[avishar]

Originally Posted by drsingh

The States will use the government response to covid-19 as a scapegoat for deficient governance. And any pain on the population in the form of poor health infrastructure and reduced salaries, high state taxes , wil be blamed on the central government not sharing GST revenue.

My understanding is, there is no issue with the central government not sharing GST revenue, they never not done that.

States recieve what they have to recieve from their State GST, Centre recieves what they have to recieve from CGST. Both Centre and States also have own other taxes too.

The centre also has a duty to give away part of its Central GST collection to states. Every state is assigned a percentage and that is what they recieve. This percentage has been determined by the 15th Finance Commission.

https://www.prsindia.org/report-summ...ion-fy-2020-21

There are no arrears here. Infact for this year the Centre has paid out to states based on FY2021 tax projections and not actual collections which is much lower.

Previous budgets also have on record what the states have recieved as a part of the divolution of taxes.

The issue lies with GST Compensation.
The Centre had agreed with the states that to make their life easier post GST, any reduction in tax collection due to GST implementation will be borne by the Centre. The Centre assured the states that their GST collections will grow at 14% per year for the next 5 years (2017 - 2022). If they don't hit that target for the year, the Centre will pay for it.

To raise money for this GST Compensation, the Centre added a Compensation Cess to sin goods like Tobacco, Pan Masala, Cars etc. The money collected goes into a Central Fund and from there they are given to States.

All this went well for the first two years when the going was good. But this plan fell apart last year when private consumption slowed down sharply. Tax collection slowed down, cess collection slowed down but compensation went up since States had to hit their 14% mark.




This graph makes it clear. This was the situation last year and leading into this financial year. And then covid came and the Compensation Fund is now almost empty, which means Centre has to pay all the differences from its pocket.

This is where States and Centre is at loggerheads. States want that compensation to shore up their revenue, but with the 14% growth target in a year where tax collection might fall by the fifth, the Compensation is becoming astronomical. Particularly so since Centre's Cess kitty is almost empty since sin goods consumption has fallen.

IMO of the options given by the Centre they should themselves borrow the money and compensate the state and also cut down the compensation for the next 2 years and bring it back up again by extending the end date.

[Samurai]

There is very easy way find out if someone understands economics. Ask their opinion about gold standard. If they are for gold standard, they don't understand economics, at least not the post 19th century economics.

Gold standard could not keep with wealth generation since 19th century. After industrial revolution, the GDP of most countries started outstripping the value of their gold reserves. So it started hampering their wealth generation.

Let's consider a country called Rashtra, whose currency is called R. Rashtra follows gold standard. Say Rashtra has 1Kg of gold in the central bank, and that bank issues a million bills of R, that is 1000R per gram of gold.

Let's say Rashtra starts making a fast moving consumer product RP that suddenly becomes very popular around the world. The product RP is priced at 10R per item, and millions of people around the world want to buy RP. But there is only million R in circulation, most of it in the hands of the citizens of Rashtra.

If a foreigner wants to buy a product of Rashtra, first they have to buy the R currency from the Rashtra central bank, then use it to buy from RP manufacturer. But the central bank only had one lakh R with them and it gets sold in a day, which is used to buy 10000 RPs.

Looking at the demand, RP maker has produced 1 million RPs. And there are millions of foreign customers who are waiting to buy those RPs. Except, no more transactions are possible because Rashtra central bank cannot print anymore R, thanks to gold standard. Duh!

If Rashtra had fiat currency, they can keep printing fiat currency to keep up with the demand without losing value. Then RPs can be sold in unlimited quantity. Now the central bank will be flush with currencies of other countries, which they can use to buy stuff from other countries. Fiat currency thus enables wealth generation without restriction. The supply of R can be increased or decreased by the central bank based on demand. Gold standard didn't give this flexibility.

[vrprabhu]

Originally Posted by Samurai

.. the central bank will be flush with currencies of other countries, which they can use to buy stuff from other countries

Great explanation. And, that is what I remember reading (which I had asked in a couple of posts back) i.e. forex reserves will enable in determining the value of a currency.

I now understand that both tangible assets plus commodities and services also add value to the currency, right?

[Samurai]

Originally Posted by vrprabhu

I now understand that both tangible assets plus commodities and services also add value to the currency, right?

