Tuesday 8 September 2015

Urgency of Creating a Bad Bank or The National Asset Management Co.(NAMCO)

The government today discussed the possibility of creating a Bad Bank or National Asset Management Co.(NAMCO) as per press reports available on the web http://economictimes.indiatimes.com/news/economy/policy/pm-narendra-modi-discusses-plan-to-set-up-a-national-asset-management-company/articleshow/48872058.cms

This is a welcome step. A few pointers that should be pertinent to discuss right away since the proposal is now getting seriously looked at as a very urgent measure to shore up the economy and derisk the NPA laden banking space.

1. Bad Banks have provided relief in the past to economies suffering from a credit meltdown post bursting of asset bubbles such as Germany (1980s), China (1990s), Sweden(1992),Ireland(2009),Netherlands(2011), Spain(2012), Portugal(2014), Latvia(2010).

2. Bad banks, in theory, operate on a short time frame project workflow basis for recovery of bad assets; while the good bank can continue to operate on a process driven manner and continue with the job of financial intermediation and credit allocation. The absence of bad assets on the books of good banks allows the good bank to concentrate fully on the evaluating credit proposals without the dead weight of past bad assets.

3. In practice, the threat of moral hazard is very real and the implementation must be such that it does not allow bad lending practices attain official sanction by the "Bad Bank" bailout. Also, small borrowers and small ticket lending that have gone bad must be kept out of the Bad Bank so that enough time is given to small borrowers to recover and repay.

4. So, Bad Bank is to be created out of the non-performing assets of the banking industry at book value or market value whichever is a fair price for the buyer(Bad Bank) and the seller(Original Bank). Needless to say, the original banks have to immediately recognize the value lost post default or due to non-repayment of the loan. But that is a given, or else shy would any investor put money in a Bad Bank and take the risk of losing capital because there is no certainty that defaulter/ borrower will repay the loan in the future.

5. The investor in the Bad Bank can be a private investor, original bank, or the Government or a combination of the three. Any model can work provided a workable and practical model of regulation and laws is put in place quickly and effectively. Even a model where the original bank forms a subsidiary bad bank at an arms length can work as evidenced by CitiBank recently in the US which has successfully implemented this model in the backdrop of the 2008 credit crisis. But the challenge in such cases is strong and effective regulatory oversight and regulatory framework.

6. The Bad Bank is not a going concern with a long life time like normal banks. It is at most a 4 - 5 year project where the investor is interested in recovering the money from the defaulters in a project management sense of business and exiting the business or handing it over to traditional banks who may be interested in buying the now-healthy not-so-Bad Bank.

That said, the creation of Bad banks will require new legislation- but examples in many nations abound as stated earlier above. These nations including Spain and Ireland had to undergo a thorough legislative law making and regulatory rule making before Bad Banks could become a reality and the challenge in the face of urgency is that these tasks be completed with great urgency.

Why should we display so much urgency? The global macroeconomic environment is nothing to be comfortable about, and ditto is the current state of our domestic banking system. If we are comfortable with dribbling the buck , then we can just stick around with the status quo and pray to God to make things better. But if we want to address the fact that every year 1 million young people are joining the workforce, then we can't just dribble- we must advance the game plan proactively to the next level without waiting for some crisis to goad us into action.

Monday 24 August 2015

Rescuing a Deflationary World

We have had the very unusual spectacle of Asian Central Banks hypnotized by the snarl of the market cobra unleashing its fangs. While it is a natural human reaction to be thus mesmerized into inaction by a Cobra in the wild, there is little room for further inaction by Asian Central Bankers who stand similarly transfixed by an asset market collapse.

We had in a an earlier post (http://ageofdeflation.blogspot.in/2015/08/tantrum-not-us-fed-ahead.html) examined the chances of a USD,CNY and JPY carry trade unwind simultaneously as 1 in 31 and had cautioned that these odds are not so remote- all it needs is some senseless chores by guys with hands on monetary levers. And it has happened too soon for comfort. The US Fed seems hell bent on hiking rates at the same time when CNY and JPY carry trades are bursting. Now that's a sure recipe for disaster.

