Top 50 loan defaulters to face action
Sidhartha
New Delhi:
TNN
Govt Asks PSBs To Crack Down On Large Borrowers To Tackle Bad Debt
The government has asked banks to launch an offensive against the country’s top 50 loan defaulters to change the perception that state-run lenders tend to be soft towards large borrowers while giving little leeway to retail borrowers and SMEs.Top bankers told TOI that the issue was discussed by financial services secretary G S Sandhu last week with chiefs of several leading public sector players, including State Bank of India, Punjab National Bank and IDBI Bank.
“There is a perception, which may or may not be correct, that we don’t act decisively against corporate borrowers and the government is keen to dispel that notion,” said a bank
chief, who attended the meeting in the finance ministry.Sources said the lenders have been asked to initiate all possible action against the top 50 defaulters to send a message that the companies cannot get away without clearing their dues to banks. On their part, bankers are learnt to have told the government that it is not often easy to recover the dues and they have to undergo a long process of litigation. “Every notice is challenged in courts and it is very tough. It is not as if we don’t want to recover the dues,” said a banker, adding that often they come under pressure from the finance ministry to restructure loans before they turn non-performing assets.
Apart from the change of guard at the Centre, the gov
ernment is keen that banks recover their dues from defaulters as they are saddled with a pile of bad debt, putting their credit worthiness at risk.Global rating agencies have flagged rising level of sticky assets as one of the major concerns for the Indian economy.
In recent years, several prominent corporate groups have found it difficult to repay their loans, including the flamboyant Vijay Mallya, whose now-grounded Kingfisher Airlines owes over Rs 7,000 crore, mostly to public sector banks. His lavish life style, despite his company’s financial woes, has raised many eyebrows. Kolkatabased United Bank of India has already served a notice to treat Mallya and others linked to the airline as “wilful defaulters”, which will choke loan flow to all group companies.The other prominent defaulters in recent years include Winsome Diamond, Zoom Developers and S Kumars Nationwide.
The All India Bank Employees Union released a list of 406 loan defaulters, who together owed over Rs 70,000 crore and are facing legal action. Banks are grappling with non-performing assets of over Rs 2 lakh crore, while loans to several large projects have been restructured, which prevented them from turning bad.
Sidhartha
|
New Delhi:
TNN
|
Govt Asks PSBs To Crack Down On Large Borrowers To Tackle Bad Debt
The government has asked banks to launch an offensive against the country’s top 50 loan defaulters to change the perception that state-run lenders tend to be soft towards large borrowers while giving little leeway to retail borrowers and SMEs.Top bankers told TOI that the issue was discussed by financial services secretary G S Sandhu last week with chiefs of several leading public sector players, including State Bank of India, Punjab National Bank and IDBI Bank.
“There is a perception, which may or may not be correct, that we don’t act decisively against corporate borrowers and the government is keen to dispel that notion,” said a bank
chief, who attended the meeting in the finance ministry.Sources said the lenders have been asked to initiate all possible action against the top 50 defaulters to send a message that the companies cannot get away without clearing their dues to banks. On their part, bankers are learnt to have told the government that it is not often easy to recover the dues and they have to undergo a long process of litigation. “Every notice is challenged in courts and it is very tough. It is not as if we don’t want to recover the dues,” said a banker, adding that often they come under pressure from the finance ministry to restructure loans before they turn non-performing assets.
Apart from the change of guard at the Centre, the gov
ernment is keen that banks recover their dues from defaulters as they are saddled with a pile of bad debt, putting their credit worthiness at risk.Global rating agencies have flagged rising level of sticky assets as one of the major concerns for the Indian economy.
In recent years, several prominent corporate groups have found it difficult to repay their loans, including the flamboyant Vijay Mallya, whose now-grounded Kingfisher Airlines owes over Rs 7,000 crore, mostly to public sector banks. His lavish life style, despite his company’s financial woes, has raised many eyebrows. Kolkatabased United Bank of India has already served a notice to treat Mallya and others linked to the airline as “wilful defaulters”, which will choke loan flow to all group companies.The other prominent defaulters in recent years include Winsome Diamond, Zoom Developers and S Kumars Nationwide.
The All India Bank Employees Union released a list of 406 loan defaulters, who together owed over Rs 70,000 crore and are facing legal action. Banks are grappling with non-performing assets of over Rs 2 lakh crore, while loans to several large projects have been restructured, which prevented them from turning bad.
“There is a perception, which may or may not be correct, that we don’t act decisively against corporate borrowers and the government is keen to dispel that notion,” said a bank
chief, who attended the meeting in the finance ministry.Sources said the lenders have been asked to initiate all possible action against the top 50 defaulters to send a message that the companies cannot get away without clearing their dues to banks. On their part, bankers are learnt to have told the government that it is not often easy to recover the dues and they have to undergo a long process of litigation. “Every notice is challenged in courts and it is very tough. It is not as if we don’t want to recover the dues,” said a banker, adding that often they come under pressure from the finance ministry to restructure loans before they turn non-performing assets.
Apart from the change of guard at the Centre, the gov
ernment is keen that banks recover their dues from defaulters as they are saddled with a pile of bad debt, putting their credit worthiness at risk.Global rating agencies have flagged rising level of sticky assets as one of the major concerns for the Indian economy.
In recent years, several prominent corporate groups have found it difficult to repay their loans, including the flamboyant Vijay Mallya, whose now-grounded Kingfisher Airlines owes over Rs 7,000 crore, mostly to public sector banks. His lavish life style, despite his company’s financial woes, has raised many eyebrows. Kolkatabased United Bank of India has already served a notice to treat Mallya and others linked to the airline as “wilful defaulters”, which will choke loan flow to all group companies.The other prominent defaulters in recent years include Winsome Diamond, Zoom Developers and S Kumars Nationwide.
The All India Bank Employees Union released a list of 406 loan defaulters, who together owed over Rs 70,000 crore and are facing legal action. Banks are grappling with non-performing assets of over Rs 2 lakh crore, while loans to several large projects have been restructured, which prevented them from turning bad.
The challenge of bad loans
Arising tide of bad loans threatens the ability of banks to continue their business as usual. The problem is particularly severe with public sector banks.
Results for the December quarter show their financial position in poor light. Each one of them has been reporting a higher level of non-performing assets and making larger provision against possible loan losses.
Not only is their profitability affected but also the increased provisioning ties up their capital.
While some reckless lending in the recent past has landed this bank in trouble, the economic slowdown has stressed the balance sheets of almost every PSB, even those with a stronger tradition of lending and better track record in managing their books. If the slowdown persists, the bad debts will increase and the chances of recovery will diminish.
Results for the December quarter show their financial position in poor light. Each one of them has been reporting a higher level of non-performing assets and making larger provision against possible loan losses.
Not only is their profitability affected but also the increased provisioning ties up their capital.
While some reckless lending in the recent past has landed this bank in trouble, the economic slowdown has stressed the balance sheets of almost every PSB, even those with a stronger tradition of lending and better track record in managing their books. If the slowdown persists, the bad debts will increase and the chances of recovery will diminish.
Two sets of related problems confront policy makers.
First, the question of recapitalising PSBs to make up for their impaired capital has become a major issue, especially at a time when all banks have been asked to move towards global norms of capital adequacy. For the government-owned banks, now listed on the Indian stock exchanges, there are special challenges. To preserve their public sector character, they have been asked not to dilute the government shareholding to below 50 per cent of their paid-up capital. So for all practical purposes they have to turn to their majority owner, the government, for additional capital. However, while recognising the banks’ predicament, the Finance Minister has made a niggardly allocation of Rs.11,200 crore in the interim budget for bank recapitalisation, below last year’s Rs.14,000 crore and well below the current requirements of PSBs.
Even in the few cases where the capital market could be accessed, investor response has been lukewarm, as the best-run PSB, State Bank of India, found recently with its qualified institutional placement. Second, the disadvantages of government ownership extend to recovery. Public sector bankers have less flexibility in dealing with problem loans.
First, the question of recapitalising PSBs to make up for their impaired capital has become a major issue, especially at a time when all banks have been asked to move towards global norms of capital adequacy. For the government-owned banks, now listed on the Indian stock exchanges, there are special challenges. To preserve their public sector character, they have been asked not to dilute the government shareholding to below 50 per cent of their paid-up capital. So for all practical purposes they have to turn to their majority owner, the government, for additional capital. However, while recognising the banks’ predicament, the Finance Minister has made a niggardly allocation of Rs.11,200 crore in the interim budget for bank recapitalisation, below last year’s Rs.14,000 crore and well below the current requirements of PSBs.
Even in the few cases where the capital market could be accessed, investor response has been lukewarm, as the best-run PSB, State Bank of India, found recently with its qualified institutional placement. Second, the disadvantages of government ownership extend to recovery. Public sector bankers have less flexibility in dealing with problem loans.
Off-target on Monetary Policy
Disregarding international experience of recent years, the Urjit Patel Committee recommends that the Reserve Bank of India pursue a single objective of inflation targeting. It focuses on the interest rate to control inflation (by influencing inflation expectations), though experience has shown that in India this mechanism has a weak impact on inflation and a stronger one on output. It is a disapointing report drawing on a textbook reading of the New Keynesian model.
The events during and after the 2008 global financial crisis have undermined all certainties faced by policymakers, especially central bankers in developing countries.
To start with, the crisis questioned the belief that the United States financial system represented the best approximation of an efficient financial market with appropriate levels of competition and transparency .
Second, as investors who had rushed in during the pre-crisis boom exited developing country markets to cover losses and meet commitments at home; open economic borders did not seem such a good idea. Whether located in a country that was a favourite of investors or in a market being shunned, central banks faced immense problems stabilising liberalised exchange rates (prone to excessive appreciation or depreciation) and managing their balance sheets. Working the monetary lever seemed near impossible.
Second, as investors who had rushed in during the pre-crisis boom exited developing country markets to cover losses and meet commitments at home; open economic borders did not seem such a good idea. Whether located in a country that was a favourite of investors or in a market being shunned, central banks faced immense problems stabilising liberalised exchange rates (prone to excessive appreciation or depreciation) and managing their balance sheets. Working the monetary lever seemed near impossible.
Third, drawing from the Japanese experience with a long recession, and faced with the real economy fallout of the financial crisis, governments were called upon to use the fiscal lever to address the downturn, since monetary policy alone was inadequate for the task. The idea that monetary policy should be privileged and fiscal policy downgraded was brought into question. And within monetary policy, there was a far greater willingness to expand balance sheets indiscriminately as quantitative easing demonstrated. Finally, the policy measures adopted in the developed countries in the aftermath of the crisis also had an impact on the so-called “emerging market economies” (EMEs), in ways that made monetary management and the use of the monetary lever extremely difficult. Any remaining belief in the omnipotence of the “independent” central banker was undermined.
To summarise, capital inflows and outflows tied the hands of central bankers, monetary policy measures did not have their intended impact, and central bankers were called upon to address multiple objectives varying from traditional ones such as reining in inflation and stabilising exchange rates to more “innovative” ones such as injecting liquidity to spur or sustain growth.
In India, the constant tussle between the finance ministry and the Reserve Bank of India (RBI), that runs parallel to a conflict between business and the financial markets (especially international finance), over how high interest rates or how tight the monetary environment should be, reflected this need for the pursuit of multiple objectives with a degree of flexibility. The strain on the central bank was obvious. On the one hand, the removal of price controls, the deregulation of administered prices (including that of oil) and the decision not to curb the activities of “market players” meant that inflation ruled high, the burden of addressing which fell on the central bank.
Central banks, in turn, could only seek to manage liquidity and manoeuvre interest rates to achieve that end.
On the other hand, with fiscal policy having been rendered largely ineffective by “fiscal reform”, the central bank was called upon to sustain and even spur growth. That required lowering interest rates and pumping liquidity into the system. Given these conflicting pulls, central banking was a tightrope walk, with one eye focused on the exchange rate and the other on the foreign investor. It was as much an act of diplomacy as it was an exercise in economic management in a complex environment. Multiple objectives and flexibility were unavoidable.
Central banks, in turn, could only seek to manage liquidity and manoeuvre interest rates to achieve that end.
On the other hand, with fiscal policy having been rendered largely ineffective by “fiscal reform”, the central bank was called upon to sustain and even spur growth. That required lowering interest rates and pumping liquidity into the system. Given these conflicting pulls, central banking was a tightrope walk, with one eye focused on the exchange rate and the other on the foreign investor. It was as much an act of diplomacy as it was an exercise in economic management in a complex environment. Multiple objectives and flexibility were unavoidable.
Shocker
Read in this context the report of the Expert Committee to Revise and Strengthen the Monetary Policy Framework chaired by RBI Deputy Governor Urjit Patel, which was submitted in late January, is a shocker. This is not because the committee’s recommendations are extraordinary or wildly innovative. They are, in fact, an instance of the belated advocacy in India of a rather “strict” version of a much tried and periodically violated framework – “inflation targeting” (IT). As the report notes, a host of countries have adopted IT as a monetary policy objective since the 1980s and there is a vast literature making a case for that policy. Much of the report is, in fact, a selective and rather banal review of that literature.
No Nuance
In the event, with minimal argumentation and little concern for nuance, the report makes the following salient recommendations. To start with, a nominal inflation rate of 4% (surrounded by a 2% band) should be the “target” of monetary policy, which must subordinate all other objectives including growth to that goal.
The second is that the combined-consumer price index (CPI) that is being released since early 2011, as opposed to the wholesale price index (WPI), should be the basis for calculating the rate of inflation. While there is strong reason to believe that the CPI is a better indicator of inflation in the country, opting for the CPI as inflation indicator for monetary policy purposes has a larger implication. Since inflation as measured by the CPI tends to rule much higher than inflation as measured by the WPI, making the former the anchor would require a proactive and much more restrictive monetary policy. The committee in fact lays out such a proactive road map.
The second is that the combined-consumer price index (CPI) that is being released since early 2011, as opposed to the wholesale price index (WPI), should be the basis for calculating the rate of inflation. While there is strong reason to believe that the CPI is a better indicator of inflation in the country, opting for the CPI as inflation indicator for monetary policy purposes has a larger implication. Since inflation as measured by the CPI tends to rule much higher than inflation as measured by the WPI, making the former the anchor would require a proactive and much more restrictive monetary policy. The committee in fact lays out such a proactive road map.
Third, while recognising that the food and fuel groups are overwhelmingly responsible for consumer price inflation, and that inflation in these commodity groups is driven from the cost/supply side and often imported, the committee still believes that “headline inflation” (as measured by the CPI in full) as opposed to “core inflation” (which excludes commodities like food and fuel from the calculation) should be the anchor. This according to the committee is because holding down inflation requires dampening “inflation expectations” that contribute to the inflationary trend.
Having decided that IT should be the main concern of monetary policy the Urjit Patel Committee goes on to prescribe a simple rule of thumb: when the inflation rate is above the nominal anchor, the real policy rate, which is to be the overnight repo rate at which banks can access liquidity adjusted for inflation, should be positive, with the degree to which it is in positive territory being determined by the Monetary Policy Committee, taking account of the output gap or the level of actual output growth relative to trend or potential.
No Discretion
This emphasis on a single-policy instrument is strengthened by the requirement set by the committee that to ensure transmission of policy impulses in the form of interest rate adjustments, no discretionary measures to enhance liquidity should be adopted. Provision of liquidity by the RBI at the overnight repo rate is to be “restricted to a specified ratio of bank-wise net demand and time liabilities (NDTL), that is consistent with the objective of price stability”. In addition, any measures of credit allocation to specific sectors that influence the level of liquidity in the system must be abjured. And, since the interest rate is to emerge as the crucial policy variable, sector specific interest rate subventions are to be phased out.
How is this framework expected to work? Conceptually, it is made to appear simple. “Adjustments in the policy interest rate, for instance, directly affect short-term money market rates which then transmit the policy impulse to the fuller spectrum of interest rates in the financial system, including deposit and lending rates, that in turn affect consumption, saving and investment decisions of economic agents and eventually aggregate demand, output and inflation.” All that is required is an “independent” central bank, adopting the IT framework and taking the limited decisions it can, based on discussions and voting by a five-member committee consisting of the governor and two officials of the central bank and two external members nominated by the governor and deputy governor. That is presented as ensuring technocratic integrity, transparency and full “independence” in the pursuit of the best monetary policy.
However, admitting that the “effectiveness of monetary policy…remains constrained by several country-specific factors”, the report makes a case for (i) reducing the persistence of “fiscal dominance” despite fiscal reform, that effects transmission and leads to “crowding out of the private sector”; (ii) reducing the statutory liquidity ratio (SLR) and trimming the captive market for government securities that suppresses the cost of borrowing for the government and dampens the transmission of interest rate changes; (iii) resetting interest rates paid on small saving at shorter intervals (half-yearly or quarterly) so that they do not have a competitive edge vis-à-vis bank deposits and erode “the effect of the monetary transmission mechanism, especially the bank lending channel”; and (iv) examining the adverse impact on transmission that interest rate and non-interest subventions (such agricultural debt waiver schemes) have. That is, IT has to be combined with a range of rather typical neo-liberal, reform measures.
New Keynesian Model
To back its case for a restrictive form of IT as the basis for monetary policy, the report approvingly refers to an almost textbook version of the New Keynesian model “based on optimising behaviour of households and firms, rational expectations, and market clearing”, presenting it as gospel truth. That model, built on a framework loaded with assumptions, is even made deceptively simple for the policymaker in terms of three equations. First defines the current output gap as being positively influenced by the past and/or expected future output gap and negatively by the real rate of interest. A second makes current inflation dependent on past inflation, the output gap and the expected future inflation rate. And the third is a monetary policy rule, which requires the policy interest rate to be set taking into account the inflation rate, the deviation of output from its steady state value and possible shocks.
Besides making assumptions about firm and household behaviour that are questionable, this model rests not just on predictable expectations about inflation and output that are seen as homogeneous across decision-makers but on the assumption that those expectations determine prices and outputs today as well. This makes the task of policy one of influencing both the output gap (which through its impact on demand and supply helps bring inflation to target) as well as inflation expectations, since those expectations are seen as capable of sustaining inflation at higher than targeted levels even when the output gap does not warrant it. Above all, just one instrument, the nominal short-term rate, unhindered by counteracting factors like fiscal profligacy or subventions, is seen as capable of ensuring the required adjustment.
Three Striking Features
There are three striking features of this framework. First, policy is completely endogenous, since how the policy rate is to be moved to achieve the goal of bringing inflation down is defined from within, once the inflation rate and output gap are known. In the event, IT by an ostensibly independent central bank does the same – circumscribes and limits monetary policy. Second, inflation expectations that play a crucial role are implicitly being seen as determined by the commitment of the central bank to IT. If the central bank’s commitment to controlling inflation is credible, inflation expectations are low. And low inflation expectations help keep current inflation down. Third, once inflation is controlled everything else takes care of itself. This, according to the report, is because high inflation (a) depresses saving by rendering real interest rates negative; (b) undermines competitiveness, weakens the currency, intensifies inflation and worsens the balance sheets of firms that have borrowed in foreign currency; (c) adversely affects investment allocation and growth; and (d) worsens income distribution. So using just one instrument, the interest rate, to control inflation, helps realise multiple objectives.
These features do not make the reasoning particularly convincing. Conceptually, the call to subordinate all else to IT does require a leap of faith. So, in the final analysis the appeal must be to reality. Does the evidence show that IT works? As a first step, do interest rate adjustments help rein in inflation? Not surprisingly, while the committee recognises that in many contexts the interest rate channel for transmission of monetary policy impulses is weak, it selectively refers to a set of empirical studies that seem geared to establishing that in India, “among the channels of transmission, the interest rate has been found to be the strongest”.
Weak Impact on Inflation
The fact of the matter is, there is much evidence internationally that the impact of interest rate changes on inflation is weak, and that the impact on investment is stronger. So relying on IT delivers less in terms of reducing inflation while hurting growth significantly. In India too, though interest rates have been raised significantly over the last three to four years, inflation has continued to rule at relatively high levels.
Two trends have been especially responsible for this outcome. First is the rise in the international prices of oil and the decision of the government to link domestic to international oil prices, resulting in a rise in the prices of this universal intermediate with attendant cascading effects on costs and prices. Second, this has been a period when the government has been seeking to reduce subsidies and decontrol prices in a range of areas that have an impact on costs and prices. To expect interest rates to neutralise these cost-push influences is without basis.
The IT framework does this by attributing much of inflation to what goes on in the minds of individuals. If expectations can be reined in so can inflation. So the framework makes the assumption that a declared policy of targeting inflation can make a difference to how expectations respond to food and fuel shocks, ensuring that inflationary expectations do not heighten when cost-push inflation occurs. And since those expectations are so weighty in influencing the rate of inflation, the result is a significant reduction in the latter. That amounts to little more than an assertion, with no real empirical grounds.
Moreover, cost-push inflation is likely to intensify given the committee’s recommendation that all price controls should be withdrawn since they are seen as contributing to, rather than helping to dampen, inflation or as reducing the efficacy of monetary policy in curbing inflation. This despite the fact that higher prices for commodities like fertiliser, power or fuel, resulting from decontrol have been known to and are bound to aggravate inflationary trends as has happened in the recent past.
Waking Up to Reality
Finally, the validity, if any, of all of this depends on the assumption that in today’s world central banks can enjoy the luxury of the independence required to pursue IT confident that the necessary transmission would occur. The fact of the matter is that in a world of large and volatile cross-border capital flows and relatively open financial borders, central banks are tied down to addressing the exchange rate and liquidity effects of such flows. That requires them to focus on a lot more that just inflation, necessitating policy flexibility of the kind addressed at the beginning of this essay. The Urjit Patel Committee suddenly wakes up to this reality in Chapter V titled “Conduct of Monetary Policy in a Globalised Environment”, in which the consequences for developing country monetary policy of capital inflow surges and developed country policies such as quantitative easing and the taper are discussed.
This chapter, that reads like a stand-alone essay unrelated to the thrust of the rest of the report, seems to question even the possibility of pure IT, let alone its efficacy. It is as if would-be believers are taken through a long course in IT catechism, only to be suddenly revealed the truth that those principles cannot hold. The treatise on IT seems irrelevant at best, or bad economics at worst.
Purpose of Exercise?
As a result, the serious reader is left asking what the intent of this whole exercise was. One interpretation could be that, committed to financial liberalisation but fearing capital flight, RBI mandarins want to keep interest rates high in order to stall the exit of foreign financial investors. IT is just being used a weak defence of that strategy, whether right or wrong. The second, and the more favourable interpretation is that the RBI wants to place on the table an extreme defence of its policy of keeping interest rates high so long as inflation is high, so that even minor concessions it makes in term of either not raising rates or enhancing liquidity would be received with much applause. The third, which may not be fair, is that the committee was just not up to the task set by its title and the accompanying terms of reference.
Reference
Borio, Claudio (2011): “Central Banking Post-Crisis: What Compass for Uncharted Waters?”, BIS Working Paper No 353, Monetary and Economic Department, Bank for International Settlements, Basel.
Flawed Cartography?
A New Road Map for Monetary Policy
The Urjit Patel Committee has come out in favour of the Reserve Bank of India moving towards a flexible infl ation targeting system. This approach to monetary policy is a product of the much-criticised "new consensus macroeconomics", a school of thought that is credited with causing the recent global fi nancial crisis. The objectives for monetary policy that the committee suggests are not only theoretically unwarranted, but also unjustifi ed for the current state of evolution of India's financial system.
The views expressed are personal.
General Macroeconomic Approach
The opening sentence2 of Box II.1 of the UPC makes it amply clear that the theoretical framework of this report closely follows that of its antecedents – the Percy Mistry Committee Report and the Raghuram Rajan Committee Report. This theoretical framework, rooted in the twin hypotheses of rational expectations and continuously clearing efficient markets (and cryptically referred to in the current macroeconomic literature as the “new consensus macroeconomics” (NCM)) stands largely discredited in the post-crisis era (Allington et al 2011; Arestis and Karakitsos 2011; Nachane 2013a). The vertical Phillips curve based on the premise that the non-accelerating inflation rate of unemployment (NAIRU) is invariant with respect to shifts in demand factors has been empirically rejected and in its place has emerged the backward bending Phillips curve, originally postulated by Akerlof et al (2000) and then revived in a slightly different format by Palley (2008).
Similarly not much credence is now attached to concepts like the representative agent and rational expectations. There is realisation that economic theory must make room for heterogeneous agents and recognise the limits on an individuals’ rationality imposed by cognitive inabilities to deal with overly complex situations (see the collection of articles in Tesfatsion and Judd 2006 and Caballero 2010). There are many other facets of NCM which have come under very heavy criticism, but I have focused only on those aspects of immediate relevance to policy. But even this brief discussion should suffice to draw attention to the fact that the theoretical framework espoused by the UPC report has been under question for the last several years and its analytical inadequacies and policy effeteness were particularly evident during the recent global crisis.
Flexible Inflation Targeting
The opening remarks of the UPC report seem to point to a fairly balanced approach, and almost leads one to expect that it would favour a monetary policy moving away from a “narrow focus on inflation towards a multiple targets-multiple-indicators approach” (see para II.3). However, the theoretical framework (NCM) espoused by the UPC drives it inexorably to the FIT framework (i e, one where the inflation target is expected to be maintained on the average over the business cycle). By and large, the empirical evidence does indicate that inflation-targeting regimes are successful in their avowed purpose of moderating commodity inflation and tempering its volatility (see Agenor and da Silva 2013, box 3, pp 32-34 for a summary of the latest evidence in this regard). But this, of itself, does not constitute an unqualified criterion for success. There is an abundant theoretical literature supported by adequate econometric evidence that FIT-type regimes could have an unfavourable impact on several other macroeconomic dimensions of direct/indirect significance for social welfare. We briefly discuss only three of these below.
(1) Nominal Exchange Rate: Under a pristine FIT regime, the exchange rate should be left freely floating. However, in most emerging market economies (EMEs) such an option is precluded on pragmatic grounds, as the exchange rate is an important channel of monetary transmission. However, while a dejure floating regime with de facto managed features retains appeal as a workable arrangement, it has to be remembered that in a globally integrated open economy with extensive external commercial borrowings, the exchange rate can move idiosyncratically out of sync with domestic price movements. Imagine the strain on central bank credibility; if in a situation of inflation above the central bank target, it is forced to lower interest rates to cap an exchange rate appreciation (due to an exogenous influx of foreign inflows occasioned by a global liquidity surge).3
(2) Fiscal Dominance: FIT regimes are likely to run into fiscal roadblocks, if public debt (as a proportion of the gross domestic product (GDP)) is high. The logic of this fiscal dominance operates through the so-called risk premium channel (Blanchard 2005), wherein a high interest rate burden on public debt imposed by an inflation-anxious central bank could raise the sovereign risk premium and in extreme cases even lead to capital outflows. A freely floating exchange rate (a necessary adjunct to a FIT regime) could then depreciate sharply, frustrating the very objective of inflation control. That this is not a pure academic point is illustrated by the Brazilian case surrounding the period of the 2002 crisis, documented by Zoli (2005). At this time Brazil was on an inflation-targeting regime and its public debt stood at 79.8% of the GDP. While the corresponding figure currently (2012) stands around 67.6% for India, which may well be considered safe, it is advisable that the public debt profile is kept in mind before embarking on a FIT regime.
(3) Asset Prices and Fragility: The FIT regime does not explicitly regard asset prices as an issue that should concern monetary policy, in the belief that price stability and financial stability are highly complementary and mutually consistent objectives for a central bank (the so-called Jackson Hole Consensus). The global crisis brought out the fatal flaw in this consensus, and gradually prompted an academic shift of opinion to an alternative viewpoint, which argued for a less benign relationship between monetary and financial stability. The essence of this alternative viewpoint (Borio 2011; Bean 2004 and others) sees not only monetary stability coexisting with financial instability, but occasionally also a causal nexus from the former to the latter.
Periods of monetary stability (such as the so-called Great Moderation spanning the decade and a half from 1990 to 2007) are often accompanied by output growth and generate bullish expectations of future prospects. These, in turn, lay the foundations for booms especially in equity markets and real estate. Central banks under FIT regimes (exclusively focused on commodity market inflation) may keep interest rates low, stimulating high risk speculative investment. This sets the stage for the kind of asset price booms which have preceded many crisis episodes including those of 1893, 1907, the Great Depression (1929-33), the Asian Crisis of 1997-98, and of course the current global crisis beginning with the Lehman collapse of 2007. As this alternative viewpoint gained increasing ground in the post-crisis years, a loose consensus seems to have built up around the desirability of a monetary policy responsive to asset prices, though the issue of whether these prices should be used as targets or merely asindicators still remains an open one (Akram and Eitrheim 2008; Lo 2010; Nachane 2014, etc).
The Inflation Metric
Almost universally, inflation-targeting countries have opted for the consumer price index (CPI) as a metric for inflation, as it proxies an ideal cost-of-living index (COLI). In India, the wholesale price index (WPI) (essentially a producers’ price index) has been the preferred official choice for measuring headline inflation. The report proposes to move in line with international practice and adopt the new CPI-combined index being officially published since October 2013. There are however two major problems with the CPI as compared to other indices. We note these below.
(1) The Plutocratic Bias:In a major study for the US, the Boskin Commission (Boskin et al 1996) identified a plethora of problems with the use of the CPI as a measure of COLI. First there is the upper-level substitution bias arising from substitution among different items in the consumption basket identified for the CPI over time.4 Second, there is alower-level substitution bias arising from the way elementary price quotations are aggregated over geographical zones.
But perhaps most important, among the CPI biases, is the plutocratic bias (noted first by Prais 1958, also see Ruiz-Castillo et al 1999 and Ley 2001 for modern treatments and an econometric method for estimating this bias empirically). As is well known, the CPI represents a weighted average of individual household price indexes, with the weights being each household’s total expenditure. Such an index may be termed as a plutocratic index. If instead each household is given equal weight, we get the so-called democratic price index. The plutocratic bias is simply the difference of these two indices, and is essentially dependent on (i) differences in expenditures across different households and (ii) differences in the behaviour among different prices. Estimates of this bias are available for Spain (Ruiz-Castillo et al 1999) and for the US (Deaton 1998). The extent of the plutocratic bias can be judged from the fact that for Spain the representative consumer (i e, whose consumption pattern is closest to the implied CPI weights) is in the 61st percentile, while for the US he/she is in the 75th percentile.5
(2) Terms of Trade Shocks: The financialisation of global commodity markets has meant an increased volatility in commodity prices of fuel and base metals. Trade theory teaches us that unfavourable (favourable) terms of trade shocks are best accommodated via depreciating (appreciating) the exchange rate. CPI-targeting economies would respond to the perceived rise in COLI via an increase in interest rate, reducing the current account deficit (via capital inflows) and leading to exchange rate appreciation, amplifying the consequences of the unfavourable terms of trade shock. As shown in Frankel J (2011), a producers’ price index (based on the prices of goods produced domestically), by comparison, may respond much less to a terms of trade shock (i e, only via second-round effects), thus eliciting a more muted response from the central bank and lower exchange rate appreciation.6
Choice of the Target
The UPC settles on a target rate of inflation of 4% with a tolerance band of 2%. In the absence of any visible evidence to the contrary, I am presuming this result is based on the econometric validation of the dynamic stochastic general equilibrium (DSGE) model in Box II.1, in which case the concerns expressed on “the deflationary bias” and “external shocks” (RBI 2014: 63) seem like ad hoc supplements. An overt commitment to the NAIRU hypothesis rules out any systematic trade-off between inflation and growth, which of course leaves the choice of the target inflation rate in limbo. Bernanke’s (2004) OLIR (optimum long-run inflation rate) as the long-run rate that achieves the best average economic performance over time with respect to both the inflation and output objectives, is not of much help either. One sincerely wishes that the committee had delved deeper into this question.
Miscellanea
Recommendation 7 of the UPC report (p 63) identifies administered setting of prices and wages as significant impediments to monetary policy transmission, but in all fairness should have admitted that the rapid growth of securitisation and shadow banking are equally great (or even greater) impediments. While the enhanced status of the Monetary Policy Committee (MPC) (RBI 2014: 64) would have been understandable under the current operating framework, it is not clear what such an MPC would achieve under a FIT regime guided by a Taylor-type rule, where the monetary policy stance is largely predetermined. Instead such an MPC could easily become a battleground for competing stakeholders in the financial system. Finally (on p 67) the UPC report insists that the “Government should eschew suasion and directives to banks on interest rates that run counter to monetary policy actions”. With this I am in complete agreement.
Conclusions
The UPC has come out very strongly in favour of the RBI moving towards a FIT regime. I have tried to argue that the case for such a regime is neither warranted on theoretical grounds nor justified by the current state of evolution of the country’s financial system. This, of course, is not to say that the current system is perfect and needs no change, or that inflation is not an important issue for the economy.
In my assessment the drawbacks in the current system spring not so much from the choice of objectives as from the operating procedures, and over-dependence on a theoretical framework (the NCM) whose limitations have already become amply evident with the recent crisis.7 The UPC, while persisting with this framework, simply takes it to its logical policy extremity.
RBI sets out rules to revitalise distressed assets
The Reserve Bank of India (RBI), on Wednesday, issued guidelines for revitalising distressed assets by forming Joint Lenders’ Forum (JLF) and adoption of Corrective Action Plan (CAP) for operationalising the framework.
“The general principle of restructuring should be that the shareholders bear the first loss rather than the debt holders,” the RBI said.
With this in view and also to ensure more ‘skin in the game’ of promoters, the RBI suggested JLF/CDR to consider several options, including the possibility of transferring equity of the company by the promoters to the lenders “to compensate for their sacrifices” when a loan is restructured.
