Arbitrage Magazine - February 2023 - Finance & Investment Club | IIM Rohtak

Management Of NPA In India

Charchil Paghadar & Riya Shah

IIM Rohtak

What are NPAs?

Banks and financial institutions lend loans to individuals and firms, which are recorded in the assetside of the bank's balance sheet. If the interest or principal is not paid on the due date, it is considered installment overdue. A loan or advance for which the principal or interest payment remains overdue for more than 90 days is classified as NPA, or Non-Performing Asset.

History of NPAs

The origin of the Non-Performing Assets can be traced back to the mid-2000s, when the new millennial brought development, growth,and theboom in the economy. Corporations were grantedloans and the leverage ratio grew, leading to the reduction of their repayment capacity. This led tothe India's Twin Balance Sheet problem, where both the lender and the borrower were under financial stress.

Trends in India

The Gross NPAs of all banks for the 2020–21 fiscal year are estimated to be around Rs. 8.41 lakh crores. There has been a downward trend since the peak in 2017–18 when they rose to 10.37 lakh crores, with actual recoveries at Rs. 1.59 lakh crores in 2020–21. Despite a downward trend in loanrecovery, there has been a decreasein gross non-performingassets(NPAs).Thiscouldbecausedbythebankwrite-offs,whichtotaledaboutRs.2.2lakhcrores for the five-year period from 2016–17 to 2020–21, making up a large component of NPAs.

A significant portion of the overall Gross NPAs are attributable to public sector banks. Around 72% of the total NPAs in 2020–21 will come from public sector banks, with the remainder comingfrom private sector banks, foreign banks, and small financial institutions.

Comparison with othercountries

The Gross NPAs have hit a 6-year low of 5.9% as of March 2022. India also has one of the highestNPAs among countries with economies of a similar size, excluding Russia. Even China, Malaysia,and Indonesia, which are other South Asian economies, have a much lower NPA ratio as compared to India.

Reasons for NPA’s

• Economic/industrial slowdown

• Inaccurate Credit Evaluation and Lack of Diligence by Banks

• Natural calamities

• Changes in government regulations and policies

• Frauds and borrowers' moral degradation

• Inefficient management and political pressure

How to avoid NPAs

NPAs can be reduced through continuous monitoring of accounts and adapting sanctions. Qualitative appraisal of financial statements and accounts, understanding unhealthy developments in the working of the company and examining the viability of the project should be taken care of by deploying more efficient resources and technology. Banks must take haircuts and be recapitalized, and the Bankruptcy Code (IBC) has provided relief to lenders by giving priority to secured creditors.

Twin Balance Sheet Problem

The twin balance sheet problem is a situation where both the banking sector and the corporate sector of an economy have high levels of debt and non-performing assets (NPAs). This can lead to avicious cycle where the high levels of NPAs in thebanking sector weaken the banks' balance sheets,leading to a lack of credit availability for the corporate sector. The two balance sheets refer to the overleveraged infrastructure companies and a large

Preventive Measures

Governments and central banks around the world implemented a variety of measures to address the twin balance sheet problem, including bailouts for troubled banks, monetary easing, and fiscal stimulus. Monetary easing, which involves lowering interest rates andincreasingthesupplyof money,wasusedtostimulateeconomicactivity by making it cheaperfor businesses and householdsto borrow money and invest.

Fiscal stimulus, such as increasing government spending and/or cutting taxes, can help to stimulateeconomic activity by boosting consumer and business confidence and increasing demand for goodsand services. These measures helped to stabilize global economy and prevent full-blown depression, but the recovery from the Financial Crisis was slow and uneven, leading to slow growthand a lack of recovery for many people.

The twin balance sheet problem is a situation where both the banking and corporate sectors have high levels of debt and NPAs, leading to a vicious cycle of economic downturn. In India, most of these NPAs were present in Public Sector Banks, which hindered their ability to give out loans. During the Financial Crisis, measures were implemented to address the problem, but they were not successful in stabilizing the global economy.

