I call as forward-looking budgets which combines both the needs of pandemic and the rigours that are needed for India to be five trillion economies and then moving forward. So, any budget should reflect that we saw that yesterday in our discussions whether the people are able to appreciate it or not, the story is that. I keep reinforcing to people that Trump’s stimulus budget and the program was an outstanding budget. So, to Nirmala Sitharamanji kudos to her and you know to make this budget there was not apprehensions, you know, what is going to be the budget to that’s going to come out. It’s almost like to make her sink.
Here’s if you want me to jump into some key kind of overall strategic context, I ll just start with a one-liner then I’ll hand it to you. I think the whole budget is about Health, is about Defence, it’s about Growth & Development and is about Innovation, of course, Human Capital Development. And India got a mixed kind of record in terms of Human Capital Development. By other facets, they clearly have demonstrated that they are right up there with the best in the league. But, Human Capital Development is where we going to be very critical in India in terms of moving forward. I think it’s given enough attention. So, those are my kind of five high-level macro drivers in terms of what makes this budget different and the markets are giving a thumbs-up.
Sree Iyer: Good to know that. So, in overall the direction in which this budget is headed as far as helping the Supply-side or Demand side. What are your thoughts on that?
Sridhar Chityala: Well, I think that India has a dual problem. India has one is a capital formation problem and second demand stimulation problem. So, historically India has relied on the government on the capital formation and that is the reason why I say this with a great sense of indignation that to achieve the first trillion dollars India probably took 45 years or so to achieve the first trillion. It is purely because the supply was controlled and the demand was regulated to the extent that the economy was never kind of grew and they accepted that this is the I don’t know what you want to call me Nehruvian or a socialistic model of Indian evolution. But, we have seen the last 2 trillion come fairly quickly and we probably will go the third and the forth trillion, which will take you to the five years far more rapidly relative to the preceding years.
So, the demand and supply side play a pivotal role in making it happen because you can’t have a five trillion economy, which is translated, could be around 15-16 trillion PPP. Right now, India is around 10 trillion dollars PPP on the basis of its three trillion or 3.2 trillion dollars economy. So, I think that so you what you are seeing is that they are putting it across both the demand and the supply side of the ledger and Modi has pointed out very clearly that he needs to generate what you call dividends so, that the stakeholders which are on the rural side they call as the social capital. The social capital can be funded through dividends generated by harnessing the assets of the nation. You don’t kind of reward that you have reward stakeholders with dividends you can’t kind of keep on making them wait for eternally here, then, the markets kind of tank your stock if I have to use the market terminology. So, I think is doing that quite well, so this budget if you look at it from a capital formation point of view, you can see that the programs that have come in place, you know reflect that which is namely the disinvestment program. I think they’re targeting about 1.75 lakh crores, which I believe, they will achieve that number rather than some big big big number that you aim for and you often find you are missing the post, so, that will go into the balancing the revenue side of the balance sheet. They are diluting the capital requirements in the insurance sector, to part 74%. Then, so they’re going LIC, which is one of the largest Insurance Holdings in the world. They are going to an IPO so, therefore there is going be a lot of equity flowing into the Life Insurance Corporation not reliant on the government sector.
I think they’re putting between 20 to 25 thousand crores in the recapitalisation of the balance sheets of the banks, which also helps them, to further credit enhancement. Two the two sectors which have shown tremendous growth, but, have not received the necessary attention purely based on the relative risk-weighted rules of lending in the banking is the infrastructure as well as the MSME sector. MSME sector, I don’t know in and I’ve heard different numbers, numbers are always a tough game in India. And what I hear on the MSME is that it employs close to 50% of the people between 40 to 42% of the GDP comes from them MSME sector, but it has not received the necessary Capital. So, therefore, they are likely to form an independent institution which is focused towards MSME where they will allow private equity and other forms of capital to flow in, in building that MSME institution. They have announced the formation with initial 25 thousand crores of the infrastructure bank or infrastructure institution and infrastructure has been one of the phenomenal kind of growth segments that in India.