So what should Asian Central Banks do now that a simultaneous unwind of carry trades is in motion? Simple - ease monetary conditions domestically and let their respective currencies depreciate. Coupled with a possible weighing in of Govts' Fiscal support in the form of either Infrastructure investment or tax breaks for manufacturing and Services, the situation is imminently manageable. 

And what should the US Fed, BoJ and PBoC be doing? Firstly, the US Fed should stop playing the pantomime with the public. Every kid in primary school knows that his/her dad earns a lot less than 8 years ago- a wage deflationary spiral. So notwithstanding the Obama jobs boom, the take-home pay is deflating as efficiency gains outstrip hiring effects. So the lack of inflation is not surprising and the Fed should stop behaving as though if a rate hike does not go through in September it would mean a major loss in credibility. Secondly, the PBoC should finally achieve the lower bound in its targetted monetary policy rates to beat off a very likely deflation over the next 3 - 6 months. Thirdly the BoJ has to stabilize the Yen and ensure that the JPY does not overly strengthen against the US$ in order not to crush off the yen carry trade with precisely the wrong synchronous effect. The watchword here is stability. Reduce volatility. If the market must go down, let it go down 2% in a day for 5 days, rather than 10% in 1 day. 

Bad Bank/Good Bank


Now for some long term fixes- QUARANTINING of banking assets in Asian countries with pent-up credit booms now laid bare by an implosion into Non Performing Assets. The urgent need is for segregating banking assets into Good assets and Banking assets that have turned bad must be quarantined into a Bad Bank . It is important that there is a clear demarcation of bad assets into the single "Bad Bank" which will have separate recovery targets and capitalization. The rest of the "good banks" could only then function better with better credit targeting and allocation without the haunting fear of the ghosts of the past which irrationally constrains credit /raises cost of credit even to deserving borrowers with clean records. 

Government Investment into Non deflationary Infrastructure creation


In an era where every private entity is deleveraging, the State cannot also simultaneously deleverage. To rationalize take a simple case: In a closed economy, where there are only two agents, you and me, my spending is your earning and your spending is my earning. The entire world is a closed economy. If everybody is deleveraging, if unemployment is high, wherefrom economic growth will come? Hence the State has to invest in infrastructure such as Education, transportation, Tourism and the like that are inherently non-deflationary by borrowing at these historically low rates of sovereign bond yields. 

After forceful public investment lifts the economy from the deflation, the private sector develops the 'animal spirits' to restart investment- borrowing and hiring picks up. In this stronger phase of economic growth the private sector is more efficient than the public sector. Now here is where Keynes writings did not resolve issues because he wasn’t around to witness the decadence of public enterprise in the 1970's in the US/UK, and indeed in much of the globe including the USSR. However it was getting very obvious that in the 1970's, the size of the public sector was inefficient, gigantic and it was trying to borrow money from the same public resulting in crowding out of the more efficient private sector. The need of the hour then, was to cut down the size of the government and restrict the role of the state to only those areas where no other actor could qualitatively contribute. That's where Reagan and Thatcher came in, in the 1980's. But this is 2015. The situation is different. We are entering a global deflation. The only way out for a global recovery to gain ground is that Governments globally borrow massively and invest directly in the productive sectors of the economy. Roosevelt's "New Deal" needs to get replicated and for that to happen we need to really ignore traditional thinktanks like the IMF that had messed up in Latin America in the 80's and S.E. Asia in the late 90's and are now looking to repeat the same errors in 2015. Those who hold Reagan and Thatcher in great esteem can come in later, say in 2017, if by that time the global economy has been safely pulled out of the woods, and the private sector is getting back its mojo. By all means then-in 2017, dismantle the government and cut down upon activities that the private sector can do better. There will be lethargy on either ends of the economic cycle. Functioning democracies can tackle this type of lethargy and rent seeking on either ends of the cycle provided institutions are allowed to function the way they ought to.  