Four-BalanceSheetproblem

The Four-Balance sheet problem is a recent phenomenon observed in India by Arvind Subramanian,a famous economist. It adds two sectors: Real Estate and NBFCs (Non-Banking Financial Companies)to the existing two sectors, Commercial banks and Infrastructure companies. This has caused a slowdown in consumer goods production and a decrease in non-oil tax exports and imports and government tax revenue. The proposed reasons

for this are the stagnation of the growth rate of wages and inflation.

Apart from this, there was also a decline seen in private investment by companies due tofear ofundertaking risky projects and investments.

Hence, how did this Four-Balance sheet challenge come about?

The Four Balance Sheet problem is caused by the Twin Balance Sheet problem and the Global Financial Crisis, which caused a slowing down of investment and exports. This was caused by the collapse of the ILFS, which had around Rs. 90,000 crores worth of debtors. This lending was channeled toward real estate, and the repayment of these loans was dependent on the real estate inventories being sold off. After the crisis, the economy seemed to be getting back due to a large fiscal stimulus and the NBFC Credit boom.

To summarize, these were the core reasons which led to the Four Balance Sheets: Slowing down ofconsumption, credit crunch by banks, and eventually even NBFCs, slowing down of growth rate of wages, piling real estate inventory, and lower private investment.

IS-LM and Four Balance Sheet Problem

The main effect the high number of NPAs in a country has on the LM curve is that as the consumption is slow in the economy, the transitionary demand of money (k) is low. Due to these reasons, the LM curve is relatively flat as the slope (k/h) is a small number.

The economy is in a liquidity trap, where slow consumption rates affect companies and individuals,leading to more people to save and transact less. This leads to high interest rates in the economy, as banks are unwilling tolend and companies are over-leveraged and need short term loans to fulfilltheir interest payments.

Monetary policy

The monetary policy is ineffective in a liquidity trap, as the economy operates on a flat part of themoney

demand curve. To reduce interest rates, the RBI aims to use the Interest Rate monetary transmission channel, but this channel is broken as banks do not pass this benefit to the public due to the fear of more NPAs. Even if the RBI reduces the CRR, it will still not make a difference due to the high number of NPAs.

Fiscal Policy

India's fiscal deficit was already 9% of the GDP in 2018-19, making it difficult to engage in more fiscal spending. However, encouraging and stimulating consumer spending is the only way to increase profits and increase factor income, which will help reduce NPAs.

Introduction

Ratings, Valuation, And Investing

Mahak Kejriwal XIMB

The last few decades have witnessed a profound change in investing values. Consumers are aware of the environmental issues plaguing the Earth today and expect the businesses they interact with to be equally invested in addressing these environmental concerns. These ideas have now percolated deep into the investment avenues, with social justice for the environment taking center stage.

The Environment, Social, and Governance (ESG) investing sector is reported to boom to a mammoth $50 trillion market globally in the coming years. This article aims to understand this significant growth and the driving factors.

What is ESG Investing and why is it important?

ESG Investing refers to making the conscious choice of being more environmentally and socially concerned right from the core. While no rules are set in stone to attribute to what constitutes ESG investment, companies proactively working towards environmental protection and social improvement are considered promising examples.

This is extremely important for corporates today, considering the increasing awareness of consumers and the need to maintain ethics in a world of capitalism. Customers are more willing to pay for environmentally safe products, and the companies that fail to follow protocol face severe backlash, causing their reputations to take a powerful hit.

The Rise of ESG Investing and The Returns

The ESG sector has been seeing a tremendous rise owing to more and more interest from investors in projects scoringhigh on ESG.Thedrivingfactorsforthis canbeattributedto theregulatory benefits andrespect among the consumers that ESG companies enjoy. But, the concern is whether the investors can expect higher returns on ESG investing.