On the heavy manufacturing side, they have been receiving a very good flow of capital into the defence sector and because the diluted again the equity portion with foreign companies to come and manufacture. The defence budget itself is around 17 per cent. So, you are beginning to see the big-ticket items on what you call as the supply side of the economics being lifted.
One of the most refreshing things where India lost its momentum is in the Textile Sector. The textile sector in India was one of the leaders but they lost it at Vietnam, they lost it to Bangladesh, you know, they lost it to some of the even Latin American nations. So, they are forming this textile six textile Parks, so, I can reasonably guess you know, whose hand is in this and this is one of the sectors by a former colleague, dear friend. Dr. Arvind Panagariya was constantly stating give the textile sector a boost, we have everything, every village has a next time Shop, somehow we should have kind of re-engineered. So, the story is that I’m really delighted to see that segment being given due attention.
They have introduced these hydrogen sectors. So, all these things what you’re saying are on the supply side. On the demand side finding what they’re saying here is the Social Capital programs, there are 17-18 different names and you know people locally worked extremely familiar further extending the LPG connections, you know, further enhancing other types of benefits goes into the rural household because the per capita is a lager in India purely because of 55% of the population to do not participate in the economic activity. So that’s where I think the social capital what he calls that he’s going to use. So, I think these are my kind of and then I can talk a little bit about once I’ll pass for a couple of seconds and then I can talk about some of the things around the structural side.
Sree Iyer: Thank you and I will give you some of the things that are being passed off as a central effort to increase prices. I want to disabuse our viewers as far as I read it the taxes. Cess this cess on petrol is two-and-a-half rupees per litre and Diesel is 4 rupees per litre. It starts taking effect from tomorrow morning. We have to remember that Petrol, Diesel and liquor are not under GST. These are state government. The state government are deciding to do this thing. They might want to pass it off as a central government expense, but, I think viewers should remember that these are state government relations initiative. Also, I want you to quickly touch upon, the fact that now and now NRIs can form a single person company in the lead in India that used to be not possible before. I think that is a tremendous step in the forward direction. The reason is that all big ideas start small.
Sridhar Chityala: Yeah indeed, sir, you know, just to kind of again caveat. I am a market Economist and the banker and if I have put $10 how would I allocate capital and how many portions of the money, I would allocate to India. So, I’m coming from that side of the business, so, therefore, to respond to the question that Sree Iyerji has asked, I see four specific drivers which helped us. First and foremost is one man company formation is very very pivotal because large pools of small investors and you know midsize investors. I’m talking about these people with 1 billion dollars to five million dollars to 10 million dollars high-net-worth officers who want to quickly set up a company, invest some activity and kind of you know to get things underway. That’s great news for them. So, you are beginning to now a attract that Capital. Second, they have eliminated these Draconian dual taxations. I am an investor in India through our Venture Capital fund and you know, we see the Draconian aspect of this tax is a very tax what you call disincentive destination. We get punished for investing in India for and make again. So I think it’s good to see that Dual taxation. So in other words, I can pay either the Indian tags are I can pay the US Kind of the tax and you know and move that. I think the third rule is the 120 days, residency kind of status. They are removing that. I think there is a lot of hue and cry, I think that probably is coming, this is not Finance. This is more Ministry of External Affairs is the concept of dual citizenship which would probably open up the window. So when I look at both from what you call three important segments one participation in the large gap, I believe that there is dilution and new institutions help, the participation of one man now will help especially in the MSME sector. So, 10 friends come to me and say ‘look, I am starting this kind of a setup. If you like to invest, you can invest here, or you can set up a one-man company in India and let that be the capital formation company and then you can begin to now invest into each one of us, then we have a mechanism to do that. I recognize they’re also trying to minimize this bureaucracy in terms of getting business, but that’s always a challenge in India. Hopefully, that thing will begin to improve on that side. I think that the second middle layer which is very very significant from an Indian Evolution point of view is the ability to attract capital for investment into the equity markets. One of the things that we had made a plea is the FBI scheme, especially into the Small-Cap Market. That thing has been opened up and they are going to further open up that. So when you look at the three important pivots in terms of the capital allocation and capital formation, I think that they have done, in my view, on the supply side. I know that your focus is demand as well. I am not an expert on the demand side of the Indian Ledger, but I can speak about how we allocate capital on the supply side. And I think that these are all very good.
