Sunday, July 13, 2014


SMEs in Union Budget 2014-15 – Implementation Challenges

This path-breaking Union Budget providing discontinuing continuity on several fronts has concretized all the promises in the BJP manifesto unfolding the vision of the Modi Government. Its allocations reflect pragmatism in that some projects got funds for Detailed Project Reports while others of long term nature that can only make a beginning got symbolic outlays.

Manufacturing sector that is just showing signs of revival with its growth rate touching 4.7% in May 2014 reversing the negative trend of growth till the end of March 2014 got a shot in the arm. Of particular relevance is the attention paid to the MSME sector.
This highly heterogeneous MSME sector in terms of the size of the enterprises, location, variety of products and services, people employed, coverage of social sector, and leveraging information, communication and technology (ICT) in running their enterprises holds nearly 3olakh units employ around 500lakh persons. 98 percent of them are in micro and small categories going by the definition of the MSME Development Act 2006. They have always reflected growth rates ranging from 8 to 11 percent far higher than their elder cousins. While INR 10crore investment in large enterprise provides one job or less, INR one crore in MSMEs provide on average 4 persons. They are also providing on-the-job skills and tolerate attrition rates multiple times the large enterprises while contributing to 40 percent of exports in manufacturing sector.
Most of them are in debt markets and are unable to access equity despite the SME Exchange in position.

The three key issues facing the sector; lack of finance, need for support for technology /skills and innovation and need for exit option get due attention. While the schemes are well intentioned, the implementation at the State level will be critical and would require State Governments to overhaul their machinery to take full benefits from these measures. Succinctly put, Arun Jaitly announced the following for the MSMEs:
1. Fund of Funds with a corpus of INR 10,000crore for providing equity through venture capital funds, quasi-equity, soft loans and other risk capital will facilitate startup companies.

2. Initial sum of INR 100crore for “Startup Village Entrepreneurship Programme” for encouraging rural youth to take up local entrepreneurship programmes. Read with the support for producer companies, this is a big shot in the arm.

3. Corpus of INR 200crore to be set up to establish Technology Centre Network. Successful execution of all these promises will give a significant boost for entrepreneurs and SME’s and facilitate the promotion and development and enhancing the economic growth of the country.

4. Promised to develop an entrepreneur-friendly legal bankruptcy framework for SMEs that will enable easy exit.

5. To incentivize small entrepreneurs in the manufacturing sector, the government has also proposed to provide investment allowance at the rate of 15 percent to a manufacturing company that invests more than INR 25crores in any year in new plant and machinery for investments up to 2016-17.

6. Definition of SMEs would be modified.

7. A nationwide “District level Incubation and Accelerator Programme” to be taken up for incubation of new ideas and necessary support for accelerating entrepreneurship.

However, once an entrepreneur sets up a unit in the sector, it is well nigh impossible for him/her to exit under the existing rules. The MSME Development Act 2006 has not been able to create a window for safe exit. It is this context that makes the announcement on exit policy and bankruptcy law greet with lot of enthusiasm. This measure will eventually distance them from the endemic sickness.

Some of these proposals like MSME tool rooms and innovation centres that are already present in most large cities unless implemented enterprise friendly, would bring wrinkles on the already sweating brow. Similarly entrepreneurship development programmes conducted by all State Governments and EDIs and MSME DIs, are not able to generate proposals/projects that are bankable. Finance still holds the key.

However, MSME sector faces all its problems at the State and sub-State levels where actual implementation mechanism rests. The District Industries Centers save exceptions like Tamil Nadu and to some degree in Karnataka, Gujarat and Maharashtra, are a window of harassment and the single window scheme for securing all clearances have multiple doors and windows. The archaic DICs have to be converted into District Facilitation Centers in the first place if good governance has to touch this recognized distressed sector.

The other implementation block is delayed release of announced subsidies both from the Central and State Governments. Third, State Government machinery needs to be trained for the magnitude of work expected from them and also their knowledge levels/ familiarity with technology, bankability of schemes etc has to significantly improve. Here, the ministry of MSME can play an important role to ensure that the State Governments are ready to implement budget proposals.