The RBI suggested infusion of more equity into their companies by promoters and transfer of their holdings to a security trustee or an escrow arrangement till the turnaround of the company. “This will enable a change in management control, should lenders favour it,” it said.
In case a borrower had undertaken diversification or expansion of activities, resulting in the stress on the core-business of the group, a clause for sale of non-core assets or other assets could be stipulated as a condition for restructuring the account, it said.
Banks would be required to report credit information, including classification of an account to Central Repository of Information on Large Credits (CRILC), on all their borrowers having aggregate fund and non-fund based exposure of Rs.5 crore and above with them.
As soon as an account was reported by any of the lenders to CRILC, where principal or interest payment overdue between 61 days and 90 days, they should mandatorily form a committee to be called JLF if the aggregate exposure (AE) of lenders in that account was over Rs.100 crore, the RBI said.
Lenders also hade the option to form a JLF even when the AE in an account was less than Rs.100 crore, it noted. .
All the lenders should formulate and sign an agreement incorporating the broad rules for the functioning of the JLF.
The Indian Banks’ Association (IBA) would prepare a master JLF agreement and operational guidelines for JLF which could be adopted by all lenders. The RBI said that the JLF should invite representatives of the Central/State government/project authorities/local authorities if they had a role in the implementation of the project financed.
While JLF formation and subsequent corrective actions would be mandatory in accounts having AE of Rs.100 crore and above, in other cases also the lenders would have to monitor the asset quality closely and take corrective action for effective resolution as deemed appropriate.
For accounts with AE of less than Rs.500 crore, the restructuring package should be approved by the JLF and conveyed by the lenders to the borrower within the next 15 days for implementation.
The RBI further said that for accounts with AE of Rs.500 crore and above, the techno-economic viability study and restructuring package would have to be subjected to an evaluation by an independent evaluation committee (IEC) of experts. “The IEC will look into the viability aspects after ensuring that the terms of restructuring are fair to the lenders.”
The IEC would be required to give its recommendation in these cases to the JLF within 30 days.
Thereafter, considering the views of IEC, if the JLF decided to go ahead with the restructuring, the restructuring package, including all terms and conditions as mutually agreed upon between the lenders and the borrower, would have to be approved by all the lenders and communicated to the borrower within next 15 days for implementation.
RBI makes it tough for firms to get away with loan default
The Reserve Bank of India has moved in to make it difficult for corporate borrowers to escape repaying banks for their loans.
In less than a month after putting up a plan for better fire-fighting against bad loans, RBI Governor Raghuram Rajan has finalised the rules for Indian banks. The norms say that shareholders, including promoters of companies, will be asked to suffer the first loss instead of the banks that provided the debt.
To ensure more skin in the game of promoters when a loan is restructured, they would be asked to bring in more equity into the company. This equity will be put into an escrow or a trustee account till the company is revived. The banks will also have the right to complain about auditors to the Institute of Chartered Accountants of India if they are seen to have given clean balance sheets for a borrower actually in trouble.
To ensure more skin in the game of promoters when a loan is restructured, they would be asked to bring in more equity into the company. This equity will be put into an escrow or a trustee account till the company is revived. The banks will also have the right to complain about auditors to the Institute of Chartered Accountants of India if they are seen to have given clean balance sheets for a borrower actually in trouble.
Similarly, where advocates have given clear legal titles for assets which are not so, their names should be reported to the Indian Banks Association, the RBI rules say. Their names, like the auditors’, will be circulated among the banks before giving them any work. The provisions will apply for large loans of over Rs 100 crore. Banks will need to come together in a Joint Lending Forum (JLF) to protect their interests even before the debt becomes a non-performing asset.
Non-performing assets and restructured loans in the Indian banking sector has crossed 10 per cent of total advances and, according to rating agency Crisil, could reach close to 15 per cent in another year. The JLF will begin much before the current system of corporate debt restructuring (CDR) cell and will consequently have a better chance to rescue the loans. The JLF will work with the borrower to put the loan back on track and for this purpose can also invite state or Central officials if there is a need for a change in policy to help the project. In recent years, nearly Rs 15 lakh crore of projects were stymied due to environmental and land-use policies of Centre and states.
The RBI rules will ensure that projects will not have to waste time for a decision on whether they are fit cases for CDR. Instead the JLF mechanism will come in. Banks will also be allowed to fund specialised entities which can acquire and turnaround troubled companies. “The lenders should, however, assess the risks associated with such financing and ensure that these entities are adequately capitalised, and debt equity ratio for such entity is (prudent)” the RBI circular says.
Such companies can be promoted by individuals or institutional promoters having professional expertise in turning around “troubled companies”. At the same time, RBI has increased provisioning norms for loans that become sub-standard which will encourage banks to get rid of them quicker.
The RBI said if banks refinance any existing infrastructure and other project loans by way of take-out financing, even without a pre-determined agreement with other banks or FIs, and fix a longer repayment period, the same would not be considered as restructuring.
The RBI said if banks refinance any existing infrastructure and other project loans by way of take-out financing, even without a pre-determined agreement with other banks or FIs, and fix a longer repayment period, the same would not be considered as restructuring.
Sebi’s new norms to shake up multiple director seats
72-year-old Pradip Kumar Khaitan is the favourite for India Inc in their choice of independent directors. Khaitan the managing partner of Khaitan & Co has a seat on the board of 14 companies.
Kolkata-based Khaitan, an expert in commercial and corporate tax laws, will however have to resign from the directorship in seven companies as per the latest norms of the Securities and Exchange Board India. “I hope Sebi will give some time. I agree that one director can’t devote full attention to many companies. There’re many other capable directors in India,” he said.
Khaitan is one on the long list of 93 directors who between them account for a third of India’s list of independent directors. Between them the 283 directors held positions in all NSE-listed companies. He is followed by 82-year-old Rajendra Ambalal Shah, senior partner of Crawford Bayley & Company who has served as chairman of the Indian arms of several multinational firms such as Pfizer Limited, Clariant Chemicals (India), Procter & Gamble and Godrfrey Philips.
Last week, the market regulator has cut to seven the maximum directorships a person can hold. The Companies Act passed by Parliament in the winter session was more liberal at 10. “This is a drastic cut in directorships by the regulator. We will have to comply with the law. I will have to resign from the boards of six companies. I have been giving my inputs based on my experience in all the companies where I have been a director,” said Anil Haris, another independent director who is preparing to quit from the boards of six companies.
Under the guidelines. Sebi’s new corporate governance norms for independent directors has stipulated that a person can serve as an independent director on the boards of a maximum seven listed companies and a maximum of three listed companies in case the person is serving as a whole-time director in a listed company. “This is a drastic cut in directorships by the regulator. We will have to comply with the law. I will have to resign from the boards of six companies though I have been giving my inputs based on my experience in all the companies where I have been a director,” said Harish.
The blow-up of the United Bank of India could not have come up at a more inopportune time for Reserve Bank of India Governor Raghuram Rajan, on a mission to cleanse the system, and the next government, probably headed by the Bharatiya Janata Party if one were to go by opinion polls. As the Bimal Jalan committee works on setting stiff conditions for potential private sector bank licences, what flies in the face of the regulator is the drain of resources because of mismanagement and corruption in public sector banks.
The next government, before fuelling economic growth, has to bail out the banking system. And there is a scary parallel for the principal opposition party to ponder over if it comes to power — It may well be de javu for the party. At the start of its last stint in power, bad loans were as high as 9% of total loans; it is more than that now. Three state run lenders — Indian Bank, UCO Bank and, yes, United Bank of India — were in trouble in 1998. Now almost all the 26 are, the difference is in the magnitude. As then, there is demand for capital now. It was Basel II then; it is Basel III now. As political parties joust in the run up to the 2014 national polls, the biggest challenge anew government faces is potential internal crisis in the form of India's state-run banks. A time bomb may well be ticking.
Bad loans as a proportion of total loans is more than 4.2 %, and if restructured loans are taken into account, it is more than 10%, which essentially puts all capital at risk. Stress tests conducted by the regulator, including a contagion effect, show that over 40 % of the banking industry’s capital would be wiped out if bad loans were to rise 100 %, the RBI’s Financial Stability Report shows. The economic growth slowdown is blamed for much of the ills of the PSU banks, but that’s just part of the story. The bigger problem is mismanagement, corruption, lack of management skills, political interference, and a nimble private sector. “There is a vacuum in the top management,” says BA Prabhakar, former chairman and managing director at the state-run Andhra Bank. “The quality of the top management is getting weaker. Frequent change in policies is leading to discontinuity.”
Other than skills and political interference, capital could also become a key issue. Ratings company Moody’s Investor Services reckons the government will have to provide . 25,000 crore to . 36,000 crore to meet the core capital needs of banks in FY15. It is not just Moody’s, bankers and analysts also feel bad loans have not peaked yet and will rise next fiscal. Nothing illustrates what’s gone wrong better than the fact that the bad loan pile-up is concentrated mainly in stateowned banks compared to the cleaner books of some of India’s top private banks. For HDFC Bank, the gross bad loans is 1% of total loans compared with more than 5% for State Bank of India. And much of it has to do with the owner of these banks — the government — and governance failures. Control over these banks may be central to a political philosophy of a party or to extend patronage. So setting them free, even if it could avoid draining tax payer money, is something governments do not think about. Banks owned by the government and publicly listed are in a way an oddity. That’s because, unlike their private peers, there is no separation of ownership and management. Also, the boards of PSU banks are run by chairmen with a remote control from New Delhi. Private bank chief executives can be fired if the banking regulator is convinced about doubtful practices, but such an action is not possible in a PSU bank. When the central bank insisted on such a right to govern PSU banks, the government turned it down a few years ago citing political pressure.
The weakening of the process to select the right man for the job is alarming. Bankers say the minute their names figure on a shortlist for appointment as executive directors or CEOs, fixers turn up offering to swing the job for them in Delhi. The quality of PSU banks’ personnel is also being questioned now. “They did not recruit mid-management for nearly two decades,” says Atul Joshi, chief executive at India Ratings. “There is a dearth of skilled labour. It will reflect in the efficiency of the banks. Managements should be independent of the government.” Government ownership of these banks mean that unlike other listed entities, bank CEOs are not chosen through an independent process vetted by the board of directors. A skewed process marked by an esclator approach to promotions in some small-sized banks has meant that Dena Bank and earlier Corporation Bank have more candidates heading relatively larger banks. The board of a PSU bank is a sleepy one. For an industry that operates on high leverage, public funds and is critical to financial stability, the standards of governance, especially disclosures, ought to be way higher. But many local banks fail that test.
So what is the way out? An easy way is to cut state’s stake to 26 % from 58% now. The political establishment is aware of what needs to be done but given the pressures may not be keen to pursue this option. As finance minister, Yashwant Sinha had tried to introduce a law to cut down the government’s stake to 33 %, but gave up due to resistance. In theory, a lower stake will certainly help in a diversified ownership, which could lead to pressure from the shareholders and the market to perform and lower demands on the government to provide capital support. “They have to bring in market discipline,” says Prabhakar. “The board and the CEO should be accountable to the market, and not to the government. Unless the market punishes the management, the managements would not be bothered.” That can come about without cutting the government’s stake significantly but only if the owner maintains a hands off approach and steps in only under certain circumstances if warranted. Still pruning of equity will be called for if only to ensure that a commercial entity such as listed bank is free from the shackles of the CBI and sundry agencies and also from officials in the department of financial services. Surely, the boards and the owner are capable of making the right judgements on bonafide decisions. But any change in lowering the government's stake will have to be accompanied by a change in the law governing state-owned banks — the Banking Nationalisation Act. The trigger point could be to align it with the Companies Law to ensure listed banks function on the same lines as other entities.
There has been considerable debate on fixed tenures for bank CEOs to ensure they deliver. Interestingly, in India, the performance of those banks in which the CEOs had a five-year run was sub optimal as reflected in the case of Bank of Baroda and Punjab National Bank. Autonomy in terms of appointment of key personnel to banks with professional search committees, including reputed independent board members being part of the process could help including for joint ventures floated by banks where a CEO is now parked after retirement without considering his eligibility. So will insistence on professional management of boards including ground rules on providing time to directors to vet proposals and the agenda and thus squash efforts to push through dubious proposals hurriedly.
And choosing the best candidate. A case in point — Over a decade ago, PJ Nayak who is now heading a committee on governance of banks was chosen to run a quasi public sector bank without ever been a banker. Axis is now the third most valuable private sector bank. All this will work only when there are adequate but not out-of-line incentive structures in place coupled with performance contracts for senior bankers and oversight by the board. The credibility of India's central bank, which has representatives in PSU bank boards, is also in line. The United Bank episode shows the need to revive former governor YV Reddy's plan to pull RBI representatives out of bank boards and also on committees to select senior bank executives. It will pay off if the regulator focuses on the quality of supervision.
Cutting off the government’s yoke from banks may not be acceptable to the establishment because of direct lending to social sectors. “A government majority helps from the credit markets perspective,” says Joshi. “The question is whether the banks should be used for social objectives. If they are allowed to perform professionally, probably the dividends could be more to fund social objectives than directing them to do it directly.” The closest parallel to India’s predominantly state-run banking industry could be Indonesia. In dissecting the 1991 crisis, what has often been missed out is that part of the liquidity crisis was because of problems faced by some public sector banks overseas, including capital.
The next government may have to spend much time cleaning up the muck. This is one legacy Finance Minister P Chidambaram and his predecessor Pranab Mukherjee should worry about.
shaji.vikraman@timesgroup.com
Fight for Capital: New Govt Faces a Stiff PSU Bank Test
NPAs are debilitating PSU lenders, as highlighted by United Bank’s woes. But govt intervention and weak managements could take a heavier toll on them unless structural issues are quickly addressed, say Shaji Vikraman & MC Govardhana Rangan
The blow-up of the United Bank of India could not have come up at a more inopportune time for Reserve Bank of India Governor Raghuram Rajan, on a mission to cleanse the system, and the next government, probably headed by the Bharatiya Janata Party if one were to go by opinion polls. As the Bimal Jalan committee works on setting stiff conditions for potential private sector bank licences, what flies in the face of the regulator is the drain of resources because of mismanagement and corruption in public sector banks.
The next government, before fuelling economic growth, has to bail out the banking system. And there is a scary parallel for the principal opposition party to ponder over if it comes to power — It may well be de javu for the party. At the start of its last stint in power, bad loans were as high as 9% of total loans; it is more than that now. Three state run lenders — Indian Bank, UCO Bank and, yes, United Bank of India — were in trouble in 1998. Now almost all the 26 are, the difference is in the magnitude. As then, there is demand for capital now. It was Basel II then; it is Basel III now. As political parties joust in the run up to the 2014 national polls, the biggest challenge anew government faces is potential internal crisis in the form of India's state-run banks. A time bomb may well be ticking.
Bad loans as a proportion of total loans is more than 4.2 %, and if restructured loans are taken into account, it is more than 10%, which essentially puts all capital at risk. Stress tests conducted by the regulator, including a contagion effect, show that over 40 % of the banking industry’s capital would be wiped out if bad loans were to rise 100 %, the RBI’s Financial Stability Report shows. The economic growth slowdown is blamed for much of the ills of the PSU banks, but that’s just part of the story. The bigger problem is mismanagement, corruption, lack of management skills, political interference, and a nimble private sector. “There is a vacuum in the top management,” says BA Prabhakar, former chairman and managing director at the state-run Andhra Bank. “The quality of the top management is getting weaker. Frequent change in policies is leading to discontinuity.”
Other than skills and political interference, capital could also become a key issue. Ratings company Moody’s Investor Services reckons the government will have to provide . 25,000 crore to . 36,000 crore to meet the core capital needs of banks in FY15. It is not just Moody’s, bankers and analysts also feel bad loans have not peaked yet and will rise next fiscal. Nothing illustrates what’s gone wrong better than the fact that the bad loan pile-up is concentrated mainly in stateowned banks compared to the cleaner books of some of India’s top private banks. For HDFC Bank, the gross bad loans is 1% of total loans compared with more than 5% for State Bank of India. And much of it has to do with the owner of these banks — the government — and governance failures. Control over these banks may be central to a political philosophy of a party or to extend patronage. So setting them free, even if it could avoid draining tax payer money, is something governments do not think about. Banks owned by the government and publicly listed are in a way an oddity. That’s because, unlike their private peers, there is no separation of ownership and management. Also, the boards of PSU banks are run by chairmen with a remote control from New Delhi. Private bank chief executives can be fired if the banking regulator is convinced about doubtful practices, but such an action is not possible in a PSU bank. When the central bank insisted on such a right to govern PSU banks, the government turned it down a few years ago citing political pressure.
The weakening of the process to select the right man for the job is alarming. Bankers say the minute their names figure on a shortlist for appointment as executive directors or CEOs, fixers turn up offering to swing the job for them in Delhi. The quality of PSU banks’ personnel is also being questioned now. “They did not recruit mid-management for nearly two decades,” says Atul Joshi, chief executive at India Ratings. “There is a dearth of skilled labour. It will reflect in the efficiency of the banks. Managements should be independent of the government.” Government ownership of these banks mean that unlike other listed entities, bank CEOs are not chosen through an independent process vetted by the board of directors. A skewed process marked by an esclator approach to promotions in some small-sized banks has meant that Dena Bank and earlier Corporation Bank have more candidates heading relatively larger banks. The board of a PSU bank is a sleepy one. For an industry that operates on high leverage, public funds and is critical to financial stability, the standards of governance, especially disclosures, ought to be way higher. But many local banks fail that test.
So what is the way out? An easy way is to cut state’s stake to 26 % from 58% now. The political establishment is aware of what needs to be done but given the pressures may not be keen to pursue this option. As finance minister, Yashwant Sinha had tried to introduce a law to cut down the government’s stake to 33 %, but gave up due to resistance. In theory, a lower stake will certainly help in a diversified ownership, which could lead to pressure from the shareholders and the market to perform and lower demands on the government to provide capital support. “They have to bring in market discipline,” says Prabhakar. “The board and the CEO should be accountable to the market, and not to the government. Unless the market punishes the management, the managements would not be bothered.” That can come about without cutting the government’s stake significantly but only if the owner maintains a hands off approach and steps in only under certain circumstances if warranted. Still pruning of equity will be called for if only to ensure that a commercial entity such as listed bank is free from the shackles of the CBI and sundry agencies and also from officials in the department of financial services. Surely, the boards and the owner are capable of making the right judgements on bonafide decisions. But any change in lowering the government's stake will have to be accompanied by a change in the law governing state-owned banks — the Banking Nationalisation Act. The trigger point could be to align it with the Companies Law to ensure listed banks function on the same lines as other entities.
There has been considerable debate on fixed tenures for bank CEOs to ensure they deliver. Interestingly, in India, the performance of those banks in which the CEOs had a five-year run was sub optimal as reflected in the case of Bank of Baroda and Punjab National Bank. Autonomy in terms of appointment of key personnel to banks with professional search committees, including reputed independent board members being part of the process could help including for joint ventures floated by banks where a CEO is now parked after retirement without considering his eligibility. So will insistence on professional management of boards including ground rules on providing time to directors to vet proposals and the agenda and thus squash efforts to push through dubious proposals hurriedly.
And choosing the best candidate. A case in point — Over a decade ago, PJ Nayak who is now heading a committee on governance of banks was chosen to run a quasi public sector bank without ever been a banker. Axis is now the third most valuable private sector bank. All this will work only when there are adequate but not out-of-line incentive structures in place coupled with performance contracts for senior bankers and oversight by the board. The credibility of India's central bank, which has representatives in PSU bank boards, is also in line. The United Bank episode shows the need to revive former governor YV Reddy's plan to pull RBI representatives out of bank boards and also on committees to select senior bank executives. It will pay off if the regulator focuses on the quality of supervision.
Cutting off the government’s yoke from banks may not be acceptable to the establishment because of direct lending to social sectors. “A government majority helps from the credit markets perspective,” says Joshi. “The question is whether the banks should be used for social objectives. If they are allowed to perform professionally, probably the dividends could be more to fund social objectives than directing them to do it directly.” The closest parallel to India’s predominantly state-run banking industry could be Indonesia. In dissecting the 1991 crisis, what has often been missed out is that part of the liquidity crisis was because of problems faced by some public sector banks overseas, including capital.
The next government may have to spend much time cleaning up the muck. This is one legacy Finance Minister P Chidambaram and his predecessor Pranab Mukherjee should worry about.
shaji.vikraman@timesgroup.com
From austerity to growth
In a noticeable change in its stance, the G-20, comprising the world’s biggest economies, at the recent meeting in Sydney decided to shift emphasis from championing austerity to promoting growth at a time when the financial crisis in seen to be receding. Towards that end, Finance Ministers and central bank governors of the G-20 agreed to target reforms aimed at adding more than $2 trillion to the global economy over five years. Political leaders from the bloc who will meet in November are expected to outline what reforms they expect to implement to achieve the target. Yet the tasks of identifying reforms and implementing them in a synchronised manner among countries are not easy. For one, the world’s biggest economies are not a homogenous lot. Even the traditional categorisation such as advanced and developing economies falls flat when individual countries in each sub-group exhibit diverse characteristics. Among advanced economies, the U.S. is ahead with recovery gathering steam. Countries of the EU, on the other hand, are still struggling to come out of the recession, although they have put their worst days behind them.
Another important development often highlighted by institutions such as the IMF is that while in the early post-recovery period, China and India along with a few other developing countries were spearheading global growth, the position is now reversed with the advanced economies led by the U.S. emerging in the forefront. All these explain why the joint G-20 communique cannot be anything but bland. It talks of ambitious but realistic policies to lift the collective GDP to 2 per cent above the trajectory implied by current policies, over the coming five years. The fixing of a numerical target for future growth is considered significant. In the past, the G-20 has shied away from fixing numbers in such areas as fiscal adjustments. India’s strong views on the deleterious consequences of the U.S. Federal Reserve’s ongoing taper process were accommodated in the final communique, which calls for a continuous calibration of monetary policy settings by individual countries and their communication to one another. Another of India’s key concerns — the reform of the IMF quota system to give developing economies a greater say — was also taken on board. The G-20, comprising the biggest industrialised and developing countries accounting for 85 per cent of the world economy, might have regained some relevance which it was fast losing as countries went their own ways, However, even its most notable success — persuading members to shift gears from austerity to growth — has met with scepticism from certain key members, who have termed the numerical targets aspirational rather than realistic.
Is India’s economy out of the woods? Is economic growth about to return to the days of 8-9% annual increases? In the recently published 2014 IMF country report for India, we examine these questions and conclude that while near-term risks have receded, vulnerabilities remain high. Structural impediments to growth and persistently high inflation are key concerns.
This New Year brought back unpleasant memories of the summer of 2013, with major emerging market economies coming under external financing pressures. In subsequent weeks the rupee lost around 1% and Sensex fell by about 5%. But other emerging market economies such as Turkey, South Africa and Indonesia were affected to a greater extent. This is in sharp contrast to what happened in May-September 2013, when the rupee depreciated by 17%, Sensex fell by 10%, and $12.5 billion of portfolio investments left the country.
India has taken substantive policy actions to narrow external and fiscal imbalances, tighten monetary policy, move forward on structural reforms, and address market and rupee volatility. Record-high CAD has contracted sharply, thanks to measures to reduce gold imports and an impressive revival in exports. Schemes to bolster capital inflows have more than compensated for capital outflows and helped bolster foreign exchange reserves.
Indeed, India has significant foreign exchange reserves to deploy in the event of a revival of external financing pressures. Fiscal deficit target for 2013-14 has been met and investment project approvals have accelerated. All these factors have helped ameliorate the impact of the early-2014 global financial turmoil.
But inflation remains high, growth has yet to decisively turn around, CAD continues to be financed by volatile external flows, and the quality of fiscal consolidation remains a concern. In addition, subdued economic growth has led to rising corporate
and financial sector strains.
In the event of resurgence of financial market volatility, it will be important to put in place a well-communicated package of policy measures to minimise disruptive currency movements and bolster market confidence. This would involve continued rupee flexibility complemented by judicious use of reserves, tightening of monetary conditions, additional fiscal consolidation efforts, and further easing of constraints on capital inflows.
India’s growth has slowed considerably in the last two years. It is projected at about 4.7% in 2013-14, with a modest pick-up to about 5.5% in 2014-15, helped by slightly stronger global growth, improving export competitiveness, and a confidence boost from recent policy actions. Growth is expected to gradually rise to its mediumterm potential of about 6.8% as recently-approved investment projects are implemented and global growth improves.
However, even in the presence of slowing growth, Indian inflation has remained persistent and high, eroding households’ financial savings and undermining currency stability. We believe low and stable inflation is the best way for monetary policy to support robust inclusive growth.
Sustained reduction in inflation will require concerted tightening of monetary stance, possibly over a protracted period. Nonetheless, progress on structural reforms — particularly those related to removing the constraints on food supply — will help raise potential growth and reduce the currently large burden on monetary policy in tackling inflation.
India can return to an 8% growth trajectory if it maintains reform momentum. This means addressing structural challenges quickly, particularly moving to market-based pricing of natural resources (including coal, natural gas and fertiliser), removing infrastructure constraints, easing restrictive labour laws, and reforming agriculture production and marketing.
On the fiscal front, Indian authorities’ resolve to attain their budget deficit target, even in the presence of slowing growth, is commendable. Lower fiscal deficits will support monetary policy in fighting inflation, free resources for investment and help lower vulnerabilities. Still, we think it is important to improve the quality of fiscal consolidation, to make it more growth friendly.
Linking India’s social safety net to Aadhaar holds considerable promise. In addition, more efficient taxation (including GST), reforms to fuel and fertiliser subsidies, and shifting spending toward health and education will improve the composition of fiscal adjustment.
Finally, while India’s financial system remains well-capitalised and supervised, slowing growth is highlighting corporate vulnerabilities and leading to deteriorating bank asset quality. RBI’s recent initiatives to increase provisioning and capital requirements for bank lending to firms with sizeable foreign currency exposures, and for improving the recognition of restructured advances on bank balance sheets,are welcome steps.
Although no firm has come under severe stress so far, there is an important information gap about the extent of unhedged foreign currency exposures of large firms, which needs to be rectified. In addition, improvements in the legal and institutional insolvency framework will also help deepen domestic capital markets.
As the Indian economy starts to look up, now is the time to capitalise on India’s considerable potential by doubling down on the reform effort.
There Will Be Shocks
Slowing growth is stressing corporate vulnerabilities and deteriorating bank asset quality
Paul Cashin and Rahul Anand
Is India’s economy out of the woods? Is economic growth about to return to the days of 8-9% annual increases? In the recently published 2014 IMF country report for India, we examine these questions and conclude that while near-term risks have receded, vulnerabilities remain high. Structural impediments to growth and persistently high inflation are key concerns.
This New Year brought back unpleasant memories of the summer of 2013, with major emerging market economies coming under external financing pressures. In subsequent weeks the rupee lost around 1% and Sensex fell by about 5%. But other emerging market economies such as Turkey, South Africa and Indonesia were affected to a greater extent. This is in sharp contrast to what happened in May-September 2013, when the rupee depreciated by 17%, Sensex fell by 10%, and $12.5 billion of portfolio investments left the country.
India has taken substantive policy actions to narrow external and fiscal imbalances, tighten monetary policy, move forward on structural reforms, and address market and rupee volatility. Record-high CAD has contracted sharply, thanks to measures to reduce gold imports and an impressive revival in exports. Schemes to bolster capital inflows have more than compensated for capital outflows and helped bolster foreign exchange reserves.
Indeed, India has significant foreign exchange reserves to deploy in the event of a revival of external financing pressures. Fiscal deficit target for 2013-14 has been met and investment project approvals have accelerated. All these factors have helped ameliorate the impact of the early-2014 global financial turmoil.
But inflation remains high, growth has yet to decisively turn around, CAD continues to be financed by volatile external flows, and the quality of fiscal consolidation remains a concern. In addition, subdued economic growth has led to rising corporate
and financial sector strains.
In the event of resurgence of financial market volatility, it will be important to put in place a well-communicated package of policy measures to minimise disruptive currency movements and bolster market confidence. This would involve continued rupee flexibility complemented by judicious use of reserves, tightening of monetary conditions, additional fiscal consolidation efforts, and further easing of constraints on capital inflows.
India’s growth has slowed considerably in the last two years. It is projected at about 4.7% in 2013-14, with a modest pick-up to about 5.5% in 2014-15, helped by slightly stronger global growth, improving export competitiveness, and a confidence boost from recent policy actions. Growth is expected to gradually rise to its mediumterm potential of about 6.8% as recently-approved investment projects are implemented and global growth improves.
However, even in the presence of slowing growth, Indian inflation has remained persistent and high, eroding households’ financial savings and undermining currency stability. We believe low and stable inflation is the best way for monetary policy to support robust inclusive growth.
Sustained reduction in inflation will require concerted tightening of monetary stance, possibly over a protracted period. Nonetheless, progress on structural reforms — particularly those related to removing the constraints on food supply — will help raise potential growth and reduce the currently large burden on monetary policy in tackling inflation.
India can return to an 8% growth trajectory if it maintains reform momentum. This means addressing structural challenges quickly, particularly moving to market-based pricing of natural resources (including coal, natural gas and fertiliser), removing infrastructure constraints, easing restrictive labour laws, and reforming agriculture production and marketing.
On the fiscal front, Indian authorities’ resolve to attain their budget deficit target, even in the presence of slowing growth, is commendable. Lower fiscal deficits will support monetary policy in fighting inflation, free resources for investment and help lower vulnerabilities. Still, we think it is important to improve the quality of fiscal consolidation, to make it more growth friendly.
Linking India’s social safety net to Aadhaar holds considerable promise. In addition, more efficient taxation (including GST), reforms to fuel and fertiliser subsidies, and shifting spending toward health and education will improve the composition of fiscal adjustment.
Finally, while India’s financial system remains well-capitalised and supervised, slowing growth is highlighting corporate vulnerabilities and leading to deteriorating bank asset quality. RBI’s recent initiatives to increase provisioning and capital requirements for bank lending to firms with sizeable foreign currency exposures, and for improving the recognition of restructured advances on bank balance sheets,are welcome steps.
Although no firm has come under severe stress so far, there is an important information gap about the extent of unhedged foreign currency exposures of large firms, which needs to be rectified. In addition, improvements in the legal and institutional insolvency framework will also help deepen domestic capital markets.
As the Indian economy starts to look up, now is the time to capitalise on India’s considerable potential by doubling down on the reform effort.
Key positions at financial regulators remain vacant
With the dates for general elections to be announced soon, some top positions in regulatory bodies for the financial sector such as Reserve Bank of India, Pension Fund Regulatory & Development Authority (PFRDA) and Insurance Regulatory and Development Authority (Irda) are still vacant with no signs filling them up in the near future.
Interviews for these positions have been completed several months ago, but the final decisions on the appointments are tied up in red tape.
The worst hit is the Pension Fund Regulatory and Development Authority (PFRDA) in which all the top four positions — the chairman and three members are yet to be filled.
Former PFRDA chairman Yogesh Agarwal who was apparently not taken into confidence on major issues like the selection of its members was forced to quit in November 2013.
Currently, Anup Wadhawan, joint secretary in the department of financial services, holds concurrent charge of PFRDA. Interviews for the three members of PFRDA were over by the first week of January last year and that for the chairman was completed by February. Top retired bureaucrats, bankers and insurers had appeared for it.
Although retired finance secretary RS Gujral was one of the top contenders for the post, the name gaining ground, according to sources, is of Hemant Contractor, one of the managing directors of the State Bank of India. In fact, Contractor’s own chair would become vacant after his retirement next month.
The pension fund regulator has an enormous agenda to implement in the pension sector now that it has got statutory status. It will have to soon appoint more pension fund managers to sell pension policies in the country.
At the Irda, the position of Member-Life has been lying a vacant after S Roy Chowdhury retired recently. Interviews for the position, with the involvement of the private sector life insurers, are long over.
The crucial position of Member-Actuary at the Irda has been lying vacant for years now. This is because no actuary — the highest paid professional in the insurance industry — is willing to take up the office, which would entail a pay cut.
At the Reserve Bank of India, the position of a deputy governor lies vacant after the retirement of Anand Sinha.
The government is yet to name a successor, although key sources say R Gandhi, a senior official at the central bank, is the frontrunner.
The chair occupied by Sinha is a critical one, as the new incumbent would be handling the important function of issuing new bank licences.
Sinha’s responsibilities are being handled concurrently by deputy governor HR Khan. “The government has already conducted interviews for this post,” said a source.
The position of chairman at public-sector insurer National Insurance Corporation is vacant since last week with the retirement of NSR Chandraprasad.
Interviews were held in the first week of January this year, although no decision on appointment has been made.
In another case, the government, after much dilly-dallying, appointed Yaduvendra Mathur as CMD of Export-Import Bank of India. Prior to this appointment, Mathur, an IAS officer of the 1986 batch, was chairman and managing director of the Rajasthan Financial Corporation since 2011.
UNFILLED VACANCIES
* The PFRDA is the worst-hit with positions of chairman and members remaining unfilled.
* At the Irda, the positions of Member-Life remains unfilled, and there are no takers for the position of Member-Actuary
* After Anand Sinha’s retirement, one position of deputy governor remains vacant at RBI. The occupant of this post will have to decide on bank licences.
* At the Irda, the positions of Member-Life remains unfilled, and there are no takers for the position of Member-Actuary
* After Anand Sinha’s retirement, one position of deputy governor remains vacant at RBI. The occupant of this post will have to decide on bank licences.
