Declining Consumer Demand and Reluctant Investors

In September, Finance Minister Nirmala Sitharaman was anguished that industry was holding back from investing in manufacturing despite a significant cut in corporate tax rates in 2019.

Analyzing the corporate Investment since the pandemic

Less investment is not the result of losses: The slowdown in corporate investment did not happen because companies were making losses.

More profit but less investments by corporates: In fact, private companies, boosted by considerable tax cuts, made windfall profits. A State Bank of India analysis shows that tax cuts contributed 19% to the top line of companies during the pandemic. But this did not result in increased investments.

Dividends to shareholders: Before the pandemic, instead of investing in themselves, companies chose to reward shareholders with higher dividends.

Investment in equity and debt instead of Infrastructure: During the pandemic, they did not use the profits for paying out dividends; they retained a big chunk of the profits. However, instead of investing in buildings, plants and machinery, they invested in equity shares and debt instruments.

Corporate cited the slowdown in demand as reason for less investment: So, both before and after the outbreak, they shied away from capital investments. The hesitancy to invest can be explained by a slowdown in the demand side of the economy.

Corporates didn’t invest in long term returns sectors: Consumer demand started to decline the year before the pandemic and worsened after the COVID19 outbreak. This forced companies to use the increased profits to decrease their debts, pay dividends and invest in financial instruments instead of increasing productivity by making capital investments.

What is The current consumer’s demand situation?

Average Consumer sentiment index: Private companies invest when they are able to estimate profits, and that comes from demand. The Centre for Monitoring Indian Economy’s (CMIE) consumer sentiment index is still below pre-pandemic levels but is far higher than what was seen 12-18 months ago.

Buoyant Aggregate demand: RBI’s Monetary policy report dated September 30 says, Data for Q2 (ended Sept) indicate that aggregate demand remained buoyant, supported by the ongoing recovery in private consumption and investment demand. It shows that seasonally adjusted capacity utilization rose to 74.3% in Q1 the highest in the last three years.

High household savings: Along with household savings intentions remaining high, might hold the key to the investment cycle kicking in.

Statistic on demand and investment

New investment projects: The new investment projects announced as a % of GDP, since FY18, the share has remained below the 5% mark, compared to over 9% between FY05 and FY22.

Collection of corporate tax decreased: Corporate tax and income tax collected in India as a % of GDP after the cut in 2019, the share of corporate tax declined dramatically, while the share of income tax gradually increased.

Double burden on tax payers: The shift in tax burden from the corporates to the people came at a time of job losses and reduced income levels. This pushed more people into poverty.

Corporate profit increased after tax cut: Profit after tax earned by non-financial private companies in ₹ trillion after the tax cut, the profits of these companies rose to ₹4-5 trillion in the last two financial years from ₹1-2 trillion in many of the previous periods.

Increase and decrease in dividend to shareholders: Dividends paid by non-financial private companies as a share of profits earned after tax, Payouts to shareholders surged in FY20, the year before the pandemic, but reduced in the following years.

Profit retention increased: Retained profits as a % of profit after tax surged to 63% in FY22 the highest in a decade (limited companies were analyzed in FY22, so data are provisional).

Profits are invested in equities: In FY21, the debt-to-equity ratio came down to 0.86 the lowest in at least three decades. In FY22 (provisional data), it came down further to 0.71.

Year on year decline in capital investment: Year on year change in the investments of non-financial private companies in fixed assets such as buildings, plants, machinery, transport and infrastructure have declined in recent years. But the year on year change in investments in financial instruments such as equity, debt and mutual funds have surged.

India’s role in Russia-Ukraine war

As external affairs Minister Subrahmanyam Jaishankar arrives in Russia this week for a bilateral visit, there is growing international interest in the potential Indian diplomatic contribution to ending the tragic war in Ukraine which is now in the ninth month and has shaken the world to its core.

The story of Ukraine’s war and India’s Strategy so far

India’s balanced approach: India has reasons to be satisfied that there is a better appreciation of its position on Ukraine in the Western public discourse. In the last few months, the Western media and think tanks had been relentless in their criticism of the Indian approach to the crisis as lacking moral and strategic clarity in the face of Russia’s unprovoked aggression.

India didn’t criticize Russian nor endorse Russian aggression: Through the last nine months, Delhi was reluctant to explicitly criticize Russian aggression against Ukraine and insisted on a dialogue between the warring parties. At the same time, India refused to endorse Russian aggression, underlined the importance of respecting the United Nations Charter, emphasized the inviolability of territorial sovereignty, warned against the use of nuclear weapons, and sought to draw at tension to the economic impact of the war on the “Global South”.

