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Harvard, IMF researchers assess damage due to demonetisation, claim 3% drop in economic activity

The report says both the RBI and the Centre maintained secrecy prior to the policy’s announcement and that the RBI “did not print and distribute a large quantity of new notes before the announcement”, which led to an immediate shortage of cash

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Modi Notebandi

The Narendra Modi government’s demonetisation move, which turned around 86 per cent of cash in circulation illegal tender overnight on November 8, 2016, led to a significant decline in cash, which lowered India’s economic growth and led to a reduction in jobs by at least 2-3 percentage points in the quarter of the note ban, a new study has found. The study shows that Indian districts that experienced more “severe demonetisation shocks” had much larger contractions in ATM withdrawals, and highlights its effects on the Indian economy. It also talks about the rise of alternative forms of payment options, including mobile wallets, after demonetisation.

The paper, ‘Cash and the Economy: Evidence from India’s Demonetisation’, written by Gabriel Chodorow-Reich, an associate professor of economics at Harvard; Gita Gopinath, the Economic Counsellor and Director of the Research Department of the IMF; and Prachi Mishra of Goldman Sachs and RBI’s Abhinav Narayanan, was done to highlight “the consequences of demonetisation in the cross-section of Indian districts”.

Talking about the effects on economic activity, the paper says the economic activity declined by 2.2 percentage in November and December 2016. “To reach this number, we first cumulate the cross-sectional effects on employment and nightlights over districts. Next, we argue that this calculation provides a lower bound for the aggregate consequences of the cash decline. Such a lower bound arises in our model due to cross-district trade. Combining these two results yields a decline in nightlights-based economic activity and of employment of 3 pp or more in November and December of 2016 relative to the counterfactual path, which translates into a decline in the quarterly growth rate of 2 pp or more,” it said.

The paper also says there was around 2 percentage points or more decline in credit in Q4 of 2016. Talking about the poor implementation of the note ban, the report said both the RBI and government maintained secrecy prior to the policy’s announcement and the RBI “did not print and distribute a large quantity of new notes before the announcement”, which led to an immediate shortage of cash. “Printing press constraints then prevented the government from quickly replacing more than a fraction of this total with new notes. Thus, the total currency declined overnight by 75 per cent and recovered only slowly over the next several months,” said the report.

The study said while the slow replacement of notes led to a decline in the currency, it did not affect the overall size of the RBI’s balance sheet. “The immediate consequence was to increase deposits at commercial banks as households deposited old notes but could not freely withdraw new notes due to the cash shortage,” it said.

The RBI initially required banks to hold these deposits as reserves at the central bank by increasing the cash reserve ratio to 100 per cent on all incremental deposits received between September 16 and November 11, said the report. “Since these reserves paid no interest while banks continued to pay positive interest on their deposits, on December 6 the RBI withdrew the increase in the reserve ratio and instead absorbed the deposits by issuing short-term Market Stabilization Bonds (MSB),” it maintained.

“We conclude that in modern India cash continues to serve an essential role in facilitating economic activity,” said the report.

On November 8, 2016, at 8:15 pm, Prime Minister Modi had announced in an unscheduled national televised address that the two largest denomination notes, the 500 and Rs 1000 rupee, would “cease to be legal tender”, and that they would be replaced by new Rs 500 and Rs 2,000 notes. The Centre said the decision was taken to target black money, reduce corruption, and remove fake currency notes.

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AGR an unprecedented crisis, sought cut in taxes for industry: Mittal

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Sunil Mittal-wefornews

New Delhi, Feb 20 : Bharti Airtel chairman Sunil Mittal on Thursday met Telecom Minister Ravi Shankar Prasad in the wake of the current AGR payment to be made by the telcos, saying he suggested that for the overall health of the industry, taxes needed to be brought down.

Mittal, however, said the issue of AGR payment per se did not figure in the talks. The discussion was on the overall industry, he said.

“Adjusted Gross Revenue has been an unprecedented crisis for the telecom industry. I made certain suggestions on the overall health of the industry. Industry has been heavily taxed and taxes need to be looked at. The issue of very low revenues left in the kitty of the industry needs to be addressed and the AGR also need to be dealt with”, he said after the meeting with Prasad.

He said Airtel will make the balance payment expeditiously .”The demand for reduction in taxation for the telecom sector has been for a long time. The regulator has been supporting it”, he said in response to a query if he has sought any cut in levies.

Mittal met the minister amid reports that said government was looking at some form of relief for the sector in view of huge AGR dues to be paid by telcos.

The telcos, particularly Vodafone Idea, which is severely hit by the AGR payment, has sought a bailout. The options here before the government are limited. There could be a cut in licence fee and spectrum usage charges, staggered payment of AGR over long years with interests, a waiver of interest and penalties on AGR dues.

So far the Government has neither stated nor indicated any relief for the telcos. On Wednesday, Mittal met Finance Minister Nirmala Sitharaman and sought sustainability for telcos in the stressful times. He had said Indian telecom industry has been under stress for the last three-and-a-half years and the government should ensure sustainability of the sector.

“The only thing government needs to do is to focus on how to ensure sustainability of the sector,” he said after meeting the FM.

Airtel faces Rs 35,500 crore AGR dues. The company has already announced its plans to pay the dues that arose from the Supreme Court ruling.