RBI in its guidelines provided for collateral free credit to these MSMEs up to Rs.10lakhs although the Credit Guarantee Fund Trust for MSEs provided for such access up to Rs.100lakhs. It is a different issue that banks follow neither save very few exceptions going by less than lakh of lucky MSEs securing collateral free credit.

RBI has also advised the Banks to display the facilities available to the MSME sector including the guarantee thresholds in the banking hall and there is clear breach on this count with no regulatory action. There is no mandatory percentage of priority sector credit to flow to this sector. The credit issues and rules and regulations are expected to be examined by a Committee and the three month speedy delivery of its Report would hopefully be followed up with equally speed implementation mechanisms. Budget certainly made the MSMEs smile this time as environment for enhancing their competitiveness improves significantly.

Saturday, June 14, 2014

Emerging Economies, Free Trade and Poverty


Poverty alleviation has been on the global agenda for the last seven and half decades. The World Bank, Asian Development Bank, United Nations, several developing nations and Developed Nations have made it as an important agenda. But the US, Japan, Germany and even China that registered consistent high growth during the last two decades could not be free of the poor. Asian Development Bank that has been spending billions on the agenda of poverty alleviation has poverty dancing right in front of its huge mansion in Manila. It could not show case even a small nation rid of poverty. Poverty can at best be reduced and not eliminated – this is one lesson that the economic history teaches us.
All the conferences on poverty alleviation throughout the World are held in Five Star or Seven Star Hotels and in Air-conditioned Conference Halls for hours and days together. Intellectuals gather to discuss their poverty and other’s poverty. Goals in one name or other and common agenda across the nations – e.g., Millennium Development Goals – are discussed and settled. Several researchers, bureaucrats, government and non-government organizations, donor institutions etc., decide to spend billions of dollars on the agenda. So much is the scope for employment provided by the poor across the world. Poor are the biggest employers in the world. Interest keeps renewing on poverty alleviation agenda – and now with focus on emerging economies and free trade. This paper is divided into two parts: part 1, dealing with free trade and emerging economies and Part 2, dealing with poverty with specific reference to India.
Part 1: Free Trade and Emerging Economies
A word or two about free trade becomes imminent to relate to the poverty alleviation agenda. The IMF and the World Bank have preached long the structural transformation followed by liberalization of trade and export-driven agenda. They prescribe cutbacks, “liberalization” of the economy and resource extraction/export-oriented open markets as part of their structural adjustment programmes. Privatization accompanied by reduced protection to domestic industries, currency devaluation to keep the dollar in its prime trading position, increased interest rates, elimination of subsidies particularly those that offer guarantees to the poor, food security measures, are some of the glaring measures and these would precisely ensure that the emerging economies inviting such adjustment programmes depend upon them continuously and the poverty that actually gets accentuated in the process, is kept high on the economic debates.
One analyst succinctly puts it: “The impact of these preconditions on poorer countries can be devastating. Factors such as the following lead to further misery for the developing nations and keep them dependent on developed nations:
• Poor countries must export more in order to raise enough money to pay off their debts in a timely manner.
• Because there are so many nations being asked or forced into the global market place—before they are economically and socially stable and ready—and told to concentrate on similar cash crops and commodities as others, the situation resembles a large-scale price war.
• Then, the resources from the poorer regions become even cheaper, which favors consumers in the West.”
The other effects are that capital flows become more volatile and the bottom of the pyramid, gets wide leading to social unrest.
“In the worst cases, capital flight can lead to economic collapse, such as we saw in the Asian/global financial crises of 1997/98/99, or in Mexico, Brazil, and many other places. During and after a crisis, the mainstream media and free trade economists lay the blame on emerging markets and their governments’ restrictive or inefficient policies, crony capitalism, etc., which is a cruel irony.”
Developed countries grew rich by selling capital intensive products at high price and buying labour-intensive products at low price. This imbalance of trade increases the gap between the rich and the poor. A country’s ability to purchase imported goods declines when the purchasing power of a country’s exports declines. Emerging economies would not be able to fund the sustainable development programmes without incurring huge fiscal deficit. These deficits are calculated in relation to the Gross Domestic Product – a measure that fails to reckon many products and processes that happen in the economy. A case in instance: In India, all the deals in scrap and waste are on cash and carry basis running to millions of rupees and they do not get into the national accounts. There are many other such items in the services sector as well – the services of many doctors, lawyers and the unrecorded sales in jewelery shops .