Sebi wants monitoring agency to keep an eye on all IPO funds
In the four-year period between April 1993 and March 1997, as many as 4,005 companies entered the capital markets with their initial public offerings (IPOs) to raise an aggregate of Rs 41,319 crore. The IPOs accounted for more than 9 per cent of the average market capitalisation of Bombay Stock Exchange over the four-year period.
If these many companies raised money from the public, several companies also duped investors in the pretext of public offer — vanishing from the market over the coming years. There are 238 companies in the ministry of corporate affairs’ list of ‘vanishing companies’ and out of that, 87 remained untraceable till March 2012.
While nobody was held accountable for investors’ loss then, the Securities and Exchange Board of India (Sebi) has now proposed that all companies that come up with IPOs need to set up a monitoring agency that will look into the use of issue proceeds. The market regulator has also looked into putting some onus on independent directors, management and audit committee in the same regard.
This is a big move by Sebi. Earlier, companies coming up with public offerings of raise less than Rs 500 crore were not required to have any monitoring agency.
A look into Initial Public Offers in the last three calendar years (2011-2013) shows that only 8 out of the 51 public issues raised over Rs 500 crore from the market, whereas more than 80 per cent of the issues had issue size of less than Rs 500 crore.
Therefore, going by the current market regulations, a large number of companies attracting a significant number of investors are not required to float a committee that monitors the use of the IPO money — a big gap in the regulations, which Sebi looks to bridged with its new proposal.
“It is a move in the right direction as it will provide protection to all investors against misuse of IPO funds in companies. If the regulator is worried about misuse of funds then all investors need to be protected,” said Prithvi Haldea, chairman, Prime Database.
Proposed regulations
After almost four years that the government had asked the capital markets regulator to figure out ways to monitor the use of IPO proceeds, Sebi has finally come out with a discussion paper on the same, inviting public comments till March 25.
The market regulator has also proposed that the monitoring agency will have to submit its report on a quarterly basis (as against semi-annual basis) and should make the report public through dissemination to the stock exchanges.
“Considering that Companies Act, 2013 requires prior approval from shareholders for any change of object and a provision for exit to dissenting shareholders, it is very important that shareholders get regular update on utilisation of issue proceeds,” said the working paper, giving the rationale behind making the report public.
Earlier, in several cases, companies have given one reason in the object of raising the money while coming up with their IPO, and later, the promoter would change the stated object of use of funds by getting a resolution passed through a majority.
Experts say that while the new Companies’ Act provides minority shareholders with the power to recall their money in case of any change in the use of funds by the promoter, Sebi’s proposal on quarterly disclosure of the report at the stock exchanges would further empower investors as they would get an update on the use of funds on a quarterly basis.
On the categorisation of the report, it has been proposed that the monitoring agency will have to grade the deviation from stated use of funds on a two-digit scale — first stating the deviation from object (on a scale of 0-2 where 1 stands for no deviation)and the second indicating the range of deviation (on a scale of 0-5 where 1 indicates deviation up to 10 per cent).
“Monitoring Agency Reports where there is a deviation from objects of the issue should be segregated from reports where the utilisation is in line with objects of the issue. Companies Act, 2013 requires that the company shall not change its objects for which it raised the money through prospectus unless a special resolution is passed by the company and dissenting shareholders have been given opportunity for exit by the promoters and shareholders having control,” said the paper.
Responsibility on independent directors
Not only has the role of promoters and management on the use of funds has come under the lens, the regulator has also brought independent directors’s role to the fore. While Sebi has proposed that the companies need to set up the a sub-committee of board of directors before the opening of the issue that will oversee the monitoring of utilisation of issue proceeds, it has further said that the majority of that committee will be constituted by the independent directors and will be headed by one of them.
“Constitution of such committee will be helpful in facilitating monitoring of utilisation of issue proceeds. Further, the said requirement will ensure active involvement of board of directors monitoring of utilisation of issue proceeds,” the discussion paper said, giving the rationale behind setting up of the sub-committee.
Along with the new corporate governance norms that look to put a check on the number of companies and the tenure that one can serve as an independent director, this move puts in additional responsibility on the shoulders of independent directors.
While the audit committee and the management were not in picture earlier, the regulator has said, “Audit committee and the board/ management shall provide their comments for the deviation, if any, pointed out in the report of monitoring agency.”
Sebi said that such comments will help understand the reasons for any such deviations.
The bottomline
Once the proposals are approved by the Sebi board and implemented, it will go a long way in providing a safety net to retail investors. It will also act as a deterrent for promoters who enter the capital market with wrong motives. While the proposals look to empower and entrust independent directors with additional responsibility, it should also help in reduction of instances of promoters misusing funds raised through IPOs.
The vanishing act
There are 238 companies in the government’s list of ‘vanishing companies’ and out of them 87 remained untraceable till March 2012.
Earlier, companies coming up with public offerings of raise less than Rs 500 crore were not required to have any monitoring agency. Sebi has now come out with a discussion paper inviting public comments on its proposal to require all public offers to have a monitoring agency.
A look into IPOs between 2011-2013 shows that only 8 out of the 51 public issues raised over Rs 500 crore from the market, whereas more than 80% of the issues had issue size of less than Rs 500 crore.
Market regulator has also proposed that the monitoring agency will have to submit its report on a quarterly basis against semi-annual basis.
No escape from freedom
A closed capital account is not a real option. We should focus on sequence and timing.
In his article, ‘Against the flows’ (IE, February 24, goo.gl/rOG0oD), Gulzar Natarajan said capital controls were good and necessary. Liberalising our capital account, he claimed, will not benefit India either through higher growth or investment. It will only result in currency crises and higher risks, which we cannot manage.
India must, therefore, not liberalise its capital account — even the IMF has endorsed this line of reasoning according to Natarajan. But this argument ignores India’s de facto capital account openness, the aspirations of a young and ambitious country, which does not want to go back in time, and the enormous body of evidence on the failure of capital controls as a tool of macroeconomic policy.
Economists like to think that there is a debate about capital account openness and that a decision about whether it should be open or closed is yet to be made. But this is not what happens in the real world. In the real world, a maturing country develops a capable financial system and sophisticated firms. It develops a liberal democracy, where the government is unable to interfere in the freedom of citizens. Once a country reaches this state of maturity, the capital account is de facto open.
Whether some economists think it should be open or not, in the eyes of the top 10 per cent of India — which makes decisions for the bulk of the economy — the capital account is open. To close it requires intruding on personal freedoms, inflicting harm on internationalised firms, and damaging the financial system.
When some Indian bureaucrats have argued in favour of a closed capital account at international forums, they have faced amusement from the audience. No country has taken this idea seriously. This so-called “lesson from the global financial crisis” is something no one is interested in learning. There has been no reduction in capital account openness — either among advanced countries or among emerging markets — after the crisis. The free movement of goods, services, ideas, capital and enterprise across national borders is an integral part of modernity.
Capital controls in emerging economies, where they exist, are like tariff or non-tariff barriers that can be switched on and off. They can be price- or quantity-based. Most evidence shows that these controls have little usefulness, both in terms of the time period for which they are actually effective, and in terms of their macroeconomic impact, which is limited and short-lived.
Advocates of capital controls have argued that their failure to deliver results is because they have been temporary. It is contended that permanent controls, which intrude deeply in the functioning of the economy, would work better. India is a rare laboratory that permits restrictions on capital flows.
The present Indian framework is a complex licence-permit raj. It is unlike what is found almost anywhere else in the world. We, in India, know that complex licence-permit systems always work badly, and are almost allergic to the thousands of pages of detailed restrictions.
Have Indian capital controls been effective? The effectiveness of controls is an often-misunderstood concept. We should measure whether they were able to achieve the objective that they were imposed for. If the all-in-cost ceiling for external commercial borrowings (ECB) was reduced from Libor plus 400 basis points to Libor plus 200 basis points, then the question to be asked is not whether borrowing went down. Instead, it should be whether this decision was able to achieve the objective of the restriction — for example, to reduce net inflows. All too often, companies respond to controls by simply changing the garb in which the same capital flows.
If companies moved from pure debt under ECB to foreign currency convertible bonds, the same money would come into India under a different name. One could then wrongly argue that the controls were effective because flows under ECB declined after restrictions were imposed. But the original objective — reducing overall inflows — was not met. Careful analyses of effectiveness have demonstrated that the Indian framework has not delivered on the objectives of macroeconomic policy.
Natarajan’s article is about the least interesting end of the capital account openness puzzle. There are two interesting questions to be asked. First, in what order and sequence should controls be removed? Second, what auxiliary actions should India undertake in order to become resilient to the new challenges that an open capital account introduces? If you have air travel, you will have plane crashes, and the country will need to develop the institutional capability to respond to crises. It is interesting and important to understand the regulatory framework required for aircraft and airports. But surely, nobody would propose that we should not have planes.
This takes us to the territory of technical questions that generally do not fit neatly in opinion pieces. What does prudent foreign borrowing mean? Should rupee-denominated debt continue to be more restricted than foreign currency-denominated debt? How can companies be encouraged to hedge their currency risk? How can we help markets for hedging develop? And so on. These are the interesting questions in the field of capital controls — not ideological sloganeering about whether capital account liberalisation is good or bad.
To a significant extent, this is about generational change. One generation ago, it was interesting and fashionable to discuss whether India should liberalise its capital account or not. Things have changed. We are now a $2 trillion economy, with capable global firms, with aspirations for a sophisticated financial system, with a liberal democracy that makes it infeasible for the government to arbitrarily restrict the freedoms of citizens. In such a country, what merits attention is the sequence and timing of capital account liberalisation, and the establishment of institutional capability for fiscal, financial and monetary policy.
Bad loans, the biggest challenge for public sector banks: FM
RBI is keen to issue bank licences’
The Reserve Bank (RBI) is likely to issue a few bank licences during the model code of conduct, which came into force from Wednesday, Union Finance Minister P. Chidambaram said here.
“What does the code of conduct have to do with this [bank licence process]. The government and regulators are discharging their normal duties... They [RBI] wish to issue a few licences,” Mr. Chidambaram told reporters at a press conference.
“So that’s the indication we have got. We are not interfering with that process, that is, the RBI’s decision,” he added. The Minister also clarified that the Cabinet would continue to take decisions right up to the elections in accordance with the model code of conduct rules, which bars the ruling party from acting to alter the level-playing field during elections. “The Cabinet will clear proposals based on policies announced earlier...no where does it say government functioning should come to a halt,” he said.
Behind the Veil of Finance
Structural Roots of Global Economic Crisis
The 2013 Nobel in Economics to Eugene Fama, Robert Shiller and Lars Hansen for their work on importance and limitations of financial markets comes five years after a financial crisis that drove the US and world economies into their deepest recession since the Great Depression. The “great slump” has meant immense hardship for the entire global economy and has been at the centre of intense political and academic debates. The slim book under review provides an accessible, engaging and comprehensive discussion of the structural roots of the crisis. The discussion is not confined to merely the opaqueness of financial instruments and limitations of the financial markets. It shows how the financial crisis of 2008 was itself based on the real estate bubble building up in the US and the bursting of the same a year before the crisis.
Moreover, the roots of the crisis can be traced to the restructuring of class relations in response to the crisis of the 1970s, whereby profit incomes and financial incomes soared at the cost of wages. Another dimension of the crisis is rooted in the ascendancy of the dollar as the “international money”, which enabled the US to build up debts and deficits at the cost of the rest of the world and that the hegemony of the dollar is closely interlinked with the rise of the US as an imperial power.
A historical and political perspective, rich economic analysis, and empirical grounding are the strengths of this book. Not to be missed is the lively and literary style which stays throughout the book. Even the title seems to be sourced from a line in a poem by Irish poet W B Yeats and also from a novel of the same name by the Nigerian author Chinua Achebe, both of whom are talking about disintegration and unpredictability, though in different contexts. A continuous analogy with the Great Depression convincingly shows that this crisis was not a “random fluke event”, but was of a systemic nature. References to Marx indicate that insights into the processes at work under capitalism and propensity to crisis were visible as early as the 19th century.
One way of understanding the crisis is to compartmentalise the analysis into different time frameworks – the short term, in terms of days and weeks; the medium term, in terms of months and years; and the long term, in terms of decades. In the short run, it can be understood as a severe financial crisis whereby financial institutions became unwilling or unable to lend and borrow, thereby freezing the flow of credit in the entire economic system; this was visible in the events of September 2008. In the medium term, the crisis made visible the highly leveraged speculative bubble on real estate that finally burst in the middle of 2007. This speculative bubble was mediated by fancy financial instruments manufactured by Wall Street. From a long-term perspective, the present crisis is a full-blown crisis of the neo-liberal phase of capitalism that began in the 1970s (Basu 2008).
High Drama: Bursting Bubble
The book begins with the analogy between the bursting of the stock market bubble in 1929 and the crash of 2008, when within the span of a week the financial markets in the US came to a standstill. The crash of 1929 led to the Great Depression, while the present crash has led to the “great slump – a long and protracted contraction of the US economy”. The initial chapters describe the dramatic events of September 2008 in a lively, literary and dramatic manner, while continuously taking the reader to similar events in history. Images of bank runs after the crash of 1929 are invoked to show how what happened in 2008 was a run on the shadow-banking system, which had started dominating credit creation in the US. Finally, the financial markets in the US froze with the collapse of the five largest investment banks – Bear Stearns, Goldman Sachs, Lehman Brothers, Merrill Lynch and Morgan Stanley. The second week of September saw the nationalisation of Freddie Mac and Fannie Mae, two giants of the mortgage markets as well as the rescue of AIG (American International Group), the world’s biggest insurer at one point of time.
What lay behind this financial crisis was the real estate bubble which had begun to burst the previous year. The defaults on sub-prime mortgages, i e, the housing loans to the least credit-worthy borrowers had broken the “dizzying spell” of the real estate bubble. The housing bubble had created the basis for risky lending and engineering of financial innovations by the huge financial giants. The author describes at length how this was made possible through reversal of the regulatory mechanism put in place with the Glass-Steagall Act of 1933, which had separated investment and commercial banking. Over time, the distinction between the two was blurred and through the Gramm-Leach-Bliley Act, 1999 (also known as the Financial Services Modernisation Act, FSMA), the crucial provisions of the Glass-Steagall were repealed.
The resulting “financial landscape” was one in which capital markets (markets for trading securities) became the centre of borrowing and lending activities. Borrowing was based on short-term commercial paper or repos rather than deposits (as would be done traditionally), while sale of all kinds of financial assets replaced lending. The growing importance of investment banks can be seen by the fact that the assets of US investment banks grew from 3% of US gross national income in 1975 to about 24% of the gross domestic product in 2007 (p 37). This is further substantiated through many more empirical details. The opaqueness of financial instruments is explained through the “alchemy of finance” (p 41).
Loans or mortgages were converted into marketable bonds like mortgage-backed securities (MBS) and asset-backed securities (ABS) through securitisation. Securitisation transforms future income streams into tradable assets. In this context, it led to pooling together of hundreds and thousands of mortgage loans and then selling of bonds on that pool of mortgages and the next step was to take a pool of these assets, slice and chop them and repackage them into a new class of instruments called collateralised debt obligations (CDO).
The mind-boggling complexity of these instruments comes across clearly and so does the role of “independent” credit rating agencies like Standard & Poor’s, Moody’s or Fitch required to “bless these exotic instruments” (p 43)! Defaults on mortgage payments and falling house prices meant that assets like the MBS started losing value. This in turn led to the sale of assets at short notice and at low prices. This meant that with the fall in the value of collateral, which the financial firms could offer, they found it increasingly difficult to borrow from the market, leading to further sale and fall in the value of assets. Thus the collapse of sub-prime mortgage markets sent the financial markets into panic and led to a “run” on the shadow-banking system. This is what happened in 2008.
The Structural Roots
The events of 2008 or 2007 cannot be explained simply in terms of speculative excesses of a few individuals or the absence of a regulatory environment in the financial markets. Despite the fact that finance serves a useful economic function, the growth of finance “carries with it seeds of fragility” (p 58). Vasudevan points out that Marx had warned about capitalism’s propensity for financial crisis, which arises “where the ever-lengthening chain of payments, and an artificial system of settling them, has been fully developed” (Vasudevan 2009).
At the centre of financialisation – the growing political and economic power of finance – was the neo-liberal revolution and ideology which shifted the “balance of power” in favour of corporate and financial capital (p 92). After the end of the golden age of capitalism in the 1960s, the US economy was faced with stagflation, declining profitability and falling accumulation. Rising wages and the growing strength of labour in the post-war period were perceived to be responsible for this decline in profitability. The response to this changed the balance of class forces in favour of corporate and finance capital and away from the working class.
Chapter 5, titled “Another Gilded Age” throws light on the growing polarisation of income and wealth in the US economy and once again the book draws a parallel with the “gilded age” preceding the Great Depression. The Volcker shock in 1979 – the programme of monetary austerity under Paul Volcker, the then chairman of the Federal Reserve – paved the way for adoption of policies favourable to corporate and finance capital. Financial regulations were eased and the share of finance in national income grew steadily. The financial sector profits in total corporate profits peaked to 40% in 2003 (p 94). The compensation earned by financial sector kept rising and by 2005, a banker could expect to earn 40% more than the wages of other workers based on their level of skills and education.
On the other hand, the wages of workers were squeezed and workers’ unions busted. The United Auto Workers (UAW) union was forced to accept wage freeze and cut in benefits as part of a wider assault on the working class. Between 1950 and 1973, real wages had mirrored the growth of labour productivity but between 1979 and 2007, although productivity of labour (output per hour) rose by 1.91%, average hourly earnings of workers were stagnant, declining by 0.04%. Average CEO compensation became 768 times the average wage of a full-time worker in 2005. The rich-poor gap more than tripled in 2006 as compared to 1979. This created a massive increase in profit incomes, largely accruing to the financial sector.
Inequalities kept increasing and the exploding profits on one hand and stagnant wages on the other created the supply and demand, respectively, for debt-driven consumption. Finance extended its tentacles into working-class households in the form of debt. With the state retreating from provision of housing, healthcare and education, all kinds of loans such as auto loans, student loans, home loans soared. The net result was the largest build-up of debt in the US economy since the Great Depression.
The burden of the debt fell disproportionately on the working class and blunted their capacity for resistance even further. The benefits of growing profits were cornered largely by the executive and managerial classes, who are averse to long-term illiquid investments as their salaries are linked to short term and quick returns. Finance appeared to be independent of the “sweat and grime of the factory” (p 115) and investment and accumulation suffered as a result. The author argues that this slowdown of accumulation was not on account of lack of avenues for investment, but due to the dominance of finance. A similar managerial and financial revolution had been visible in the early 20th century, which had paved the way for the crisis of the 1930s. Thus the current crisis reflects the “unstable, contradictory character” of capitalism (p 118).
Dollar Hegemony and Imbalances
The systemic nature of crisis or the long-term structural tendencies of capitalism do not absolve the need to analyse the specific historical context of any crisis. The present crisis cannot be fully comprehended without understanding the privileged position of the dollar in the global economy. This is an area which has received relatively less attention in the context of the 2008 crisis, and this book needs to be applauded for its detailed exposition of the role of the dollar in the present crisis.
Chapter 6 explains the ascendancy of the dollar to this position which is intertwined with the ascent of the US to the position of dominant imperial power. Despite the crisis of confidence that had seized the US financial markets in the aftermath of the events of 2008, US treasury bills continued to remain a safe bet and this was due to the unique position of the dollar being the “international money”. Thus, the “insatiable thirst” for dollars prevented a currency crisis in the US. The gold rush during the Great Depression had been replaced by demand for dollars – the “contemporary form of world money” (p 147). The fact that the US can continue to run high deficits and still generate international liquidity is precisely due to the hegemony of dollar in the international monetary system.
The rise of the dollar as the international money itself was a product of post-war developments and is linked to the rise of the US as the dominant imperialist power. The author analyses the historical context in which the Bretton Woods negotiations after the the second world war became the basis for establishing the dominance of the dollar. Even after the collapse of the Bretton Woods system and adoption of the “floating dollar standard” in 1973, aggressive liberalisation and integration of global financial markets continued to preserve the role of the dollar as the international currency. In effect, the US became the banker of the world. It siphoned off surpluses from the creditor countries in the periphery and recycled them to the emerging economies through financial markets. Financial dominance of the US and hegemony of the dollar had made this possible. Although the current crisis is a reflection of the “contradictions of the dollar empire” (p 148) it may not mean an end to the dominance of the dollar.
Crisis and Beyond
Towards the end, the author discusses the impact of the crisis on the countries of the European Union and their policy response to this. The author asks some pertinent questions about where we are headed now. Will the dollar hegemony be dismantled? Will the balance of forces shift away from the growing power of finance and corporate capital? Can the neo-liberal paradigm resume the pace of accumulation?
She argues that the current crisis does provide a basis for initiating a process of structural change but the outcome can head in various directions. However, recent uprisings across the world from west Asia to Europe to Spain and the US itself are indications of the fact that crisis will not go waste and that the hope for a more equitable world is not lost.
This book by Ramaa Vasudevan is a very welcome effort in more ways than one. Although this is her first book, the author has written numerous articles on the political economy of money and finance. In this book, not only is the analysis rich and grounded, but the tendencies of capitalism are unravelled in a lively, almost theatrical manner and most importantly a hope for a better world is shown. However, the section on the hegemony of dollar could have been explained in easier terms to make it more accessible. One problem with the book is that its price makes it inaccessible for many interested readers.
No room for complacency
India’s balance of payments (BOP) improved dramatically in the third quarter (October-December 2013) of the current financial year. In releasing the data a full three weeks before the scheduled date in end-March, the Reserve Bank of India has, though not for the first time, broken with convention to share the good news with the markets as soon as it could. The significant piece of news in the BOP data for the third quarter is the dramatic narrowing of the current account deficit (CAD) to $4.2 billion (0.9 per cent of GDP) from $31.9 billion (6.5 per cent) in the same period last year. Even compared with the preceding quarter (July-September) when the CAD was $5.2 billion (1.2 per cent), the performance is impressive. Clearly, the positive trends in India’s BOP are getting entrenched and do not represent a one-off development. On a cumulative basis, during the nine months of 2013-14, the CAD at $31.1 billion (or 2.5 per cent) marks a big improvement over the corresponding period last year when it was $69.8 billion (or 5.2 per cent).
The lower CAD was primarily on account of a decline in the trade deficit as merchandise exports picked up and imports, especially of gold, moderated. There is no doubt at all that the rupee depreciation has helped in boosting exports — they clocked 7.5 per cent growth in the third quarter. On the other hand, merchandise imports fell by 14.8 per cent as against an increase of 10.4 per cent in the third quarter of 2012-13. The decline was mainly due to a sharp fall in gold imports which added up to $3.1 billion as compared to $17.8 billion a year ago, All these helped in contracting the merchandise trade deficit by about 43 per cent to $33.2 billion. The vast improvement in the current account is at the centre of a smart recovery in India’s external account. The rupee has remained stable for a fairly long time and foreign investors with a higher risk appetite are sensing better opportunities in India. However, while due credit should be given to the government and the RBI, there is a need for continued vigilance. Lower non-bullion imports reflect the ongoing economic slowdown. The government’s clampdown on gold imports through tariffs and administrative measures might have paid off, but there is enough evidence that a part of the gold trade has moved underground with large-scale smuggling starting again. Two other areas of concern are that iron ore exports are still restricted while coal imports have increased dramatically, aggravating the trade deficit. These are structural problems, and as long as they exist the external economy will remain vulnerable. Any pick-up in growth would see a rise in imports, and export performance needs to remain robust.
Tested by Fed
Indications from the US Fed are that it may raise interest rates in 2015, earlier than expected. While India has been stable in the period of the actual taper, as a large part of the correction in the exchange rate took place after Ben Bernanke’s taper speech, it remains to be seen how global markets will react to the increase in interest rates by the US Fed. The RBI must focus on keeping inflation low and stable. In case inflation goes up and the rupee appreciates in real terms, it is likely that when US interest rates start rising, there will be a decline in the nominal value of the rupee so that the real rate corrects.
RBI Governor Raghuram Rajan has taken a number of measures to increase dollar inflows. However, many of these involve raising India’s external debt. While on the one hand, higher dollar flows and reserves send a signal of stability, if these are due to borrowing more, beyond a point the policy can backfire. Thus, from now on, the RBI should let the rupee float so that the exchange rate is not misaligned. The less the misalignment, the greater the chance of stability. The combination of a floating exchange rate with low inflation can help ensure a stable rupee when the time comes for the US to raise rates.
A third element of the strategy has to be domestic demand compression. The economy has slowed down and so the main instrument in this scenario will be the fiscal deficit. The fiscal deficit has to be contained to reduce total demand in the system. This will keep the current account deficit under control. It has been seen that countries with low fiscal deficits, current account deficits and inflation rates have been more stable in the time of the taper. India should focus on these fundamentals.
This will ensure that, one, there is little pressure on the rupee, and two, even if there is pressure, India does not react in a knee-jerk manner with capital controls and restrictions on financial markets, as it did last time. There is no substitute for an approach that seeks to shore up the basics. The NRI deposit flows have come at a cost, where the RBI has partly paid the price of hedging. It is ultimately the tax payer who is paying these costs. This should be avoided next time.
Flip side to good news
Amid the generally bleak economic scenario, two recent news items should provide some relief to the government. The narrowing of the current account deficit (CAD) to $31.1 billion (2.3 per cent of gross domestic product (GDP)) during the first-half of the year (April-December 2013) from $69.8 billion (5.2 per cent of GDP) during the same period in the previous year is nothing short of spectacular — so worried were the policy-makers at this time last year that the burgeoning CAD was listed as the number one economic problem, which also did not appear to have any easy solution.
The other piece of good news relates to inflation which has remained persistently high. The good news is that both CPI (Consumer Price Index) inflation (retail inflation) and WPI (Wholesale Price Index) inflation eased substantially in February. Retail inflation declined for the third straight month to a 25-month low of 8.10 per cent. WPI inflation touched a nine-month low of 4.68 per cent in February, down from 7.28 per cent in the previous year and 5.50 per cent in January 2014.
Both these are significant news and are on the face of it, extremely positive for the economy. The widening current account deficit, not so long ago a bugbear, appears eminently manageable. In fact, BoP data for the third quarter showed CAD at $4.1 billlion, the lowest in 19 quarters. The current financial year might well end with a deficit of around 2 per cent.
In sync with the impressive fall in the CAD, the rupee has been stable. Foreign capital flows have been coming in strength and there is no threat to external reserves which have remained stable. Can there be a contrary view? Perceptive analysts do not discount the achievement but are not so sanguine about the ways in which the CAD has been brought down.
Gold imports
The arguments are familiar. The reduction in the CAD is mainly due to a severe clampdown on gold imports through tariff and non-tariff measures. During each of the past eight months, gold and silver imports contracted at an average of nearly 70 per cent a month. For the first 11 months, India’s gold and silver imports, on a cumulative basis, stood at $30.53 billion. That is more than 40 per cent lower than the $52.47 billion of imports over the same period in the previous year. Consequently, during the same period, India’s trade deficit fell by nearly 29 per cent to a little over $128 billion from over $179 billion. That, in turn, brought about a reduction in the CAD.
Inevitably, on the negative side, there has been a spurt in gold smuggling with its attendant deleterious consequences. The government loses revenue which would have accrued if the trade had remained above ground. Smuggling has major implications for law and order. Hawala trade has revived. Besides, India’s considerable exports of jewellery have been hit by the clampdown on gold imports.
Trade balance
Turning to the favourable trade balance, it must be remembered that it has occurred not by the ideal way of increased exports. In India, exports did stage a smart pick-up but recently have slowed. Imports — non-gold, non-oil — have declined but that is not a good sign as it is an indication of the slowdown. In short, the CAD contraction has occurred due to a rigorous curtailing of gold imports. Exports need to go up on a sustained basis but fall in imports is not at all positive.
Inflation
On the inflation front, policy have earned a much-needed respite but does it give any leeway to the Reserve Bank of India (RBI) to reduce interest rates when it presents its credit policy statement on April 1?
Despite the appreciable fall, retail inflation is still high. Inflation expectations remain high consequently. Besides, the fall in inflation is almost entirely due to a sharp fall in vegetable prices. This was anticipated by the RBI much earlier. The possibility of vegetable prices going up cannot be ruled out. Reports speak of unseasonal rains in some important vegetable producing States.
Importantly, the RBI is shifting monetary policy anchor to retail inflation in line with the Urjit Patel Committee’s recommendations. Moreover, core inflation — non-food, non-fuel manufactured inflation — has been going up steadily. This is a widely watched measure of inflation.
In the present context, all these indicate maintenance of a status quo by the RBI on April 1.
The above analyses recognise the fact that there is a flip side to any major development. Reduction in the current account deficit is of great significance but it has come about through a drastic compression in imports of gold. News on the inflation front should bring cheer but there is a possibility that the seasonal decline in vegetable prices might reverse.
Rajan's Target: Inflation or the Poor?
Reserve Bank of India (RBI) Governor Raghuram Rajan said that Parliament should set inflation targets for the central bank to follow. On the face of it, this looks like the RBI is trying to hold itself accountable to the elected representatives of the people, especially where the interests of the poor are concerned. But is that really so?
Targets have become the rule of the day with the Fiscal Responsibility Budgetary Management (FRBM) Act taking the lead on the fiscal front and now inflation targeting (IT) on the monetary front. A lot has been written about the FRBM from opposite perspectives but the policy of IT in India is a more recent phenomenon. India has been witnessing significantly high rates for inflation since mid-2009 and, except for some blips here and there, inflation has continued to remain quite high. This obviously hurts those whose income is not indexed to inflation. There are broadly two categories of people who are hurt most by inflation. One obvious group is the poor; the not-so-obvious group consists of those who have invested in financial assets, the real value of which depreciates with inflation.
The way IT works is that it is assumed that there is a trade-off between inflation and output; so to bring inflation down one needs to reduce the level of output (thereby the level of employment too gets affected). Output can be brought down with a higher rate of interest, which would adversely affect two of the most important components of total output, private investment and credit-financed consumption. On the face of it, this policy stance looks just fine. But there is many a slip between the cup and the lip, in particular if the underlying assumption of a trade-off between output and inflation turns out to be incorrect. Output is normally assumed to be positively related to inflation because the per unit cost of production is assumed to increase with output. This can happen for a variety of reasons: the strength of labour unions can grow with an increase in employment which leads to stronger wage demands; the productivity of inputs like labour can decrease with increased usage (in the jargon of economics, there is diminishing marginal productivity of labour); supply constraints on other inputs can push up their prices. So, any reduction of production is supposed to bring down the costs of these factors and, thereby, inflation. But what if these reasons do not hold in a developing country like ours?
For a developing economy like India with a vast reserve army of labour (reflected in a large unorganised sector), assuming a rise in the bargaining strength of the working class alongside a growth in employment seems very distant from reality. Moreover, if the usage of all inputs is rising in tandem there is no reason why an additional unit of output will cost more than the previous unit. In other words, there hardly seems to be a direct relationship between output and inflation. Therefore, any policy to control inflation by targeting a lower level of output will be counterproductive. It will not only not control inflation it will also increase unemployment and create fears of a recession which could further fuel such pessimistic expectations. That this has been witnessed by India in the last two-three years should not come as a surprise. While the index of industrial production (IIP) has seen a declining trend in growth over the period of a continual hike in interest rates, inflation has hardly abated except in the rise in prices of commodities where the monsoon has played a supportive role.
This brings us to the question of why inflation has been so stubborn over the past few years. The answer to this question lies in looking at the cost rather than the demand side. Kalecki, a Marxist economist, had proposed that while prices of industrial commodities are cost-determined, those of primary commodities are demand-determined. Indeed, can one say that the prices of automobile rise just because there has been a surge in its demand? On the other hand, this can be true for agricultural commodities. So it is obvious that inflation which has entered the system with the rise in prices of the latter, cannot be controlled by bringing down the production of the former. Moreover, inflation because of a rise in prices of critical imported inputs like oil (because of an increase in dollar prices and/or depreciation of the rupee) also cannot be controlled by bringing down production and employment. For primary commodities, inflation essentially follows from inadequate and volatile production, speculative hoarding and commodities futures. What the government needs to do then is not follow a conventional IT approach but attack the real sources of inflation by (a) countercyclical taxation of oil and related items (increase tax rates when their prices in rupee terms are low and vice versa); (b) improvement and investment in storage capacities across the country; (c) controlling the futures market; and (d) cracking down on commodity hoarders.
RBI may opt for status quo on interest rate
For many reasons, the Reserve Bank of India’s forthcoming bi-monthly policy statement for 2014-15 will be unique. The idea to have a policy statement once in two months was mooted by the Urjit Patel Committee. The RBI is signalling acceptance of some of the recommendations, which do not involve discussion with the government. However, the core recommendations of the Committee’s report involving inflation targeting and shifting the monetary policy’s anchor to CPI (retail ) inflation, instead of WPI, will be implemented only after a consensus is reached.
It is most likely that the RBI will spell out its approach to this important report but no major decisions can be expected. As of now, inflation targeting is not easily understood in the Indian context.
The RBI Governor has said that it will be flexible, which suggests that even when it is adopted formally, the central bank will have some leeway to adjust the target rate and or timeframe.
Two important issues confront the RBI. In the run-up to the elections — with the model code in force — how far could it go in deciding policy issues? Even on new bank licences, a subject that has taken a long time and is in the final stages, the RBI is not expected to announce the first few licensees.
Although it is not clear that even continuing policy initiatives should be halted temporarily until after the new government is formed, the RBI might play it safe. The RBI Governor has said that the Election Commission will be consulted.
A suggestion has been made before whether the monetary policy itself could be deferred after the Union Budget for 2014-15 is presented by the new government in June 2014. This would be on the pattern of government withholding policy measures.