Hmm, you will have to tell me why. There is no direct connection. However, having dollar reserves allows them to buyback own currency to strengthen it. For example, China pegged their Yuan to US dollar for a long time. They could buy or sell yuan using dollars to keep the yuan pegged to the dollar. These activities are called currency interventions, and it works if the country has disposable excess foreign currency.

Value of currency is a relative thing. To quote an earlier post:

Originally Posted by Samurai

2) Relative exchange rates don't mean much. It is the volatility that matters. For example, 1.45 Japanese Yen is just 1 rupee, it doesn't mean rupee is strong than Yen. It is just a number. India is a much stronger economy now at ₹75/dollar than when it was ₹15/dollar in the 80s.

When you sign an international contract, the current dollar exchange is irrelevant. Say you signup to supply a service over 3 years for ₹10C/year. If the dollar rate was ₹75, you will charge $1.33 million. If the dollar rate was ₹72, you will charge ₹1.43 million. After that you will pray that the dollar exchange rate stays stable or go up for next 3 years. You don't want it to go down. Importers also have the same problem, except they don't want the dollar to go up. In fact, many companies sign a foreign exchange forward contract with their bank to hedge against dollar rate volatility. But the banks charge pretty high for this service, so cheapos like me take a chance.

Therefore, stability of the currency is more important than the absolute value of the currency. That is why central banks of every country do currency interventions to keep the relative value of currency stable.

[vrprabhu]

Originally Posted by Samurai

Hmm, you will have to tell me why. There is no direct connection. However, having dollar reserves allows them to buyback own currency to strengthen it.

Value of currency is a relative thing.

Therefore, stability of the currency is more important than the absolute value of the currency. That is why central banks of every country do currency interventions to keep the relative value of currency stable.

The 'why' is because of two factors - (a) effect of inflation on the exchange rate and relative value of the currency and (b) the nature of asset / service (value of a perishable good - agri commodities - depreciates fast; similarly, value of service will be sustainable only up to the moment there is another who can supply at a lower cost...)

For example, oil reserves in middle east are reported to last for xxx years, but never in terms of value. Since cost of crude keeps varying, they obviously can't quantify it.

But, for an oil importer, the crude cost as well as the exchange rate of their currency to USD will determine the cost to be paid. If their petroleum demand keeps rising and their currency value keeps falling, aren't they in a downward spiral?

I very much understand your second part - and also that Govt./RBI has now permitted extended time to repatriate export proceeds. If I am not mistaken, the USD-INR rate has very rarely moved in favour of Rupee. So, importers don't want to take chances on this front....

If I may deviate a little from economics -

Adding another dimension to this issue is that Governments also raise overseas debt - which they will be required to repay (guess they don't hedge their forex rate for future requirements ); so an appreciating currency will lower their burden whereas depreciating one will increase their burden. Of course, they may choose to repay out of hard currency earnings, but still the amount when translated into current market rates (it would need accounting somewhere?) there would be a difference.

[Sutripta]

Originally Posted by avishar

My understanding is, there is no issue with the central government not sharing GST revenue, they never not done that.
...
IMO of the options given by the Centre they should themselves borrow the money and compensate the state and also cut down the compensation for the next 2 years and bring it back up again by extending the end date.

The issue for, for me and I guess for VN is that a sovereign govt. thinks that defaulting/ reneging on a commitment is not only an option but a low cost one at that.

Sutripta

[ashokrajagopal]

Originally Posted by Samurai

There is very easy way find out if someone understands economics. Ask their opinion about gold standard. If they are for gold standard, they don't understand economics, at least not the post 19th century economics.

Somewhere in US, Peter Schiff must be sneezing the hell out.

My update in previous post dint come thru, so creating as a new post.

Originally Posted by Samurai

Gold standard could not keep with wealth generation since 19th century. After industrial revolution, the GDP of most countries started outstripping the value of their gold reserves. So it started hampering their wealth generation.

Let's say Rashtra starts making a fast moving consumer product RP that suddenly becomes very popular around the world. The product RP is priced at 10R per item, and millions of people around the world want to buy RP. But there is only million R in circulation, most of it in the hands of the citizens of Rashtra.

If a foreigner wants to buy a product of Rashtra, first they have to buy the R currency from the Rashtra central bank, then use it to buy from RP manufacturer. But the central bank only had one lakh R with them and it gets sold in a day, which is used to buy 10000 RPs.