Before I forget, because that was the other point the whole asset restructuring, distressed asset program guard, they were 4 important financial programs that were necessary during Modi’s first term. First and foremost was the whole compliance to the global standards, Financial Compliance to the global standards. They achieved that. Basel 3 compliance, which is the risk, so all banks were recapitalized, number two. Number three is the capital adequacy norms, which is the bank, what type of capital and number four is the whole monetary policy, which is through an external monetary policy committee, which was looking at interest rates. I think interest rates are or are still very high in India, but the next year of activities that followed was the Single Market which is the GST. The GST is beginning to pay off the fourth quarter. The numbers are, I just saw the numbers from one of the analysts’ institutions, the numbers look very good. If those numbers hold then the contraction of the Indian GDP will look relatively better than what has been forecast, very similar to the United States, but the most important measure where the capital is going is the Distressed Assets Program. So to recapitalize and to take it off the balance sheet of the Institutions, Banks, and do your distress release program and without violating any kind of unwarranted, in my view Supreme Court kind of intervene. But now they have an asset monetization committee and asset resolution committee as possibly asset resolution process our asset monetization process that would begin to also help in the recapitalisation and unloading of the numbers from the balance sheet.
So you can see my I’m speaking to you not, whether thousand dollars has been put into somebody’s pocket or two thousand dollars has been put into or twenty thousand rupees tax slabs have been removed or whether it’s a part of it. The only thing that I am saying is as a fiscal conservative, the good thing is that there are no capital gains, there is no wealth tax, and there are no further new taxes that have been levied which all augers well because that’s the only way you get people to spend more money.
Sree Iyer: Thank you, sir. Let’s take a quick look at other things happening around the world. Myanmar just had a coup and people are wondering if there is a Chinese hand in this. What are your thoughts?
Sridhar Chityala: Well, I think that clearly, this is not just something that has cropped up overnight. There are semblances, China is making its presence felt in a number of places. And I don’t have evidence; off the record or on the record but it points to the fact that if there is a coup the natural extension of this is going to be falling into the hands of the Chinese. The Military Junta is with the Chinese. And if you are somebody who is interested in both Mekong River Valley efforts as well as the borders skirmishes strategic that happens in that specific region with India both are problematic, because the Laos Dam is not too far from that specific place. Laos is also going, Combodia is also going through its tough tenure with the Chinese, all it needs is Myanmar in their hands. So this is not very good news. So it’s a big challenge and Biden has gone to sleep, in the sense that he is still struggling to get his stimulus and act together. So I think it’s a problem.
Sree Iyer: Sir, in other news, Thailand has challenged the Laos River Dam building. I’m just going to quickly go through one or two things because I want you to weigh in on this one important thing. I think it’s Jake Sullivan speaks countering Chinese narrative. So, don’t you think now Biden is also getting on the same page as the outgoing Trump administration?
Sridhar Chityala: I think they are still that settling down, would be the right-thinking to say because if I look at Thomas Greenfield, Linda Thomas Greenfield statement, she’s talking about talking to China if you talk about Janet Yellen, she’s talking about collaborating, we talked about Blinken, Blinken on one side is talking about Quad with India, and then he’s talking counter-terrorism affairs with Pakistan and then he’s talking about, fighting and then the only person to me who has given an unequivocal and unambiguous statement on China is clearly Jake Sullivan. Jake says really we have a problem and the problem is that their narrative has to be kind of met with a counter-narrative because right now there is no counter. So, therefore, they are stealing. By the way, just to wrap up on China and Laos, there has been, we don’t have time, there are seven distinct incursions that are going on. Survey ships are going around the South China Sea entering the terrains of various different contentious places from the Philippines to Thailand to Japan to Taiwan to Indonesia, now as you can see into Myanmar, everywhere, it is trying to poke its nose whether it will become its undoing, we don’t know but clearly, the absence of trump is being felt. All this is happening while he left office and a new person has taken over. Right until now, they were not wagging their tail, they waiting for their time. Now you can see all these kinds of things happening. So that to some extent answers your question whether there is a hidden hand of China in Myanmar. The only conclusion that we can draw – possibly.