Earlier this week, Bharti Airtel had paid Rs 10,000 crore to the telecom department as part of its AGR dues. The company plans to pay the balance amount before the next date of Supreme Court’s hearing which is on March 17.

Former Finance Secretary Subhash Chandra Garg has said in a blog that telecom crisis is not limited to AGR and that the problems are much deeper.

Vodafone Idea Chairman Kumar Managalam Birla, had also met the Finance Minister on Wednesday. The troubled telecom major has also paid Rs 2,500 crore to the Department of Telecom (DoT) earlier this week and paid another Rs 1,000 crore on Thursday.

Vodafone Idea has an AGR bill of Rs 53,000 crore. The company has sought relief from government to remain a going concern.

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Vodafone Idea condition extremely precarious: Citi

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IDEA VODAFONE

New delhi, Feb 20 : Vodafone Idea’s situation remains extremely precarious given its net debt/EBITDA of 20 times, analyst firm Citi has said in a report.

The company has admitted that its ability to continue as a going concern remains at risk in the absence of relief on its over $6billion AGR liability. While some green shoots were visible in 3Q (+2 per cent qoq revenue growth, 4G sub adds accelerated, tariff hike benefits to be visible from 4Q), this could come to naught without any relief.

The company has, for now, announced that it intends to make a part-payment towards its dues shortly (quantum still being assessed), the report said.

The deleveraging depends on Relief on the company’s AGR liability, either in terms of quantum or in payment terms, further relief measures from the government which could reduce levies and improve the balance sheet and cash flows and better than expected execution on synergy extraction and better than expected pace of 4G subscriber additions.

The risks Vodaofne Idea currently faces are that the company being made to bear the entire AGR liability, depressed India mobile revenues resulting from competitive intensity worsening and increase in subscriber churn and lower than expected pace of 4G subscriber additions.

We struggle to see what the next recourse could be for VIL with most legal options appearing to be exhausted. While it may still be possible for the government to offer relief perhaps via some legislative/policy action if it so chooses, we are yet to see any such indication or willingness from the government. Given the heightened uncertainty, Potential market share gains on further industry consolidation could drive upsides for Airtel & RIL while further tenancy exits could create downside risks for Infratel (Neutral). We keep our estimates unchanged for the moment as the situation remains extremely fluid and uncertain.

The report said Airtel has begun clearing its dues following the strong and unforgiving stance that SC has adopted. Airtel has made a partial payment of $1.4billion of its $5billion dues and will pay the balance well before the next date of hearing on March 17 post self-assessment. Following its $3billion capital raise in Jan and $2+billion of cash on books as of Dec, this should not be a stretch for the company.

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PSUs may pick stake in merged PFC-REC entity to keep 51% govt holding

Another option may be to get the LIC and one of the power sector PSUs to pick up 5 per cent each in the merged entity.

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PFC Merger

New Delhi, Feb 19 : State-run financial institutions or public sector enterprises such as LIC, NTPC, NHPC may pick up a stake in the Power Finance Corporation (PFC) to prevent government shareholding in the power sector financier from falling below the threshold 51 per cent level post merger with the REC.

The PFC, which bought 52.63 per cent of government equity in REC last March, is looking to merge the entity with itself. However, the exercise has been delayed by a year for want of viable options.

As per current regulations, 51 per cent government holding is needed to maintain the PSU character of an organisation. Post the PFC-REC merger, the government shareholding in the merged entity is expected to fall to about 42-43 per cent taking the company outside the PSUs fold.

“Various options are being looked at by Deloitte which has been appointed as a consultant to see through the completion of the merger. The option before it is to extinguish or reduce the liability on any of its (government) shares in respect of capital not paid up or cancelling any paid up capital that is lost or unrepresented by available assets. But, equity dilution in favour of another PSU would also work well as it will keep direct and indirect holding of government above 51 per cent level in merged entity,” said a government official privy to the development.

Under the plan, power sector companies may be permitted to pick up to 10 per cent equity in the new entity created after REC merges with PFC. Companies such as NTPC, NHPC, or the PowerGrid Corporation may be the likely candidates for this investment.

Sources also said that government may also consider going in for investment by the Life Insurance Corporation (LIC) in the merged entity to maintain the PSU character of PFC.

Another option may be to get the LIC and one of the power sector PSUs to pick up 5 per cent each in the merged entity.

In March 2019, the PFC acquired government’s 52.63 percent stake, or 104 crore shares, in another state-owned power financier REC at Rs 139.5 a piece, along with the transfer of management control. The cost of acquisition was Rs 14,500 crore.

PFC Chairman and Managing Director Rajeev Sharma had then said the PFC-REC merger would be next on the agenda and the process would be started in ongoing fiscal year. But with complications arising over government shareholding, the process has got delayed and merger may now be completed in the first quarter of next financial year (FY21).

The merger of two largest state-owned power sector financiers will create a common platform for lending to the sector. The PFC will benefit from the exercise as it would get access to the wide geographical reach of the REC and will also be able to leverage the expertise of REC in distribution and transmission.

The REC, on the other hand, will be able to leverage the expertise of PFC in the power generation space.

The merger will also facilitate resolution of stressed assets as the entity would be equipped with a wider pool of information.

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