Looking at the demand, RP maker has produced 1 million RPs. And there are millions of foreign customers who are waiting to buy those RPs. Except, no more transactions are possible because Rashtra central bank cannot print anymore R, thanks to gold standard. Duh!

If Rashtra had fiat currency, they can keep printing fiat currency to keep up with the demand without losing value. Then RPs can be sold in unlimited quantity. Now the central bank will be flush with currencies of other countries, which they can use to buy stuff from other countries. Fiat currency thus enables wealth generation without restriction. The supply of R can be increased or decreased by the central bank based on demand. Gold standard didn't give this flexibility.

It is slightly different in operation from this.
In this above scenario, any foreign customer who wants to buy R, simply needs to give Gold (or something convertible to gold) to the central bank and they will give R in return.

The key with gold standard era was that virtually everybody had gold standard, and all currencies are directly convertible to gold. That is a logical extension of using gold coins for transaction and up to the time the system broke up, the idea was to just use money as a denomination on gold.

Lets say Ford started making cars and somebody in UK wanted to buy that. Thru a "capital account of sorts" they will transfer pounds to US, on the basis of which US bank will provide dollars to be used to buy the Ford car.
Since pound = some factor * gold, US bank will take that and buy more gold with that. Accounting that gold, it will print more dollars.

Of course, this is the idea. I am oversimplifying it and nation states used to fudge these all the time because there was no international standard.
Plundering and colonialisation was the logical extension of "how to create more wealth".
But transnational money flow was not directly a function of the amount of gold the recipient nation held -- best example is US which had spectacular bubbles in stock market continuously. There are other examples like Argentina that boomed on agricultural produce like beef as trade became more possible.

That era was very very globalisation friendly for movement of people and movement of capital; this is why there are all kinds of diaspora in places like US.


The issue with gold standard was slightly different. When technological bursts happen, essentially you will run into deflationary cycles. Having a gold standard meant that there is a price for the intrinsic wealth of the world. Meaning, as a transacting circuit like US-UK-EU etc, their total growth was limited by the speed with which mining can be done.

At any point in time, when a new item comes to the market, essentially it channels money away from other stuff. This is okay for normal times, but when technology disruptions like steam engine, car etc happens, the productivity increases and the rest of the society suffers from lack of money supply.
When that happens, the firms/producers will try to maintain profit by reducing wages. This in turn reduces sales further, and further reduced buying power, going into a deflationary vicious cycle. Unemployment, starvation etc for workers were very common.

This is also the economic reason behind the uptick in labor movement across the world in late 19th century and early 20th century.

[Samurai]

Originally Posted by ashokrajagopal

It is slightly different in operation from this. In this above scenario, any foreign customer who wants to buy R, simply needs to give Gold (or something convertible to gold) to the central bank and they will give R in return.

While trying to explain a concept it is not possible to cross every T and dot every I.

Originally Posted by ashokrajagopal

The issue with gold standard was slightly different. When technological bursts happen, essentially you will run into deflationary cycles. Having a gold standard meant that there is a price for the intrinsic wealth of the world....... This is okay for normal times, but when technology disruptions like steam engine, car etc happens, the productivity increases and the rest of the society suffers from lack of money supply.

Isn't that what I said in the first paragraph you quoted from my post? How is it different unless you are getting into semantics?

Originally Posted by ashokrajagopal

This is also the economic reason behind the uptick in labor movement across the world in late 19th century and early 20th century.

Laborers were forced to work at machine pace for the first time in the history of the world.

Just taking US data:
Steel workers in 19th century worked 84hours (12x7) per week.
Other industrial workers in 19th century worked 60 (10x6) week.
Women in textile mills worked from 5am until 7pm, for an average 73 hours per week. The word spinster comes from these women, because they were spinning yarn until they were old maids.

Capitalists from 19th century would be shocked to know factory workers only did 40 hours in 20th century and beyond. They would literally lose their marbles.

[ashokrajagopal]

Originally Posted by Samurai

Isn't that what I said in the first paragraph you quoted from my post? How is it different unless you are getting into semantics?

Agree, what I was planning to point out was that example scenario may not happen. Because almost the opposite happened ie.foreign currency to gold conversion thriving.

But I also ended up explaining again.

[kiku007]

So the stock market represents the state/outlook of a select group of companies and the GDP apparently only represents the formal economy which arguably represents only a small portion of the Indian economy (because the informal economy is argued to be much larger).