Wednesday 12 August 2015

Of Global FX Devaluation Wars and Zero Sum Games

This is not a blame-fire write-up on China or any specific Country's FX devaluation policy because every country has done this at one point or the other in its history. Why blame China for a 3.5% CNY depreciation , for example, if Japan and the EU have both devalued their currencies by a flat 30-40% in the past couple of years. 

So this is not about naming and shaming FX de-valuers. This is about the nature of these beggar thy neighbour policies which are essentially Zero sum games. Over the last 5 years which country has truly benefited by playing the devaluation game? Name one country. I can't think of a single one. Because when the US is done in weakening the US$, the EU starts devaluing the EUR, and when both these guys are done, Japan says 'me too' and starts the same game- only to be followed famously by China now. So there's no great shakes in getting to devalue that filthy lucre that you print Mr. Central Banker so-and-so. What you can do, the next guy can overdo it, and destroy whatever little temporary benefit on the current account that you had derived previously. 

So we come to the central theme of this Global Devaluation Game- There's Nash equilibria out there- One of which is quite a no brainer - it happened way back in the 1930s and then exploded in 1939 in the form of a World War. Its all in the history books- well, Wiki is actually more accessible than those old books anyway!!

So why is everyone playing this game? Do they not know what is going on? Off course these guys are pretty smart. & Who told you that the great depression and the World War II was a very horrible time? Did you ask all those pumped up Bankers and Armament /Weapon producers who never sent their sons to fight in the War and die in those stupid bombings? The idea is to have a deflationary world- have unemployment - lots of it-so that young people are frustrated enough to believe and do anything preposterous - like frenziedly participating and dieing in another World War. That's the idea- Only a War, in this perverted scheme, can be suitably ignited to maximise the Keynesian pump priming that induces Sovereigns borrowing obscene sums of money to finance Wars run by Armaments /Weaponry Industry producing costly and immediately saleable weapons to kill those very young agitating to do something, anything. Problem solved. Big profits for the big guys and coffin caskets for everyone else. What a great time for these brainy chaps, no? Yes they are indeed very clever. Ask them why they have not used the record low sovereign bond yields in the G7 to borrow and invest in Infrastructure? They will speak some Hayekian non-sense like "Public borrowing crowds out private sector borrowing". Ask them where is the private sector borrowing now that Governments has actually desisted from investment? There's only share buybacks and cash surpluses maintained by private sector? Then they say, "Where is the climate for Investment? Governments need to create that climate first...", when it was these Hayekians who themselves stopped the Governments from actually doing so. You can easily understand why they say such dumb things. They are playing according to a script. They have the media, the smooth talking economists, everyone on their rolls. They are gunning for something big. Your money, your job, your son- & they will send across his body/news about his liquidation- one fine day, when they are done. Ask them why they will not allow Governments to borrow at close to zero costs and invest in supporting the economy through Infrastructure investments while they are ready to bankroll States/Nations in costly and meaningless Wars? Answer is profit margin. The margins are very poor when you do things the right way. But if you do it in the name of Lucifer, Well !! Well !! Stupendous margins in lending money at highest rates to war torn nations , not to mention the easy money that arms suppliers make on the rebound. Just add those coffins to the cost that simple folks will suffer BUT these smart guys will NOT INCUR.

This Nash equilibrium is being forced upon the world to benefit a very small circle of guys who will happily enjoy as millions and billions perish in another World War. 

So you get the drift- Ukraine, Afghanistan, Iran, Middle East, Africa- ISIS, Boko Haram etc. etc.

There's one Nash equilibrium which can be a regulated equilibrium where an optimal or a sub-optimal Nash equilibrium can be enforced if the G20 were to come together on issues like FX devaluation and trade. Since it is very clear that the Nash equilibrium discussed earlier is not in the interest of either Global peace or the World community, classical Game theory says that regulated behaviour amongst participants of the game can avoid a bad Nash equilibrium and move to another Nash equilibrium which is either optimal or close to optimal- but definitely atleast better than that bad Nash equilibrium. 