America showed sensitivity to India’s position: In the Biden administration there was a measure of understanding of where Delhi was coming from and India’s long-standing equities in the relationship with Russia and the constraints it imposed on India. Official Washington never let the heat of the Ukraine crisis in Europe undermine the longer-term American imperative of engaging India to stabilize the Indo-Pacific. The same can’t be said about Europe, but then the continent was right in the middle of the gravest conflict since the Second World War. The European trauma from a shattered peace is real.

India’s role in grain shipment and nuclear power station: Recent reports in the US media recount the Indian diplomatic contribution at a few critical moments in the nine-month-long war-in helping overcome issues over the grain shipment deal from Ukraine and in reducing the growing risks of the war targeting the nuclear power station at Zaporizhzhia in eastern Ukraine.

Efforts to end war by west and Russia

Communications between the defence ministers: The defence ministers of the two countries have frequently talked to each other reminding each other of their redlines in the war. Meanwhile, the onset of winter will increasingly limit the possibilities for military operations in Ukraine and would give a chance to both sides to pause, regroup and rethink their strategy and tactics.

Putin’s strategy: Putin’s current focus on destroying the Ukrainian cities and the occasional threat to use nuclear weapons underline Russia’s weakness in the Ukraine war rather than strength. From a military perspective, there is no easy way for Russia to secure a “victory” in this war.

Limitations of Putin: Putin might have no option but to consider an honorable draw that will save his political face and secure some territorial gains in Ukraine. Can the same be said about the other Vladimir? (The Russians and Ukrainians both claim Vladimir or Volodymyr the Great of the 10th century as the founder of their nations).

Ukraine’s strategy: Ukraine’s president Volodymyr Zelenskyy has led the country’s fight against Russian aggression with impressive determination. Unlike the Russian troops, the Ukrainian forces are trying to save their nation against aggression and have inflicted significant military defeats on the Russians.

Limitations of Ukraine: There is a question, can Zelenskyy succeed in liberating all territories occupied by Russia, including Crimea which Russia took by force in 2014? Zelenskyy might like to fight on until he realizes that goal, but there are second thoughts in the Western coalition that is backing him.

Western effort of sanctions on Russia: The West had bet that the massive sanctions it imposed after Moscow launched its war against Ukraine would bring the Russian economy to its knees. But Russia is still standing and the costs of the sanctions are beginning to have major effects on Western societies.

Rising energy cost and Ineffectiveness of sanctions: As the economic and energy costs of the war mount, there is growing political support in Europe for a quick resolution of the conflict. In the US, which has emerged as the main supporter of Ukraine, there are both Republicans and Democrats who are questioning the current American “blank cheque” for Ukraine. If the Republicans do well as they are expected to in this week’s midterm elections to the US Congress, the internal polarization could sharpen and cast a shadow over American foreign policy, including the Ukraine strategy.

USA is repairing its strategy: Although these developments need not be fatal to US strategy, Washington is beginning to recalibrate. In important private advice to Kyiv last week, Washington called for greater flexibility in Zelenskyy’s approach to negotiations with Putin.

Supreme Court, in a majority verdict, upholds the EWS Quota

A Constitution Bench of the Supreme Court, in a 3:2 majority decision, upheld the validity of the 103rd Constitutional Amendment, which provides 10% reservation in government jobs and educational institutions to the Economically Weaker Sections (EWS) of society.

What else?

The judgment excludes the “poorest of poor” among Scheduled Castes (SC), Scheduled Tribes (ST), Socially and Educationally Backward Classes (SEBC) and Other Backward Classes (OBC) from its scope.

What was the 103rd Amendment?

The 103rd Amendment inserted Articles 15(6) and 16(6) in the Constitution to provide up to 10 per cent reservation to the economically weaker sections (EWS) among non-OBC and non-SC/ST sections .

In other words, the amendment had changed the Constitution and introduced a quota for the poor among the so-called ‘forward castes’ or ‘general category’.

Quota available to EWS

The quota is available in:

Admissions to higher educational institutions and

Initial recruitment in central government jobs

The amendment also empowered state governments to provide reservation on the basis of economic backwardness.

On what basis was the quota challenged?

Ans. Violation of Basic Structure

Violation of basic structure: Essentially, the challenge was based on the argument that the 103rd amendment violated the “basic structure” of the Constitution.

Socially disadvantage: The primary argument in this case stemmed from the view that the special protections guaranteed to socially disadvantaged groups is part of the basic structure.

Sole economic criterion: The 103rd Amendment departs from this by promising special protections on the sole basis of economic status.

How the judiciary deviated from its earlier judgments?

However, the dissenting opinion says that permitting breach of 50% would result in compartmentalization, and the rule of right to equality will become right to reservations.