How to measure the economic health of a huge nation like India with reasonable confidence?

After reading about the World Bank's recent pause on Ease of doing business ratings, I really don't know whom and what to trust.

I'm sorry if this question has already been discussed.

[V.Narayan]

Originally Posted by kiku007

So the stock market represents the state/outlook of a select group of companies and the GDP apparently only represents the formal economy which arguably represents only a small portion of the Indian economy (because the informal economy is argued to be much larger).

I am no economist or even a big reader of economic theory. Samurai and Ashok can add better flavour. As an ordinary business man my understanding is as follows:

-- the GDP calculations, in India at least, take into account an estimate for the informal economy. There are several physical factors that can be measured and triangulated to estimate with reasonable accuracy (though not perfectly) what that informal piece is in each sector. Also a large part of the informal piece feeds into the supply chain or the consumption demand of a formal sector.

-- The stock market indices may represent only say 50 to 500 stocks (varies with index) but those stocks represent a vast majority of the trading, and cash flows and hence are representative of the sentiment of the investor. As I have mentioned earlier the stock index is not an index of the economy but of a part of it.

How to measure the economic health of a huge nation like India with reasonable confidence?

I am a bit out of my depth here. But being a egoistic codger I'll stick my neck out. For the bottom 65% of our population economic health means unemployment index, consumer inflation, stability of food prices, and GDP growth in that order. For the MSME it is growth in demand (GDP again) & availability of liquidity.

After reading about the World Bank's recent pause on Ease of doing business ratings, I really don't know whom and what to trust.

Well the world bank's index of ease of doing business was good enough to determine which broad quartile a country fell in. For an investing business man rank 52 versus rank 61 makes no sense - it is like trying to measure beauty. Investors do their own very real homework. WB might as well scrap it.

[Sutripta]

Originally Posted by V.Narayan

Well the world bank's index of ease of doing business was good enough to determine which broad quartile a country fell in.
...
Investors do their own very real homework. WB might as well scrap it.

The WB realised that the index was very easy to game, and that too many countries were doing just that. (And no, India was not specifically mentioned in the rogues list.)

It is a 'fun' index and if one tries to determine the value it brings vs the efforts needed to prevent it from being gamed, the sensible 'management decision' would be to scrap it.

Sutripta

[extreme_torque]

Originally Posted by Sutripta

The WB realised that the index was very easy to game, and that too many countries were doing just that. (And no, India was not specifically mentioned in the rogues list.)

It is a 'fun' index and if one tries to determine the value it brings vs the efforts needed to prevent it from being gamed, the sensible 'management decision' would be to scrap it.

Sutripta

Now that you have mentioned it, i remembered that I read about it somewhere. Here it is https://www.huffingtonpost.in/2018/1...gs_a_23594375/

[vrprabhu]

Originally Posted by V.Narayan

.. But being a egoistic codger I'll stick my neck out. For the bottom 65% of our population economic health means unemployment index, consumer inflation, stability of food prices, and GDP growth in that order

Pretty good explanation, for an egoistic codger

Just a small doubt, won't domestic (household) savings form a part of this measurement?

[V.Narayan]

Originally Posted by vrprabhu

Just a small doubt, won't domestic (household) savings form a part of this measurement?

Savings rate is important. Sadly ours has been declining for 10 years - 36% in 2007-08 to 34.6% in 2012-13 and 30% in 2019. The forces at play seem to indicate the biggest drop has been in physical savings of households rather than financial. Maybe a good thing? Though I suspect that might reverse with the current economic uncertainty.

Originally Posted by extreme_torque

Now that you have mentioned it, i remembered that I read about it somewhere. Here it is https://www.huffingtonpost.in/2018/1...gs_a_23594375/

With due respect to Huffington Post if working to improve a country's ease of business rating is undertaken by a regime the author likes then it is a master stroke, a great effort to boost FDI etc. If the same is undertaken by a regime the author dislikes then it is 'gaming', 'fudging', 'chasing an image' etc. While we, including this journalist, are all very passionate about our own carefully nurtured views, no one view is more right or less wrong than the other. One measure of a destination country's attractiveness is FDI inflows. I prefer to believe when money is put where the mouth is, than believe a journalist. FDI inflows for FY2019-20 topped US$49.97bn, the highest ever in our history. They used to be around the US$28bn for FY2012-13. Each of us can draw our own conclusions. Having said all this real improvement is nominal.