There has to be a global leadership away from the present one which takes on the onerous task of regulating the G20 away from the bad Nash Eq. This leadership is non-existent at present but the need is to get together and take the teetering world away from this bad Nash eq. Any effort is better than no effort- anything. 

Will leave you with three centrepiece blog extracts over the past 5 months- its worth a read to understand and read between the lines and join the obvious dots.

I. 20th May 2015

http://ageofdeflation.blogspot.in/2015/05/infrastructure-creation-fiscal-deficit.html


"...There is an urgent need to re- engineer strategy now that advanced economies have simultaneously launched an FX war on developing countries using zero lower bound interest rates and unconventional monetary policy. Developing economies cannot afford to join this zero sum game because their per capita incomes are very low compared to the developed economies. Ideally , all Governments in developed economies should use their prevalent low interest rates to borrow and supplement collapse in private demand by spending on infrastructure-both greenfield and maintenance of depreciating works. But these geniuses refuse to even consider such a policy relook and instead continue to debase their currencies in the hope of exporting their way out of deflation. The Nash equilibrium is very simple-Developing economies ape the same strategem and world spirals down a never ending FX war.


But there's a way out -There's another solution with superior payoffs as compared to the suboptimal Nash equilibrium above. Suppose developing countries that have the fiscal and inflationary room to increase government involvement in infrastructure spending, do so, then the resultant demand generation there can reinvigorate demand slowly elsewhere(especially in the developed world). This can serve a very useful purpose-Developed nations trying to export there way out of deflation will eventually export the deflation to developing countries if the latter fall into the Nash trap. Hence it is now in the interest of developing countries to search for demand generation internally. China best fits the bill with very healthy government finances and an Imminent deflation it wants to desperately avoid."


II. 10th June 15
http://ageofdeflation.blogspot.in/2015/06/the-real-malinvestment.html


"I can hear you say - But there's deflation already on in major economies, and higher investments at this stage will create more of the excess capacity and recreate stronger deflationary headwinds. Not if real unemployment is already in double digits and if the investment is likely to draw the pool of the unemployed or underemployed folks back to a decent job- which it will. These extra jobs/work that the investment creates will fuel demand immediately while the capacity creation comes only with a time lag - think 'Golden Gate bridge'. Since capacity creation comes only with a time lag post demand creation , as described above- the two are mutually reinforcing and there is no deflationary impact as is being feared by the Austrian school. ....

....but the underinvestment in most of the Western world is even worse and Chinese over-investment is a kid in size relative to the chimpanzee of the underinvestment pogrom that the 'Austrian' guys are doing to the great detriment of their respective economies. "

III. 18th March 2015
http://ageofdeflation.blogspot.in/2015/03/what-negative-sovereign-yields-signal.html
"...it is vey clear that in a deflationary environment private sector spending collapses and with negative yields supporting sovereign borrowing with beneficial fiscal spinoffs , the need of the hour is to sharply expand public investment in infrastructure,research and education. The answer is obvious-in the face of collapsing private sector demand only public sector demand can galvanize a deflating economy back to a modicum of health."

Thursday 6 August 2015

Tantrum Not ! US Fed Ahead !


Review time folks!!!- 17th March 2015 carried the following blogpost:
entitled “Fighting Deflation in India Amidst Capital flow Vulnerabilities and Imminent US Fed Rate  Hike

So hows it been over the last 5 months or so? Lets review it now -

RBI cut repo rate once in June ‘15 by 25 bps. Indian 10 yr sovereign is almost unchanged at 7.8%. The US Fed has not moved and we think it will move in September or December for the first token increase in almost three quarter of a decade. US 10 year yields have moved up by about 20 bps to 2.25%. India’s FX reserves has increased by USD 20 Billion thanks to RBI’s strenuous efforts in this direction, even though Gold prices and bond holding MTMs have fallen- which goes to say that had these asset prices remained same over the 5 month period, the increase in reserves would have been optically higher. Our original model says under such conditions the currency should move almost as per the forward rate curve, and it has. There has not been much volatility in the currency pair since March, again in agreement with the model.

