Project Niyat in Indian Economic Purview.pptx

Decsribes a hypothesis whether repo rate effects are discussed in Indian economic purview.

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1. Project Niyat The way to balance

2. Niyat Philosophy “The smallest of action affects the entire creation.” Scientifically, the forces operating inside an atom affect every other atom in the creation. Spiritually, the actions of a single person affect every other person trough the divine balance, Karma.

3. Niyat Philosophy But why are we discussing such abstract concepts? Because a single unpaid loan is passed on to a bigger firm with added interest. This when unpaid, is passed on to a yet bigger firm again with added interest and this goes on until this imbalance in lending and earning brings in phases of inflation and recession. But, only if… everybody is conscientious and there is lesser imbalance? And that’s why, our project ‘ Niyat ’ (intention) aims to restore balance both financially and foreign relations via thoughtful and practical policy making across the globe.

4. The Short Story- Preface Every economy is standing on three pillars namely, Financial institutions like banks, Businesses, and Customers aka citizens’ consumption capacity. They are all interdependent on each other and behave like a see-saw. Banks as the balancing fulcrum in the centre and businesses and citizens as loads on the two opposite sides.

5. Problem Statement #1 Polarisation: Few people with most money and most people with no money. Inflation & Recession: Too much growth and too less growth but whatever you do one does not has much money. Both added together… There is hardly any money but whatever is there is present with the top few leading to unemployment and daily wage jobs even for skilled workers.

6. Example Case Study: India Accounting for roughly 18% of the world’s population, India’s top 1% hold 23-40% of wealth while bottom 50% just 1% of wealth . India’s inflation rate sits at 5.08% in June’24 which can be considered slightly high as compared to developed countries, but maybe, India’s inflation rate is fine for a developing country. Whether or not, is a matter to explore. Anyways adding up both the scenarios of polarisation and inflation, we see India is already spending more than it is making and whatever it is making is concentrated amongst the top 1%!

7. Inflated & Polarised Economy Life Cycle

8. The Story Characters Anuj is a factory worker living at/below poverty line and is somehow able to make both ends meet and represents 50% of the country’s population. Yash is manager in the same factory and is able to make certain savings and represents around 40% of the population of the country. Mostly salaried tax paying people. Aakash is the factory owner and Mohit as the bank owner. They represent the top 1% of the population. Note: Since the economy is both inflated and polarised, thus money flow is low and poor people are getting poorer and rich richer.

9. Table of Contents Preface Chapter #1: The Loan & NPA Saga Chapter #2: Consumption Hits Speed Breaker Chapter #3: Money Flow Hits Speed Beaker Chapter #4: CASA Deposits Hit Speed Breaker Chapter #5: RBI Is In Choppy Waters Chapter #6: Detour Towards Economy Chapter #7: RBI’s Waters Turn Stormy Chapter #8: Imbalance Increases Polarisation Chapter #9: Polarisation Increases Imbalance Chapter #10: Vicious Cycle & Silver Lining Chapter #11: The Solution Chapter #12: Explaining The Solution Chapter #13: Executing the Solution

10. Preface One day Anuj slips and hurts his leg. He takes an unsecured personal loan for his medication. His salary was already low, had no savings and could not go to office due to injury. Summing up, he couldn’t repay the loan. Now because Anuj could not repay, everybody is affected. Bank’s employees and owner because of the NPA. Even lower money to spend with Anuj because of the cash crunch, leading to lower consumption and consumer demand. Thus businesses suffer because no demand thus however much marketing you do, people won’t buy. Note: According to us, in most economies, economy is not run by businesses but consumers buying from businesses. Let us now understand these three points step by step.

11. Chapter #1: The Loan & NPA Saga His loan gets accounted as NPA and the bank sells their stressed loan book to another loan recovery firm and they to someone else and so on. But since Anuj could not pay his loan, the bank’s profit suffered. But Anuj is not just one person. He comprises 50% of the population who share similar problems. Thus banks when unable to manage their NPAs, sell them to loan recovery firms. Also, when their profit suffers, they take loans from government, foreign agencies, or announce public issues, and so on. This situation leads to foreign currency deficit, load on regulators and even a decline in GDP. Why, you may think. Bottom 50% were already finding it difficult to make ends meet. But when banks don’t get their due profit, the salaries of their managers are also affected ( Yash ). So now not only bottom 50% but certain 40% middle class has started to suffer.