The answer is not definite and is subject to specific market conditions. To take this into perspective, let us consider the short run; the companies given high ESG ratings may get higher returns as more investors invest in them. Thisinferencestems from theinvestors’willingnesstopayahigherprice forESGcompanies, thereby ballooning the stock prices. However, the returns would probably be lower in the long run as the new equilibrium would dictate a more settled investor preference.

In this sense, it can be safely said that when the ESG companies have an increasing preference from the investors whose shares are increasing and unexpected new advantages in regulatory requirements and tax savings are unlocked, the highly rated ESG companies will be more likely to earn higher returns.

What are ESG Ratings?

An ESG measures how the company is working towards mitigating long-term environmental, social, and governance risks. The financial implications caused due to these issues should be discussed in financial reviews. Using ESG ratings in addition to the conventional financial analysis can help a company to better evaluate its potential in the long term by providing a broader perspective.

A good ESG rating speaks about the company taking care and being conscious of its impact on the environment and abiding by the regulations. This has become an essential metric for companies to consider. With growing awareness, customers are getting increasingly wary of the brand image and how a company portrays its ESG consciousness. To objectively assess a company's ESG performance, several ESG Rating Agencies have been up and about, the likes of MSCI and Sustainalytics. These Agencies aim to set companies globally regarding their ESG performance and create transparency by publicizing this data to their clients.

Scores are given for each aspect of the “E,” “S,” and “G,” which are then aggregated to give out a cumulative score. This data also helps in helping investors to identify the kind of ESG risks involved before investing financially in a business.

A good ESG score indicates that the company is invested in creating long-term value and is in better control of anticipating potential opportunities.

However, that being said, companies must keep track of maintaining a consistent performance across different rating agencies. Any discrepancy in the same might lead to serious customer trust issues, thereby creating severe repercussions for the brand image. They might feel the company uses unscrupulous means to “greenwash” the customers.

How to calculate the impact of ESG on valuation?

The critical issue with calculating the value of ESG in the financial analysis of companies is the need for its tangible nature. No uniform framework can help in consistently analysing the performance of different companies. Other issues include the need for more technical expertise.

However, different methods have been proposed for incorporating ESG in company valuation. One of the most preferred ones includes making precise adjustments in cash flow forecasts. For example, let us consider the oil spill in the Gulf of Mexico in 2010. It was the largest ever unusual mortality event caused by marine life.

This spill resulted in significant fines for the companies involved and led to the company being imposed with extremely stringent improvements in the operations and production, thereby creating more costs for the companies. This extra cost must be added to the Discount Cash Flows as these significantly additional fines can severely impact Future Cash Flows. Another critical example is mining companies, which can include the effects of shortages that are imminent in their future cash flows.

A significant advantage of this method is that it compels an investor to create a genuine issue out of an abstract concept like ESG. Making an impact on future cash flows forces them to concentrate on material problems. However, the difficulty of estimating the effect on cash flow due to rare events which create a considerable impact (like the oil spill) needs to be better understood. That being said, considering the importance of having jotted down financials, assumptions made in factoring in these ESG factors are also expected to be of high quality, thereby increasing the probability of a well-thought-out report.

Conclusion

In conclusion, pro-ESG investors will be happy with higher returns due to the higher valuations at a lower cost of capital. This would facilitate incentives for higher ESG adoption and investment. Generally speaking, they would be okay with earning lower returns for the companies that work in an ethical and environmentally-friendly way and for a cause they believe in.

Interestingly, the “anti-ESG” investors would also be happy as they would earn higher-return stocks in the long run. They might even benefit from the brown companies turning into green companies. From this perspective, ESG investing can be a win-win.

The importance of focusing on ESG ratings and the precautions to maintain consistent ratings across agencies have been mentioned. The lack of standardization in incorporating ESG in valuations was identified as a critical issue in accurately depicting the impact of ESG.