For the past so many years, however, elections have not inhibited monetary policy. There is no reason to think that it will be different this time. But it is a safe bet that no “big-bang” announcements will be made.
The second dilemma is specific to monetary policy. Both WPI and CPI inflation have come down. CPI inflation is down by 300 basis points over the past three months. Without formally adopting it as the policy anchor, the RBI has shown its preference. However, no change in interest rate stance is expected.
A sharp fall in food prices has driven down inflation. That could be a temporary phenomenon; the possibility of food prices reversing is real. In important vegetable producing states such as Maharashtra, unseasonal rains and hailstorm have damaged crops. This will impact on inflation numbers.
Yet with CPI inflation very close to the RBI’s March 2015 target of 8 per cent, the RBI will most probably talk of increased upside risks to justify its holding of rates in the forthcoming policy statement. The other alternative of revising the 2015 target might not be practicable. As it is, the March 2016 target of 6 per cent (as per the Patel Committee report) looks daunting.
As has been the case with every policy statement, the RBI’s views on the macro-economy will be keenly watched. The union budget postulated a GDP (gross domestic product) growth rate of 5.5 per cent for 2014-15. In the recent past, even the normally conservative RBI had to lower its growth estimates. There are any number of uncertainties on the macro-economic front. After a record run of favourable monsoons, the El Nino effect can impinge on monsoons, and, hence, output. Administered prices will have to be revised upwards. External account parameters might be much stronger than they were a year ago, but extreme vigilance is still called for.
Monetary policy’s traditional dilemma of growth versus inflation can never be wished away.
In line with its recent thinking, CPI inflation will be in focus. The CPI index gives more weight to food and it is on this that inflation expectations are based.
The forthcoming policy will be the last before general elections, which commence a few days after the RBI policy. The fiscal stance of the next government will obviously matter in policy formulation.
All these suggest a neutral policy announcement on Tuesday— a status quo on the interest rates. As always, broad macro-economic trends will be discussed.
Mumbai: Premier infra finance company IDFC, which on Wednesday received an inprinciple approval to set up a bank, will shift assets into an NBFC infra fund as part of the process to convert into a bank. It will also operationalize its plans on several fronts as it races against time to meet an 18-month deadline to open its bank branch doors.
At one end, the plans include initiating legal process for transfer of group companies under a non-operating holding company. On the operational side, the company will start hiring bankers, installing IT systems and identifying branches.
Speaking to TOI, IDFC MD & CEO Vikram Limaye said that the bank had obtained the board’s approval prior to approaching the RBI and would now start the conversion process. “We have to work on how we operationalize the bank and have 18 months to do that. There is a lot of work to be done in terms of structure, people, and technology. Branches have to be set up. But this has not come as a surprise as we have been thinking this through for several months and now we have to execute our plans,” Limaye said.
Part of the restructuring involves creating an NBFC infrastructure fund into which the finance companies would transfer assets to reduce pressure on the bank. This is necessary as the company would have to meet all the cash reserve ratio andstatutory liquidity ratio requirements on its liabilities. “There is no dispensation and that was quite clear in the RBI’s guidelines. We will have to comply with all the requirements on cash reserve ratio and statutory liquidity ratio,” said Limaye. It would also have its private equity, investment banking and asset management business under a common non-operating holding company.
One of the pre-conditions for the licence is that IDFC transfer all businesses that can be undertaken from within a bank to the bank. At present, IDFC has 21 domestic subsidiaries and five international arms. The domestic arms include investment banking, primary dealership and pension management. IDFC has to work on several fronts at the same time as the 18-month deadline would have to take into account time taken by the courts to grant approval for mergers.
The bank has already started the hiring process by identifying managers. Now with the approval in place, appointment letters will be issued. “We have been hiring selectively but we have met a lot of people who we would like to join us. Till a few days ago it was not clear whether the election commission would clear the process or whether the licences would be given our pre-election or post-elections. So now that we have visibility, we can close on some of the hiring that we have not done as yet,” said Limaye.
Recently IDFC had hired Avtar Monga (senior executive with Bank of America) who comes with a strong background in operations and technology. It had earlier hired Ajay Mahajan, who used to be with YES Bank and UBS. “There are many more we need to make in areas we do not have experience such as retail, agriculture and financial inclusion,” Limaye added.
Chandra Shekhar Ghosh gave up his family business and started Bandhan in 2001 with three employees in Howrah. Today, it boasts of over 2,000 branches, 13,000 employees and close to 54 lakh clients. Having received a bank licence, Ghosh intends to access deposits to lower the cost of funds. In an interview, the Bandhan CMD insists that the financial inclusion business is robust, while keeping the focus on the unbanked and under-banked. Excerpts:
How are you planning the rollout? We are a non-banking finance company and are maintaining the highest level of corporate governance. Whatever is required further, will be done. What we will do now is have a board meeting and a meeting with the senior management, and present a plan — which we have shared with RBI — and go ahead with execution. We would like to provide banking services to our existing clients in rural areas as well as other customers who are living in these areas. We plan to offer other financial savings products on the basis of the experience that we have gathered in the last 13 years.
Will access to deposits be the biggest gain for you? Yes. It will help us accept deposits and reduce the cost of funds, which will enable us to provide more benefits to our customers.
Will you look at new segments? We cater to segments that are not serviced by existing banks or where banks don’t have a reach. We look at other similar segments, which could include small and medium enterprises. Around 70% of our branches are in rural areas and they are in the eastern part of the country and in the North-East. We will gradually look to expand to other parts of the country. But the focus will remain on the under-banked segments of the society. We would like to execute financial inclusion, true financial inclusion.
Will it be a profitable business model?
It will be a sustainable business model.
Over the last two decades, several bank licences have been issued but a lot of the banks have merged with others as they found it tough to do business. How confident are you of sailing through?
In our case, we have been following the micro-finance business and are working in the area for the last 13 years. We have established a healthy model and we have a set staff that has worked well in the unbanked areas of the country. We have worked quite well and this will help in creating a successful model.
IDFC to shift assets into infra fund
To Merge Subsidiary Biz Into Parent Co As Part Of Its Banking Plans
Mayur Shetty TNN
Mumbai: Premier infra finance company IDFC, which on Wednesday received an inprinciple approval to set up a bank, will shift assets into an NBFC infra fund as part of the process to convert into a bank. It will also operationalize its plans on several fronts as it races against time to meet an 18-month deadline to open its bank branch doors.
At one end, the plans include initiating legal process for transfer of group companies under a non-operating holding company. On the operational side, the company will start hiring bankers, installing IT systems and identifying branches.
Speaking to TOI, IDFC MD & CEO Vikram Limaye said that the bank had obtained the board’s approval prior to approaching the RBI and would now start the conversion process. “We have to work on how we operationalize the bank and have 18 months to do that. There is a lot of work to be done in terms of structure, people, and technology. Branches have to be set up. But this has not come as a surprise as we have been thinking this through for several months and now we have to execute our plans,” Limaye said.
Part of the restructuring involves creating an NBFC infrastructure fund into which the finance companies would transfer assets to reduce pressure on the bank. This is necessary as the company would have to meet all the cash reserve ratio andstatutory liquidity ratio requirements on its liabilities. “There is no dispensation and that was quite clear in the RBI’s guidelines. We will have to comply with all the requirements on cash reserve ratio and statutory liquidity ratio,” said Limaye. It would also have its private equity, investment banking and asset management business under a common non-operating holding company.
One of the pre-conditions for the licence is that IDFC transfer all businesses that can be undertaken from within a bank to the bank. At present, IDFC has 21 domestic subsidiaries and five international arms. The domestic arms include investment banking, primary dealership and pension management. IDFC has to work on several fronts at the same time as the 18-month deadline would have to take into account time taken by the courts to grant approval for mergers.
The bank has already started the hiring process by identifying managers. Now with the approval in place, appointment letters will be issued. “We have been hiring selectively but we have met a lot of people who we would like to join us. Till a few days ago it was not clear whether the election commission would clear the process or whether the licences would be given our pre-election or post-elections. So now that we have visibility, we can close on some of the hiring that we have not done as yet,” said Limaye.
Recently IDFC had hired Avtar Monga (senior executive with Bank of America) who comes with a strong background in operations and technology. It had earlier hired Ajay Mahajan, who used to be with YES Bank and UBS. “There are many more we need to make in areas we do not have experience such as retail, agriculture and financial inclusion,” Limaye added.
IDFC MD & CEO Vikram Limaye
We will execute true fin inclusion: Bandhan CMD
Sidhartha TNN
Chandra Shekhar Ghosh gave up his family business and started Bandhan in 2001 with three employees in Howrah. Today, it boasts of over 2,000 branches, 13,000 employees and close to 54 lakh clients. Having received a bank licence, Ghosh intends to access deposits to lower the cost of funds. In an interview, the Bandhan CMD insists that the financial inclusion business is robust, while keeping the focus on the unbanked and under-banked. Excerpts:
How are you planning the rollout? We are a non-banking finance company and are maintaining the highest level of corporate governance. Whatever is required further, will be done. What we will do now is have a board meeting and a meeting with the senior management, and present a plan — which we have shared with RBI — and go ahead with execution. We would like to provide banking services to our existing clients in rural areas as well as other customers who are living in these areas. We plan to offer other financial savings products on the basis of the experience that we have gathered in the last 13 years.
Will access to deposits be the biggest gain for you? Yes. It will help us accept deposits and reduce the cost of funds, which will enable us to provide more benefits to our customers.
Will you look at new segments? We cater to segments that are not serviced by existing banks or where banks don’t have a reach. We look at other similar segments, which could include small and medium enterprises. Around 70% of our branches are in rural areas and they are in the eastern part of the country and in the North-East. We will gradually look to expand to other parts of the country. But the focus will remain on the under-banked segments of the society. We would like to execute financial inclusion, true financial inclusion.
Will it be a profitable business model?
It will be a sustainable business model.
Over the last two decades, several bank licences have been issued but a lot of the banks have merged with others as they found it tough to do business. How confident are you of sailing through?
In our case, we have been following the micro-finance business and are working in the area for the last 13 years. We have established a healthy model and we have a set staff that has worked well in the unbanked areas of the country. We have worked quite well and this will help in creating a successful model.
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Participatory notes holders may be taxed: Shome
Holders of participatory notes (PNs) issued by foreign institutional investors (FIIs) might be taxed in the next budget as it had been agreed by the Finance Department, advisor to Union Finance Minister Parthasarathi Shome said.
“So far PNs issued by the FIIs to overseas investors were not taxed by the Income-tax Department. But after deliberations in the Finance Department, the PN holders may be taxed in the next budget”, Dr. Shome said at an interaction organised by ICAI here on Monday.
He said that internationally, PN holders were taxed by countries where their investments were routed through FIIs.
Dr. Shome said the revised Direct Taxes Code of 2013, the erstwhile practice of granting EEE (exempt, exempt, exempt) to savings at the time of investments, accruals and withdrawal had been retained as there was substantial opposition to the EET (exempt, exempt, tax) as proposed in the original DTC of 2009. He had also supported the 35 per cent marginal tax slab for individuals and HUF for income of Rs.10 crore or more per year.
According to him, this new tax rate had been introduced to impart equity in tax administration as well as to bring efficiency gains.
In the case of wealth tax, the revised DTC proposed that the dividend distribution tax (DDT) for incremental dividend in excess of Rs.1 crore would be taxed in the hands of the shareholders. — PTI
RBI panel suggests benchmark for floating rate products
The Reserve Bank of India (RBI), on Thursday, suggested measures for transparent and appropriate pricing of credit under a floating rate regime.
The working group on pricing of credit, set up by the RBI, recommended that the Indian Banks’ Association (IBA) develop a new benchmark for floating interest rate products, namely, the Indian Banks Base Rate (IBBR), which may be collated and published by the IBA on a periodic basis. To begin with, the working group said, “IBBR may be used for home loans.” “It would be desirable that banks, particularly those whose weighted average maturity of deposits is on the lower side, move towards computing the Base Rate on the basis of marginal cost of funds. This may result in more transparency in pricing, reduced customer complaints, better transmission of changes in the policy rate and improved asset liability management at banks,” said the working group. “The board of a bank should ensure that any price differentiation is consistent with bank’s credit pricing policy factoring Risk Adjusted Return on Capital (RAROC). Banks should be able to demonstrate to the RBI the rationale of the pricing policy.”
Banks’ internal policy must spell out the rationale for, and range of, the spread in the case of a given borrower, as also, the delegation of powers in respect of loan pricing, the working group suggested.
The floating rate loan covenant may have interest rate reset periodicity and the resets may be done on those dates only, irrespective of changes made to the Base Rate within the reset period.
There may be a sunset clause for Benchmark Prime Lending Rate contracts so that all the contracts thereafter are linked to the Base Rate.
Pre-payments
The working group has also said that the benefit of interest reduction on the principal on account of pre-payments should be given on the day the money is received by the bank without waiting for the next EMI cycle date to effect the credit. For retail loans, the working group said that customers should have a choice of ‘with exit’ and ‘sans exit’ options at the time of entering the contract.
Two new banks on the horizon
A day after reviewing the credit policy statement on April 1, the Reserve Bank of India (RBI) announced its decision to award ‘in-principle’ approval to two applicants, IDFC Limited and Bandhan Financial Services Private Ltd., to set up banks. These two successful applicants will now proceed to set up full-fledged banks under guidelines issued by the RBI on February 22, 2013. They have 18 months to comply with the requirements under the guidelines and any other stipulations that RBI might prescribe.
Senior officials from both the institutions have been keenly aware of the tasks on hand. They have very different profiles at present. In their march to full banking status, they would naturally leverage on their existing strengths — infrastructure in the case of IDFC and micro finance for Bandhan. The tasks look daunting but achievable within the given timeframe.
The last private bank licences were awarded ten years ago in 2004. Kotak Mahindra Bank and Yes Bank came into being. At the start of the reform era, several licences were given to private players to set up “new generation private banks”. These were expected to be very different from the already existing private banks, in terms of technology, capitalisation and so on.
However, in the reform context, it is easy to see that these new banks were licensed specifically to be a model for the public sector banks, which continue to be the dominant force till date.
Pedigree matters most
It is difficult to generalise but the performance of the new private banks as a class did not match the expectations of them. More significantly, only a few of them have survived, the others being gobbled up by stronger private banks. One high-flier, Global Trust Bank, had to be rescued by the government-owned Oriental Bank of Commerce. And the CRB fiasco, when a totally undeserving non-banking finance company was given an in-principle clearance to start a bank, is still fresh in our minds.
One message from the more successful ones is that their model has not been inclusive. Using technology and starting with a clean slate they have created a new paradigm essentially for the well heeled. How far their success in niche areas is relevant to bank licensing today —with its emphasis on financial inclusion — is to be seen.
Interestingly, the more successful banks set up in the 1990s and thereafter are those with good pedigree.
All the above provide an explanation as to why the process of issuing private bank licences has taken so long. The RBI has, for very valid reasons, been conservative. Bank licensing is a sensitive subject always. More so when private players, including corporates, were to be considered. In fact, the suggestion to include corporates among those who can bid has been the most controversial. The RBI itself was opposed to it and most of the responses to the discussion papers were not in favour.
Those who oppose granting bank licences to corporates are on a sound wicket. Recent economic history is on their side. Banks were nationalised in two phases beginning 1969 to end the corporate owners’ stranglehold over major banks. Whatever else might have been the pitfalls of nationalisation, it ended the cosy relationship between bank managements and corporates.
It was in 2010 that the then Finance Minister, Pranab Mukherjee, first mooted the proposal to issue a few private bank licences in his budget speech. The RBI circulated discussion papers and elicited responses from a wide range of people. Guidelines were framed after that. After two of them withdrew, 25 were considered. The first round of scrutiny was done at RBI. To further vet the applicants who meet the eligibility criteria and also to avoid any bias, the RBI appointed a High Level Advisory Committee (HLAC) headed by former RBI Governor Bimal Jalan. It is on the basis of this committee’s recommendations that the first two licences were awarded.
The RBI has done everything right. The two successful applicants are non-controversial. As to the criticism that the RBI could have waited until after a new government is formed, the Governor had said that the entire process might have had to be revisited in that case. Considerable ground had been covered and the whole procedure has been above board. Despite some big names among the corporate applicants, the RBI has played it safe by giving in principle clearances to entirely non-controversial non-banking finance companies.
Reality check on the economy
Economic issues are inextricably tied to the ongoing
high voltage election propaganda. The claim that a BJP-led NDA
government will manage the economy far better than the UPA II will have
to be tested.
But for now, do official data on the economy corroborate popular feelings? Take the single important issue of price rise.
Economists
discuss price rise in terms of inflation and inflation expectations but
for the common man it is the burden of price rise and his understanding
of what the future price situation would be. Inflation expectation are
said to be hardened if a majority of consumers do not think prices of
say essential commodities would come down.
Common man’s problems
Even
more difficult it is for the common man to relate to the debates over
GDP (gross domestic product) such as whether India’s growth is on track.
For most people, economic growth is to be seen in the context of issues
such as employment generation and not as some abstract statistical
figure.
On the eve of a new government formation, the
ruling coalition has a “lame duck status” — under the model code it
cannot announce any new policy measures to uplift the sentiment. Also,
until the announcement of election results on May 16, there are very few
routine data releases — the monthly inflation numbers, both WPI
(wholesale price index) and CPI (consumer price index), the index of
industrial production (IIP) data the monthly and annual trade figures of
the Ministry of Commerce and Industry.
The CSO’s
(Central Statistics Office) estimates of GDP growth for the whole year
(2013-14) will not be released until the beginning of June. Nor will the
next monetary policy review of the RBI be made before the election
results are out. (The scheduled review will be on June 3). So what do
these seasonal data releases of the past few weeks indicate?
Deceleration in exports
To
take up trade figures first, the March data released by the Ministry of
Commerce and Industry show a deceleration in exports by 3.15 per cent,
the second consecutive monthly fall. For the whole year (2013-14),
exports were $312.35 billion, short of the target of $325 billion.
Imports fell by a little over 8 per cent to nearly $451 billion. The
trade deficit (imports minus exports) was at a three-year low at a
little over $138.59 billion.
A few points about the
trade data: (1) Narrowing of the trade deficit is not by itself a
welcome development. That depends on how the contraction has occurred.
Ideally, it should be on the basis of an export revival and not just
import contraction. Gold and silver imports have declined sharply due to
stringent government restrictions. Oil imports were higher. A reduction
in non-oil imports is not always welcome news. On the contrary, it
indicates economic slowdown.
(2) Exports declining
for the second month in a row are a worrisome development. Until two
months ago, there was a revival of sorts, aided in part by a
depreciating rupee and economic recovery in the U.S. The rupee has shown
signs of appreciating recently. Currencies of some competing countries
have been depreciating alongside this. India’s weak manufacturing growth
is another factor as also uncertainty at the global level.
The
government that takes office in May will have plenty to do to boost
exports. However, ultimately, for both imports and exports it is a broad
economic revival that will be the solution.
The
Index of Industrial Production (IIP) data is often considered to be a
lead indicator of macro-economic growth. Often criticised for its
volatility and sometimes for its unreliability, the IIP is still the
most widely watched index for industrial activity. For February, it
declined by 1.9 per cent against a rise of 0.8 per cent in the previous
month. Manufacturing, forming 75 per cent of the index, declined by 3.7
per cent. Mining has recovered somewhat while electricity posted a
robust growth. Consumer durables segment continued to slide. For the 11
months till February, industrial output fell by 0.1 per cent compared
with 0.6 per cent growth last year.
This is as
convincing an indication as is available of the slowdown. It is here, of
course, that the accent of the new government will have to be on
reviving investment.
The sluggish growth in
industrial output has not dampened inflation. Both WPI and CPI inflation
data for March released on Tuesday (April 15) show an uptick over the
previous month.
WPI rose to 5.7 per cent. It was at a
nine-month low of 4.68 per cent in February. CPI inflation was also
higher than expected at 8.31 per cent up from 8.03 per cent in February.
Higher food inflation — costlier vegetables, fruits milk and milk
products — are behind the rise in both the indices. Amid weak growth,
the RBI would find it difficult to hold back rates.
It will be a gross understatement to say that the new government will face daunting challenges.
CAG scan of the private sector
The Supreme Court’s ruling that the Comptroller and Auditor General of India can audit private telecom firms that share their revenues with the government is a landmark one. The ruling has, at one stroke, extended the reach of the CAG from government and public sector companies to any entity that may be using a public resource in its business and sharing revenue with the government. The ostensible principle behind the ruling is that when the Executive deals with natural resources, such as spectrum, which belong to the people, Parliament should know how the nation’s wealth has been dealt with. The quantum of revenue generated from the resource has to be verified; whether the revenue has been properly accounted for by the government and the private licensee also needs to be ascertained. The principle behind the ruling is unexceptionable and gains resonance in the context of scams in spectrum and coal blocks allocations that were unearthed by the CAG. Politicians are not beyond colluding with private firms to extract rent from their control of public resources, and the latter have been happy to play along. The origins of the case that has led to the Supreme Court ruling lie in a dispute between a couple of telecom companies and the government over accounting of revenues, which is crucial to determining the licence fee payable to the government. The government suspected that the companies were accounting for revenues in a manner that would lower their fee liability.
The fact is that companies that use public resources have a responsibility to bear, and if they play true and fair they have nothing to fear from an audit, including one by the CAG. A CAG audit can be an irritant in the conduct of daily business as records need to be produced and queries answered, especially because this will be in addition to the statutory audit under the Companies Act. If governments and the CAG ensure that there is no harassment, there would be no cause to protest against the audit itself, as industry associations are now doing. After all, the ruling is a direct result of proven misdemeanour by some entities in recent times. That said, the challenge for the CAG will be in deploying adequate resources and talent in such audits when called upon by the government or the regulators. These need to be completed and the reports submitted in good time unlike traditional CAG audits of public sector entities that are invariably delayed. The government and the regulators should resort to CAG audits sparingly and only under exceptional circumstances where they suspect serious wrongdoing by a player. Turning to CAG audits routinely will only increase the regulatory burden and turn away private investors.
‘Jobless growth’ no more
Since 2004-05, for the first time in the history of India, more workers have left agriculture for productive work in industry and services
Higher than normal inflation, high current account deficit, a depreciating rupee and slowing GDP growth might hold true in recent times. However, when it comes to employment, the facts are quite different as between 2009-10 and 2011-12, non-agricultural employment grew rapidly.
Between 1999-2000 and 2004-05, National Sample Survey (NSS) data reveal that nearly 12 million joined the labour force. However, the number of non-agricultural jobs created per annum was much lower — 7.5 million. Non-agricultural employment increased between 1999-2000 and 2004-05 (which coincides with the time the National Democratic Alliance was in power) by 37.5 million over the five-year period, i.e., 7.5 million new jobs in industry (manufacturing and construction) and services per annum.
Growth of non-agricultural jobs
The number of non-agricultural jobs between 2004-05 and 2011-12 increased by 52 million over seven years, i.e., by 7.5 million per annum again. However, since 2004-05 fewer people joined the labour force. This meant that fewer people were looking for work, but the number of non-agricultural jobs created was as many as before; the open unemployment rate fell.
The important point is that millions left agricultural work after 2004-05 on account of many new opportunities. Although 37 million persons left agriculture during the periods 2004-05 and 2011-12, they found work in non-agricultural activities, both rural and urban. In comparison, 20 million new workers joined agriculture between 1999-2004. At India’s stage of development, more workers joining agriculture at a time when agricultural productivity is very low is exactly the opposite of what is expected, since agricultural productivity is already lower than comparator countries. Incomes fall when a sector has more workers than needed. Development implies that workers leave agriculture for more productive work in industry and services, and total factor productivity increases in the entire economy. Every developing country is supposed to undergo this structural transformation.
Since 2004-05, this transformation has been happening for the first time in the history of India. Of the 60 million additions to the workforce between 1999-2000 and 2004-05, a third (20 million) joining agriculture indicated growing rural distress, on account of the slow growth in agriculture between 1996 and 2005.
Agriculture has grown much faster since 2005. In fact, during the 11th Plan, agricultural output grew at 3.2 per cent per annum (2007-12) on average, despite crippling drought in 2009-10. The share of agriculture in the workforce has been in decline for decades (falling to 49 per cent in 2001-12). However, the absolute numbers in agriculture have always grown till 2004-05. So, fewer workers were producing more output in agriculture, farm mechanisation increased, and productivity grew.
There was another development. Unskilled workers who left agriculture flocked to construction employment. Such employment increased by only eight million (17 to 25.6 million) during 1999-2000 to 2004-05. But it grew sharply to 50 million by 2011-12. This was an increase from under two million a year to seven million a year. While a part of this increase in construction employment was in housing real estate, it was infrastructure (roads, bridges, airports, ports, energy projects) investment which drove most of the employment growth.
Rural areas also saw significant growth in non-farm construction-related employment: government investment in rural housing for the poor (Indira Awas Yojana) grew, as did rural roads and other rural construction investment (Pradhan Mantri Gram Sadak Yojana and the Mahatma Gandhi National Rural Employment Guarantee Act). In addition, $475 billion worth of infrastructure investment materialised during the 11th Plan period.
Increasing employment was accompanied by rising wages. Wages were stagnant between 1999-2000 and 2004-05, especially rural wages. However, two factors drove wages upward after 2004-05. First, as a result of MGNREGA and rising minimum support prices for government procured cereals, a floor wage was created in the rural areas. This along with an increasing demand for labour in construction led to a tightening of the labour market, both rural and urban. This led to a knock-on effect on urban unskilled wages as well. A second reason for the rise in wages for unskilled/semi-skilled workers was the demand for labour in construction — which is treated as non-manufacturing industry.
The prophecy of a recent CRISIL report that employment in industry will fall in the next five years, and that workers will go back to agriculture is baseless. If anything, the 12th Plan projects an investment of $668 billion in infrastructure over 2012-2017, which should sustain employment growth.
Growth in service jobs
Most importantly, services jobs grew by 11 million, and manufacturing employment increased by a remarkable nine million in two years alone (2009-10 and 2011-12), although manufacturing employment fell in absolute terms by three million between 2004-05 and 2009-10. It is crucial to understand why non-agricultural employment has risen rapidly between 2009-10 and 2011-12. After 2004-05, demand for a number of consumer goods has grown sharply, which is reflected in the rise in consumption expenditure to 2011-12. This rise of consumption expenditure shows that the numbers of poor fell from 407 million (Tendulkar line) in 2004-05 to 356 million in 2009-10, and further to 269 million (2011-12).
For the first time in the history of India, there was a decline in the absolute numbers of the poor after 2004-05; until then for nearly 30 years (1973-74 to 2004-5), there was a fall in the percentage, but not in the absolute numbers of the poor (322 million poor in 1973-74 and 302 million poor in 2004-05, by the Lakdawala poverty line). The decline in poverty was driven by a rise in real wages. This rise in real wages and an increase in consumption expenditure have driven demand for goods to the bottom of the pyramid, as poor people have emerged out of poverty.
The new non-poor demand simple manufactured consumer goods: processed food (biscuits, milk), leather goods (shoes, sandals), furniture (plastic chairs/tables, wooden furniture), textiles, garments and mobiles. All these product areas and services saw a dramatic increase in employment between 2009-10 and 2011-12, primarily because these simple, low-end products (at least those consumed by the new non-poor) are produced in the unorganised sector, using labour-intensive methods.
A new inclusive dynamic is in place in the Indian economy, which is difficult to reverse. There is a feedback loop between increasing demand, and production to meet that demand, that generates employment among those who will consume the products that are produced.
Chennai: Non-Banking Finance companies (NBFCs) have been stumped by a provision in the new Companies Act. It mandates all such players that raise funds by issuing debentures to create a debenture-redemption reserve (DRR) and maintain 15% of the monies in lowinterest securities or SLRbacked instruments.
SLR or the statutory liquidity ratio is the percentage of deposits banks need to maintain in liquid form – cash, gold or government bonds.
The Companies Act appears stricter for NBFCs, particularly on two counts: creation of a DRR equivalent to 50% of debentures or bonds over the repayment term, and building liquidity support at the start of fiscal for debentures maturing during the year (at least 15% of the value maturing). “This is a retrograde step. Cost of funds could increase 80 to 90 basis points (100 bps = 1%). The move is sure to impact profitability of those companies which raise debt through bond issues,” said G S Sundararajan, group director, Shriram Group, and MD, Shriram City Union Finance, an NBFC that is active in the bond market.
While one RBI’s Nachiket Mor Committee wants SLR requirements for NBFCs to be abolished, another arm of the government — the ministry of corporate affairs (MCA) — wants increased investments in SLR-backed securities, he said. Though market players are not clear whether the norms are prospective or retrospective, Sundararajan said, “Our legal interpretation suggests it is prospective.”
The Act has not only increased reserve requirement for debentures raised through public source (from 25% to 50%), it has also introduced requirements for privately placed debentures (to 50%).
“If implemented with retrospective effect, creation of DRR will adversely impact dividend paying capacity of NBFCs given their higher dependence on borrowing through this route (around 60% of overall borrowings). Moreover, negative carry of 200-300 bps on liquidity support for maturing debentures will impact earnings, though the impact will be marginal (around 0.5% over FY15-16 on profitability),” analysts from Edelweiss wrote in a report.
The Act requires companies issuing debentures to earmark an amount not less than 15% of the amount maturing in a particular year by way of investment and deposits in specified securities, which are liked to SLR — simply put, in low interest-bearing instruments.
“The Act seems to be tougher on NBFCs given their higher dependence on borrowing through the bond market. However, NBFCs have made a representation to the MCA and asked for exemption (similar to that was available previously) and clarification on ambiguity of implementation (retrospective/prospective effect). But, if implemented in the current form, it is likely to impact NBFCs’ dividend payout and margins (negative carry on 15% of funds), albeit marginally,” the Edelweiss report said.
Gilt lender Manappuram’s managing director I Unnikrishnan concurred: “The Act will impact distributable surplus. The mandatory requirements of additional SLR-linked investments will affect profitability and I sincerely hope the requirements are prospective and not retrospective.
Tough reserve rules to hit NBFCs
Rajesh Chandramouli TNN
Chennai: Non-Banking Finance companies (NBFCs) have been stumped by a provision in the new Companies Act. It mandates all such players that raise funds by issuing debentures to create a debenture-redemption reserve (DRR) and maintain 15% of the monies in lowinterest securities or SLRbacked instruments.
SLR or the statutory liquidity ratio is the percentage of deposits banks need to maintain in liquid form – cash, gold or government bonds.
The Companies Act appears stricter for NBFCs, particularly on two counts: creation of a DRR equivalent to 50% of debentures or bonds over the repayment term, and building liquidity support at the start of fiscal for debentures maturing during the year (at least 15% of the value maturing). “This is a retrograde step. Cost of funds could increase 80 to 90 basis points (100 bps = 1%). The move is sure to impact profitability of those companies which raise debt through bond issues,” said G S Sundararajan, group director, Shriram Group, and MD, Shriram City Union Finance, an NBFC that is active in the bond market.
While one RBI’s Nachiket Mor Committee wants SLR requirements for NBFCs to be abolished, another arm of the government — the ministry of corporate affairs (MCA) — wants increased investments in SLR-backed securities, he said. Though market players are not clear whether the norms are prospective or retrospective, Sundararajan said, “Our legal interpretation suggests it is prospective.”
The Act has not only increased reserve requirement for debentures raised through public source (from 25% to 50%), it has also introduced requirements for privately placed debentures (to 50%).
“If implemented with retrospective effect, creation of DRR will adversely impact dividend paying capacity of NBFCs given their higher dependence on borrowing through this route (around 60% of overall borrowings). Moreover, negative carry of 200-300 bps on liquidity support for maturing debentures will impact earnings, though the impact will be marginal (around 0.5% over FY15-16 on profitability),” analysts from Edelweiss wrote in a report.
The Act requires companies issuing debentures to earmark an amount not less than 15% of the amount maturing in a particular year by way of investment and deposits in specified securities, which are liked to SLR — simply put, in low interest-bearing instruments.
“The Act seems to be tougher on NBFCs given their higher dependence on borrowing through the bond market. However, NBFCs have made a representation to the MCA and asked for exemption (similar to that was available previously) and clarification on ambiguity of implementation (retrospective/prospective effect). But, if implemented in the current form, it is likely to impact NBFCs’ dividend payout and margins (negative carry on 15% of funds), albeit marginally,” the Edelweiss report said.
Gilt lender Manappuram’s managing director I Unnikrishnan concurred: “The Act will impact distributable surplus. The mandatory requirements of additional SLR-linked investments will affect profitability and I sincerely hope the requirements are prospective and not retrospective.
RBI for two-stage verification for online transactions
Customers should be given option to choose fromdifferent methods of authentication
Worried over rising number of frauds in online banking, the Reserve Bank of India (RBI) has suggested that banks introduce two-stage authentication to ensure security of transactions.
The RBI report on ‘Enabling Public Key Infrastructure (PKI) in Payment System Applications’ said banks should also inform customers about risks associated with different types of online banking transaction.
“Internet banking applications of all banks should mandatorily create authentication environment for password-based two-factor authentication as well as PKI-based system for authentication and transaction verification in online banking transaction,” the report said.
It also said customers should be given the option to choose from different methods of authentication for ensuring security of online transactions.
There are various PKI-enabled electronic payments systems introduced by the RBI such RTGS, NEFT, CBLO, Forex Clearing, Government Securities Clearing, and Cheque Truncation System (CTS). In volume terms, these systems contributed 25.1 per cent whereas these systems contributed 93.7 per cent share to the total payment transactions carried out in 2012-13 in value terms.