12. Chapter #2: Consumption Hits Speed Breaker What happens when you do not have money. You do not spend. As we know, Anuj’s community is experiencing troubles and Yash’s has started experiencing it. When most of the population does not spends, national consumption and hence GDP falls to a large extent.

13. Chapter 3: Money Flow Hits Speed Beaker When consumption/ expenditure of say, 70-80% of the country’s population hits a speed breaker, money flow in the market reduces. When Anuj first got unwell, his debt cycle started. He couldn’t go to factory and was not earning his daily wages anymore. And that time wasn’t far, when he started taking debts for every small expense. This further affected the spending capacity of 50% of the country’s population and the money flow in the market started reducing. This was easily reflected when studying sales and profit growth of Pharma and especially core FMCG companies. Their sales and profit growth has either been negative or has remained unchanged over almost 5 years. This clearly highlights a pattern, businesses don’t earn by producing more but by selling more.

14. Chapter 4: CASA Deposits Hit Speed Breaker When debt ridden, savings are out of question for Anuj. Thus bank’s savings accounts deposits see a downturn. Since, businesses have started witnessing a downturn as well, bank’s current accounts deposits also decline. Savings and current accounts deposits form the foundation of any bank. They lend loans from their CASA deposits and earn from the difference in interest spent and earned. Now banks do not have required money to support their loan book. The same was cautioned by RBI to banks a few days back in India. However, still they borrow from RBI at the levied repo rate.

15. Chapter #5: RBI Is In Choppy Waters Current repo rate (RBI’s lending rate to banks): 6.5% Current reverse repo rate (RBI’s borrowing rate from banks): 3.35% Now the scenario is such that banks’ deposits are reducing by the day however their loan book is increasing accordingly. RBI is earning from 4 factors: Lending to commercial banks on repo rate + Government Investments Seigniorage Foreign Exchange Reserves Other Services Income Now let’s consider a situation where commercial banks income keeps on decreasing due to increasing NPAs. Foreign trade is not going great either. What will RBI do to overcome the shortage? They print more currency!!! -> More inflation!!! And inflation not because of growth but due to lack of growth, which is actually not inflation but recession.

16. Chapter #6: Detour Towards Economy

17. Chapter #6: Detour Towards Economy

18. Chapter #7: RBI’s Waters Turn Stormy India is currently in the recession phase where both businesses and consumption are lagging. In such times if RBI prints more money, it will result in devaluation of money squared. One because the trade and consumption cycle is broken leading to NPAs. Thus RBI won’t recover what it has lent to the banks. Second since it is printing more to both keep the RBI afloat and to generate revenue for country’s requirements, it is causing inflationary pressures while the economy is in recession. In simple words, RBI is printing at an increasing rate with depleting reserves resulting in currency devaluation squared.

19. Chapter #8: Imbalance Increases Polarisation When RBI prints more, economy is already in imbalance where businesses’ inventory is not being sold because of lack of consumption capacity with masses. So manufacturing further for masses is of no use. Current inventory would do. Great still if that gets sold off. But they also know that there is a chunk of economic class which can afford but they only buy premium products. This economic class is roughly the top 4-5%. Since 90% profit has to come from the top 4-5% of population, the prices should be premium too. On the other hand, this top 4-5% also has various sections some which wants premium products but just affords neck to neck. And drained due to the high prices of everything more and more people start shifting to lower wrungs of the society. Thus, now Yash who happened to be among the top 5% until now. His effective consumption capacity has slumped.

20. Chapter #8: Imbalance Increases Polarisation Another factor is that the raw products are not expensive. The MSP of wheat in India is 22.75/kg, while the end consumer, Yash gets it at 45-50/kg from the shops. All the margin goes to the company who is trying to do an array of things from this margin: Recover their losses from the lower segment of products. Market their premium products. Manufacture/ Source their entire product segments. Obviously generate some profit for the company. Thus, this imbalance creates more imbalance as the poor farmer is not getting is due income and the small higher middle class is getting drained and all the money is going to a handful few. Hence, the polarisation increases and the situation keeps on worsening.

21. Chapter #9: Polarisation Increases Inflation As already discussed, the imbalance in economy reduced Yash’s effective consumption capacity too. Which means he may default on any major loan he has taken creating more NPAs. And this time bigger NPAs because the loan size was mostly bigger than Anuj’s. In a scenario where, banks are lending from loans taken from RBI and giving back NPAs instead of principal amount to RBI, ultimately RBI’s reserves will shrink. Thus, the rate at which the country will have to print more currency will increase and the time when you would need truck full notes for handful bread is not far.