Most developing economies depend on primary commodities as their main source of revenue and these account for about half of their export revenues and such primary commodities are very few in numbers.
These concerns are not new.
Political economist Adam Smith in his magnum opus ‘Wealth of nations’- dubbed as a Treatise on Capitalism was highly critical of the mercantilist practices of the wealthy nations, while he recognized the value of local industry and the impact of imported manufactured products on local industries:
“Though the encouragement of exportation and the discouragement of importation are the two great engines by which the mercantile system proposes to enrich every country, yet with regard to some particular commodities it seems to follow an opposite plan: to discourage exportation and to encourage importation. Its ultimate object, however, it pretends, is always the same, to enrich the country by the advantageous balance of trade. It discourages the exportation of the materials of manufacture, and of the instruments of trade, in order to give our own workmen an advantage, and to enable them to undersell those of other nations in all foreign markets; and by restraining, in this manner, the exportation of a few commodities of no great price, it proposes to occasion a much greater and more valuable exportation of others. It encourages the importation of the materials of manufacture in order that our own people may be enabled to work them up more cheaply, and thereby prevent a greater and more valuable importation of the manufactured commodities.” (Emphasis Added) We notice therefore that the free markets are preached while mercantilist interventions in markets are practiced.
In April 2001, Greg Palast conducted an interview with Joseph Stiglitz which was published in the British newspaper Observer and Guardian.
The World Bank talks of “assistance strategies” for every poor nation using careful country by country investigations. However, as reported in the article, “according to insider Stiglitz, the Bank’s ‘investigation’ involves little more than close inspection of five-star hotels. It concludes with a meeting with a begging finance minister, who is handed a ‘restructuring agreement’ pre-drafted for ‘voluntary’ signature.”
Stiglitz then tells Palast that after each nation’s economy is analyzed, the World Bank “hands every minister the same four-step program” (emphasis added), described in the article as follows:
1. Privatization: the programme is endorsed as it provides scope for corrupt politicians to sell the State silver on a platter and transfer at least 10 percent of the ill-gotten money to undisclosed Swiss bank accounts. Stiglitz asserts that the Us government knew about it at least in one such case: in the 1995 Russian sell-off: “‘The US Treasury view was this was great as we wanted Yeltsin re-elected. We don’t care if it’s a corrupt election.’” (Emphasis added)
2. Liberalization of Capital Markets: Stiglitz describes the disastrous capital flows that can ruin economies as being ‘predictable’, and says that ‘when the outflow of capital happens, to seduce speculators into returning a nation’s own capital funds, the IMF demands these nations raise interest rates to unsustainable levels of 30-70 percent.
3. Market-based pricing: This Stiglitz calls, “the IMPF riot.” We have seen the consequences in India: safe drinking water is either priced or bottled and sold post liberalization. Prior to 1990 we had no mineral water bottles as the only safe drinking water in India.
4. Free Trade: This is a version dominated by the World Trade Organization and the World Bank. Stiglitz likens this to the opium wars. US and Europe created barriers to sales of farm products in Asia, Latin America and Africa while barricading their own markets against the Third World Agriculture. They talk about rule-based global mechanisms and the media always feels shy of asking what these rules are and who framed them, when? They are “devised in secrecy and driven by an absolutist (absurd) ideology. Parentheses mine.
Commenting on Doha WTO Conference in November 2001, Raj Patel gave a harsher description of the structural adjustments and trade related policies as ‘weapons of mass destruction.’
I would not like to sound so cynical and harsh for the reason that these free trade policies have come to bear on the manufacturing sector certain product and packaging standards, environmentally friendly policies and emergence of a robust services sector that gave fillip to new generation employment as also increase in wages and salaries that pushed the unwinding of traditional labour markets.
How do we build the poor as building bricks for growth of the economy? Most of the poor are categorized as unorganized sector as they do not have a common articulation of the problems. Everyone else speaks for them, thinks for them and acts for them. In the process, their assets do not get cognizance and they also get most often undervalued. The low collateral value gets them nowhere with the lending institutions. They become prey for MFIs who charge highest risk price for the money lent. The modern western economic model is ill-suited for developing countries: be it Thailand, Indonesia, Philippines, Bangladesh, Pakistan or India.