So what is next? The question uppermost on the minds of everyone is whether a US Fed Monetary Policy tightening will induce the same kind of volatility that we witnessed in July 2013? The US Fed is now getting very certain that their target Federal Funds rate should be at least 125-150 bps higher until December 2016 next year given the strength of the US economy, if not more. The issue at hand is critical- what if US$ carry trade unwind and JPY carry trade unwind were to coincide with a Chinese stock market crash(See https://ageofdeflation.wordpress.com/2015/07/10/avoiding-chinese-collapse-and-a-simultaneous-jpy-carry-trade-unwind/) when the US Fed has hiked rates by 125-150 bps by 2016 end? Then it will be a global market crash- India included- and Indian asset markets will take a drubbing in such a worst case scenario(this scenario has a 3% probability).  

Probabilities scientifically to all the possible 8 scenarios:

State of Macroeconomy
Probability of Macro economy to exist at the given state; incorporating all publicly known information
Expected Policy Response from Aug '15 until Dec'16
eco doing gr8; inflation at 5%
20.00%
25 bps rate cut
eco doing gr8; inflation at 6%
37.50%
no rate cut
eco doing gr8 inflation at 5.5%
10.00%
no rate cut
eco not doing well but inflation at 6%
10.00%
no rate cut
eco doing badly, inflation at 4%
7.50%
50 bps rate cut
eco doing great ; inflation at 7%
7.00%
25 bps rate hike
eco doing great inflation hitting 7.5%
5.00%
50bps rate hike
eco doing very badly inflation at 3%
3.00%
75bps rate cut

The Average expected Policy response is -6 bps, with Standard deviation  of 24.5 bps. So (Mean - Sigma is -30.5 bps) and (Mean + Sigma is +18.5 bps).  


So what about the Indian 10 year yield and the USD/INR? Based on the probability distribution of various scenarios as above, and based on the likeliest concurrent US Fed /US Economic scenarios as detailed below, the currency and the 10 yr yield in India would stand at three different combinations (a),(b),(c) as detailed in the last column below:


State of Macroeconomy
Probability of State 0f Macro economy to exist
Expected Policy Response from Aug '15 untill Dec'16
State of Macroeconomy
us fED fUND RATE
US 10 Yr
India FX Reserves
INR
India 10 YR
eco doing gr8; inflation at 5%
20.00%
25 bps rt cut
eco doing gr8; inflation at 5%
1.5
4.25
Unchanged
(a) 68.8 (b) 69.1 (c) 69.45
(a) 8.15% (b) 7.8% (c) 7.4%
eco doing gr8; inflation at 6%
37.50%
no rate cut
eco doing gr8; inflation at 6%
1.5
3.75
Unchanged
(a) 68.8 (b)69.15 
(c) 69.35
(a) 7.9% (b) 7.5% (c) 7.25%
eco doing gr8 inflation at 5.5%
10.00%
no rate cut
eco doing gr8 inflation at 5.5%
1.5
4
Unchanged
(a) 68.8 (b) 69.1 (c) 69.45
(a) 8.15% (b) 7.8% (c) 7.4%
eco not doing well but inflation at 6%
10.00%
no rate cut
eco not doing well but inflation at 6%
1.5
3.25
Unchanged
(a) 68.8 (b) 69.15 (c) 69.25
(a) 7.4% (b) 7.1% (c) 6.9%
eco doing badly, inflation at 4%
7.50%
50 bps rate cut
eco doing badly, inflation at 4%
0.75
2.5
320 Billion US$
(a) 68.8 (b) 69.15 (c) 69.35
(a) 7.5% (b) 7.1% (c) 6.9%
eco doing great ; inflation at 7%
7.00%
25 bps rate hike
eco doing great ; inflation at 7%
1.5
3.25
Unchanged
(a) 68.8 (b) 69.15 (c) 69.35
(a) 7.65% (b)7.25%
(c) 7%
eco doing great inflation hitting 7.5%
5.00%
50bps rate hike
eco doing great inflation hitting 7.5%
1.5
3
Unchanged
(a) 68.8 (b) 69.15 (c) 69.35
(a) 7.65% (b) 7.25% (c) 7%
eco doing very badly inflation at 3%
3.00%
75bps rate cut
eco doing very badly inflation at 3%
1.5
3.75
300 billion US$
(a) 68.8 (b) 69.1 (c) 69.3
(a) 8.35% (b) 8.0% (c) 7.8%