22. Chapter #10: Vicious Cycle & Silver Lining The currency devaluates -> Prices of goods and services increase -> More NPAs -> Even lesser money flow in market -> Even more pressure on RBI to print more -> More currency devaluates and so on… However there is a silver lining in these stormy clouds. But first let’s take a detour towards how an economy works?

23. Chapter #11: The Second Detour The big question- How country’s economy works? Consider India is a company with a large young workforce, good intellectual and raw material resources, has a large market capitalisation, but… is in loss! It is not making profit. Will the company grow? Obviously, no! When the company cannot grow without making profit, how can a country develop at a fast pace without making more than what they are spending. Roughly calculating to how can a growing economy have such state of finances?

24. Chapter #11: The Second Detour If efficiently used , all the resources can actually make India more money than what they are spending on their people. An ideal situation could be where GDP is high and the printed currency is less than the reserves against it. This process will curb devaluation of money at its root. But what does this efficiently used term means? It only means that banks, businesses, and citizens work in tandem with each other. But how would they work? What are the first steps? What is the solution, the silver lining?

25. Chapter #12: The Solution The solution: Increasing repo rate. Distributing cash to all who may need. Reduce taxes on businesses and put forward a taxing system such that they give taxes. Also, simplify the tax regime, making tax system profit-based instead of turnover-based.

26. Chapter #12: The Solution As mentioned earlier too, an economy is dependent on majorly three factors- banks, businesses, and customers aka citizens. Increasing repo rate will strengthen banks income. And distributing free cash to a country’s citizens will give/ increase purchasing power of the citizens of a country. When equipped with more purchasing power, businesses will benefit from increased sales and profit. Reduced and simplified taxes will make tax filing easier and tax theft harder. Let’s see how these three solutions can reverse the polarised and inflated economy cycle mentioned in the very beginning of the discussion.

27. Chapter #12: The Solution However, the question is how?

28. Chapter #13: The Solution (Explained) When people will have more free cash they will like to pay off their debts. They will also buy more. Somebody will buy more grocery, somebody will buy an auto rickshaw for their business and somebody will buy house. With more consumption and more loans and repayment of stressed books, banks and businesses will benefit. Business sectors which were not picking up will see a fresh wave of money flowing. Also, banks deposits be it term deposits or CASA, will improve. Thus, now Anuj will have more money and he can start his journey back to normalcy. Within 6 months he can be off his debts and in another 6 months save enough for a business or make some deposits in the bank.

29. Chapter #13: The Solution (Explained) We agree increasing repo rate will make it harder to recover NPAs, but compromising the bank’s health is not an option. One cannot balance a seesaw with a pebble as a balance. You need a heavy rock for a stable see saw. Thus, increasing repo rate is healthy for the banks as it increases their income. Banks do not earn by lending but by the difference of interests spent and earned. So, when they earn more than they spend, they will obviously do good. Also, when the banks increase deposit rates, more money will flow as deposits which otherwise flows into stock markets. With deposits large enough to support their loan book, banks will be more stable. When banks are more stable, they will not become an NPA for RBI and it’s reserves will prosper. Thus, they will not have to depend on currency devaluation for lifting up GDP. Thus printing lesser money and controlling inflation at its root.

30. Chapter #13: The Solution (Explained) The businesses are supplying in sync with the citizens’ demand/ consumption. Leading to less wastage, more efficiency, and better profits. An organic GDP growth is not far away. When GDP is good, reserve banks, other govt., commercial banks are balanced. Businesses and consumption is balanced, polarisation will begin balancing too. People have more consumption power, thus the gap has already started bridging. But when demand increases in sync with supply, prices come down. This will add to bridging the gap between the extreme sets of poor and rich. Business owners will also prosper because of lower and simplified taxes. Hence money is flowing from all the possible nooks and corners. And an efficient economy is where all three components- banks, businesses, and customers function in tandem with each other. All of this will further increase the citizens purchasing power which translates into even lesser NPAs and so on.