Non-PKI enabled payment systems contributed 75 per cent in volume terms but only 6.3 per cent in value terms in 2012-13.
“The objective of an effective payment system is to ensure a safe, secure, efficient, robust and sound payment system in the country. In order to secure electronic documents and transactions and to ensure legal compliance, digital technology is used,” it said.
The report said that the banks may carry out in three phases PKI implementation for authentication and transaction verification.
“The banks have been mandated to issue EMV (card with chip and pin) to certain category of customers and for the other customers, banks have been given option to either issue EMV cards or adopt Aadhaar biometric authentication as additional factor of authentication,” the report said. — PTI
India concludes pact with U.S. on tax evasion under FATCA
India has concluded an ‘in substance’ agreement with the U.S. to combat possible tax evasion by Americans through Indian financial entities.
The ‘in substance’ agreement with India under the Foreign Account Tax Compliance Act (FATCA) was concluded .
The Securities and Exchange Board of India (SEBI) plans to issue guidelines for market intermediaries in this regard this fiscal, sources said. The U.S. said India had consented to Model 1 — Intergovernmental Agreement (IGA) under FATCA.
As per Model 1, financial entities will be required to report information on U.S. account holders to the U.S. IRS (internal revenue service) through CBDT.
FATCA requires the U.S. government to sign IGAs with various countries, including India, where American individuals and companies may hold accounts and other assets.
“Regulatory measures from SEBI and other regulators after the signing of this IGA would immensely help Indian financial institutions to cope with this complex regulation,” said Amit Maheshwari, Partner Ashok Maheshwary & Associates.
He said other regulators such as RBI were also expected to issue guidelines to ensure compliance of FATCA.
Signing of IGA coupled with regulatory measures from SEBI would be helpful for Indian financial institutions and corporates to better comply with this significant legislation, experts said.
SEBI was asked to examine the applicability of the FATCA provisions to all market intermediaries regulated by the capital markets regulator. This was examined by SEBI in coordination with the Finance Ministry.
According to sources, necessary comments and suggestions have been provided to the Ministry and pursuant to the government directions, SEBI would issue appropriate guidelines in 2014-15 to market intermediaries on due diligence and reporting requirements with respect to FATCA. While FATCA became a law way back in 2010, the final regulations were issued for it in January, 2013, and it is set to come into effect from July 1, 2014, after signing of IGAs with different countries. — PTI
Markets await revamped IIBs from Reserve Bank
The much-publicised Inflation-Indexed Bonds (IIBs) failed to attract investor interest, either retail or institutional, in the last financial year. The Reserve Bank of India (RBI) is now planning to re-launch this product in a restructured form.
Globally, inflation-indexed bonds are much in demand since they provide investors an inflation hedge providing real interest rate returns.
IIBs were primarily issued to institutional investors, and initial auctions worth Rs.6,500 crore received a muted response. Arun Khurana, Country Head, Global Markets Group, IndusInd Bank, felt the main reasons for this was IIBs were primarily linked to wholesale price index (WPI) and not consumer price index (CPI).
“There is uncertainty of cash flows. Future cash flows accruing to the bond are not known, and there are no systems for internal valuation of the bonds. There is also absence of secondary market trading,” he pointed out.
Retail segment
For the retail segment, Inflation Index National Savings Securities, (linked to CPI) were available to the tune of Rs.1,000 crore.
“The poor appetite is mainly because it is not transferable, that is, it cannot be traded in the secondary market and premature redemption is allowed only after three years with a penalty,” Mr. Khurana added. It will be difficult to quantify the exact demand for the product, but with the gross borrowing programme at Rs.6 lakh crore (approximately), “this could catch the interest of investors provided there is sizable liquidity created through continuous issuances”.
Further, investors in these bonds would be insurance companies, pension funds, banks for their SLR portfolios and FII’s.
“If corrective action is taken, I would foresee these bonds garnering investor interest,” said Mr. Khurana.
In 1997, IIBs were issued in the name of Capital-Indexed Bonds (CIBs) but failed to attract investors.
According to Mr. Khurana, the main reason for its lack of demand is attributable to its nature, that is, “only protection of capital against inflation and not the coupon”.
Any such instrument that is introduced in the market needs to serve a dual purpose, that is, be investor-friendly and be adequately attractive to brokers / distributors.
There are a slew of investible products in the market. “Therefore, for investors, the attractiveness of the product is important to highlight,” said Anis Chakravarty, Senior Director, Deloitte Touche Tohmatsu India Private Limited.
While the RBI tried to tailor the structure by raising the investment cap and offering a higher brokerage, it still fell behind in certain respects, said Mr. Chakravarty. According to him, liquidity aspects of the instrument, particularly around interest payouts, were important.
Further, taxation issues needed to be ironed out. Another important factor was that inflation itself had declined over the past few months. Mr. Chakravarty said the timing of introduction of such a product vis-à-vis its attractiveness, needed to be better understood.
The biggest shortcoming of the IIBs in the current format was the taxation issue, said Umang Papneja, Chief Investment Officer, IIFL Private Wealth. On a post-tax basis, there were many instruments offering better returns than the IIBs, he said.
Long-dated FMPs (fixed maturity plans) and tax-free bonds were some of these instruments, he pointed out.
The bonds now offered did not have indexation benefits. “If indexation benefits are available to investors on these bonds, then there will be a huge demand from individual investors,” Mr. Papneja said.
New Delhi: The global economic balance seems to be tilting towards the developing countries. India has overtaken Japan to emerge as the third largest economy in purchasing power parity (PPP) terms, after the US and China, latest data released by the World Bank showed.
Separately, an analysis showed members of the OECD, a rich-country club, accounted for 50% of the global economy estimated at $90 trillion in 2011, compared to 60% of the $70 trillion economy in 2005. While developing countries made up the remaining half, large emerging market economies such as India, China, Brazil, Indonesia, Russia and South Africa now make up around 30% of the world GDP.
The previous version of the World Bank’s International Comparison Program (ICP) report had said that India was ranked 10th in 2005 in terms of PPP. PPP is used to compare economies and incomes of people by adjusting for differences in prices in various countries.
“The economies of Japan and the UK became smaller relative to the US, while Germany increased slightly and France and Italy remained the same,” the World Bank report said.
It said that six of the world’s 12 largest economies were in the middle-income category. The dozen largest economies accounted for two-third of the world economy and 59% of the population, the report added.
The six largest middleincome economies — China, India, Russia, Brazil, Indonesia and Mexico — accounted for 32.3% of world GDP, while the six largest high-income economies — US, Japan, Germany, France, UK and Italy — accounted for 32.9%, showing the distance that the emerging economies had travelled through rapid growth in recent years.
At 27%, China has the largest share of the world’s expenditure for investment, with the US at half the level with 13% share. India, Japan and Indonesia followed with 7%, 4%, and 3%, respectively.
India pips Japan to be 3rd largest eco in PPP
OECD Bloc’s Share In Global Eco Shrinks To 50% Big Emerging Mkts Touch 30%
TIMES NEWS NETWORK
New Delhi: The global economic balance seems to be tilting towards the developing countries. India has overtaken Japan to emerge as the third largest economy in purchasing power parity (PPP) terms, after the US and China, latest data released by the World Bank showed.
Separately, an analysis showed members of the OECD, a rich-country club, accounted for 50% of the global economy estimated at $90 trillion in 2011, compared to 60% of the $70 trillion economy in 2005. While developing countries made up the remaining half, large emerging market economies such as India, China, Brazil, Indonesia, Russia and South Africa now make up around 30% of the world GDP.
The previous version of the World Bank’s International Comparison Program (ICP) report had said that India was ranked 10th in 2005 in terms of PPP. PPP is used to compare economies and incomes of people by adjusting for differences in prices in various countries.
“The economies of Japan and the UK became smaller relative to the US, while Germany increased slightly and France and Italy remained the same,” the World Bank report said.
It said that six of the world’s 12 largest economies were in the middle-income category. The dozen largest economies accounted for two-third of the world economy and 59% of the population, the report added.
The six largest middleincome economies — China, India, Russia, Brazil, Indonesia and Mexico — accounted for 32.3% of world GDP, while the six largest high-income economies — US, Japan, Germany, France, UK and Italy — accounted for 32.9%, showing the distance that the emerging economies had travelled through rapid growth in recent years.
At 27%, China has the largest share of the world’s expenditure for investment, with the US at half the level with 13% share. India, Japan and Indonesia followed with 7%, 4%, and 3%, respectively.
SEBI proposes new listing, disclosure requirement norms
The Securities and Exchange Board of India (SEBI), on Monday, proposed a new set of rules, which would require greater disclosures by companies and give more powers to stock exchanges to check any non-compliance.
The proposed norms, to be called SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2014, would need to be followed by all listed companies, as also for listing of debentures, bonds and mutual funds on stock exchanges.
The final norms, which would be framed after taking into public comments, would replace the existing provisions for Listing Agreements that currently act as a contract between a stock exchange and the entity seeking to list on its platform.
SEBI has sought public comments on the proposed norms by May 30.
Detailing the proposed norms in a 74-page document on Monday, SEBI has brought in provisions related to powers of bourses in case of non-compliance by listed entities, empowering bourses to impose penalties on entities for violations, listing and disclosure requirements for mutual funds, among others.
“The stock exchange shall, in case of non-compliance with provisions of these regulations, initiate appropriate action against the listed entity including levying of fines, suspension, freezing of promoter shareholding and the like as specified by the board through circulars or guidelines issued in this regard from time to time,” the draft norms said.
“The stock exchange shall revoke suspension, unfreeze promoter shareholding etc of the listed entity in the manner as directed by the board from time to time,” it added.
The new rules would also include provisions related to the revised corporate governance framework such as requirement by companies to get shareholders’ approval for related party transactions, setting up a whistle blower mechanism, elaborate disclosures on pay packages and requirement of at least one woman director on company boards. The draft norms are also likely to include rules that would require entities to give prior intimation about their fund raising events such as preferential issue and debt issue as well as file an annual information memorandum.
“In order to ensure uniformity in disclosure requirements, the provisions of various clauses of equity listing agreement have also been made applicable to SMEs,” SEBI said. Moreover, the proposed rules may also be made applicable to non-convertible debt securities and non-convertible redeemable preference shares.
According to SEBI, ‘policy changes’ are being proposed separately with respect to financial results “by following a consultative process”. The same would be included in draft regulations once the process is completed.
Meanwhile, SEBI said norms with respect to allotment, refund and payment of interest, book closure date, requirement of 1 per cent security deposit, submitting multiple copies of documents to stock exchange, among others, may not be included in the new listing norms as they are either redundant or would be incorporated in separate set of regulations.
The 10-Point Agenda For The Modi Sarkar
After the 2nd Cabinet meeting, the first proper one, we have a 10-point agenda.
(1) Focus on economy and infrastructure ministries;
(2) Better inter-Ministerial coordination;
(3) Restore confidence of bureaucrats;
(4) Use IT and social media to maximize public interaction;
(5) Focus on education, health, water and roads;
(6) Improve the government machinery;
(7) Ensure a stable and sustainable government;
(8) Transparency in government;
(9) E-auctions for government tendering; and
(10) People-oriented systems.
These have been described as a 10-point agenda, but they are more like governance principles. If one adheres to the 10-points, not all are on the same footing.
For instance, (2), (3) and (6) are clearly different from (1) and (5). On (2), (3) and (6), some elements are administrative, others require legislative changes. Scrapping GOMs, rehabilitating Cabinet and PMO is immediate. But restoring confidence of bureaucrats requires deterrent for mala-fide action and protection of the bona-fide. While executive action can partly restore confidence, overhaul of bureaucracy also requires legislative changes, documented in reports of 2nd Administrative Reforms Commission.
Citizen expectations centre on growth, inflation and corruption. The (2), (3) and (6) and some bit of positive sentiments can restore the investment cycle, but only partly. These streamline clearance processes and unclog projects stuck in the pipeline. Fresh investments are however contingent on something being done about land, forest and environmental legislation. These are not that tractable, apart from the obvious point about decentralization to States, a welcome point repeatedly stated by PM.
However, the FM’s task, with a budget in the 1st week of July, is not going to be easy. Signaling return to FRBM and fiscal consolidation is one thing, reducing deficits in 2014-15 is another. A deficit overhang, not yet visible amidst the statistical jugglery, has been left by the preceding government. There is the compulsion of increasing Plan/capital and defence expenditure. Capital infusion is required in banks, with dilution of equity in PSU banks a viable option.
Most expenditure items (interest payments, wages, pensions) are frozen in the short-turn. Subsidies require discussion with States. This is equally true of tax reform (both GST and DTC), apart from retrospective provisions and cleaning up the tax-related dispute mechanism (including appeals).
Other than dilution of equity in PSU banks, privatization/disinvestment are unlikely. Therefore, one shouldn’t have any unrealistic deficit-reduction expectations about the 2014-15 budget. The growth improvements will be incremental, not big-bang. This also applies to supply-side changes, necessary for both agro and manufactured inflation. While one should argue for changes in APMC Acts, ECA and perhaps even MSP, or even for cold storage, processing and other forms of better intermediation, these do not kick in immediately.
On the corruption part, such as in (9), IT and reduction of human interfaces do indeed contribute to reduced corruption. But these are typically State issues. Rare is the scope for e-auction alone solving problems for a government in Delhi. In addition, for something like (8), the point is the following. Can one completely eliminate subjectivity in decision-making in Delhi, despite being transparent about it? Since one can’t, how does one ensure decision-making in this climate of greater public scrutiny?
This governance problem isn’t easy to solve. However, (4) and (10), if they are indeed two-way traffic, make governance more participatory and thereby restore faith in government. That (1) and (5) are important is obvious. But here again, delivery is a state subject and the sooner discussions start with the states, the better. If nothing else, there will have to be tweaking of centrally-sponsored schemes.
Two additional points deserve mention. First, in the first cut of Cabinet formation, there hasn’t been enough rationalization of Ministries/departments. One hopes the reported second cut (in July) will address this better. Second, though expectations are sky-high, it is always best for a government to under-promise and over-deliver, rather than the other way around. Specifically, on growth and inflation, the earlier government had a terrible track record of getting both sets of numbers horribly wrong. Beyond those 10 points, the government also needs to restore the somewhat more intangible aspect of government being credible.
Revive India Story
Confidence will soar if government liberalises FDI policy and implements GST
The India story came off the rails recently. The NDA government won a huge mandate on the promise of reigniting growth. It's welcome that PM Narendra Modi's list of 10 priorities places emphasis on the economy, including infrastructure and investment reforms. There are two big-ticket moves the government can undertake to revive interest in the India story: scripting a liberal FDI framework and implementing a muchdelayed GST regime. The finance ministry has signalled it is working on them. But delivering these reforms will demand political steadfastness.Finmin is drafting a policy framework that will allow at least 49% foreign investment in all sectors, barring some strategic ones. Even more significantly , this minimum 49% investment could be allowed through an automatic route. Chipping away the chaff of time-consuming government approval will make India more attractive to investors. Sectors like defence, railways and e-commerce are expected to benefit, as is insurance where the cap remains stuck at 26% despite most experts recommending otherwise. Foreign com panies will bring in not only sorely needed capital but enhanced technological capa bilities and expertise as well.
GST, which is meant to weave India into a seamless market, is an idea whose time has come. But its roll-out has been delayed long past the scheduled date of 2010. Its genesis can actually be traced all the way back to the previous NDA government.
Even if the thought is depressing, it may lend poetic incentive to Modi's government to finish a Vajpayee project.
Impetus for implementing GST has dramatically increased in the interim, as a maze of taxes mismatched across state boundaries both raise the cost of doing business and lower overall revenue collection.
GST reform requires two-thirds majority in Parliament and also ratification by half the states. This may sound like a tall order, but two things are in the new government's favour. First, it was largely BJP states that stalled GST, protesting a squeeze on their revenues. Modi and Arun Jaitley should be able to sweeten their tempers and tax baskets. Second, after working quite hard to implement GST, Congress will find it difficult to block it now.
It won't of course be smooth sailing, especially given BJP's weak footing in Rajya Sabha. But the returns will be worth it. Alongside streamlining FDI and tax frameworks, it would also help if the government categorically announces it will impose no retrospective taxes.
GST, which is meant to weave India into a seamless market, is an idea whose time has come. But its roll-out has been delayed long past the scheduled date of 2010. Its genesis can actually be traced all the way back to the previous NDA government.
Even if the thought is depressing, it may lend poetic incentive to Modi's government to finish a Vajpayee project.
Impetus for implementing GST has dramatically increased in the interim, as a maze of taxes mismatched across state boundaries both raise the cost of doing business and lower overall revenue collection.
GST reform requires two-thirds majority in Parliament and also ratification by half the states. This may sound like a tall order, but two things are in the new government's favour. First, it was largely BJP states that stalled GST, protesting a squeeze on their revenues. Modi and Arun Jaitley should be able to sweeten their tempers and tax baskets. Second, after working quite hard to implement GST, Congress will find it difficult to block it now.
It won't of course be smooth sailing, especially given BJP's weak footing in Rajya Sabha. But the returns will be worth it. Alongside streamlining FDI and tax frameworks, it would also help if the government categorically announces it will impose no retrospective taxes.
Kerala gets investment tracking system
ePMS to facilitate review and fast-track projects
Government officials in the State can now keep tabs on the progress of projects in the public and private sectors and speedily resolve prickly issues that impede timely completion.
The Central Cabinet Secretariat has deployed an online project management system named ePMS to facilitate, review, and fast-track projects in Kerala with investment from Rs.100 crore to Rs.1,000 crore.
The institutional mechanism is designed on the lines of eCCI, a system used by the Cabinet Committee on Investment to help track and pursue stalled investment projects and remove bottlenecks to ensure that they are completed on time. Developed using open source technology, the portal integrates the services of various departments.
ePMS can be used to submit a new project, update and review a project, and highlight the bottlenecks. It can assist in preparing the agenda and minutes of meetings and analytical reports. The portal generates automatic notifications to take instant action. One of the features of the system is that private entrepreneurs can view the progress of their projects as well as decisions.
The Kerala State Industrial Development Corporation (KSIDC) will be the monitoring agency for the investment tracking mechanism.
A State-level project monitoring group has also been set up under the government to pursue stalled projects. Kerala is the third State after Odisha and Uttarakhand to deploy the State-level investment tracking system.
Launching the portal here on Thursday, Chief Secretary E.K. Bharath Bhushan said it would be a powerful tool for the government to iron out unexpected hurdles such as the delay in land acquisition that held up projects. He said the government would utilise the tool well.
Additional Secretary of Cabinet Secretariat Anil Swarup, Joint Secretary V.P. Joy, and Additional Chief Secretary and Managing Director of KSIDC Aruna Sundararajan were present.
Informatics Division Head of Cabinet Secretariat Shubhag Chand said the eCCI system had helped clear 152 stalled projects involving an investment of Rs.5,31,779 crore.
Positive signals
Given the context, the meeting between RBI Governor Raghuram Rajan and the new Finance Minister, Arun Jaitley, was expected to be significant. In the event, the meeting, which was among the first between a senior government officer and a senior Minister of the new government, has been noteworthy for several reasons. Most importantly, Mr. Jaitley appears to be on the same wavelength as the RBI, acknowledging the challenges the government faces in restoring the pace of growth, contain inflation and concentrate on fiscal consolidation, all important policy objectives whose pursuit involves “a tough balancing act”. Those words will resonate well with the RBI, which has scheduled the second bi-monthly monetary policy review of the current year (2014-15) for June 3. That will be the first official major economic policy statement after the formation of the government. The BJP-led NDA government has fought and won the elections largely on an economic agenda, the promise to revive growth, improve governance and curb rising prices. The last has been a particularly decisive factor during the recent State elections as well and will present a major challenge to the new government. Too often in the recent past, the Finance Minister and the RBI have differed on the approaches to maintaining price stability and reviving growth. These might be early days yet, but the messages from the first meeting between the Minister and the Governor are positive for the conduct of macroeconomic policies without public bickering or contrary political pressure over immediate policy goals.
The monetary approach to curbing inflation is through interest rate hikes but that runs counter to reviving economic growth, at least over the near term. The government’s preference for a softer interest rate regime has not always found favour with the RBI which had doggedly pursued its own course to bring down consumer inflation to 8 per cent by January 2015 and to 6 per cent a year later. The traditional monetary policy dilemma of growth versus stability is once again in focus. Consumer price inflation is above the RBI’s comfort zone. However, industrial growth has been weak to the point of stagnation. While this suggests an interest rate cut, the RBI will most likely again urge the government to undertake supply side measures to cool inflation and outline a credible programme of fiscal consolidation. After a lull, the overall economic outlook looks better. The CAD has been reined in. The economy seems poised to break out of the sub-5 per cent growth trajectory. Monetary and fiscal policies complementing each other will be vital to spur growth and maintain price stability.
DIPP for Simplification of Land Acquisition Act
DILASHA SETH
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NEW DELHI
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AN OPEN ROAD May propose scrapping social impact assessment
The Department of Industrial Policy and Promotion (DIPP) will pitch for simplification of the land acquisition act to facilitate investment and manufacturing in the economy by doing away with the cumbersome rules and procedures in the legislation.Commerce and industry minister Nirmala Sitharaman will likely take the matter up with her rural development counterpart Gopinath Munde.
DIPP will likely propose doing away with the social impact assessment process in the Act, which is a pre-requisite for public-private partnership (PPP) and private entities to acquire land.
“Land Act in the present form has stalled industrial activity and suitable amendments are urgently needed to spur manufacturing in the economy. There is no land acquisition taking place. We have taken up the matter with the minister,“ said an official.
The Act stipulates establishment of a state social impact assessment unit, the office of a commissioner, rehabilitation and resettlement, and a state-level monitoring committee by each state government. The Act has nearly brought acquiring land to a halt, impacting large projects hitting manufacturing growth, which contracted by 0.7% in 2013-14.
Besides, the commerce and industry ministry may also recommend empowering of district collectors of each state to authorise providing of up to 500 acres for smallscale industrial projects.
Investment and infrastructure reforms are one of the 10 point agenda of Prime Minister Narendra Modi unveiled on Thursday.
Rural development minister Gopinath Munde ruled out scrapping of the land acquisition act, however, called for a need to amend it.
Sitharaman has emphasised on bolstering manufacturing in the economy.
Munde was recently reported as saying that the rules of the Act have made the implementation difficult.
“There is no question of repealing the Act, as we supported it in Parliament; it is a good law. I have taken up
the Act as my first issue with officials in this ministry… I must say I agree with the rates of compensation in the Act,” he said.Any amendment the Act will need to go through the Parliament.
The Act has made it mandatory to get the consent of at least 70% of the affected people for acquiring land for PPP projects and 80% for acquiring land for private companies. DIPP secretary Amitabh Kant had said in his interview to ET last month that the law had to be redrafted and simplified keeping in mind that a fair price is paid to the farmer.
“We need to unshackle controls. It provides for too many committees and too many approvals. It will be too time-consuming a process,” he had said.
The new law provides compensation four times the market price for rural land and up to twice the value of urban land for acquiring for public works or industrial activities.
DIPP will likely propose doing away with the social impact assessment process in the Act, which is a pre-requisite for public-private partnership (PPP) and private entities to acquire land.
“Land Act in the present form has stalled industrial activity and suitable amendments are urgently needed to spur manufacturing in the economy. There is no land acquisition taking place. We have taken up the matter with the minister,“ said an official.
The Act stipulates establishment of a state social impact assessment unit, the office of a commissioner, rehabilitation and resettlement, and a state-level monitoring committee by each state government. The Act has nearly brought acquiring land to a halt, impacting large projects hitting manufacturing growth, which contracted by 0.7% in 2013-14.
Besides, the commerce and industry ministry may also recommend empowering of district collectors of each state to authorise providing of up to 500 acres for smallscale industrial projects.
Investment and infrastructure reforms are one of the 10 point agenda of Prime Minister Narendra Modi unveiled on Thursday.
Rural development minister Gopinath Munde ruled out scrapping of the land acquisition act, however, called for a need to amend it.
Sitharaman has emphasised on bolstering manufacturing in the economy.
Munde was recently reported as saying that the rules of the Act have made the implementation difficult.
“There is no question of repealing the Act, as we supported it in Parliament; it is a good law. I have taken up
the Act as my first issue with officials in this ministry… I must say I agree with the rates of compensation in the Act,” he said.Any amendment the Act will need to go through the Parliament.
The Act has made it mandatory to get the consent of at least 70% of the affected people for acquiring land for PPP projects and 80% for acquiring land for private companies. DIPP secretary Amitabh Kant had said in his interview to ET last month that the law had to be redrafted and simplified keeping in mind that a fair price is paid to the farmer.
“We need to unshackle controls. It provides for too many committees and too many approvals. It will be too time-consuming a process,” he had said.
The new law provides compensation four times the market price for rural land and up to twice the value of urban land for acquiring for public works or industrial activities.
Beef up supply chain to check food inflation: CRISIL
A deadly combination of high minimum support prices for food grains, poor supply chains and huge amounts of wastage and pilferage has been the primary driver behind high food inflation in recent times, according to a new study.
The report, which was issued by ratings agency CRISIL, points out that food inflation has averaged 8.1 per cent in the last decade despite agriculture growth surging to 3.6 per cent in the last ten years from 2.9 per cent in the decade before.
“Between fiscals 2005 and 2013, the production [of fruits and vegetables] surged close to 5.3 per cent per year compared with a paltry 1.3 per cent previously (fiscals 1998 to 2004). Yet, their inflation rose to an average 8.9 per cent, with no dramatic change in the number of mouths to feed,” the report said.
Reduce wastage
Cranking up agricultural productivity, therefore, should be a secondary mission. The primary goal, the report points out, should be to improve the country’s supply chain and reduce waste and pilferage.
“High MSPs have kept the cropping pattern biased towards food grains and have led to excessive production. But the government’s inability to intervene and release excess food stocks on time has allowed prices to hold firm at higher levels,” CRISIL said.
“Inflation has remained close to 89 per cent even as the governments stocks of rice, wheat and coarse cereals have more than tripled since 2008,” the study added.
As for wastage and pilferage, the report points out the value of fruits and vegetable wastage stood at Rs. 70,000 crore in 2010-11 and Rs. 63,000 crore in 2008-10—or a third of the entire production.
India beats Italy, Germany, is No. 2 in textile exports
New Delhi
TIMES NEWS NETWORK
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India has overtaken Germany and Italy to emerge as the world's second largest textile exporter. But it lags China, whose exports are nearly seven times higher.Data released by the Apparel Export Promotion Council (AEPC), the industry body for garment exporters, quoting UN Comtrade, showed that India's textiles exports were estimated at $40 billion in 2013, compared with China's $274 billion. Textiles includes everything from fibre and yarn to fabric, made-ups and readymade garments made of cotton, silk, wool and synthetic yarn.
Over 55% of the global trade relates to readymade garments, where India ranked sixth in 2013 with exports of $16 billion, which is around 40% of the country's textiles exports.
India beat Turkey to move up a notch. For China the share of garments is estimated at close to 60%, indicating that the government needs to provide a bigger fillip to the readymade industry.
Apart from China, Italy and Germany , smaller countries such as Bangladesh and Vietnam have overtaken India in recent years as major suppliers to retail chains in Europe and the US on the back of cheap labour and lower-duty access. The textile in dustry had expected part of the business from Bangladesh to shift to India after accidents in factories raised safety concerns. But it managed to log 18% growth in the garments segment in 2013, compared to global growth of 6%.
Over the past few months the Indian garment industry has staged a recovery of sorts which can be seen in the 23% rise in exports of shirts, trousers, skirts and other readymades during readymades during 2013. Exporters said a change in focus to markets beyond the US and the EU has helped.
“Despite having slow recovery in US and EU, our biggest traditional mar kets as well as prevailing global slowdown coupled with sustained cost of inflationary inputs, we made f the best possible efforts to Source: AEPC reach here. The government policy of diversification of market and product base has helped us and we ventured into the newer markets, which paid huge dividends,“ said AEPC chairman Virender Uppal.
Over 55% of the global trade relates to readymade garments, where India ranked sixth in 2013 with exports of $16 billion, which is around 40% of the country's textiles exports.
India beat Turkey to move up a notch. For China the share of garments is estimated at close to 60%, indicating that the government needs to provide a bigger fillip to the readymade industry.
Apart from China, Italy and Germany , smaller countries such as Bangladesh and Vietnam have overtaken India in recent years as major suppliers to retail chains in Europe and the US on the back of cheap labour and lower-duty access. The textile in dustry had expected part of the business from Bangladesh to shift to India after accidents in factories raised safety concerns. But it managed to log 18% growth in the garments segment in 2013, compared to global growth of 6%.
Over the past few months the Indian garment industry has staged a recovery of sorts which can be seen in the 23% rise in exports of shirts, trousers, skirts and other readymades during readymades during 2013. Exporters said a change in focus to markets beyond the US and the EU has helped.
“Despite having slow recovery in US and EU, our biggest traditional mar kets as well as prevailing global slowdown coupled with sustained cost of inflationary inputs, we made f the best possible efforts to Source: AEPC reach here. The government policy of diversification of market and product base has helped us and we ventured into the newer markets, which paid huge dividends,“ said AEPC chairman Virender Uppal.
Strict law on anvil for wilful defaulters
Sidhartha
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New Delhi:
TNN
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Politics & Policy: Govt Gets Tough With Promoters Who Don't Cooperate
Amid a pile of e government is bad debt, the government is working on a new legislation for `wilful defaulters' that seeks to link the jail term with the value of default in a bid to help recover dues from promoters who do refuse to cooperate.Sources said the contours of the new law are been drawn up by the finance ministry as banks, especially those in the public sector, are dealing with high level of defaults, especially in the infrastructure sector. In its master circular last July , the RBI had said that a borrower will be considered a wilful defaulter if it defaults despite having a capacity to pay, has siphoned-off or diverted funds or disposes of property or assets pledged as security with a bank. Banks are grappling with non-performing assets of over Rs 2 lakh crore, while loans to several large projects have been restructured, which prevented them from turning bad debt.
Sources said the government intends to focus on high-value defaulters and the new law may be applicable to cases of default of, say, over Rs 100 crore, with nil or negligible security . In case banks declare a borrower a wilful defaulter, they will have the option to initiate criminal proceedings and can also seek a dissolution of the company's board and appoint a new set of directors.
These cases are proposed to be tried in special courts, which also have powers to punish for contempt of court. At the same time, to ensure that the loan defaulters do not seek a stay from other courts, the proposed legislation will have a provision that will not allow other courts to take cognizance and grant stay .
Separately , the finance ministry is also discussing ways to improve the effectiveness of the recovery laws, which includes special multi-member debt recovery tribunals (DRTs) to deal with high-value cases and a principal bench in Delhi, while streamlining the procedure of DRTs.
In addition, a proposal to set up six new DRTs is being sent for cabinet approval, while a notification on rationalization of their jurisdiction is in the offing.
Sources said the government intends to focus on high-value defaulters and the new law may be applicable to cases of default of, say, over Rs 100 crore, with nil or negligible security . In case banks declare a borrower a wilful defaulter, they will have the option to initiate criminal proceedings and can also seek a dissolution of the company's board and appoint a new set of directors.
These cases are proposed to be tried in special courts, which also have powers to punish for contempt of court. At the same time, to ensure that the loan defaulters do not seek a stay from other courts, the proposed legislation will have a provision that will not allow other courts to take cognizance and grant stay .
Separately , the finance ministry is also discussing ways to improve the effectiveness of the recovery laws, which includes special multi-member debt recovery tribunals (DRTs) to deal with high-value cases and a principal bench in Delhi, while streamlining the procedure of DRTs.
In addition, a proposal to set up six new DRTs is being sent for cabinet approval, while a notification on rationalization of their jurisdiction is in the offing.
A $5-Trillion Giant By 2025
Chetan Ahya
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Demographics, reforms and globalisation can lift the Indian economy to the No. 5 spot in a decade We expect steady policy reforms, which will lay the foundations for India's real GDP growth to move higher to an average of 6.75% over the next 10 years
Propelled by the three “success factors“ of favourable demographics, globalisati on and productivity-boost ing reforms, India's trend growth rates have been rising since the 1980s. Over the last decade, GDP growth has averaged 7.6%, compared with 6.1% in '90s and 4.6% in '80s.However, this structural uptrend had been disrupted since the credit crisis in 2008. An adverse global environment and, more importantly , poor macro policy choices of pursuing high fiscal deficit, strong rural wage growth and policy inaction adversely affecting investment sentiment have led to slower growth and higher inflation.
Over the last 12-18 months, policymakers have recognised the adverse impact of past policies and begun to take corrective actions. The effects of adjustments in the real effective exchange rate and real interest rates, and steps to improve the business environment alongside the improvement in the external environment, are beginning to show in improving macro stability indicators.
Indeed, we expect India to transition out of the current stagflation environment over the next eight quarters, with GDP growth accelerating from 4.6% in Q1, 2014, to 6.8% in Q1, 2016, and CPI inflation to head towards RBI's comfort zone of 6%.
Cyclical challenges will give way to structural ones. Over the next dec ade, the interplay of demographics (strong growth in the working-age population), reforms (that can help improve productivity) and globalisa tion (accelerating productive job op portunities, income and saving) will support India's growth trend.
Improvement in demographics -as measured by the decline in age dependency -has been a major source of higher potential growth. Favoura ble demographics provide a platfo rm of surplus labour that the econo my could mobilise.