The apex court has repeatedly underlined the 50% ceiling on reservations imposed by the landmark Indra Sawhney judgment of 1992.

On that basis, attempts by a number of states have been struck down.

Several of those issues can now be reopened. Now states can rebel with their populist moves to provide reservations to some communities. Ex. Nomadic Tribes case in Maharashtra.

What is the EWS Quota?

The EWS criteria for employment and admission was notified on January 31, 2019 by the Department of Personnel and Training (DoPT) based on the 103rd Amendment.

Under the 2019 notification, a person who was not covered under the scheme of reservation for SCs, STs, and OBCs, and whose family had a gross annual income below Rs 8 lakh, was to be identified as EWS.

The notification specified what constituted “income”, and excluded some persons from the EWS category if their families possessed certain specified assets.

Broad issues with EWS quota

Reduction within general category: The EWS quota remains a controversy as its critics say it reduces the size of the open category, besides breaching the 50% limit on the total reservation.

Arbitrariness over income limit: The court has been intrigued by the income limit being fixed at ₹8 lakh per year. It is the same figure for excluding the ‘creamy layer’ from OBC reservation benefits.

Socio-economic backwardness: A crucial difference is that those in the general category, to whom the EWS quota is applicable, do not suffer from social or educational backwardness, unlike those classified as the OBC.

Metropolitan criteria: There are other questions as to whether any exercise was undertaken to derive the exceptions such as why the flat criterion does not differentiate between metropolitan and non-metropolitan areas.

OBC-like criteria: The question the court has raised is when the OBC category is socially and educationally backward and, therefore, has additional impediments to overcome.

Not based on relevant data: In line with the Supreme Court’s known position that any reservation or norms for exclusion should be based on relevant data.

Breaches reservation cap: There is a cap of 50% on reservation as ruled in the Indira Sawhney Case. The principle of balancing equality ordains reservation.

Way forward

Preserving the merit: We cannot rule out the sorry state of economic backwardness hampering merit in our country.

Rational criteria: There has to be collective wisdom to define and measure the economic weakness of certain sections of society in order to shape the concept of economic justice.

Judicial guidance: Judicial interpretation will pave the wave forward for deciding the criterion for EWS Quota.

Targetted beneficiaries. The center needs to resort to more rational criteria for deciding the targeted beneficiary of this reservation system. Caste Census data can be useful in this regard.

Income study: The per capita income or GDP or the difference in purchasing power in the rural and urban areas, should be taken into account while a single income limit was formulated for the whole country.

MHA annual report underlines need to update NPR

The Home Ministry in its latest annual report has underlined the need to update the National Population Register (NPR) database across the country, except Assam.

What did the MHA say?

The report said the NPR is prepared under various provisions of the Citizenship Rules, 2003, framed under the Citizenship Act, 1955.

In 2015, a few fields such as name, gender, date and place of birth, place of residence and father’s and mother’s name were updated and Aadhaar, mobile and ration card numbers were collected.

To incorporate the changes due to birth, death and migration, the MHA pressed the need to update it again.

What is National Population Register (NPR)?

The NPR is a Register of usual residents of the country.

It is being prepared at the local (Village/sub-Town), sub-District, District, State and National level.

This is carried under provisions of the Citizenship Act 1955 and the Citizenship Rules, 2003 (Registration of Citizens and issue of National Identity Cards).

It is mandatory for every usual resident of India to register in the NPR.

A usual resident is defined for the purposes of NPR as a person who has resided in a local area for the past 6 months or more or a person who intends to reside in that area for the next 6 months or more.

Why NPR is under fire?

Though NPR was first compiled in 2010 and updated in 2015, the new questions were part of a trial exercise involving 30 lakh respondents in September 2019.

The exercise has perceived the first step toward the compilation of the National Register of Indian Citizens (NRIC) according to Citizenship Rules, 2003.

How are NRIC and NPR related?

Out of the NPR, a set of all usual residents of India, the government proposes to create a database of “citizens of India”.

Thus, the “National Register of Indian Citizens” (NRIC) is a sub-set of the NPR.

The NRIC will be prepared at the local, sub-district, district and State levels after verifying the citizenship status of the residents.

The rules say the particulars of every family and individual found in the Population Register shall be verified and scrutinized by the Local Registrar.

How NPR is different from Census?

The census involves a detailed questionnaire — there were 29 items to be filled up in the 2011 census.

They are aimed at eliciting the particulars of every person, including age, sex, marital status, children, occupation, birthplace, mother tongue, religion, disability and whether they belonged to any SC or ST.

On the other hand, the NPR collects basic demographic data and biometric particulars.

While the census is legally backed by the Census Act, 1948, the NPR is a mechanism outlined in a set of rules framed under the Citizenship Act, 1955.