Union Budget 2023-24: The Green Credit Programme- An In-Depth Analysis

Mangesh Gadewar IIM Rohtak

Ten years ago, we couldn't have imagined getting monetary credit for planting trees or choosing a sustainable alternative. Well, it's a reality now. In the Union Budget of 2023-24, the government launched the Green Credit Programme as a part of their push towards Green Growth in the 7 priorities (Saptarishi) outlined as a vision for the Amrit Kaal. So what exactly is this ‘Green Credit Programme’ all about?

The Green Credit Programme or GCP is a scheme where individuals, industries and even local and state governments will get credits for adopting green or sustainable practices. In simple words, if any person adopts a sustainable practice, they will get rewarded for it. But the GCP doesn’t end here. Once you earn a green credit, you can trade it online on a platform that will be created by the government.

The GCP is focused on improving the general environment and reducing climate change through encouraging efficient energy usage and environment conservation practices. Isn’t this something really cool and futuristic?

Indeed it is. India is the first country in the world to announce such an extensive programme spanning over six sectors; water, agriculture, waste management, air pollution reduction, forestry and mangroves. But how does India’s Green Credit Programme compare to other countries?

● The United States of America is a leader in ‘green bonds’. Green bonds are those instruments that support environmentalorclimate-relatedprojects.Forexample,infrastructureprojectstobuildsolarplantsorwind farms. According to (John & Rapp, 2022), the issuance of green corporate bonds has grown rapidly in recent years, totaling almost $400 billion in 2021.

● In 2016, a G20 Summit was held in Hangzhou, China where every state head agreed on the promotion of green finance strengthening China’s pursuit of pursuing a green finance policy.

● According to a report by the World Economic Forum, in 2019, the UK government is working with the industry to set up a Sustainable Finance Standard that will act as a regulatory framework and give improved access to improved finance for green projects.

● Countries like Japan, Canada, Mexico and European Union member nations are at the forefront of green bonds. The following chart shows the amount of green bonds issued in 2021 (in billion US Dollars)

But the GCP is not just about green bonds. Let’s have a look at some possible green credit use cases for different stakeholders.

● For individuals:

Let’s say we install a rain-water harvesting system in our house. This would entail building a storage tank, inlet and outlet pipes, etc. If GST was paid for the purchase of these items, we can claim input tax credit while filing returns. Thus, the government is rewarding us for our sustainable efforts.

● For corporates: In addition to the existing green bonds, corporates will form the majority of investors who will be buying these green credits on the trading platform. These can be used to offset any environmental emissions or penalties that could be levied on them.

● For local governments: In Feb 2023, the city of Indore issued a green bond which got an overwhelming response as it was oversubscribed by investors. Through this, the municipal government will be building a solar plant that will generate 60 MW of electricity. This idea could be further extended to various sustainable measures like conservation of mangroves or handling waste.

● For farmers: Farmers who would shift to crops which are water-resilient like cotton, millets instead of water intensive crops like sugarcane and paddy will be awarded green credits or direct monetary benefits.

With things looking good for GCP, according to me, there is one problem which could be a deterrent in this vision. Through the GCP trading platform, anybody could buy these credits. A legally correct but morally incorrect practice here could be that companies which are cash rich could buy green credits and get away from environmental obligations. In my opinion, the government should issue guidelines that would prevent them from doing so.

It will be interesting to see if the Green Credit Programme really brings about a behavioural change amongst residentsofourcountry.Withthisglobalgreenmovement,wecansoonseecompaniesaccountingfor‘Carbon Emissions’ in their Balance Sheets.

Let’s strive to be pro-planet, pro-people individuals!

The Dangers of Foreign Aid: The Economics Behind Modern Day Debt Traps

Moosa Talha Al Kaseri H.R. College of Commerce and Economics

Foreign aid and international lending for countries in dire need of economic assistance are often seen as beacons of hope, shining examples of how one country can help another in their time of need. However, much like everything else in life, this foreign “aid” comes with its own set of strings attached in the form of often deceptive terms and conditions that can render the entire purpose of providing such aid entirely useless and further hinder the growth of any country that goes ahead with such “debt traps.”