Labour Gains Throughout the region, there has been a virtuous cycle of falling age dependencies, improving savings and investment, and long phases of strong GDP growth. Indeed, India will continue to benefit from declin ing age dependency and increasing labour supply till 2040. The quality mix of the fresh additions to the workforce is also likely to improve dramatically with rising literacy lev els and focus on skill development providing uplift to potential growth.
Globalisation supplies two grow th enablers: external demand and fi nancing. A growing skilled labour pool and steady liberalisation policy have helped India harness the bene fits of globalisation. India's integra tion with the global economy started in the early 1990s, but accelerated meaningfully only in the 2000s.
While the last few years have seen a bit of disruption in the globalisati on trend, the improving global grow th environment should support Ind ia's integration. As the government takes more steps to improve the busi ness environment, removes supply side constraints and maintains ex ternal competitiveness by tackling inflation, India's integration with the global economy will deepen. This will be supportive of the medium term growth trend.
The demographic and globalisati, on-linked merits are well understo od and are, to some extent, a given in the context of today's India. However, the key driver that will push high er sustainable growth is the imple mentation of productivity-boosting reforms. Economic reforms -when undertaken -incentivise the corpo rate sector to invest, in turn utilising the surplus labour and unleashing faster productivity growth.
Clear Mandate for Change The recent election outcome has given the present government a clear mandate and boosted its ability to implement productivity-boosting reforms at a fast pace. The government would must focus on improving the business environment to kick-start the investment cycle, contain the less effective redistributive fiscal polici es and improve infrastructure.
Moreover, the rising middle class and young, literate and well-connect ed population will demand greater accountability of policymakers to deliver on reforms that revive the vi ARINDAM rtuous dynamic of productive jobsincome growth-savings-investment.
Hi Five for India We expect a steady pace of implementation of policy reforms, which will lay the foundations for India's real GDP growth to move higher to an average of 6.75% over the next 10 years.
If our projections were to come to fruition, India's economy would pass the $5-trillion mark by 2025, a feat that has been achieved by only the US and China thus far, and would lift India to be the fifth-largest economy (from 10th currently).
There are hurdles to achieving the near-7% growth rate, but the confluence of positive structural factors should yield strong economic performance over the next 10 years. That this structural story is playing out in a region where many other countries are experiencing headwinds to their potential growth imposed by declines in their working-age population and debt-deleveraging dynamics makes the case for India all that more compelling.
Over the last 12-18 months, policymakers have recognised the adverse impact of past policies and begun to take corrective actions. The effects of adjustments in the real effective exchange rate and real interest rates, and steps to improve the business environment alongside the improvement in the external environment, are beginning to show in improving macro stability indicators.
Indeed, we expect India to transition out of the current stagflation environment over the next eight quarters, with GDP growth accelerating from 4.6% in Q1, 2014, to 6.8% in Q1, 2016, and CPI inflation to head towards RBI's comfort zone of 6%.
Cyclical challenges will give way to structural ones. Over the next dec ade, the interplay of demographics (strong growth in the working-age population), reforms (that can help improve productivity) and globalisa tion (accelerating productive job op portunities, income and saving) will support India's growth trend.
Improvement in demographics -as measured by the decline in age dependency -has been a major source of higher potential growth. Favoura ble demographics provide a platfo rm of surplus labour that the econo my could mobilise.
Labour Gains Throughout the region, there has been a virtuous cycle of falling age dependencies, improving savings and investment, and long phases of strong GDP growth. Indeed, India will continue to benefit from declin ing age dependency and increasing labour supply till 2040. The quality mix of the fresh additions to the workforce is also likely to improve dramatically with rising literacy lev els and focus on skill development providing uplift to potential growth.
Globalisation supplies two grow th enablers: external demand and fi nancing. A growing skilled labour pool and steady liberalisation policy have helped India harness the bene fits of globalisation. India's integra tion with the global economy started in the early 1990s, but accelerated meaningfully only in the 2000s.
While the last few years have seen a bit of disruption in the globalisati on trend, the improving global grow th environment should support Ind ia's integration. As the government takes more steps to improve the busi ness environment, removes supply side constraints and maintains ex ternal competitiveness by tackling inflation, India's integration with the global economy will deepen. This will be supportive of the medium term growth trend.
The demographic and globalisati, on-linked merits are well understo od and are, to some extent, a given in the context of today's India. However, the key driver that will push high er sustainable growth is the imple mentation of productivity-boosting reforms. Economic reforms -when undertaken -incentivise the corpo rate sector to invest, in turn utilising the surplus labour and unleashing faster productivity growth.
Clear Mandate for Change The recent election outcome has given the present government a clear mandate and boosted its ability to implement productivity-boosting reforms at a fast pace. The government would must focus on improving the business environment to kick-start the investment cycle, contain the less effective redistributive fiscal polici es and improve infrastructure.
Moreover, the rising middle class and young, literate and well-connect ed population will demand greater accountability of policymakers to deliver on reforms that revive the vi ARINDAM rtuous dynamic of productive jobsincome growth-savings-investment.
Hi Five for India We expect a steady pace of implementation of policy reforms, which will lay the foundations for India's real GDP growth to move higher to an average of 6.75% over the next 10 years.
If our projections were to come to fruition, India's economy would pass the $5-trillion mark by 2025, a feat that has been achieved by only the US and China thus far, and would lift India to be the fifth-largest economy (from 10th currently).
There are hurdles to achieving the near-7% growth rate, but the confluence of positive structural factors should yield strong economic performance over the next 10 years. That this structural story is playing out in a region where many other countries are experiencing headwinds to their potential growth imposed by declines in their working-age population and debt-deleveraging dynamics makes the case for India all that more compelling.
Defending India's Strategic Sectors
Sushil Kumar Roongta
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CENTRAL PUBLIC SECTOR ENTERPRISES
India should not give away space in some vital sectors, just because these sectors may not attract private sector investments. The country must have a strong presence in some “strategic“ sector industries as it prepares to emerge as the third-largest economy .
What these sectors are needs to be debated at the highest policy levels but could include subset of defence, special capital machinery and equipments, etc. The need for new technologies -and development and control of intellectual property around new technologies -could be a good starting point for debate.A new form of government intervention may be required that can incubate companies and take risks that the private sector is not taking. But the structure for such central public sector enterprises (CPSEs) should not burden them with the same constraints that exist today . The model for future CPSEs could be different from the units that operate in the public sector, with the option of quick entry/exit for the government.
The model is a mix of sovereign wealth fund, a single holding structure (SHS) and the government acting as a venture capitalist. There is a need to create an SHS for all future CPSEs.
The ownership of Maharatna companies to this structure could also be considered, to begin with. This SHS would be in the nature of a holding company owning different stakes in different CPSEs, to be decided by its board. The SHS would have an inde pendent board that could have 12 members of which six would be from outside the government. The PM would appoint the chairman of the board and the government directors would be six incumbent bureaucrats as ex-officio members and six nongovernment members. The SHS would be managed by a small management team like a mutual fund.
It would also undertake investments in some units on the basis of the strategic intent of the government. The board of the SHS entity could primarily discharge two functions: (a) deciding about which sectors to invest, and (b) managing the investments. It would also decide the extent of holding and timing of divestment or exit. The SHS board would appoint the boards of companies it invested in, to the extent of its holding. The boards so appointed would select the chairmen and directors on the incubated/invested companies/CPSEs. The entities will be board-run companies/CPSEs, and will be kept outside the purview of any ministry . The entities will not report to the CEO of the SHS entity .
The CEO would only manage the government's stake in the different companies and provide a year-end report on the financial performance of each of the invested entities for its board. In special circumstances, the chairman of the SHS could ask for the CEO of an invested company to be replaced. The performance of SHS entity could be monitored by an empowered group of ministers (EGoM) to whom it would be accountable.
The governing policies of the units could be framed by the board in keeping with the industry sector under which the unit fell. Thus, a CPSE in nuclear energy would have compensation and other policies in line with the nuclear energy sector and not any other CPSE benchmark. All HR policies should be market-related. All contracting rules in respect of procurement, partnerships, joint ventures, etc, could be framed by boards of the individual units. These companies would be running on commercial lines with independent boards. These companies are, moreover, proposed to be kept outside the purview as state under Article 12 of the Constitution.
There would not be any reservation in these sectors for the CPSEs but only an attempt to support incubation of companies in vital sectors where enough Indian companies are not entering. The intent in most of these sectors is to incubate and create Indian winners and not to have entities owned by the government for a long time.
The country must create an incubator that can strategically support its interests. To do so, it will need to alleviate risks in some sectors where the pay-off time lines or where India's competitive disadvantage is currently inhibiting investment. In these areas, it should invest/incubate on professional terms and allow the entities so conceived full latitude to operate on terms level with the best in the world.
The writer is former chairman, SAIL
What these sectors are needs to be debated at the highest policy levels but could include subset of defence, special capital machinery and equipments, etc. The need for new technologies -and development and control of intellectual property around new technologies -could be a good starting point for debate.A new form of government intervention may be required that can incubate companies and take risks that the private sector is not taking. But the structure for such central public sector enterprises (CPSEs) should not burden them with the same constraints that exist today . The model for future CPSEs could be different from the units that operate in the public sector, with the option of quick entry/exit for the government.
The model is a mix of sovereign wealth fund, a single holding structure (SHS) and the government acting as a venture capitalist. There is a need to create an SHS for all future CPSEs.
The ownership of Maharatna companies to this structure could also be considered, to begin with. This SHS would be in the nature of a holding company owning different stakes in different CPSEs, to be decided by its board. The SHS would have an inde pendent board that could have 12 members of which six would be from outside the government. The PM would appoint the chairman of the board and the government directors would be six incumbent bureaucrats as ex-officio members and six nongovernment members. The SHS would be managed by a small management team like a mutual fund.
It would also undertake investments in some units on the basis of the strategic intent of the government. The board of the SHS entity could primarily discharge two functions: (a) deciding about which sectors to invest, and (b) managing the investments. It would also decide the extent of holding and timing of divestment or exit. The SHS board would appoint the boards of companies it invested in, to the extent of its holding. The boards so appointed would select the chairmen and directors on the incubated/invested companies/CPSEs. The entities will be board-run companies/CPSEs, and will be kept outside the purview of any ministry . The entities will not report to the CEO of the SHS entity .
The CEO would only manage the government's stake in the different companies and provide a year-end report on the financial performance of each of the invested entities for its board. In special circumstances, the chairman of the SHS could ask for the CEO of an invested company to be replaced. The performance of SHS entity could be monitored by an empowered group of ministers (EGoM) to whom it would be accountable.
The governing policies of the units could be framed by the board in keeping with the industry sector under which the unit fell. Thus, a CPSE in nuclear energy would have compensation and other policies in line with the nuclear energy sector and not any other CPSE benchmark. All HR policies should be market-related. All contracting rules in respect of procurement, partnerships, joint ventures, etc, could be framed by boards of the individual units. These companies would be running on commercial lines with independent boards. These companies are, moreover, proposed to be kept outside the purview as state under Article 12 of the Constitution.
There would not be any reservation in these sectors for the CPSEs but only an attempt to support incubation of companies in vital sectors where enough Indian companies are not entering. The intent in most of these sectors is to incubate and create Indian winners and not to have entities owned by the government for a long time.
The country must create an incubator that can strategically support its interests. To do so, it will need to alleviate risks in some sectors where the pay-off time lines or where India's competitive disadvantage is currently inhibiting investment. In these areas, it should invest/incubate on professional terms and allow the entities so conceived full latitude to operate on terms level with the best in the world.
The writer is former chairman, SAIL
Don’t mess with the banking sector
As the new Finance Minister, Arun Jaitley, comes to grips with his portfolio, he will need to quickly focus on the banking sector. Today, Public Sector Banks (PSBs), which account for over 70 per cent of assets in the banking system, are bogged down by a rise in non-performing assets. This has eroded their profitability and limited their ability to raise the regulatory capital needed to make loans.
A Reserve Bank of India (RBI) committee on bank governance, headed by P.J. Nayak, has a ready solution: free PSBs from government control and eventually privatise them. It is a solution that is fraught with both political and economic risk. Mr Jaitley must steer clear of such quick fixes.
The Nayak committee’s case for privatisation rests on the presumed superior efficiency of private sector banks. It thinks that if only the government gave up its controlling function and became a passive investor instead, it would stand to make enormous returns on its shareholding.
Problems with the proposition
There are serious problems with this proposition. One, it is based on a comparison of performance of PSBs and private sector banks at a time when PSBs are weighed down by the problems of the economy at large. It would be more appropriate to compare performance over a longer period. A wide range of academic studies points to a trend towards convergence in performance of PSBs and private banks since banking sector reforms were set in motion in 1993-‘94.
Two, such comparisons are flawed by what is called ‘survivor bias’ in the private sector group. Several new private sector banks licensed after 1994 have ceased to exist. Precisely for this reason, they would not be found in the private bank group used for comparison. This lends an upward bias to the performance indicators of private banks.
Three, the comparisons ignore the scope of activities of PSBs and private banks. PSBs have an important development role. They took upon themselves the task of funding private investment in infrastructure which was an important driver of growth in the boom period of 2004-08. Private banks can be more choosy about what they wish to fund. Many are focussed on the retail segment, working capital and wealth management. Foreign banks make enormous profit out of their capital markets division alone. If PSBs were to adopt such a narrow focus, sectors that are crucial to the economy would be starved of credit.
From a flawed starting point, the committee moves on to a diagnosis and a prescription that are even more flawed. The committee thinks the PSBs are doing badly because their boards are dysfunctional. The government packs the boards with its own people. The boards go through the motions of approving proposals put up by the management. Little thought is given to issues of strategy and risk management. In contrast, private banks have high-quality professionals on their boards that provide sage counsel. This, the committee contends, is what explains superior private sector performance.
The solution? The government should distance itself from bank boards. The committee wants government shareholding to be transferred to a Bank Investment Company (BIC). The Bank Nationalisation Act and other related Acts must be repealed and PSBs brought under the scope of the Companies Act. The BIC would appoint members of boards of PSBs as well as their CEOs and executive directors. It would let its stakes in PSBs fall below 50 per cent so that banks are freed from limits on remuneration, the Right to Information Act and the jurisdiction of the Central Vigilance Commissioner.
Freed from these vexations, the PSBs can single-mindedly focus on profit maximisation. Eventually, the BIC would transfer its ownership powers to the bank boards. The government’s stake in the BIC itself would fall below 50 per cent, thereby privatising these banks. We would enter a brave new world of Indian banking liberated from the stranglehold of government ownership.
The committee’s faith in the functioning of private bank boards is truly touching. If boards in the private sector are such paragons of virtue, the committee must tell us why some of the biggest banks in the U.S. and the U.K., whose boards were packed with glittering names from the corporate world, collapsed in the financial crisis of 2007.
To cite only one example, the U.K. regulator, the Financial Services Authority (FSA), looked into the collapse of the Royal Bank of Scotland, the biggest banking failure in the country’s history. Its report noted that there was an almost complete lack of questioning and challenge on the part of the board in the critical years when the bank hurtled towards ruin. There was nothing wrong with the composition of the board.
Boards in general are dysfunctional, whether in the private sector or the public sector. The remedies must, therefore, be generic in nature. The Companies Act 2013 and clause 49 of Securities and Exchange Board of India’s listing agreement now contain clauses that are intended to improve the functioning of boards, in particular, that of independent directors.
In banking, the regulator needs to go further. ‘Fit and proper’ criteria for board members must be strengthened and the RBI might adopt the FSA’s practice of interviewing candidates proposed for a directorship on a bank board. For banks above a certain size, there could be a requirement that positions be advertised and nominations sought from eminent persons so that a wide pool of talent is tapped. The RBI may stipulate that bank boards contain expertise in areas such as risk management and marketing of financial services. Board effectiveness could be measured using outside experts.
These measures would help strengthen boards. We must recognise, however, that there is only so much that boards can contribute. It is the quality of management that is crucial to performance. In PSBs, this must be the government’s responsibility.
The government does not have to discharge this responsibility through diktat from the finance ministry. It can operate through its nominees on the board. The government nominees and the RBI nominee on PSB boards must ensure that there is proper succession planning and that managers are groomed for various levels of leadership.
Opposing privatisation
It is unlikely that the Nayak committee’s proposals will go through in the near future. Political parties and trade unions will oppose any move towards privatisation. This will make the repeal of various Acts difficult, given the present composition of the Rajya Sabha. Selling government stakes in PSBs without turning them around is bound to invite accusations of a ‘scam’. No government can risk distancing itself from control of PSBs and handing over these to a group of professional managers at a time when banks are severely stressed.
That apart, we need to be clear about the basic rationale for government ownership in banking in India. There is more to it than the larger social purpose of banking. Our experience has been that government ownership has been a factor underpinning stability in banking. The world over, economies have faced banking crises over the past several decades. Banks failed, they were nationalised or bailed out, then turned over to the private sector. This is the phenomenon of socialisation of losses and privatisation of profits that has come to attract public outrage.
India’s experience has been refreshingly different. The Indian approach has been to have the public sector dominate banking while exposing it to competition. In the process, efficiency has improved without jeopardising stability. Experience has shown that it is possible to retain the public sector as the sheet anchor of the banking system without compromising on efficiency.
Addressing the issues of governance at PSBs requires focus on the part of the finance ministry. Mr. Jaitley doesn’t have to look very far for inspiration. One of Narendra Modi’s less heralded achievements as Chief Minister of Gujarat was his success in turning around state PSUs by professionalising their boards and giving management a free hand.
10 Tax Issues the Budget Needs to Address
The final budget for 2014-15 is expected to be presented in the first week of July. ET takes a look at the tax issues the budget needs to address:
ENABLING GROWTH The Mandate is for Bold Economic Reforms
Rana Kapoor
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The new government will have to prioritise its action plan for the next five years to ensure the economy surges towards a 10% growth trajectory.However, this plan will need clear, measurable, bold and brave milestones for first 100 days, first 12 months, and on a rolling basis after that.
India is a compelling long-term growth story. By 2020, India is set to become the world’s youngest country with 64% of its population in the working-age group. The only way we can harness this demographic dividend is by embarking upon new economic and structural reforms.
All economic stakeholders are looking to the leadership of PM Narendra Modi to take firm steps in pursuit of reviving the investment cycle and growth. In less than 60 days, the new government will present the Budget for 2014-15. There are many things it can do to boost investor confidence.
Bold decisions in the short term should be directed towards India’s growth, linked with job creation. Job creation must be enabled by transforming employment exchanges into career centres and focus must be shifted towards development of multiple skills in urban and rural areas.
The government should clear pending project proposals and approvals, quickly. It should liberalise foreign investment across key sectors, and take steps to privatise sick state-owned companies and divest government holding in the top 10-15 PSUs, to generate over .
`1,00,000 crore. While India
continues to draw healthy interest from domestic and foreign investors alike, for investments to materialise, we need a transparent, systematic and non-discretionary policy framework that gives confidence to the investor community, particularly in the process of issuing licences and permits. Further, inordinate delays in clearances and in the passage of important Bills discourage investors from taking a long-term view.Creating an enabling legislation and policy guidance environment is crucial for actualising the envisioned 10% growth. The Prime Minister’s compact ministry is definitely the first step towards his promised approach of maximum governance and minimum government. We should liberalise external commercial borrowing guidelines for companies, rationalise policy rates to catalyse growth and undertake steps to ensure reduction in bad debt in the banking sector. We need to enhance tax revenue by broadening the tax base and increase efficiency of tax administration. Tax regimes need to be modernised and focused on a customerservice approach.
Implementation of the goods and services tax (GST), India’s most ambitious indirect tax reform, can boost growth by up to two percentage points and replace existing state and central levies with a uniform tax, boosting revenue collection while cutting business transaction costs. It is imperative that there is a renewed focus on promoting labour intensive industries such as housing, tourism, services, manufacturing and so on.These industries possess the vigour to unleash huge growth multipliers, due to their strong backward and forward linkages with other sectors.
We must simplify the procedure of granting clearances for manufacturing units to enthuse investors. Land acquisition and environment clearances for mega projects should be speeded up — a joint task force comprising central ministries like environment, finance and state governments should be formed and given a specific time period to take decisions.
India gave its verdict on May 16, 2014, and India’s business community reacted with optimism that Modi will fulfil his campaign promises to jump-start the economy, create jobs and restart stalled infrastructure projects. The economic mismanagement of the last few years has several ingredients besides fiscal profligacy: lack of reforms, policy instability and poor governance. The journey out of the trough may be long, but the Budget to be presented should build on the recent fiscal success to further strengthen national finances.
A majority mandate provides full confidence and conviction of a stable government. This, complemented by the animal spirits of Indian enterprises, can herald what Modi calls a shining India that will make the 21st century “India’s century”. Carpe Diem!
India is a compelling long-term growth story. By 2020, India is set to become the world’s youngest country with 64% of its population in the working-age group. The only way we can harness this demographic dividend is by embarking upon new economic and structural reforms.
All economic stakeholders are looking to the leadership of PM Narendra Modi to take firm steps in pursuit of reviving the investment cycle and growth. In less than 60 days, the new government will present the Budget for 2014-15. There are many things it can do to boost investor confidence.
Bold decisions in the short term should be directed towards India’s growth, linked with job creation. Job creation must be enabled by transforming employment exchanges into career centres and focus must be shifted towards development of multiple skills in urban and rural areas.
The government should clear pending project proposals and approvals, quickly. It should liberalise foreign investment across key sectors, and take steps to privatise sick state-owned companies and divest government holding in the top 10-15 PSUs, to generate over .
`1,00,000 crore. While India
continues to draw healthy interest from domestic and foreign investors alike, for investments to materialise, we need a transparent, systematic and non-discretionary policy framework that gives confidence to the investor community, particularly in the process of issuing licences and permits. Further, inordinate delays in clearances and in the passage of important Bills discourage investors from taking a long-term view.Creating an enabling legislation and policy guidance environment is crucial for actualising the envisioned 10% growth. The Prime Minister’s compact ministry is definitely the first step towards his promised approach of maximum governance and minimum government. We should liberalise external commercial borrowing guidelines for companies, rationalise policy rates to catalyse growth and undertake steps to ensure reduction in bad debt in the banking sector. We need to enhance tax revenue by broadening the tax base and increase efficiency of tax administration. Tax regimes need to be modernised and focused on a customerservice approach.
Implementation of the goods and services tax (GST), India’s most ambitious indirect tax reform, can boost growth by up to two percentage points and replace existing state and central levies with a uniform tax, boosting revenue collection while cutting business transaction costs. It is imperative that there is a renewed focus on promoting labour intensive industries such as housing, tourism, services, manufacturing and so on.These industries possess the vigour to unleash huge growth multipliers, due to their strong backward and forward linkages with other sectors.
We must simplify the procedure of granting clearances for manufacturing units to enthuse investors. Land acquisition and environment clearances for mega projects should be speeded up — a joint task force comprising central ministries like environment, finance and state governments should be formed and given a specific time period to take decisions.
India gave its verdict on May 16, 2014, and India’s business community reacted with optimism that Modi will fulfil his campaign promises to jump-start the economy, create jobs and restart stalled infrastructure projects. The economic mismanagement of the last few years has several ingredients besides fiscal profligacy: lack of reforms, policy instability and poor governance. The journey out of the trough may be long, but the Budget to be presented should build on the recent fiscal success to further strengthen national finances.
A majority mandate provides full confidence and conviction of a stable government. This, complemented by the animal spirits of Indian enterprises, can herald what Modi calls a shining India that will make the 21st century “India’s century”. Carpe Diem!
How to Open up the Sky in India
It is welcome that low-cost carrier AirAsia is taxiing for takeoff in the Indian skies and has promised to be “disruptive in pricing” in an extremely fare-sensitive market — access to aviation is still a dream for about 99.5% of the people. What is not welcome, however, is the reported move of AirAsia India to unilaterally “unbundle” a host of services and charge even for baggage without clearance from the Directorate General of Civil Aviation. Note that while airlines in India are allowed to unbundle or charge for services provided such as in-flight refreshments, they need to inform the regulator beforehand.Now, AirAsia is reputed to be have the world’s lowest cost per available seat kilometre, which it is able to maintain in several ways. It makes use of low-cost terminals, has a high aircraft utilisation rate, or quick turnaround time between flights, and low ticketing costs with most sales done on its website (so, low commission charges). The airline is also known to earn as much as 18% of its revenues from ancillary services via unbundling (the like figure for full-service carriers is in the low single digits). All the same, it would earn valuable brand equity by keeping a set of services included in the airfare.
The growth potential for aviation in India is massive, it could be the world’s number one by 2030, says a recent KPMG report.
But we need proactive policy. The notion that flying is for the elite needs to be dropped. The Centre needs to rationalise local taxes on aviation fuel — as a few states have done — incentivise maintenance, repair and overhaul (MRO) services and shore up connectivity by having no-frills airports in tier-III towns (the concept of low-cost terminals is yet to take wing). At present, all MRO activity gets done outside India, thanks to obtuse policy. In aviation, the sky is the limit here.
The growth potential for aviation in India is massive, it could be the world’s number one by 2030, says a recent KPMG report.
But we need proactive policy. The notion that flying is for the elite needs to be dropped. The Centre needs to rationalise local taxes on aviation fuel — as a few states have done — incentivise maintenance, repair and overhaul (MRO) services and shore up connectivity by having no-frills airports in tier-III towns (the concept of low-cost terminals is yet to take wing). At present, all MRO activity gets done outside India, thanks to obtuse policy. In aviation, the sky is the limit here.
MANUFACTURING Agenda for Manufacturing Micro Enterprises
Tamal Sarkar
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The world of MSMEs is highly polarised. Of the 11.5 million manufacturing MSMEs (4th Census), 99% are MEs and less than 1% are SMEs. Also, 91% of the units are unregistered. Interestingly, the pain points that constrain the growth prospects of MEs and SMEs are not similar on many occasions.One prime issue that cripples MEs is access to formal finance. The major obstacles are registration of units, availability of small value loan at competitive rates and efforts of formal finance to reach MEs. MEs which started business either from home or rented premises, often end up operating from non-industrial land — almost a no-no as per banking norms. This requires policy intervention in supporting them in seamless conversion or relocation, if in cluster. Relocation needs to be done for the entire value chain, not just the industry in question. Special allocation of land must exist for this in a time bound manner.
A large number of MEs have a
need for loans of less than .`5 lakhs in one go. Such small value loans are not an attractive business scenario for some banks. Here, NBFCs can be supported to create various combo products for the ME clusters there, so that loan disbursement is fast. Also, NBFCs may be allowed to disburse subsidies given by ministries. Simultaneously, banks may be given targets not only with respect to value, but also to the number of non-repetitive-ME loans.
Role of pollution control boards is regulatory. Pollution control equipments are costly. There is also no approved vendor for pollution control equipment. Some desired interventions are (a) supporting MEs in reaching the pollution norms gradually in a time bound manner, rather than frightening them away (b) incentivising research for creating affordable pollution control equipment and (c) creating a list of approved
vendors for sourcing pollution control equipment/techniques.Most MEs are not even aware of scores of labour laws, leave aside the intricacies and confusions.
While simplification is the solution, immediate support is needed for providing (a) legal education and counselling in each of the industrial townships, starting with locations having more than 10 ME clusters and (b) creating an incentive mechanism for MEs who cater to these norms.
95% of MEs are proprietary/partnerships and are mostly one-person shows. They need affordable and quality business development service providers (BDSPs). At present, BDSPs who are useful are mostly not affordable. Availability of labour is a prime issue. While some of it is due to growth in real wages via MGNREGA, MEs, particularly unregistered ones who have the lowest
capacity to pay, took the worst hit.Taking the clue, there has been a trend for mechanisation. With passing years, this may lead to deskilling of labour, for whom it will be a point of no return, leading to further rise in labour costs. MGNREGA must be linked to providing employment incentives for industrial skilled work. The situation also needs creating or transferring ME friendly technology on a war footing, if we want to touch the planned target in manufacturing value added.
Also of importance is the means of communication. Most support schemes are available in English and are too complex. Simpler versions may be made available in Hindi and vernaculars. Adequate budgetary arrangements are also needed to take care of rising applications through this process. Not least is the need for clearance in a fortnight and ensuring that the cost of availing support should not be costlier than the quantum of support itself.
Cluster-level product based industry associations can help achieve these goals, if they are strengthened by creating a strong secretariat along with necessary infrastructure. They will also be the one-stop shop for putting forward the voice of MEs to ensure these achievements.
A large number of MEs have a
need for loans of less than .`5 lakhs in one go. Such small value loans are not an attractive business scenario for some banks. Here, NBFCs can be supported to create various combo products for the ME clusters there, so that loan disbursement is fast. Also, NBFCs may be allowed to disburse subsidies given by ministries. Simultaneously, banks may be given targets not only with respect to value, but also to the number of non-repetitive-ME loans.
Role of pollution control boards is regulatory. Pollution control equipments are costly. There is also no approved vendor for pollution control equipment. Some desired interventions are (a) supporting MEs in reaching the pollution norms gradually in a time bound manner, rather than frightening them away (b) incentivising research for creating affordable pollution control equipment and (c) creating a list of approved
vendors for sourcing pollution control equipment/techniques.Most MEs are not even aware of scores of labour laws, leave aside the intricacies and confusions.
While simplification is the solution, immediate support is needed for providing (a) legal education and counselling in each of the industrial townships, starting with locations having more than 10 ME clusters and (b) creating an incentive mechanism for MEs who cater to these norms.
95% of MEs are proprietary/partnerships and are mostly one-person shows. They need affordable and quality business development service providers (BDSPs). At present, BDSPs who are useful are mostly not affordable. Availability of labour is a prime issue. While some of it is due to growth in real wages via MGNREGA, MEs, particularly unregistered ones who have the lowest
capacity to pay, took the worst hit.Taking the clue, there has been a trend for mechanisation. With passing years, this may lead to deskilling of labour, for whom it will be a point of no return, leading to further rise in labour costs. MGNREGA must be linked to providing employment incentives for industrial skilled work. The situation also needs creating or transferring ME friendly technology on a war footing, if we want to touch the planned target in manufacturing value added.
Also of importance is the means of communication. Most support schemes are available in English and are too complex. Simpler versions may be made available in Hindi and vernaculars. Adequate budgetary arrangements are also needed to take care of rising applications through this process. Not least is the need for clearance in a fortnight and ensuring that the cost of availing support should not be costlier than the quantum of support itself.
Cluster-level product based industry associations can help achieve these goals, if they are strengthened by creating a strong secretariat along with necessary infrastructure. They will also be the one-stop shop for putting forward the voice of MEs to ensure these achievements.
Putting the spring back into the conomy
After a historic electoral battle, Indian voters have given their mandate and a new government is now in office. The government has promised the people that it will deliver on good governance and inclusive development. However, a number of challenges lie ahead, the biggest of them, without doubt, being the state of the economy. To use a term that has increasingly been employed in this context, the economy is in a state of paralysis. So what are the most important steps that thegovernment needs to take to help the economy recover from this paralytic state? To answer this, it is important to understand how the current state of affairs came about.
The reforms era
In the first slew of economic reforms and liberalisation in 1993, the traditional industrial and services sectors within the economy gained a lot of freedom that they had never enjoyed earlier. Before 1993, the major constraints these sectors faced were legal and policy constraints like the industrial licensingpolicy, tariff and quota restriction on import of raw materials and intermediate goods, etc. The 1993 reforms removed most of these constraints. This led to the first growth boom in India, with the average per capita growth rate of the economy going up from less than two per cent to more than four per cent per year.
Then came the second growth boom in 2004 with per capita growth rates increasing to more than six per cent per year. This boom happened partly due to some of the traditional sectors continuing to do well and also because of a new kind of growth momentum from some specific sectors — minerals, construction, real estate and telecom. The momentum in the minerals sector came from exports, as global demand and the price of minerals were very high during this period. In the real estate and the telecom sectors, growth resulted directly from increased middle class incomes due to the first growth boom. The impetus in construction was the result of conscious policy decisions of the government that wanted to push for big infrastructure projects.
Interestingly, the growth momentum in all these sectors was based on a close relationship between the political class and big private investors. The mineral sector, which was earlier completely under the public sector and catering largely to domestic demand, was consciously opened up to big private investment and exports. The real estate sector, previously made up almost entirely of small players, saw a number of large private investments during this period. In the telecom sector, the nature of the market ensured that only big players could participate. Even in the construction sector, some of the big projects like airports needed huge investment and big businesses.
Paralysis and backlash
Undoubtedly, these sectors needed to be developed for sustained and continuing growth in India. The problem was that policymakers thought that the set of reforms made in and after 1993 would be sufficient to regulate this new kind of growth. On hindsight, we now know that there were very significant regulatory failures in these sectors during the second growth boom. We also understand that the reforms of the 1990s, which focussed on removing constraints on activity, were insufficient to provide broad-based, corruption-free growth in these sectors. Each of these sectors needed a different governance structure and set of regulations, which were not put in place before the sectors started growing at a very rapid rate. We also know that the regulatory failures during the second growth boom led to a very strong institutional and political backlash since 2010.
This backlash manifested itself in several ways. Since 2010, the media began raising issues of corruption and crony capitalism in these sectors. Next, civil society got involved and voiced its opinion on the need for alternative regulatory and anti-corruption institutions like the Lokpal. Finally, the courts passed orders and rulings that criticised the decisions made by the government in these sectors. All this led to what is now being called the paralysis.
In fact, the paralysis manifested itself in the activity of two important agents of the economic growth — bureaucrats and private investors. Once the courts gave adverse rulings on the decisions taken by some bureaucrats, the bureaucracy as a whole became jittery about taking decisions, sometimes deferring to them to the extent that projects simply ground to a halt. Private investors, on the other hand, found out that formal and informal understandings that they had entered into with the political class were not as secure as they had thought them to be, especially in the face of court cases and popular political uprisings like the one in Singur. This uncertainty that crippled both the bureaucracy and private investors led to the collapse of investment and growth rates.