Sree Iyer: A couple of quick things that I would like you to look at. First off, the global covid update. The global cases are at 103 million and deaths are 2.24 million and about 26 million are active. So now what we are having is that the stimulus package again comes to the front and centre from 1.9 trillion, some senators are offering an alternate plan, which is only 600 billion. Is this realistic or is it slashing too much? Is it a Republican Senators plan? What are you thought sir?
Sridhar Chityala: Well, I think we have trained our audiences extremely well in the budgeting process and the covid economic multipliers and what they’re saying is we have already put $3.14 trillion dollars into the economy. So therefore what are the top three priorities? The top three priorities are giving money to people who are actually going to spend, who are needy, that is, give the extra $1,400 to people who are earning less than a $150,000 dollars, the people who are earning a combined income of $150,000 right now don’t need money. So you give that money but give it to a tiered. So it goes and translates itself into spend. It seems reasonable according to Biden as well. So give them money. So they put 1000 but they wouldn’t be open to 1400. Translated roughly, if you use yesterday’s arithmetic, $400 is 165, is about $330 billion dollars goes towards that money. If you double it or if you triple it, you add another maybe a 100 billion. So about 400. Unemployment insurance was roughly around, 85-100 billion dollars. So they’re saying extend the unemployment insurance for 10 more weeks, which is the right thing to do because again people are going to spend. Then the third thing is, clearly, you need help because now you have given the child credit in Phase 1 and Phase 2 so that doesn’t need to be touched now, so you go to the third piece, which is namely the Covid. So maybe we have already given close to 230 billion dollars on covid, 82 billion dollars roughly in the last one. So maybe we should give again, to further rapid movement of the thing. So, when you add these numbers and then, of course, augmented support as an option to be used from the prior unspent stimulus to the small business sector, because all of the small business loans were not utilized. So let’s go back and take because if you recall Steve Mnuchin said that I’m not giving it to you, I’m going to put it back in the treasury, pass a bill and get the capital released. This is close to about $455 billion sitting in that bill unused. So he saying, okay we can use that and direct it. So all you need is $600 billion and the rest of the stuff is goggle-doggle, it is not going to create any economic multiplier. It is only going to add a burden. So there is no surprise Mr Biden has called these 10 Republican Senators to dialogue with him on the stimulus rather than his Democratic colleagues. So how the politics play out, he met basically give and go ahead with the 600 so it gets released to the economy. To me, anything beyond that is going to be not very good when you look at the actual multipliers. We have not given the table, but we’ll share the table as well. So economic multipliers that flow from the stimulus program range from 0.56x to 0.72x on the low to high scale. That is why you saw that hockey stick effect. Now, what happened to the other portion of the dollar? The other portion of the dollar is a waste, it did not produce any economic outcome. It became a good socialistic capital for posthumous reasons rather than anything to do with economics
Sree Iyer: I must mention this is the last item. The Dow futures are down and I must also mention that the way the stimulus has been distributed to the population, the first 2000 was sent in the form of a check. Now, what I have received for the 600 is a debit card. Now think about what happens once debit cards are issued. Those are live. So the government can put any amount of money by just doing a transfer from the treasury to your bank account. They are eliminating even the process of printing of checks sending it over the mail and so on and so forth. So that is a good step in the right direction. So we are also priming ourselves with the view that it’s going to be a few more stimuli checks down the road, they are inevitable because you’re seeing that, things are still not under control. So I think all these things is a good move. We sure appreciate some things that are happening in the right direction. So maybe it was all Trump who did this thing before demitted office. Whatever it is, this is a good move in my opinion. I think with this we will bring our today’s program to an end. Tomorrow, we’re going to take a look at what Sridharji alluded to about China’s plans around seven different regions. Three of them happens to be in India and what it’s up to, we will have a detailed look at that. Thanks for joining. As always, Namaskar Sridharji and we’ll be back tomorrow. Same time, same channels, Namaskar.
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