Having run the numbers, the takeaway is mainly that there is very less chance(3%) of markets getting spooked in India against a general reversal of carry trade in the US and in Japan. So less reason to worry overall. Indian sovereign yield hunters need to sharply look out for signals from the FX markets including USD/INR and India’s FX reserves and not to forget the steepness of the US Yield curve. Having said that, 3% probability is 1 in 33 and not so uncommon after all. Some concerted tomfoolery is all that is required to hit that!! Hope folks across vales and ponds are a bit mindful of that when they go about their daily chores.


Charts for reference - US 10 yr; USD/INR FX; Indian FX reserves



Wednesday 10 June 2015

The Real 'Malinvestment'

FT today carries a well written piece by John Plender on excess capacity being created in China by accumulated domestic savings and the cons of an over the top investment led strategy which he classifies as 'malinvestment'. Point well taken. But what I do not understand, is that other than attacking Mandarin economic Policies, which by the way, Bernanke did famously last week by tearing into the AIIB (very uncalled for if you ask me), why none of the Western school of famous economists(save Krugman and his rare breed) are complaining about the lack of investments in the Western world where near zero real rates can actually be taken advantage of by Governments not immediately fiscally challenged to jump start their respective economies. Isn't that oversight a better candidate for the epithet 'malinvestment' rather than the one Plender is complaining of? For example-malnourishment is the same as undernourishment ,so why not use the term malinvestment for underinvestment? 

I can hear you say - But there's deflation already on in major economies, and higher investments at this stage will create more of the excess capacity and recreate stronger deflationary headwinds. Not if real unemployment is already in double digits and if the investment is likely to draw the pool of the unemployed or underemployed folks back to a decent job- which it will. These extra jobs/work that the investment creates will fuel demand immediately while the capacity creation comes only with a time lag - think 'Golden Gate bridge'. Since capacity creation comes only with a time lag post demand creation , as described above- the two are mutually reinforcing and there is no deflationary impact as is being feared by the Austrian school. So coming back to China- Is the investment cycle over the top there? plenderFT 

Quite likely. But the underinvestment in most of the Western world is even worse and Chinese over-investment is a kid in size relative to the chimpanzee of the underinvestment pogrom that the 'Austrian' guys are doing to the great detriment of their respective economies. 

I am not sure whether what people like Krugman are saying is reaching it right to the likes of Giants like Bernanke and his ilk. These Monetarists are treading the path of fruitlessness and will ultimately cause pain to their own nations where they unfortunately hold great sway over policy making.

Sunday 31 May 2015

Avoiding the Two Extremes- High Inflation & Deflation


One might wonder why the problem of High inflation is being highlighted in today's scenario where Deflation is the reason that Policy makers get sleepless nights.
The reason is very simple - Deflationary forces take over once and finally once and for all when monetarist expansion in the form of loose credit norms and laissez-faire banking gives way to disproportionate asset price exuberance in every sector of the economy, notably but not limited to real estate, perishable hydrocarbons and indirectly raises the rate of inflation into the uncomfortably high territory. Lax monetary policy tolerates these excesses, until social tensions spill out in the open arising due to intolerably high inflation. Taking away the punch bowl too late is the harbinger usually of a long drawn tug of war between  asset prices, credit and inflation which ultimately impacts output negatively in both quantitative and qualitative ways. The end result is always deflation as the output gap against potential output and falling capacity utilization levels hit employment and wages in a deflationary spiral.
The key lesson is that high inflation must be avoided at all costs - if not just to avoid the deflation that usually follows such monetary binges. Flashes from Phillip's curve that imply better employment figures with higher inflation must be tempered with the fact that the same Phillip's curve foretells high unemployment when deflation takes over. Moderation is indeed a very important watchword for those in control of the Monetary levers.