Bureaucracy and business
So, what should the new government do to bring back growth? The first thing that it needs to do is to move the economy out of this paralytic state. Clearly, the approach has to attempt to rejuvenate both the bureaucracy and the private investor. Here, the government has indicated that it intends to do this on a priority basis, but these are complex institutional problems and having the right intent may not be enough, unless the nature of the problem is well understood.
Take the case of the bureaucracy. The government needs to ensure that the bureaucracy does not become a part of any deal-making with the business class which can lead to decisions that are not in the best interests of the country. This means that there needs to be strong penalties for any malpractice by bureaucrats. However, if the government adopts an approach that strongly penalises the bureaucracy for any outcome that is less than satisfactory, then this may lead to a very risk-averse bureaucracy, which also hampers vibrant decision-making. In effect, the government needs to put in place a system which can differentiate between the deliberate malpractice of the bureaucracy and poor decisions that it may occasionally take even with the best of intentions.
The crony-capitalism associated with the second growth boom resulted in all sorts of informal deals between the political and the business class, which initially raised investor confidence in this period, but later led to a breakdown in confidence when the deals were challenged by ‘accountability institutions’ like the Comptroller and Auditor General of India (CAG), the Central Bureau of Investigation (CBI) and the courts. Any future relationship between the political class and the business elite has to be based on formal rather than informal deals. This will not only help investments become less costly due to a fall in transaction costs but also assure investors that these deals will not be reneged in future. Ultimately, only that can bring back investor confidence. In practical terms, this means that sectors which are prone to high rents and crony capitalism need to have more appropriate regulatory mechanisms. This will encourage investment and growth without causing future political backlash. Once these sectors are taken care of, the investment climate will no longer be held hostage to investor paralysis. It is then that the government can shift focus to structural factors like infrastructure, etc.
Tackling inflation
The other crucial thing that the government needs to do in order to sustain growth is to control inflation. Inflation has always been partly demand-driven and partly structural, due to elements like supply bottlenecks. In India, in the last few years, it’s the structural part which is almost always driving inflation, particularly food inflation. While the Reserve Bank of India (RBI) and monetary policy can ensure that inflation does not lead to hyperinflat
Govt steps up efforts for GST rollout
New Delhi:
TIMES NEWS NETWORK
|
States Demand CST Compensation Amid Indications Of Clarity In Budget
The government on Monday intensified its efforts to get the long-pending goods and services tax (GST) plan rolling, urging state to embrace the gamechanging reform to reduce the cost for industry and fasttrack growth.President Pranab Mukheerjee set the ball rolling, saying the “government will make every effort to introduce the GST, while addressing the concerns of states“.
Finance minister Arun Jaitley then picked up the threads from where the president left, flagging GST as critical for growth.
“As part of this economic integration, GST is one pending issue, on which now consensus needs to be built and implementation done at an early date. Implementation of GST has the potential to significantly improve the growth story . Many of you would recall that a decision to implement GST was taken in 2007-08 and an empowered committee was formed for building consensus on this issue. I have been informed that on many issues convergence of views has happened and there are some vexatious issues, which need resolution. I hope that these will be sorted out sooner than later,“ Jaitley said during his prebudget meeting with state finance ministers.
Ever since he moved into North Block a fortnight ago, the minister has been keen to get GST going, asking his officials for a separate present ation on the issue to understand the areas where the gaps exist.
During the UPA tenure, some of the BJP-ruled states such as Madhya Pradesh and Gujarat had blocked the ambitious tax reform, arguing that the states would lose maneuvering space.
Even on Monday , some of the areas of concern were visible, with compensation for phasing out central sales tax (CST) being a major worry. “We support GST, it is there in our election manfesto. But the CST has been reduced and in 2011-12 we were told (by the Centre) that the state will not be given the Rs 3,600 crore as compensation to be able to move towards GST. We have said that we lack confidence on the Centre's assurance on this issue,“ West Bengal finance minister Amit Mitra said.
“Only thing that states were looking for was the CST compensation and protection in revenues,“ Gujarat finance minister Saurabh Patel said.
Some states like Tamil Nadu had “serious apprehensions“ about the current GST design. “A consultative approach is needed to arrive at a just and fair solution to GST imbroglio. Tamil Nadu is also concerned about the impact of the proposed GST council on the fiscal autonomy of states and the huge permanent revenue loss it is likely to cause to Tamil Nadu, which is a net exporter with large manufacturing industry ,“ state finance minister O Panneerselvam said in his presentation. Over the next few weeks, Jaitley and his team in North Block are expected to rework the plan to ensure that everyone's on board with a revised roadmap expected in the budget next month.
Finance minister Arun Jaitley then picked up the threads from where the president left, flagging GST as critical for growth.
“As part of this economic integration, GST is one pending issue, on which now consensus needs to be built and implementation done at an early date. Implementation of GST has the potential to significantly improve the growth story . Many of you would recall that a decision to implement GST was taken in 2007-08 and an empowered committee was formed for building consensus on this issue. I have been informed that on many issues convergence of views has happened and there are some vexatious issues, which need resolution. I hope that these will be sorted out sooner than later,“ Jaitley said during his prebudget meeting with state finance ministers.
Ever since he moved into North Block a fortnight ago, the minister has been keen to get GST going, asking his officials for a separate present ation on the issue to understand the areas where the gaps exist.
During the UPA tenure, some of the BJP-ruled states such as Madhya Pradesh and Gujarat had blocked the ambitious tax reform, arguing that the states would lose maneuvering space.
Even on Monday , some of the areas of concern were visible, with compensation for phasing out central sales tax (CST) being a major worry. “We support GST, it is there in our election manfesto. But the CST has been reduced and in 2011-12 we were told (by the Centre) that the state will not be given the Rs 3,600 crore as compensation to be able to move towards GST. We have said that we lack confidence on the Centre's assurance on this issue,“ West Bengal finance minister Amit Mitra said.
“Only thing that states were looking for was the CST compensation and protection in revenues,“ Gujarat finance minister Saurabh Patel said.
Some states like Tamil Nadu had “serious apprehensions“ about the current GST design. “A consultative approach is needed to arrive at a just and fair solution to GST imbroglio. Tamil Nadu is also concerned about the impact of the proposed GST council on the fiscal autonomy of states and the huge permanent revenue loss it is likely to cause to Tamil Nadu, which is a net exporter with large manufacturing industry ,“ state finance minister O Panneerselvam said in his presentation. Over the next few weeks, Jaitley and his team in North Block are expected to rework the plan to ensure that everyone's on board with a revised roadmap expected in the budget next month.
Govt starts review of FTAs & SEZ policy, Cos Act
Chennai:
TIMES NEWS NETWORK
|
Amid criticism from India Inc, the government on Saturday said it had initiated a review of free trade agreements (FTAs) and the Companies Act, besides looking into the functioning of special economic zones. The move is being seen as a pointer to possible changes to some controversial decisions taken by the previous government.“I have instructed the ministry to do a complete analysis since not every FTA is seen as completely beneficial to India,“ commerce and industry minister Nirmala Sitharaman said at the BJP headquarters here. “The ministry will come out with a report in a fortnight.“ On the Companies Act, she said a consultative meet with all stakeholders would be held on June 21. Centre replaces revenue secy With weeks to go for the Budget, the government on Saturday appointed Shaktikanta Das as the new revenue secretary. Das, a TN-cadre IAS officer, has spent long years as chief budget officer, dealing with agencies such as World Bank and IMF. P 17 Commerce and industry minister Nirmala Sitharaman on Saturday said a complete review of special economic zones was under way on a case-specific basis to understand why they could not perform well.
“We want to know the difficulties.
Why are are some grounded? There is a complete review of SEZs happening,“ she said, rejecting criticism that the Centre was reviewing each and every decision of the UPA regime.
“I don't care during which regime these things came in,“ she said, adding the government was committed to facilitating a smooth business environment.
During a meeting with Sitharaman, industry chambers had expressed concerns over FTAs and some provisions of the Companies Act like the 2% spend on corporate social responsibility and appointment and tenure of directors.
The SEZs, which were launched during the Vajpayee government, remained a key policy weapon of UPA, which enacted a law offering several concessions to boost manufacturing and exports, only to withdraw the incentives when Pranab Mukherjee was finance minister. The commerce department has suggested that some of the tax concessions should be restored so that manufacturing comes back to Indian shores.
“We want to know the difficulties.
Why are are some grounded? There is a complete review of SEZs happening,“ she said, rejecting criticism that the Centre was reviewing each and every decision of the UPA regime.
“I don't care during which regime these things came in,“ she said, adding the government was committed to facilitating a smooth business environment.
During a meeting with Sitharaman, industry chambers had expressed concerns over FTAs and some provisions of the Companies Act like the 2% spend on corporate social responsibility and appointment and tenure of directors.
The SEZs, which were launched during the Vajpayee government, remained a key policy weapon of UPA, which enacted a law offering several concessions to boost manufacturing and exports, only to withdraw the incentives when Pranab Mukherjee was finance minister. The commerce department has suggested that some of the tax concessions should be restored so that manufacturing comes back to Indian shores.
Hunt For Capital
Avinash Celestine
|
India's public sector banks will need a few lakh crores over the next few years. How will they get it?
As finance minister Arun Jaitley gears up for the budg et in the coming weeks, one thorny question he will almost certainly have to address is an old one that a number of his predecessors have faced. To what ex tent will the government have to pump money into India's public sector banks?
Over the next five years, India's public sector banks, the workhorses of the financial system, could face a major shortage of cap ital. A recent Reserve Bank of India (RBI) committee looking into the governance of public sector banks has forecast that the state-owned banks require anywhere between `2,10,000 crore and `5,87,000 crore by 2018, depending on how fast their loans to corporates, individuals and farmers grow, and to what extent those loans turn into non-performing assets, thus requiring them to be written off. Investment banks have their own estimates -Morgan Stanley, for instance, estimates that the banks will require about `2,98,300 crore by 2019.
Changing Governance Banks will require the capital for three reasons. Firstly, it is to fund growth in loans. For each loan they make they have to set aside a proportion of capital. An economic revival will bring in its wake strong demand for loans for investment, and it's in the government's own interest that banks are in a position to make those loans and have that capital on hand. But public sector banks also need capital to write off bad loans they had made earlier.
Public sector banks, which have weaker internal controls and face political pressures to a greater degree than their private sector counterparts, consequently have steeper bad loan problems, too. Finally, banks will need greater funds to implement new norms relating to how to account for loans and how much capital they need to set aside for different categories of loans.Raising these funds, though, will require several steps, apart from legislative changes. Attracting private capital into public sector banks will need at least some governance and structural reforms.
The RBI report on bank boards had suggested several radical moves, including the repealing of existing legislation governing public sector banks, and the creation of an independent bank holding company which would actually hold the government's equity stake in them.
Handling Risk But even if this politically controversial step doesn't fructify, there are several moves the government can make to help private sector banks improve governance. As Rana Kapoor, founder and managing director of Yes Bank points out, key reforms include those to the boards of public sector banks.
Kapoor points out that public and private sector banks operate within the same environment and are subject to the same regulatory conditions, yet their performance is different. “In private sector banks, there is a major emphasis on risk and in the ways that bank boards handle risk and credit approvals.“ He advocates that an executive credit committee comprising the chairman and senior bank executives takes such decisions with any one such executive having a veto over the decision. “This way there is a spirit of collective decision making that exists,“ he says.
He also suggests the removal of political ap pointees from bank boards and the splitting of the posts of the chairman and managing director.
The RBI report points to several other constraints that public sector banks face as opposed to those from the private sector. These include dual regulation of such banks by the finance ministry and RBI, the short tenures of top executives, and the control exercised on banks by the Central Vigilance Commission, which impedes any attempt to take decisions.
But the report does caution that “in private sector banks senior management is incentivized on the basis of bank profitability, and the compensation paid out -through stock options -is in substantial measure contingent on the stock price of the bank. There is a potential incentive to evergreen assets in order that provisions do not make a dent in profitability.“
However HN Sinor, a veteran banker who served on numerous RBI committees and headed the Indian Banks Association, says the ultimate aim should be for government to divest its stake substantially from the stateowned banks. “My personal opinion is that the government cannot keep pumping in cash into these banks year after year,“ he said. “They have to take the decision to reduce the stake below 51%. Any other measure will be temporary.“
Simple Choice Given the scale of capital required, Jaitley actually faces an easy choice, especially given that the NDA gov ernment has a strong majority in parliament. He is in a better position than most of his predecessors to push through what economists and bank ers have been demanding for years, which is for the government to divest its stake in public sector banks, and in effect, privatize them.
Such a move would be a cataclysmic one for the banking sector as big in its effects as the nationalization of banks in 1969.
Expected changes in public sector banks Restructuring: Earlier this week, SBI chairman told ET that the bank was looking to merge its subsidiaries into itself. While this has long been mooted, if it actually happens, it could mark the first step towards further consolidation Reduction in government stake: Given the scale of capital required, private sector capital will certainly play a part. But to attract it, the government has to offer sweeteners Governance reform: To ensure that private capital comes in at strong valuations, the government will be looking at governance reform, including making boards autonomous from government interference Bank holding company: The government could rejig the way it holds equity in the banks, by moving its stake into a separate bank holding company
Over the next five years, India's public sector banks, the workhorses of the financial system, could face a major shortage of cap ital. A recent Reserve Bank of India (RBI) committee looking into the governance of public sector banks has forecast that the state-owned banks require anywhere between `2,10,000 crore and `5,87,000 crore by 2018, depending on how fast their loans to corporates, individuals and farmers grow, and to what extent those loans turn into non-performing assets, thus requiring them to be written off. Investment banks have their own estimates -Morgan Stanley, for instance, estimates that the banks will require about `2,98,300 crore by 2019.
Changing Governance Banks will require the capital for three reasons. Firstly, it is to fund growth in loans. For each loan they make they have to set aside a proportion of capital. An economic revival will bring in its wake strong demand for loans for investment, and it's in the government's own interest that banks are in a position to make those loans and have that capital on hand. But public sector banks also need capital to write off bad loans they had made earlier.
Public sector banks, which have weaker internal controls and face political pressures to a greater degree than their private sector counterparts, consequently have steeper bad loan problems, too. Finally, banks will need greater funds to implement new norms relating to how to account for loans and how much capital they need to set aside for different categories of loans.Raising these funds, though, will require several steps, apart from legislative changes. Attracting private capital into public sector banks will need at least some governance and structural reforms.
The RBI report on bank boards had suggested several radical moves, including the repealing of existing legislation governing public sector banks, and the creation of an independent bank holding company which would actually hold the government's equity stake in them.
Handling Risk But even if this politically controversial step doesn't fructify, there are several moves the government can make to help private sector banks improve governance. As Rana Kapoor, founder and managing director of Yes Bank points out, key reforms include those to the boards of public sector banks.
Kapoor points out that public and private sector banks operate within the same environment and are subject to the same regulatory conditions, yet their performance is different. “In private sector banks, there is a major emphasis on risk and in the ways that bank boards handle risk and credit approvals.“ He advocates that an executive credit committee comprising the chairman and senior bank executives takes such decisions with any one such executive having a veto over the decision. “This way there is a spirit of collective decision making that exists,“ he says.
He also suggests the removal of political ap pointees from bank boards and the splitting of the posts of the chairman and managing director.
The RBI report points to several other constraints that public sector banks face as opposed to those from the private sector. These include dual regulation of such banks by the finance ministry and RBI, the short tenures of top executives, and the control exercised on banks by the Central Vigilance Commission, which impedes any attempt to take decisions.
But the report does caution that “in private sector banks senior management is incentivized on the basis of bank profitability, and the compensation paid out -through stock options -is in substantial measure contingent on the stock price of the bank. There is a potential incentive to evergreen assets in order that provisions do not make a dent in profitability.“
However HN Sinor, a veteran banker who served on numerous RBI committees and headed the Indian Banks Association, says the ultimate aim should be for government to divest its stake substantially from the stateowned banks. “My personal opinion is that the government cannot keep pumping in cash into these banks year after year,“ he said. “They have to take the decision to reduce the stake below 51%. Any other measure will be temporary.“
Simple Choice Given the scale of capital required, Jaitley actually faces an easy choice, especially given that the NDA gov ernment has a strong majority in parliament. He is in a better position than most of his predecessors to push through what economists and bank ers have been demanding for years, which is for the government to divest its stake in public sector banks, and in effect, privatize them.
Such a move would be a cataclysmic one for the banking sector as big in its effects as the nationalization of banks in 1969.
Expected changes in public sector banks Restructuring: Earlier this week, SBI chairman told ET that the bank was looking to merge its subsidiaries into itself. While this has long been mooted, if it actually happens, it could mark the first step towards further consolidation Reduction in government stake: Given the scale of capital required, private sector capital will certainly play a part. But to attract it, the government has to offer sweeteners Governance reform: To ensure that private capital comes in at strong valuations, the government will be looking at governance reform, including making boards autonomous from government interference Bank holding company: The government could rejig the way it holds equity in the banks, by moving its stake into a separate bank holding company
Subsidies issue: US, EU want India to detail food support programmes to WTO
India and China have been asked to submit information on their food subsidy programmes to the World Trade Organisation by the US, the EU and some other countries.
The countries want it to be a pre-condition to starting negotiations on finding a permanent solution to India’s problem of legitimising food procurement subsidies.
This has raised the hackles of New Delhi and other members of the G-33 group of developing countries (a group with interests in agriculture for protecting their poor farmers) who have argued that no such conditions were laid down in the mandate of the Bali Ministerial meeting last December.
India has also been asked to explain how it establishes that the recipients of its support programme for poor farmers, at a recent meeting of the Committee on Agriculture at the WTO.
“These are all diversionary tactics used by developed countries, especially the US, to delay progress in a key area of concern for developing countries,” a Commerce Ministry official told Business Line .
The US, Australia, Brazil, the EU, Pakistan, Canada, Thailand, Costa Rica and Paraguay have also raised concerns about India’s wheat programme as the country also exported the foodgrain.
Last December in Bali, WTO members had agreed to a pact for streamlining movement of goods across borders by upgrading infrastructure and cutting down transaction time (Trade Facilitation Agreement) being pushed by developed countries. India and some other developing countries had given their assent to the pact as the developed countries had promised to allow them to give food procurement subsidies without attracting sanctions, as a short-term measure, while promising to work on a long-term solution to the problem soon after the Ministerial.
It is important for India to be allowed higher level of farm subsidies, which is currently fixed at 10 per cent of agriculture production, as it could breach the limit once its Food Security programme is fully implemented.
Without a permanent solution to the problem, India faces the risk of action by any member which is not satisfied with the information on prices, subsidies and procurement of agricultural items submitted by the country.
Commerce Secretary Rajeev Kher, in a press conference last week, had said that India was unhappy with the fact that while much progress had happened on implementation of the trade facilitation agreement, some countries were not allowing talks on food security to begin.
New Delhi has demanded that work on all issues agreed to in Bali, including the package of incentives for Least Developed Countries, move at the same pace.
Listing a leviathan
As a career investment banker, Uday Kotak knows the significance of timing when a company makes its market debut. His advice that the Centre act now to dilute its stake in the Life Insurance Corporation of India (LIC) and list it on the exchanges deserves to be heeded. It is not only the buoyant market mood that calls for taking the insurance leviathan public. There are other and arguably more compelling reasons.
LIC is one of the most valuable firms in the public sector space and its market position today is as strong as it has ever been. Despite competition from two dozen private life insurers, LIC has retained a firm grip on the market, with a 73 per cent share of premiums collected and an 83 per cent share of policies sold. It towers over private players on critical parameters such as the claims settlement ratio (97.7 per cent), ability to retain policyholders and distribution reach (11 lakh agents). These factors alone guarantee an excellent response to an LIC IPO from both retail and institutional investors. Once listed, LIC will have the freedom to tap the markets to fund its growth. Presently, it is wholly dependent on a cash-strapped Centre. Finally, taking LIC public will also speed up its long-overdue corporatisation. Greater accountability on its investment decisions, better accounting and risk management systems, and more detailed portfolio disclosures will benefit its policyholders. Today, LIC’s status as a government entity exempts it from prudential investment norms applicable to private insurers and prevents independent decision-making. Consider the number of times it has been called upon in the last three years to bail out divestment offers, recapitalise public sector banks and participate in complex budget-boosting manoeuvres. Reducing the Centre’s interference in LIC’s workings and improving its public disclosures should reassure policyholders that its investment decisions are indeed made in their best interests. With 27 crore individual investors and an investment kitty of over Rs. 14 lakh crore (last annual report), LIC is by far the largest domestic institution and its operations cannot be conducted in a black box closed to public scrutiny.
Detractors may argue that diluting the government stake in LIC will dent its popularity with investors. Well, this is easily resolved by the Centre divesting some of its shares in LIC while retaining majority ownership; after all, listing hasn’t hurt depositor confidence in public sector banks such as the SBI. As to whether LIC should continue to enjoy a sovereign guarantee for all its policies, this is an academic debate. Whether or not the Government explicitly extends a guarantee, the Indian public will certainly infer it. In any case, LIC, irrespective of whether or not it is listed, is too big a player in the Indian financial system to be allowed to fail.
Guest Column - Is it Time for India to Get Bitcoin Savvy?
Vaneesa Abhishek
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There may be no clarity on its status, but growing interest is a positive
When most of us think of currency, we imagine currency notes, coins and even ATM cards. But Bitcoin is a new type of digital currency that is being used all over the world, having an estimated transaction value of around $300 million per day. It is primarily used as a type of currency for e-commerce, but it can also be exchanged for conventional currencies on Bitcoin exchanges. But can Bitcoins themselves be considered to be a currency?
What are Bitcoins?
Bitcoins are computer files, similar to doc or jpeg files. They are generated mathematically using computers by executing difficult number-crunching tasks. A pseudonymous hacker calling himself Satoshi Nakamoto is said to have created Bitcoins with the idea that such a digital currency would eliminate the third party (such as a bank or financial institution), thereby reducing the costs incurred in the transaction. Bitcoin allows users to verify the transactions by distributing the public ledger in which all transactions that occur are registered. In light of the unique structure of Bitcoins, let us examine whether Bitcoins could qualify as a currency.
Legal Framework in India As of now, Indian laws do not recognise any type of digital or virtual currency. The Foreign Exchange Management Act (Fema) provides an inclusive definition of the term currency and includes all currency notes, money orders, cheques, credit cards and such other similar instruments as may be notified by RBI. It is interesting to note that Fe ma gives RBI the power to notify “similar instruments“ as currency.
In 2000, RBI had notified ATM Cards and debit cards as currency.
Therefore, RBI has the power under Fema to also notify Bitcoins as currency if it is able to justify that it is similar to currency notes, credit cards, etc.RBI, in its press release on December 24, 2013, had warned that the creation, trading or usage of virtual currencies, including Bitcoins, as a medium for payment is not authorised by any central bank or monetary authority. However, it has not banned the use of Bitcoins in India as such. There was also no comment regarding the classification of Bitcoin as a currency in the press release, but former finance minister, P Chidambaram, had given a statement that RBI was examining the issues relating to the usage, holding and trading of virtual currencies, including Bitcoins, un der the extant legal and regulatory framework of the country.
Different countries have adopted different approaches regarding the classification of Bitcoins as “currency“. In Germany, Bitcoin is not classified as a foreign currency or emoney, but stands as a financial instrument.
In the United States, the Internal Revenue Service considers Bitcoin as a form of `property' rather than a currency for tax purposes.
However, the United States District Court (Eastern District of Texas) has recently ruled that Bitcoin is a currency or form of money. Therefore, it appears that there is confusion regarding the treatment of Bitcoins in other countries as well and perhaps, RBI is waiting for a cue from the international developments.
Conclusion Although Bitcoins are accepted by major companies such as Expedia, Dish Network, Overstock, etc. and the India website highkart.com provides the facility to pay with Bit coins only , it is not a universal medium of exchange. The other major concerns regarding the use of Bitcoins as a currency are the lack of an underlying legal framework, the extreme volatility in its value of a Bitcoin and the fear that it could be used for money-laundering transactions.
The lack of a clear underlying legal framework is particularly worrisome. In fact, after the press release issued by RBI, several Indian Bitcoin exchanges had halted trading. Subsequently, Bitcoin exchanges re-started operations even though there was no guidance regarding the legislative policy. In fact, a Bitcoin exchange, BTCXIndia, which claims to be “following KYCand AML-guidelines“, has recently been launched in India.
It's apparent that there is continuing interest in Bitcoins in India.
Therefore, it is perhaps time for the authorities concerned to lay down a legal framework to govern the transactions concluded using Bitcoins as well as devise a method to tax such transactions. With a new tech-savvy Prime Minister in Narendra Modi at the helm and his legal eagle, Jaitley, as the finance minister; it may well be time for India to officially welcome a tech-savvy currency as well.
What are Bitcoins?
Bitcoins are computer files, similar to doc or jpeg files. They are generated mathematically using computers by executing difficult number-crunching tasks. A pseudonymous hacker calling himself Satoshi Nakamoto is said to have created Bitcoins with the idea that such a digital currency would eliminate the third party (such as a bank or financial institution), thereby reducing the costs incurred in the transaction. Bitcoin allows users to verify the transactions by distributing the public ledger in which all transactions that occur are registered. In light of the unique structure of Bitcoins, let us examine whether Bitcoins could qualify as a currency.
Legal Framework in India As of now, Indian laws do not recognise any type of digital or virtual currency. The Foreign Exchange Management Act (Fema) provides an inclusive definition of the term currency and includes all currency notes, money orders, cheques, credit cards and such other similar instruments as may be notified by RBI. It is interesting to note that Fe ma gives RBI the power to notify “similar instruments“ as currency.
In 2000, RBI had notified ATM Cards and debit cards as currency.
Therefore, RBI has the power under Fema to also notify Bitcoins as currency if it is able to justify that it is similar to currency notes, credit cards, etc.RBI, in its press release on December 24, 2013, had warned that the creation, trading or usage of virtual currencies, including Bitcoins, as a medium for payment is not authorised by any central bank or monetary authority. However, it has not banned the use of Bitcoins in India as such. There was also no comment regarding the classification of Bitcoin as a currency in the press release, but former finance minister, P Chidambaram, had given a statement that RBI was examining the issues relating to the usage, holding and trading of virtual currencies, including Bitcoins, un der the extant legal and regulatory framework of the country.
Different countries have adopted different approaches regarding the classification of Bitcoins as “currency“. In Germany, Bitcoin is not classified as a foreign currency or emoney, but stands as a financial instrument.
In the United States, the Internal Revenue Service considers Bitcoin as a form of `property' rather than a currency for tax purposes.
However, the United States District Court (Eastern District of Texas) has recently ruled that Bitcoin is a currency or form of money. Therefore, it appears that there is confusion regarding the treatment of Bitcoins in other countries as well and perhaps, RBI is waiting for a cue from the international developments.
Conclusion Although Bitcoins are accepted by major companies such as Expedia, Dish Network, Overstock, etc. and the India website highkart.com provides the facility to pay with Bit coins only , it is not a universal medium of exchange. The other major concerns regarding the use of Bitcoins as a currency are the lack of an underlying legal framework, the extreme volatility in its value of a Bitcoin and the fear that it could be used for money-laundering transactions.
The lack of a clear underlying legal framework is particularly worrisome. In fact, after the press release issued by RBI, several Indian Bitcoin exchanges had halted trading. Subsequently, Bitcoin exchanges re-started operations even though there was no guidance regarding the legislative policy. In fact, a Bitcoin exchange, BTCXIndia, which claims to be “following KYCand AML-guidelines“, has recently been launched in India.
It's apparent that there is continuing interest in Bitcoins in India.
Therefore, it is perhaps time for the authorities concerned to lay down a legal framework to govern the transactions concluded using Bitcoins as well as devise a method to tax such transactions. With a new tech-savvy Prime Minister in Narendra Modi at the helm and his legal eagle, Jaitley, as the finance minister; it may well be time for India to officially welcome a tech-savvy currency as well.
Hybrid Funds may be a Good Bet for Risk-averse Investors
These schemes are a safer option as they offer a small exposure to equity, while ensuring capital protection. However, one must account for the longer investment period, says Nikhil Walavalkar
Mutual fund houses such as DWS, HDFC, ICICI Prudential and Tata have launched close-ended schemes that invest in a mix of debt and equity. Though some schemes avoid calling themselves a capital protection fund, they invest in debt and equity in such a manner that by the time the scheme matures, the debt component grows to ensure that the investors get their capital back and equity brings in the additional returns.“Risk-averse investors can look at these schemes, as there is little possibility of a loss of capital over three years. The scheme offers investors an opportunity to take a small exposure to equity , while sticking to the conservative asset allocation,“ says Vijay Chhabria, founder of Prudent Investment Advisors.
These hybrid funds generally mature in three or five years. The debt component comprises good quality bonds that mature just before the maturity of the scheme. In case of a three-year scheme, approximately 80% of the money is invested in bonds, which ensure return of capital invested at the end of the tenure.
The balance is invested in equity.
These schemes aim at offering double-digit returns. The one-year returns of similar schemes look good, given the recent rally in the equity markets. Three-year schemes launched in 2011, which will be maturing in 2014, are performing well.
For example, ICICI Prudential Capital Protection Oriented Fund -Series III, launched in July 2011, has delivered 9.64% since its inception.
Axis Capital Protection Oriented Fund -Series 1 launched in November 2011, has so far delivered 15.33% returns, says Value Research, a mutual fund tracking entity .
Experts feel that the current situation is ripe for these schemes. “A three-year horizon allows the fund to benefit from relatively high ac crual yields for debt instrument in that segment. Also, it would allow the fund to benefit from equity component, while neutralising the nearto medium-term volatility,“ says Rupesh Patel, fund manager, Tata Mutual Fund.
The close-ended structure helps investors to ride out the intermittent volatility and the fund manager too is not subject to redemption pressure in these schemes, say experts.
Currently, with the stock markets on the rise, this can be a good vehicle to park their money in for risk-averse investors. In the three months ended on June 13, CNX Nifty has gained 16.16%.
“Conservative investors are worried about which way equity markets will go from the current high level and still they want to participate in equity and earn returns in excess of debt. Such schemes are launched to cater to the needs of these investors,“ says Vineet Arora, EVP & head -products & distribution, ICICI Securities.
These schemes offer both growth and dividend option. Experts advise investors to opt for the growth option. “Capital appreciation offered at the time of maturity is treated as a capital gain and taxed at lower of 20% with indexation or 10% without indexation. Given the high inflation, we have seen high index numbers that, in turn, reduce the tax liability to minimum,“ says Chhabria.
However, if you are keen on intermittent cash flows, better to go for dividend payout option.
Though the schemes seem like the best option to ride the equity markets, without risking capital, experts ask investors to rationalise their expectations. Experts feel that given the recent run-up in equities in a short span of time, future returns may be moderate.
nikhil.walavalkar@timesgroup.com
These hybrid funds generally mature in three or five years. The debt component comprises good quality bonds that mature just before the maturity of the scheme. In case of a three-year scheme, approximately 80% of the money is invested in bonds, which ensure return of capital invested at the end of the tenure.
The balance is invested in equity.
These schemes aim at offering double-digit returns. The one-year returns of similar schemes look good, given the recent rally in the equity markets. Three-year schemes launched in 2011, which will be maturing in 2014, are performing well.
For example, ICICI Prudential Capital Protection Oriented Fund -Series III, launched in July 2011, has delivered 9.64% since its inception.
Axis Capital Protection Oriented Fund -Series 1 launched in November 2011, has so far delivered 15.33% returns, says Value Research, a mutual fund tracking entity .
Experts feel that the current situation is ripe for these schemes. “A three-year horizon allows the fund to benefit from relatively high ac crual yields for debt instrument in that segment. Also, it would allow the fund to benefit from equity component, while neutralising the nearto medium-term volatility,“ says Rupesh Patel, fund manager, Tata Mutual Fund.
The close-ended structure helps investors to ride out the intermittent volatility and the fund manager too is not subject to redemption pressure in these schemes, say experts.
Currently, with the stock markets on the rise, this can be a good vehicle to park their money in for risk-averse investors. In the three months ended on June 13, CNX Nifty has gained 16.16%.
“Conservative investors are worried about which way equity markets will go from the current high level and still they want to participate in equity and earn returns in excess of debt. Such schemes are launched to cater to the needs of these investors,“ says Vineet Arora, EVP & head -products & distribution, ICICI Securities.
These schemes offer both growth and dividend option. Experts advise investors to opt for the growth option. “Capital appreciation offered at the time of maturity is treated as a capital gain and taxed at lower of 20% with indexation or 10% without indexation. Given the high inflation, we have seen high index numbers that, in turn, reduce the tax liability to minimum,“ says Chhabria.
However, if you are keen on intermittent cash flows, better to go for dividend payout option.
Though the schemes seem like the best option to ride the equity markets, without risking capital, experts ask investors to rationalise their expectations. Experts feel that given the recent run-up in equities in a short span of time, future returns may be moderate.
nikhil.walavalkar@timesgroup.com
New PPP Platform in the Works for Infra Push
DEEPSHIKHA SIKARWAR
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NEW DELHI
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The government is mulling a special platform to allow infrastructure players to renegotiate already bid public-private partnership (PPP) projects, a move aimed at giving a big push to infrastructure development in the country .Discussions have begun on creating a `resolution panel' in line with global practices as the government looks to breathe new life into PPP implementation.
“A number of issues keep cropping up in PPP....Allowing renegotiation after a project is bid out has emerged as a crucial challenge in most infrastructure sectors,“ said an official at an infrastructure ministry, who is privy to deliberations on the issue.