On the surface, it may seem like an act of generosity and goodwill from one country to another. However, further analysis of such onerous lending facades reveals a more insidious side to foreign aid. Many developing countries have fallen victim to the alluring promises of aid, only to find themselves entangled in webs of debt and obligation that can ultimately lead to their enslavement through such contracts.

The metaphorical Trojan horse of the Greeks comes to mind when such illicit aid packages are created wherein, the on-paper purpose is the prosperity and help of lesser developed countries, but it all just becomes a disguise for collecting more resources and power from these helpless countries. Such modern-day debt traps can be best explained by real life examples:

Sinking in Debt: Sri Lanka's Fatal Attraction to China's Infrastructure 'Aid'

The case of Sri Lankan ports and Chinese infrastructure “aid” is a classic example of the dangers of debt traps. The Chinese government loaned Sri Lanka more than $1 billion to build a new port that was supposed to become the country's second-largest. The port, located strategically near Indian Ocean shipping routes, was touted as a great achievement for Sri Lankan commerce. However, it failed to generate profits, which was as forecasted by experts.

Once the defaults started, naturally the loan agreement was restructured and an 85% stake was purchased by China Merchant Port Holdings Company after it agreed to pay close to $1.2 Bn. China foreclosed on the port's operations in 2017 and took it over on a 99-year lease. The lease agreement included wide-ranging tax concessions for the port and a 32-year tax break for Chinese firms. This seizure of the port comes when the world is already questioning the One Belt One Road (OBOR) initiative of the Chinese and its ambitions of “a natural requirement for realizing the rejuvenation of the Chinese nation."

Critics have long argued that Chinese loans often come with deceptive terms and conditions that create debt traps for countries in need of economic assistance. These terms ultimately serve the interests of the lender ratherthantheborrower. Moreover,whenacountryfails to repaytheseloans,thelendertakes overits strategic assets and infrastructure, increase interest rates even higher, force the indebted country to follow its political interests in military conquests and much more.

It is now more important than ever to ensure that international lending practices are fair, transparent, and sustainable for all parties involved. Only then can we ensure that vulnerable and at-risk countries aren’t taken advantage of and shackled in debt under such false pretences and noble intentions of so-called “infrastructural development”.

Cost of Borrowing from Beijing: A look at African and Pakistani Economies

Debt as a tool can be immensely helpful if leveraged in the proper amount and at the appropriate times, but it is a double-edged sword which has caused insolvencies and destroyed some of the biggest economies of the

past if not used with caution.

China does give out loans to countries that need them but as discussed earlier in the article, these come with their own set of prerequisite conditions to be met, one such as that of using Chinese labor and purchasing materials for infrastructure projects from Chinese firms. This critically limits the proper use of funds for these countries since as soon as China gives out its loans, the money goes back to different Chinese firms in accordance with the agreements and domestic labor market gets hurt to the point where there have been numerous demonstrations by labor unions in the past. These hidden costs are often ignored or just not understood due to a lack of proper due diligence which adds on to the vulnerabilities of such economically deprived countries.

African countries such as Djibouti, according to some estimates, have external debt to China amount to around 80% of its gross domestic product (GDP). This high level of indebtedness has raised concerns about Djibouti's ability to manage its debt obligations and maintain its economic independence. Some observers have also raised concerns about the potential for China to use its leverage over Djibouti's debt to secure strategic assets

or gain military influence in the region. China has had friendly relations with Djibouti since 1979 and Djibouti too has backed China’s stance on the issues of Xinjiang and Hong Kong in the United Nations. Critics thus argue that China's creation of "debt traps" are a deliberate tactic to coerce poor African states into voting with it in the UN General Assembly, endorsing its stance on Taiwan, or obtaining valuable African real estate that could be converted into military bases. It's important to note, however, that these are allegations, and they have not been found to be objectively true as of yet.