Thursday 28 May 2015

Uncaging the Tiger

The non-translativity of any Rate Cut into employment generation and growth

The RBI will very soon unveil its Monetary policy. Rate cuts will be good from the Banking system point of view as it will give banks the room to make provisions for NPAs from Fixed income gains. But that will not automatically translate into higher economic activity no matter what bright Bankers tell you on 24x7 media.

For growth to really pick up, India needs three things immediately. First is Investments, Second- Investments and third- Investments.

Can the Government provide the Fiscal muscle today that it did provide in 2008-09 when the US subprime crisis broke out? Not really. Fiscal numbers are in worse shape today than they were in 2008.

So how do we get the Tiger up and roaring?

Private Investment is the answer because Public investment is not available. But how do we attract Private investment. A stable tax regime for sure- but more importantly an attractive tax regime that attracts the right kind of capital -not just hot capital flows.

A. Investment Tax breaks
For far too long taxation theory and practice in India has concentrated exclusively on enlarging the tax base. Remember in a faltering economy the size of the cake reduces rapidly -the taxman will then have only a shrinking base no matter what the legislation or the enforcement.

A1. FDI(Foreign Direct Investment)
FII and FPI have again enjoyed the greatest attention from Policy makers, media and the markets. It's now high time to consider that piece of foreign investment that will actually generate growth and jobs.

A1(a) Regional incentives in areas to be classified as SEZs (Special Economic Zones)
Special incentives need to be provided for investment in non-aerable and non-tillable areas such as in Kutch, Thar, certain areas of Rajasthan, islands of Andaman & Nicobar and Lakshwadeep.  The rate of income tax levied on production-oriented foreign investment enterprises in these SEZs should not be more than 15 per cent unless it violates laws related to environment conservation. Similar reduced tax rates should for foreign investments in certain research and technological development zones (RTDZs), which could include the following-Hyderabad,Secunderabad,Vizag, Bangalore, Navi Mumbai, Ghaziabad, Bhopal, Noida, Rajkot, Haldia, Jammu, Thane, Raigad, Warangal, Porbandar, Surat and so on.

A1(b) Sectoral incentives for fresh Foreign investment enterprises in technologically advanced areas scheduled to operate for at least 10 years, and engaged in production-oriented activities, should entitled to an exemption from income tax for two years, starting with the first profit-making year. This can be followed by a 50 per cent reduction of the usual income tax rate over the subsequent three years, provided they remain technologically advanced.

A2. Domestic Investment
Fresh domestic Investment can also be extended A1(a) and A1(b) schemes above.

B. Indirect Taxation relief
So what is the average rate of taxation in the commin man in India?

Income Tax 30%
Indirect Taxes 25%
Inflation Tax 10% (Invisible Tax)
___________________
Total a cool 65%

So why doesn't saving + consumption go up? Because out of every Rupee earned, 65% goes away as taxes and only 35 paise is left. That leftover is for health , education and basic necessity like food and shelter.

So what must we do to reinvigorate savings rate? One doesn't need to be an Ivy grad to figure out that Indirect taxes has to be attacked first to give a much needed filip to the economy because workers earning below Rs 2,00,000 /- per annum do not actually have to pay income tax as per law.

Every % reduction in indirect tax will translate into equivalent growth in the savings rate and lower the cost of capital or rate if interest at which savings and Investment are at equilibrium in a stable and growing economy.

But will not a cut in indirect tax revenues bloat up Indian fiscal deficit. A 5% cut will not. In fact a 5% cut will actually generate enough growth to generate additional revenues elsewhere in direct taxation revenues to more than recoup the loss of the indirect tax revenues.

C. Debottlenecking Investment approval red tape and enabling Investments
This is purely a governance issue that has to be tackled by the PM and his team of Ministers.

No amount of writing or analysis can earn for the country in terms if growth what a proactive Government can do.

A,B and C taken together will give D- Dashing growth. Don't just pine away for cut, cut, cut -rate cut. Go for growth- a job generating growth.