31. Chapter #14: Effects of The Solution (Banks) Banks balance the financial equation between supply-demand or say, consumption and businesses. They take deposits (CASA) from both and from this pool balance the credit supply between citizens and businesses. And when banks need credit they take it from RBI and Repo rate kicks in. Effects of the solution on banks: Repo rate increases -> banks interest rate increases -> banks earn more. If banks’ rate increases, loans become expensive, but we are already giving citizens money, they may be inclined to give a share towards loan repayment. Thus, decreasing banks’ NPAs. Since tax has been reduced, businesses may find increased loan rates As banks get profitable, they will increase the deposit rate as well making bank deposits attractive. Hence, increasing their CASA deposits. When deposits increase ultimately banks begin becoming stable. Note: Giving out loans isn’t enough. Banks earn by getting the principal and interest back .

32. Chapter #14: Effects of The Solution (Citizens) The country is its citizens and it is for them to enjoy a good life in it. Ultimately, they run the country. If they are financially stable, the country is wealthy. Effects of the solution on citizens: Cash disbursement will improve financial health of citizens. They will be able to meet their needs relatively easily, increasing consumption. They will be able to save some money in their bank accounts, increasing CASA. They will be able to repay their previous loans reducing NPAs. If the tax burden is reduced, citizens will be able to save more and spend more. Taking new loans will be little more difficult because of the high interest rates. But this only means people will be wiser with money.

33. Chapter #14: Effect of The Solution (Business) Businesses are the powerhouse of a country. Citizens can consume only if businesses are developed enough and are producing goods and services at a certain rate. If the environment is not conducive enough for businesses, the nation will suffer as what will the citizens consume when there is no production. The more efficient the businesses of a country, the faster the growth of a country. For example, outsourcing can be the bread and butter of a country but innovative one-of-a-kind companies ultimately lead the country to prosperity.

34. Chapter #14: Effect of The Solution (Business) Effects of the solution on businesses: With increased consumption, businesses will see more sales and profit. With increment in sales they can liquefy their dead inventory. They will also be able to pay off their debts. Reduced and simplified tax will enable them to keep an increased share of profit with themselves and use it for further growth. They can also launch a range of products now as the effective customer segment is broader now.

35. Chapter #14: Effect of the Solution (Nation) Effects of the solution on nation: With increase in consumption, and net import-export, new inventory being made, GDP would increase. Government will ultimately land up with more tax, as the national consumption and trade will increase. Also, now that tax has been reduced and simplified based on profit tax slabs, tax evasion will be more difficult. Reserve bank who is currently under the threat of NPAs itself, will be able to recover its loans lent to commercial and government banks. Thus GDP will increase organically and not because of increased prices. Note: GDP is calculated as addition of consumption (C), Investment (I), Government Expenditure (G), and Net Trade (Export-Import). Our model helps increase all the four components. Next, let’s consider effect on inflation & polarisation- our root problem statements.

36. Chapter #15: GDP & Inflation It’s RBI’s job to collect and distribute tax money and keep the extra for government spending and as reserve. When tax collection is plentiful and loans are being repayed , there is no shortage or imbalance of funds. Thus, RBI does not need to print currency to fulfil the shortage of funds. The problem of India is not lack of resources or talent rather mismanagement. Once policies are in sync with the nation’s needs, the available resources and skills can provide a good GDP growth. We have already discussed, inflation and polarisation are connected. Rising prices further limit purchasing power of citizens hence increasing polarisation. Next, let us see the effect of GDP on polarisation and how it its back inflation.

37. Chapter #16: GDP & Polarisation An increasing GDP means more growth. More growth means more businesses of all sizes from petty to big will spring up and flourish as well. When businesses flourish and new businesses spring up, new jobs are created and people of all skill sets get jobs worth their skills and talent. This further boosts economy and restores overall balance. But when businesses do not grow, skilled people too have to suffice with unskilled jobs at unfair wages. Private sector businesses are the biggest provider of jobs and are the only way to provide worthy jobs to the millions of people of India. When people start earning the free cash disbursement can be stopped. In an economy like India this should not take more than a year. Indeed, the economy should be self reliant within a year.

38. Solution’s Math Talking about India, we need to provide free cash disbursement to around 80% of population. Let’s take a rough estimate of 1.5 billion as India’s population. 80% of 1.5 billion is 1.2 billion. Taking 5,000 as a good amount of cash per person, 1.2 billion multiplied by 5,000 is, 6 trillion INR for a month and 72 trillion for a year. Considering the entire globe, which is 8.1 billion people. 80% of the population, is 6.48 billion. And giving 5,000 INR in their respective currencies to everybody counts to 32.4 trillion for a month and 388.8 trillion or 3.888 x 10^16 INR maximum.