Pakistan’s current economic crisis is one of the most recent stories of how too much debt and “aid” that comes attached with unfavourable conditions can create chaos. There are people that are starving, experiencing out of control inflation and witnessing a politically unstable nation. According to some sources, CPEC has created a Chinese debt of US$ 64 billion on Pakistan, which was originally valued at US$47 billion during 2014. This debt has increased Pakistan's vulnerability to external shocks and reduced its fiscal space for development spending. At the same time, many CPEC projects have been criticized for being overpriced, completely inefficient or even environmentally unsustainable.

China's role in Pakistan's economic crisis is quite significant and complex. While China has provided Pakistan with much-needed financing and infrastructure development under CPEC [China-Pakistan Economic Corridor], it has also contributed to its debt burden and trade imbalance. Pakistan needs to find ways to diversify its funding sources and improve its export competitiveness to reduce its reliance on China and improve its economic prospects. China isn’t the only one to blame here, but it is important that other countries look at this cautionary tale of overleveraged indebtedness to foreign countries and the consequences that such ill-made financial decisions bring with them.

Conclusion

It is worth noting that China is not the only country accused of using debt as a means to gain leverage over other countries. For example, the United States was accused of similar practices in the 2000s when it exerted pressure on Argentina to repay its debts. This led to Argentina defaulting on its debts and experiencing a severe economic crisis.

Similarly, some other countries in the West and few other international financial institutions have been criticized for imposing stringent and harsh repayment and default conditions on their loans, which have led to economic and social turmoil in borrowing countries. These conditions have many times included privatization of state-owned enterprises, reduction of social spending, increasing taxes on the most vulnerable, and many more inhumane clauses.

Therefore, foreign aid and loans from foreign sources must be met with extensive due diligence beforehand and politicians must keep in mind the dangers of such debt and aid.

John Adams said it best when he wrote “there are two ways of conquering and enslaving a nation: one is by the sword and the other is by debt”.

As such, there is a need for greater transparency, accountability, and responsible lending and borrowing practices to ensure that debt financing is used to promote sustainable and inclusive economic development, rather than as a means of political or economic coercion.

Indian Economy and The Global Recession

Pranav Bharara NMIMS Mumbai

Covid-19 caused the world to experience severe economic hardship. As a result, in 2020, the global GDP decreased by 3.2% and crawled back to recovery by 6% the following year. However, even before we could shakeoffshocks of thepandemic,another threat toglobalsecurity and growthappeared in the form of Russia's adventures in Ukraine.

Now, it appears the world is about to experience another economic crisis. This possibility is suggested by signals coming from Europe and the US, which form 40% of global GDP. During the first half of this year, the US economy slid into the red. Also, just like it is in US, high inflation is a problem in Europe. Inflation in the Eurozone was reportedly at a record high of more than 10% in September. Despite the fact that the European region's economy grew by 0.2% from July to September, analysts predict that the continent will enter a recession in the last quarter.

It's interesting to note that China will have a slower recovery at 3.2% and 4% this year and the next, according to IMF's report. Its zero-tolerance policy toward Covid is the cause of this self-inflicted suffering. The Indian economy will continue to be the fastest-growing major economy in the world by rising at a 6.8% in 2022 and a little slower 6.1% in 2023, according to the IMF. However, many economists contend that India is not isolated from the rest of the world and that a growth rate of 6% at a time when inflation is above 7% is concerning. Therefore, in the midst of constant conjecture of a global recession, let's examine how it will affect the Indian economy.

How have the economy’s moving components have fared last year?

❖ Trade and Exports:

While imports are rising due to the local economy's recovery, exports are slowing due to declining global demand.45% of India's merchandis exports go to developed nations, whose economies are predicted to decline. A drop in exports would hurt consumer spending and discourage companies from making new investments.

Source: CMIE, BCG India Economic Monitor

Source: CMIE, BCG India Economic Monitor

❖ Contact-intensive services: Contact-intensive businesses including trade, hospitality, and transportation continued to be major contributors to the economic momentum in the last quarter, growing by 14.7%. Due to ongoing lockdowns, this sector had taken the brunt of the pandemic, but it is now displaying a robust recovery due to pent-up demand.