Most countries have a provision for renegotiation of contracts under the PPP mode. For example, South Africa's PPP unit is empowered to approve changes in conditions. Similar models are followed in many other countries.
In India, renegotiation of contracts has been done very selectively. C Rangarajan, who was chairman of the Prime Minister's Economic Advisory Council until last month, was asked to look at re setting of premia for road projects when a number of projects got stuck in the economic downturn.
The finance ministry had recently called a meeting to discuss what needs to be done for the PPP framework to support the new government's big infra push.
Industry experts say PPP contracts need to recognise `Black Swan' events.
“Renegotiation is necessary in PPP....It happens all over the world and is needed.... It is humanly impossible to make accurate forecast for 30-40years,“ said Vinayak Chatterjee, chairman, Feedback Infra Pvt Ltd. A number of private players had bid aggressively for road projects but then sought reset of premia as economic growth fell.
The issue has also been taken up by industry bodies including CII with the government time and again.
The official said the general view in the government is that a special resolution body should be put in place that would renegotiate contracts. “The government can spell out parameters on which these contracts can be renegotiated...But a mechanism is the call of the hour for the sector,“ said the official.
“A number of issues keep cropping up in PPP....Allowing renegotiation after a project is bid out has emerged as a crucial challenge in most infrastructure sectors,“ said an official at an infrastructure ministry, who is privy to deliberations on the issue.
Most countries have a provision for renegotiation of contracts under the PPP mode. For example, South Africa's PPP unit is empowered to approve changes in conditions. Similar models are followed in many other countries.
In India, renegotiation of contracts has been done very selectively. C Rangarajan, who was chairman of the Prime Minister's Economic Advisory Council until last month, was asked to look at re setting of premia for road projects when a number of projects got stuck in the economic downturn.
The finance ministry had recently called a meeting to discuss what needs to be done for the PPP framework to support the new government's big infra push.
Industry experts say PPP contracts need to recognise `Black Swan' events.
“Renegotiation is necessary in PPP....It happens all over the world and is needed.... It is humanly impossible to make accurate forecast for 30-40years,“ said Vinayak Chatterjee, chairman, Feedback Infra Pvt Ltd. A number of private players had bid aggressively for road projects but then sought reset of premia as economic growth fell.
The issue has also been taken up by industry bodies including CII with the government time and again.
The official said the general view in the government is that a special resolution body should be put in place that would renegotiate contracts. “The government can spell out parameters on which these contracts can be renegotiated...But a mechanism is the call of the hour for the sector,“ said the official.
U.S. push to tag India as ‘emerging economy’ aimed at market access
The crisis at the World Trade Organisation (WTO) talks in Geneva has deepened with the United States demanding that India and China be categorised as ‘emerging’ rather than as ‘developing economies’. India is resisting the move which, if it materialises, will halve WTO caps applicable to India’s food subsidies. It will also require India to grant market access to the U.S. The U.S. is insisting that India meet its food security law obligations with American imports, Commerce Ministry sources told The Hindu .
“The U.S. insists that economies such as India and Indonesia with high rates of growth can no longer be categorised as developing countries,” the sources said. “India’s stand is that going by per capita income, it is actually the world’s largest Least Developed Country where about 600 million live at less than $2 a day,” the sources said.
The U.S. has also tabled a study in Geneva, produced by its allies Pakistan and Canada, that claims food subsidies in India and China exceed those in the U.S. and the EU, sources said. India has countered the study, the sources added, with data to show that the U.S. farm subsidies to its corporate sector are to the tune of $20,000 to $30,000 per capita per year against India’s mere $200.
Besides, India’s subsidies go to subsistence farmers, said the sources adding: “To say that the subsidies that India and China give are greater than what the U.S. gives is over the top.”
At the Geneva talks, the U.S. has so far successfully thwarted India’s efforts aimed at finding a permanent protection against even the WTO’s agriculture caps currently applicable to its food subsidies. America’s own agenda of an agreement on Trade Facilitation, however, is well on track for the July 31 deadline as laid down at the Bali Ministerial.
“The U.S. is seeking to muddy the waters on the issue of subsidies in order to cause delays as it is in no position to give a commitment on the issue. The U.S. is engaged in its own domestic political arithmetic over the rejig of its Farm Bill and subsidies; it is not in a position to negotiate on the matter in Geneva,” the source said.
Emerging economy categorisation at the WTO will lower the agriculture subsidy caps applicable to India from 10 per cent to 5 per cent.
“The developing countries have managed a complete vilification by indulging in half truths; India needs to put forth its points more forcefully at Geneva,” said Biswajit Dhar, Professor of Economics at Jawaharlal Nehru University.
Treat foreign investment over 10 % in listed firms as FDI: Mayaram panel
Foreign direct investment reflects lasting interest and long-term relationship
Seeking to simplify norms, a government panel has suggested that foreign investment of over 10 per cent in a listed company be treated as FDI and the one from NRIs on a non-repatriable basis be deemed as domestic investment.
The panel on rationalising definitions of FDI and FII, headed by Finance Secretary Arvind Mayaram, said foreign investment in an unlisted company should be treated as FDI.
It aims at removing ambiguities over clear demarcation between FDI and foreign institutional investment.
The report also says an investor may be allowed to invest below the 10 per cent threshold, and “this can be treated as FDI, subject to the condition that the FDI stake is raised to 10 per cent or beyond within one year from the date of the first purchase.’’
If the stake is not raised to 10 per cent or above, then the investment can be treated as portfolio investment.
Foreign direct investment is subject to sectoral caps.
FDI reflects a lasting interest and long-term relationship, while under portfolio investment, the relationship between the investor and the company remains largely anonymous, the report says.
The report says any investment by way of equity shares, compulsorily convertible preference shares/debentures less than 10 per cent should treated as foreign portfolio investment (FPI).
FPI includes portfolio investors such as foreign institutional investors (FIIs) and qualified foreign investors (QFIs).
“The monitoring of the individual FPI limit of less than 10 per cent will be done as hitherto by the Securities and Exchange Board of India. The compliance with the FPI aggregate limit is as of now being done by the RBI...and this will continue,” the report says.
The panel further says that there is a case for treating ‘non-repatriable’ investment as ‘domestic’ and exempting it from FDI related conditions.
It says NRIs have set up large businesses abroad and may prefer investing through corporate entities.
“Overseas corporate body was one such vehicle, but for various reasons, that has been derecognised in late 2003. With suitable safeguards and checks, this can be revived in a different form and NRI investments enhanced,” the report suggests. It further says a separate team of SEBI, RBI and DEA can look into all the aspects of foreign venture capital investors (FVCI) investment and rationalise the same. — PTI
Poke Me - Where India Inc Can Help
Manjeet Kripalani
|
Businesses and government must cooperate for economic diplomacy
In October 2013, during the early days of his campaign, PM candidate Narendra Modi said “a strong economy is the driver of an effective foreign policy.“ Since then, `economic diplomacy' has become a buzzword, put into action by Modi himself.Inviting the SAARC heads of state to his inauguration, conducting hydropower diplomacy with Bhutan and soon, practising some international investment relations with Japan, China and the US are acts of economic diplomacy .
For too many years, India's intellectual elite and foreign policy establishment have ignored economic statecraft, focusing instead on the security and political compulsions of diplomacy . For a brief moment in 2006, when India's growth rate was 8.5% and the India-US nuclear deal was signed, it seemed like economics would dominate politics. But growth fell to 4.5%, the nuclear deal moved not an inch towards implementation, and with electoral politics once again in the foreground, economics was forgotten.
The global financial crisis hit soon thereafter, investments dried up and even our political and security diplomacy touched new lows. It was particularly poor judgement, as economic diplomacy was the need of the hour and India could have shown some leadership.
Now a determined, focused push to gain lost ground seems likely and the role that Indian business can play is vital. The conditions are conducive. First, trade is 50% of our GDP up from 35% in 2006. This is largely due to export of software services and raw materials.
Second, Indian direct investment abroad is an impressive $105 billion and catching up with the $186 billion of FDI into India. This means corporate India is already a significant global player, with businesses from oil to tea located across the world a benign and as-yet-unused resource abroad.
Third, our aid diplomacy has made some impact around the world and earned us goodwill. India's lines of credit are upwards of $10 billion and especially popular is our ITEC programme which provides training in accounts, IT, English, rural management and so on, in 120 developing countries. Stepping up this engagement can open doors for our business interests.
For Real PPPs Modi can take advantage of this if he can persuade Indian business to move beyond individual corporate objectives and fashion a joint effort with government to achieve strategic national objectives. This will require policy and mindset changes by government and business.
India Inc can show good intention with some immediate moves. It can support the build-out of independent intellectual think tanks, endow study centres and university chairs.
These will build policy and research capacity and incubate muchneeded India-centric ideas, databases and global trends analyses. Indian business can accelerate deputations to state or central departments of domain and legal experts in statistics, contracts and tax, financing, trade negotiation, energy , technology , areas where government is lacking. These can be project-specific or for a limited period of three years, on the corporate payroll, with a secrecy contract.
Private business can work with our public sector on foreign projects. Gail is a globally respected multinational giant with major operations abroad. A syndicate with India's private energy and infrastructure players can help counter the Chinese state juggernaut. An alignment with India's interests abroad has helped many companies become globally competitive.
Chamber Music Finally our chambers of commerce must grow beyond event management: they must boost their presence and expertise overseas, and become experts in articulating India's global business interests.
The government too must overcome its timidity and shortcomings.
Enlarging the size of the tiny , 700person ministry of external affairs and populating it with commercial counsellors and trade services experts is an imperative. Free trade agreements (FTAs) are languishing without negotiating expertise, as is our participation in regional trade fora, all substitutes for the WTO, which collapsed because of Indian and US differences.
Revive WTO Talks We can regain global stature by reviving, humbly , the WTO talks along with the US. And we must bring down our tariffs closer to global averages. This will be possible only with inter-ministerial co-operation now at a dismal low. The foreign and commerce ministries must deepen their teamwork both at home and at missions abroad.
Modi has made it clear that he will support those who support India's strategic intent. If think tanks, business and government combine to put their best ideas forward, India's diplomacy can bring to the global table, the full benefit of its intellectual, economic, political and security capacity.
The author is co-founder, Gateway House
For too many years, India's intellectual elite and foreign policy establishment have ignored economic statecraft, focusing instead on the security and political compulsions of diplomacy . For a brief moment in 2006, when India's growth rate was 8.5% and the India-US nuclear deal was signed, it seemed like economics would dominate politics. But growth fell to 4.5%, the nuclear deal moved not an inch towards implementation, and with electoral politics once again in the foreground, economics was forgotten.
The global financial crisis hit soon thereafter, investments dried up and even our political and security diplomacy touched new lows. It was particularly poor judgement, as economic diplomacy was the need of the hour and India could have shown some leadership.
Now a determined, focused push to gain lost ground seems likely and the role that Indian business can play is vital. The conditions are conducive. First, trade is 50% of our GDP up from 35% in 2006. This is largely due to export of software services and raw materials.
Second, Indian direct investment abroad is an impressive $105 billion and catching up with the $186 billion of FDI into India. This means corporate India is already a significant global player, with businesses from oil to tea located across the world a benign and as-yet-unused resource abroad.
Third, our aid diplomacy has made some impact around the world and earned us goodwill. India's lines of credit are upwards of $10 billion and especially popular is our ITEC programme which provides training in accounts, IT, English, rural management and so on, in 120 developing countries. Stepping up this engagement can open doors for our business interests.
For Real PPPs Modi can take advantage of this if he can persuade Indian business to move beyond individual corporate objectives and fashion a joint effort with government to achieve strategic national objectives. This will require policy and mindset changes by government and business.
India Inc can show good intention with some immediate moves. It can support the build-out of independent intellectual think tanks, endow study centres and university chairs.
These will build policy and research capacity and incubate muchneeded India-centric ideas, databases and global trends analyses. Indian business can accelerate deputations to state or central departments of domain and legal experts in statistics, contracts and tax, financing, trade negotiation, energy , technology , areas where government is lacking. These can be project-specific or for a limited period of three years, on the corporate payroll, with a secrecy contract.
Private business can work with our public sector on foreign projects. Gail is a globally respected multinational giant with major operations abroad. A syndicate with India's private energy and infrastructure players can help counter the Chinese state juggernaut. An alignment with India's interests abroad has helped many companies become globally competitive.
Chamber Music Finally our chambers of commerce must grow beyond event management: they must boost their presence and expertise overseas, and become experts in articulating India's global business interests.
The government too must overcome its timidity and shortcomings.
Enlarging the size of the tiny , 700person ministry of external affairs and populating it with commercial counsellors and trade services experts is an imperative. Free trade agreements (FTAs) are languishing without negotiating expertise, as is our participation in regional trade fora, all substitutes for the WTO, which collapsed because of Indian and US differences.
Revive WTO Talks We can regain global stature by reviving, humbly , the WTO talks along with the US. And we must bring down our tariffs closer to global averages. This will be possible only with inter-ministerial co-operation now at a dismal low. The foreign and commerce ministries must deepen their teamwork both at home and at missions abroad.
Modi has made it clear that he will support those who support India's strategic intent. If think tanks, business and government combine to put their best ideas forward, India's diplomacy can bring to the global table, the full benefit of its intellectual, economic, political and security capacity.
The author is co-founder, Gateway House
Brave New Workplace
Dipankar Gupta
|
How reforms of labour laws can enrich both enterprises and workers
With a new government that promises to act, there are all kinds of wish lists in the mail. The need to alter our labour laws figures prominently in many of them, but all too often from an interest specific perspective that misses out the whole.The Industrial Disputes Act, for instance, is foundationally flawed because at every step there is a number to climb over or duck under. If a unit has more than 100 workers, then there is one set of rules; if less than 20, but more than 10, then another. Industries are also categorised as small, micro and medium, and once again different regulations govern each of them.
Stay employed for 240 days at a stretch and you will get retrenchment wages, if less than that go whistle in the park once you are fired.
All of these heighten the atmospherics of hostility in the workplace. The truth is that these numerical thresholds encourage distrust between employers and employees; in fact, they bring out the worst in them. For example, if job permanence is granted only when there are a 100 or more registered workers on the muster, employers will naturally tend to knock this number down by hiring casual or contract labour. This in turn generates another flurry of laws that makes the industrial sector look like a battlefield.
But the moment we take these numbers out of the picture, look at the difference this makes. If, without threshold markers, all workers are permanently on the muster, then employers will see no advantage in keeping their units small and functionally inefficient. Nor will one set of workers, namely those on the muster and in large units, be privileged over the others. However, to make this happen, labour too must accept conditions under which they can be dismissed, provided the process of job termination is transparently just. That both sides must give and take becomes apparent only after numerical qualifiers are removed.This is not a wonderland we are
talking about. We can see aspects of these, some in full-blown form, in large parts of Europe. Contrary to popular belief in CII and Ficci, even in America hiring and firing is not all that easy. However, for such a scheme to get off the ground at home, the crucial first step is to rid our labour laws of the many thresholds that dog it.For starters, entrepreneurs need to be able to right size their
company’s bench strength from time to time, but only with good reason. What could these reasons be? They are principally three: indiscipline, bankruptcy and restructuring. All of them can be allowed if the management also undertakes to bear a portion of the cost of dismissal of the worker.Remember, unlike Europe, the unemployed in India enjoy no medical, unemployment or other such benefits. If our labour laws are changed and all employees become permanent (except, of course, those in construction and seasonal industries), dismissal would entail in every instance the payment of severance wages, or retrenchment benefits, as the case might be. You cannot just take away without giving something back in return.
This immediately stops the
management from being whimsical in getting rid of its workers.Now that there is a monetary sum that they must pay up for firing somebody, such a step will be taken only when there is no alternative but to do just that. In fact, under these altered conditions, management would do well to retain and retrain the workers rather than dismiss them; firing would then become the last option.
In fact, keeping workers happy might be the name of the new competition between entrepreneurs.
Now that there are no thresholds and all workers are permanent, they can join unions without fear of management reprisal.
Nor should this simple act of signing up signal that employees have suddenly become hostile, radioactive material. To take full advantage of this provision, every
enterprise should be allowed just one union. This step then undermines another numerical qualifier. It does not matter now how many members a union should have in order to be ‘recognised’ by the management.The union is still the first port of call when an industrial dispute takes place. In case it fails to resolve the issue, then its functioning is complemented by an internal conciliation committee which has representatives from both workers and management. If within a designated period, this committee too is unable to sort out the problem, the matter then goes up to the labour tribunal whose decisions are final and must be delivered within a fixed time frame. While constituting this adjudicating body, we would do well to follow the Supreme Court’s recommendations on the constitutionality of tribunals.
But we must start this process by first shaking off the many thresholds that cling to our existing labour laws. Once that happens, a brave, new, enterpriserich and worker-friendly world opens up. For employers to get control over the enterprise they must respect workers’ yearning for permanence. On the other side, for workers to enjoy permanence, they must yield to a reasonable and time-bound process of dispute resolution.
Remember it takes two hands to clap, but just one to slap! The choice should be simple.
Stay employed for 240 days at a stretch and you will get retrenchment wages, if less than that go whistle in the park once you are fired.
All of these heighten the atmospherics of hostility in the workplace. The truth is that these numerical thresholds encourage distrust between employers and employees; in fact, they bring out the worst in them. For example, if job permanence is granted only when there are a 100 or more registered workers on the muster, employers will naturally tend to knock this number down by hiring casual or contract labour. This in turn generates another flurry of laws that makes the industrial sector look like a battlefield.
But the moment we take these numbers out of the picture, look at the difference this makes. If, without threshold markers, all workers are permanently on the muster, then employers will see no advantage in keeping their units small and functionally inefficient. Nor will one set of workers, namely those on the muster and in large units, be privileged over the others. However, to make this happen, labour too must accept conditions under which they can be dismissed, provided the process of job termination is transparently just. That both sides must give and take becomes apparent only after numerical qualifiers are removed.This is not a wonderland we are
talking about. We can see aspects of these, some in full-blown form, in large parts of Europe. Contrary to popular belief in CII and Ficci, even in America hiring and firing is not all that easy. However, for such a scheme to get off the ground at home, the crucial first step is to rid our labour laws of the many thresholds that dog it.For starters, entrepreneurs need to be able to right size their
company’s bench strength from time to time, but only with good reason. What could these reasons be? They are principally three: indiscipline, bankruptcy and restructuring. All of them can be allowed if the management also undertakes to bear a portion of the cost of dismissal of the worker.Remember, unlike Europe, the unemployed in India enjoy no medical, unemployment or other such benefits. If our labour laws are changed and all employees become permanent (except, of course, those in construction and seasonal industries), dismissal would entail in every instance the payment of severance wages, or retrenchment benefits, as the case might be. You cannot just take away without giving something back in return.
This immediately stops the
management from being whimsical in getting rid of its workers.Now that there is a monetary sum that they must pay up for firing somebody, such a step will be taken only when there is no alternative but to do just that. In fact, under these altered conditions, management would do well to retain and retrain the workers rather than dismiss them; firing would then become the last option.
In fact, keeping workers happy might be the name of the new competition between entrepreneurs.
Now that there are no thresholds and all workers are permanent, they can join unions without fear of management reprisal.
Nor should this simple act of signing up signal that employees have suddenly become hostile, radioactive material. To take full advantage of this provision, every
enterprise should be allowed just one union. This step then undermines another numerical qualifier. It does not matter now how many members a union should have in order to be ‘recognised’ by the management.The union is still the first port of call when an industrial dispute takes place. In case it fails to resolve the issue, then its functioning is complemented by an internal conciliation committee which has representatives from both workers and management. If within a designated period, this committee too is unable to sort out the problem, the matter then goes up to the labour tribunal whose decisions are final and must be delivered within a fixed time frame. While constituting this adjudicating body, we would do well to follow the Supreme Court’s recommendations on the constitutionality of tribunals.
But we must start this process by first shaking off the many thresholds that cling to our existing labour laws. Once that happens, a brave, new, enterpriserich and worker-friendly world opens up. For employers to get control over the enterprise they must respect workers’ yearning for permanence. On the other side, for workers to enjoy permanence, they must yield to a reasonable and time-bound process of dispute resolution.
Remember it takes two hands to clap, but just one to slap! The choice should be simple.
SEBI moots level tax field for investors in bonds
itches for tax benefits on REITs, infrastructure bonds
Suggesting uniform tax treatment for all investors, Securities and Exchange Board of India (SEBI) Chairman U. K. Sinha, on Saturday, said the government needed to come out with a detailed policy on the matter to remove the existing ‘anomalies’ in the bond market.
At present, tax rates vary for entities making investments in bonds.
Mr. Sinha said the more difficult issue pertained to tax treatment or the withholding tax for investors in bond market.
Noting that there were ‘certain anomalies’, the SEBI chief said the level of withholding tax for an FII investing in infrastructure bonds was different from that of others.
“All that we have asked the government is that try and reconcile it because if you are looking for long-term and big money, especially for infrastructure companies, so long as the anomalies exist people will hesitate to invest. That is the point we are making,” Mr. Sinha told reporters here on the sidelines of a summit here.
The withholding tax is 5 per cent in some cases and 20 per cent in other cases.
Emphasising that procedures had been simplified for the corporate bond market, he said SEBI was in dialogue with industry to encourage them to come out with more issuances.
“... there have been some positive progress but a lot of ground needs to be covered. The matter is under consideration in the forum of regulators and the government. I am hopeful that some progress will come in that,” Mr. Sinha said.
On corporate governance, the SEBI chief said the regulator had looked at all qualified financial statements in 700 instances. “The 700 such reports came to us through the stock exchanges and 400 such cases we have referred it for rectification... Now there is a pressure on corporates that somebody is effectively looking at the financial statements,” he noted.
Responding to a query on sovereign wealth funds not showing much interest in government securities, he said the situation needed to be looked at for some more time.
At present, $10 billion is the maximum investment limit allowed for entities such as sovereign wealth funds in government securities.
On e-voting facility for shareholders, Mr. Sinha said listed companies had to follow SEBI norms. Recently, the Corporate Affairs Ministry extended the time till December this year for companies to mandatorily have e-voting facility under the new Companies Act.
Norms for REITs
To give a boost to capital markets, SEBI has asked the government to provide clarity on tax benefits for new products such as REITs (Real Estate Investment Trusts), as also for Infrastructure Investment Trusts and for debt securities.
“SEBI will soon finalise norms for REITs, but is awaiting clarity on taxation issues,” Mr. Sinha said, while adding that the regulator wanted such trusts to get tax pass-through status.
The regulator, he said, is close to framing new rules for Infrastructure Investment Trusts but there needed to be clarity on withholding taxation issues for such products.
These new products would allow investors to invest in specific products linked to real estate projects and infrastructure projects, while providing necessary safeguards.
Besides, these products would help the corporates raise significant amounts of capital for their projects.
The SEBI Chairman further said that there was a need to work on increasing the base of corporate bonds.
He also stressed on the need to encourage SMEs (Small and Medium Enterprises) to get listed and get benefited from the capital markets.
At present, the listed SME market capitalisation in India stands at over Rs.7,500 crore, while 65 companies have got listed on SME Platform of exchanges.
About the new regulations, Mr. Sinha said that SEBI would soon put in place norms for crowdfunding, which would allow start-ups to tap new platforms to raise funds.
Besides, there are already norms in place for Alternative Investment Funds (AIFs), such as venture capital and angel investors.
Ponzi scheme
Armed with powers given through an ordinance to take on investment frauds, Mr. Sinha said he hoped it would soon become a permanent law to ensure continued clampdown against illegal investment schemes. — PTI
Centre accepts Mayaram panel report on FDI
Foreign investment of 10 per cent or more in a listed company will now be treated as foreign direct investment (FDI) as the government has accepted the report of a committee on rationalising definitions of FDI and FII.
The Finance Ministry in a statement on Saturday said the government had accepted the report of the committee headed by Finance Secretary Arvind Mayaram.
It said an investor may be allowed to invest below 10 per cent and “this can be treated as FDI subject to the condition that the FDI stake is raised to 10 per cent or beyond within one year from the date of the first purchase“.
If the stake is not raised to 10 per cent or above, then the investment can be treated as portfolio investment.
Among various recommendations, the panel has suggested that foreign investment in an unlisted company, irrespective of the threshold limit, may be treated as FDI.
Foreign direct investment is subject to sectoral caps.
FDI reflects a lasting interest and long—term relationship, while under portfolio investment the relationship between the investor and the company remains largely anonymous, the report said.
It further said that any investment by way of equity shares, compulsorily convertible preference shares/debentures less than 10 per cent should treated as Foreign Portfolio Investment (FPI).
FPI includes portfolio investors like foreign institutional investors (FIIs) and qualified foreign investors (QFIs).
Regarding NRI investors, it said special privileges are also available to them in terms of the Overseas Citizenship Act and the provision to make ‘non—repatriable’ investments.
“This position would remain and to reinforce the same, it may be further examined if non—repatriable investment by an NRI can be treated as ‘domestic’ as also an enabling mechanism to enable such investment to come via corporate form,” the report recommended.
It has also suggested a relook at the Foreign Venture Capital Investors (FVCI) scheme as these investors are basically in the nature of FDI. — PTI
Growth of Textile Industry
The contribution of the textile industry in terms of percentage to industrial production and export earnings is constant at 12% during the last three years and current year. Textile Industry generated direct employment to over 35 million people.
In order to increase the employment in the textile industry Government has launched various schemes namely integrated Skill Development Scheme(ISDS) and Scheme for Integrated Textile Parks(SITP).
The role of the Government is to ensure conducive policy environment and encourage investment. Government has taken various steps and launched schemes namely Technology Upgradation Fund Scheme(TUFS), SITP, ISDS, etc. In the direction of encouraging and catalyzing investment in Textile sector. For modernisaton of weaving sector, subsidies (both interest reimbursement (IR) and Capital subsidy (CS)have been increased from 5% to 6% and 10% to 15% respectively. Margin money subsidy has been increased from 20% to 305 in TUFS. Integrated Processing Development Scheme (IPDS) with a budget outlay of Rs.500 crores has been approved for modernisation of Processing sector. The second quarter of the current financial year , Textile sector has added to 66,000 jobs . Infact,62% of total jobs created in the textile sector were contributed by the exporting units. Exporters gave jobs to 41,000 people. Textile sector was one of the few sector showing a growth in the index of the industrial production figures . As per the latest official figure, while total industrial production contracted to 0.21% in Apr-Nov, Textile sector output rose to 3.7%.
There is no shortage of cotton /yarn in the country to meet the requirement of domestic textile industry .For the current cotton season 2013-14(oct-sept) there is an estimated total availability of cotton at 427 lakh bales against the total estimated demand at 387 lakh bales which is adequate to meet the requirement of textile industry.
To encourage exports including export of processed clothes, incentives are available under the Foreign Trade Policy namely Interest subvention , Market Access Initiative(MAI), Market Development Assistance(MDA)Schemes and Focus Market & Focus Product Schemes. The Ministry of Textiles has adopted four pronged strategy for Textiles exports namely larger textiles trade shows, skill development initiatives, compliance programes and duty drawback schemes. A provision of Rs.500 crore has been made in the 12th plan for introducing a scheme for Integrated Processing Development.
| Wings to Boost Indian Textile Industry | |||||||||||||||||||||||||||||||||||||||
| Backgrounder The Textile Industry in India occupies a unique place in our country. The Industry with its age-old heritage has redefined as fast emerging market with half a billion middle income population in its basket by 2030. One of the earliest to come into existence in India, it accounts for 14% of the total Industrial production, contributes to nearly 30% of the total exports and is the second largest employment generator after agriculture with the current work population of more than 35 million people . Though was predominantly unorganised industry even a few years back, the scenario started changing after the economic liberalisation of Indian economy in 1991. Realising the growing demand, the Ministry of Textiles has taken special initiative to nurture and encourage the industry with innovative schemes and lucrative incentives. The fate of the small handloom weaver, Reena has suddenly changed when a financial assistance from the government has poured into after her long battle for survival. To save the debt-ridden handloom weavers, the government of India has introduced Revival, Reform and Restructuring Package for handloom sector. The scheme has been announced on February 28, 2011, and implemented from December 3, 2012. A financial package of 3000 crore rupees on acknowledging the financial distress faced by handloom sector has been sanctioned to implement the scheme. The government has also taken special efforts to upgrade the technology alongwith the welfare of the handloom weavers. In order to facilitate modernisation and technology upgradation of Textiles Miles, government has launched technology Upgradation Fund Scheme for Textiles and Jute Industry. The objective of the scheme is to leverage investment in technology upgradation in the Textiles and Jute Industry. It is a credit linked scheme and provides reimbursement of 5% point on the interest charged by the lending agency of project of a technology upgradation in conformity with the scheme, fro spinning machinery, the scheme will provide 4% for new stand alone/replacement/modernisation of spinning machinery and 5% for spinning units with matching capacity in weaving/knitting/processing garmenting. Under TUFS (01.04.1999 to 28.06.2010) 28302 units with a project cost of Rs 207747 crore have been sanctioned term loan of Rs 85091 crore. In 2013-14, a total amount of 414.93 crore rupes was sanctioned under the scheme. The Ministry of Textiles has initiated the Scheme for Integrated Textiles Parks (SITP) from August 2005, to provide infrastructure support to the textile industry. Under the scheme, 40 projects with the total project cost of Rs. 4121.23 crore were sanctioned in 2012-2013 and onother 21 projects of textile parks have been sanctioned till 2013. The objective of the Scheme is to establish integrated and hi-tech Textile Park with world-class infrastructure and manufacturing facilities based on Public-Private Partnership. Several schemes have also been taken for the welfare of Powerloom workers though Group Insurance Scheme. As per the modified scheme, the total premium each Rs 470/- out of which Rs 290/- is to be borne by the office of the Textiles Commissioner and Rs 100/- is being paid by LIC. Only a premium of Rs 80 is to be paid by the Powerloom weavers for getting the benefits under the said scheme. The scheme is in operation since July 2003. Till the may 2013, altogether 35, 063 workers have been enrolled into the industry with the total share of Rs. 1,01,68,270/- Government is also very much keen to provide modern powerloom sectors to compete with global market. A group workshed scheme for decentralized Powerloom Sector under the Xth five-year plan has been introduced with the aim to setting up of Powerloom Parks with modern weaving machinery to enhance their capabilities to compete with global market. Under the scheme, minimum four weavers should form a group with 48 modern looms of single width or 24 wider width looms and per person minimum four looms will be allowed to be installed. The maximum subsidy will be 12 lakhs per person under the scheme. The scheme does not envisage more than 500 looms under one project proposal. The Ministry of Textiles has emphasised on the overall development of the powerloom sector and to achieve this, the Integrated Scheme for Powerloom Cluster Development is being implemented from 2007 with components like Marketing Development programme for Powerloom Sector, Exposer visit of Powerloom Weavers to other Clusters, Powerloom Cluster Development , Development and UPpgradation of skills and Survey of the Powerloom Sector. The computer aided design system in the textile sector is playing much important role in the growing market trend. To facilitate creation of improved and new designs in the production of textiles, the Government has sanctioned and operationalised 17 CAD Centres in different clusters to provide dedicated design development and manufacturing support to the sectors. During the 11th plan, Government is allocating Rs.10 lakh per year towards expenditure of one CAD centre each. These CAD centre have been upgraded with latest software and hardware system. With the continous and sustained efforts by the Government, the Indian textile sector will certainly have its share in the growth story buoyed by both strong domestic consumption as well as export demand.
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| Problems Being Faced by the Domestic Manufacturing Industry Related to Power / Electrical Equipment / Capital Goods |
The domestic manufacturing industry related to power / electrical equipment / capital goods, of which Bharat Heavy Electricals Limited (BHEL) is a part, is currently going through a sluggish and difficult period since 2011-12 because of slowdown in the Indian power sector as well as subdued industrial activity. Giving this information in written reply to a question in the Lok Sabha today, Shri Praful Patel, Minister of Heavy Industries and Public Enterprises, said that this is on account of a combination of factors, which inter-alia include:
· A sharp contraction in new orders maturing in the domestic power sector market due to issues/bottle-necks related to non-availability/acquisition/ lack of enabling requirements such as land, coal/fuel linkages, environmental clearances etc.
· Orders getting deferred or being put on hold.
· Weak investment sentiment, financing constraints from the banks / financial institutions.
· Aggressive competition from new players / Joint Ventures formed in the private sector in the Country for super-critical boilers and turbine generators affecting price realisation and impacting margins.
· A surge in imports of electrical equipment in recent years, mainly from China, resulting in loss of business to the domestic power equipment manufactures.
· Inflationary pressures and hardening of interest rates impacting cost / domestic demand and cost of capital.
· Lack of level playing field including infrastructure bottlenecks suffered by the domestic industry vis-a vis foreign suppliers / manufactures.
· Enhanced ceiling on External Commercial Borrowings (ECBs) for inter-alia financing of domestic power projects which generally facilitates sourcing of equipment from outside the Country.
· Global slowdown, political turmoil, armed conflict in countries like Syria, resulting in lower demand for export etc.
The above factors have adversely affected the order booking position as also lower capacity utilisation of the domestic manufactures of power equipment, including BHEL which is a major domestic market player in the field, Shri Patel informed the House. Some of the existing power projects are going slow or are being put on hold due to customer’s constraints in releasing payments for deliveries and other constraints faced by them thereby curtailing progress of their projects. Department of Heavy Industry and Ministry of Power undertake review meeting with BHEL on regular basis and through suitable interventions provide required support in taking up the issues with other Government Agencies / Departments / Ministries etc.
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