❖ Private consumption: Private consumption is presently 11.2% greater than it was before the epidemic, with increase of 9.7% in the second quarter. As the rate of global growth is expected to drop in the coming quarters, India's GDP growth would depend on how resilient the domestic demand remains.

Despite rising consumer confidence, spending has not increased consistently. For instance, vehicle registrations have stayed flat while retail sales are expanding, albeit at a sporadic rate.

❖ Manufacturing: Government expenditure on infrastructure, particularly in industries like steel and cement, is helping manufacturing in certain ways. Production over the festive season and the ongoing high demand for automobiles were unable to stop a general decline in manufacturing. In the second half of the fiscal year, manufacturing is anticipated to experience difficulties, particularly because export growth will suffer.

❖ Tax revenues: The government has been able to pay its massive subsidy bill and investments thanks to healthy tax revenue collections, which has reduced pressure on the budget imbalance. Investments increased by 10.4% in the second quarter, driven by government capital expenditures. The focus will probably be on the prudent use of scarce resources given that government expenditure is already high.

The good news is that even as the government reduces revenue costs, the percentage of capital expenses (on assets bearing long-term benefits) is increasing (on assets having short term benefit).

❖ Investments: All 2,725 publicly listed firms' net profits decreased by 6% in Q2, marking the first decline in earnings following eight consecutive quarters of increase.

This is significant because it gives businesses the opportunity to jump-start the investment cycle once uncertaintysubsides, as well as safeguard them against globalheadwinds. Programs liketheproduction-linked incentive have encouraged private investment in industries like pharmaceuticals and electronics.

However, loan growth in the business and services sectors has sharply increased, suggesting that the outlook for capex spending by businesses is improving.

What are major Challenges for the Economy?

Perhaps the largest concern is the high inflation rate and all of the difficulties that come with it. Business expenses rise, profitability and margins are affected, and buying power is decreased under inflationary circumstances. It therefore interferes with both supply and demand.

Inflation earlier this year was mostly caused by rising commodity costs and supply problems. Higher yields benefited upstream energy businesses, but profitability in most other industries remained challenging as a result of increased production and transportation costs.

Inorderto lowerthecost ofessentials andotherimportedrawmaterials forindustries andfuel, thegovernment cut excise tax. In order to solve problems with local supplies, it also placed export restrictions on a number of goods. To absorb surplus liquidity in the system, the RBI swiftly increased its repo rates by 1.9% over a fivemonth period and also launched the standing deposit facility.

However, with global economic growth likely to moderate, global prices may ease. A possible moderation in crude oil and industrial raw material prices may reduce inflation by mid-2023. Falling cost of production will be of great help to small industries that have struggled because of rising prices.

What can the Government do?

Markets remain optimistic about India's growth narrative despite a slow decline in a number of macroeconomic indicators. The government and the RBI, however, have a difficult task ahead of them. Recently, the government required a special report from the RBI since it was unable to control retail inflation

Source: CMIE, BCG India Economic Monitor

Source: CMIE, BCG India Economic Monitor

within the target range of 2% +/- 4%.

This is because retail inflation being consistently above 6% affects the poor the most. Providing financial support by targeting underprivileged communities will be one approach for government to solve this issue without going overboard with spending.

Also, in order for smaller firms to stay in operation, the support may through loans at rates that are lower than the high market rates now in place. Hence, the government must use all policy tools at its disposal necessary to boost economic activity and increase the supply of products and services.

The capacity of authorities to properly calibrate monetary policy such that there is neither an over-tightening nor an under-tightening of monetary conditions will determine the international economy's immediate future. As has already begun to happen in countries like Sri Lanka, over-tightening will result in a protracted recession as well as debt and payment issues, while being too slow will result in an inability to manage inflation. To achieve a soft landing amidst the potential of a crash in advanced nations would be India's main policy task.

The Great Wealth Transfer and The Economy Reshape in India

Aishwarya Srivastava, Arka Jain University

The Great Wealth Transfer

India is on the brink of a major financial transformation that is expected to alter the country's economic landscape significantly. It is known as the "Great Wealth Transfer," which involves the transfer of assets and wealth from one generation to the next.

As baby boomers retire, their children will inherit their wealth and invest it in new and innovative ways, which will drive the economy towards novel and exciting directions.

The Boston Consulting Group's experts predict that India's Great Wealth Transfer will be worth an astounding $4.6 trillion between 2018 and 2027, considering various factors such as population size, economic growth rate, and age demographics. Other renowned sources, such as Credit Suisse and Edelweiss Securities, have estimated similar values, with predictions that the transfer of wealth between generations will be worth $3.5 trillion over the next decade and $4 trillion over the next 25 years, respectively

These projections make it clear that the Great Wealth Transfer is going to have a huge impact on the Indian economy. As trillions of dollars change hands between generations, we can expect to see significant changes in everything from investment patterns to consumer behavior.

But what does this mean for India's economy?

The Great Impact

Well, for starters, the transfer will cause a massive influx of capital into the financial system. As the new generation takes control of the country's wealth, they will invest it in businesses, start-ups, and infrastructure,

creating new opportunities for growth and development.

This is great news for India's economy, which has been struggling to keep up with the demands of its rapidly growing population.

With new investors taking control of the country's wealth, there will be a demand for exciting and fresh investment opportunities, and a fertile ground for start-ups to flourish.

India has already witnessed a surge in start-ups in recent years, with over 75,000 new companies emerging across the country. These start-ups are utilizing innovative technologies to solve existing problems, creating new job opportunities, and driving economic growth.

Of course, with any major economic shift, there are going to be some bumps in the road. We can expect to see some businesses struggle as the economy adjusts to the changes brought about by the Great Wealth Transfer.

Student debt and rising housing costs will impede millennials' ability to invest and shape the economy.

The financial burdens that millennials face, such as student debt and high housing costs, will limit their ability to invest and reshape the economy. This means that the Great Wealth Transfer will not necessarily translate to increased economic power for millennials.

The rise of automation will impact the economy more than the Great Wealth Transfer.

The automation of jobs and the increasing role of artificial intelligence will have a greater impact on the economy than the Great Wealth Transfer. This shift will lead to significant changes in the job market, which will further limit the power of millennials to reshape the economy.

The Great Wealth Transfer will lead to greater inequality.

However, there are some downsides to the Great Wealth Transfer. For one, there's the possibility of a "gilded ghetto" – a scenario where the super-rich continue to accumulate wealth and the rest of society becomes increasingly unequal. It may exacerbate the already-existing wealth gap in India.

The COVID-19 pandemic’s impact on the Great Wealth Transfer

The COVID-19 pandemic has impacted the Great Wealth Transfer in India, causing temporary disruptions due to economic uncertainty and market volatility. However, it has also accelerated the use of digital technologies, making the transfer of wealth more efficient and accessible. The pandemic has highlighted the importance of estate planning, resulting in a surge in demand for estate planning services.

With the right policies in place, the country can harness the power of the Great Wealth Transfer to create a more prosperous and equitable society for all.

Conclusion

In conclusion, the Great Wealth Transfer presents both risks and opportunities for India's economy for years to come. To ensure a fair distribution of wealth, we need to approach this change holistically and recognize that it won't necessarily lead to a complete restructuring of the economy.

While millennials will receive a considerable amount of wealth, economic policies and societal structures will continue to shape the economy. The wealthiest individuals and corporations will still control the economy, so we need to take a balanced approach.

It will lead to changes in the market and consumer behavior, but the extent of its impact is yet to be seen. So, buckle up and get ready for this ride - it's going to be wild!

INDIAN INSTITUTE OF MANAGEMENTROHTAK

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