The heart of the problem is that most people cannot access capital due to the under-developed legal system, particularly in terms of property rights. It is good to look at history: The Anglo-Saxon world of the 19th Century when pioneers in North America needed to legitimize their land they had grabbed and businesses they had set up. Similarly, during the same period, European nations used legal means to shelter themselves from the negative effects of globalization, a process that led to their eventual integration. Although Latin America has gone through trade liberalization and economic reforms the majority of its people remain poor. The dead capital of the poor generates less wealth because it lacks least legitimacy. When Ganges or Brahmaputra floods the villages and dismember them, the poor in the villages do not get habitation where they were earlier staying. Altogether new villages with the same name spring up. But the poor would have no titles to either their house property or farmsteads. It is the rich and powerful, the politician and the bureaucrat nexus that assigns ownership to land for the losers in the bargain. The property rights of the poor become severe casualty. Same is the case with many tribal farmers. In the bottom-up process, if the poor are involved in development initiatives, capital of a new order gets built up. Several government designed projects to help the poor have shown up only poor results.
Part2: Poverty in Indian Context
There will always be some gravitational forces that would contribute to reduction of poverty as a natural phenomenon. How much of it effort intensive and how much is gravitational needs to be established through detailed micro studies and there are quite a few. . Then why so many trumpets blow around it?
Under the guiding principles of IMF, Africa’s income dropped by 23% in a single year.
Coming to India, six decades ago poverty rate was put at 47% of the population. By 2011-12 it came down to 30%. The nearly 350mn poor equals population of Africa. The whole world is eying Indian markets because of the growing emergence of the middle class population. The recently released International Comparison Program (ICP) data have provided an independent, international validation of the poverty line fixed by the Suresh Tendulkar committee, which is being reviewed by the C. Rangarajan committee for a likely revision. A summary of the ICP Report confirms the poverty line at Rs.30.2 per capita per day or Rs.906 per capita per month (2011-12 on PPP at Rs.15.1 in 2011 to $1).
The ICP is a worldwide statistical operation involving 199 countries and agencies such as the World Bank. It produces internationally comparable price and volume measures for the Gross Domestic Product (GDP) of countries. It had ranked India’s GDP behind only that of the U.S. and China. But in terms of per capita GDP, India was ranked 129th.”
Ministries of Rural Development, Agriculture, Social Welfare, PDS etc have introduced over 150 schemes targeting the poor and spent billions of rupees in the direction of poverty alleviation. Subsidies and Grants, soft loans and even distribution of assets adorned the wage employment, self-employment, rural infrastructure, social security and food security schemes. The expenditure in administering these schemes has been around 30-40 percent of the budget outlays year after year. The claims of reduction of poverty across the States are varied. Most Advanced States have the bottom of the pyramid growing.
Requirements of the poor have vastly changed. It is not belly hunger. It is information hunger that has overtaken the persons. From scavenger earning a daily wage of no less than Rs.50 to a daily wage earner under Mahatma Gandhi National Rural Employment Guarantee Scheme (MNREGS) holds at least one mobile if not two. He finds the money for the chip and regular updates and even pays Rs.30 for a favourite tune on his mobile. But he/she is not prepared to spend for healthy food and safe drinking water or health insurance. The tastes in villages have also vastly changed. Those using soap nuts for head bath in villages today use a small shampoo sachet costing Rs.2 to serve for wife and husband once a week. Primordial needs have vastly changed. These changes should be recognized while drafting schemes for the poor.
The Human Development Index measured in terms of high literacy rates, low infant mortality rates, low school drop-out rates, availability of safe drinking water, good health and hygiene in terms of easy accessibility of medical and paramedical services has been high in certain low growth States and vice versa in high growth States. The traditionally poverty-stricken States characterized as Bihar, Madhya Pradesh, Odisha, Rajasthan and Uttar Pradesh have even after bifurcation into smaller States and economic development are still showing up high poverty rates. Each Scheme floated by the Government – State or Centre – has grown to be an empire ruled by self-centered politicians. The scheme is implemented independent of other schemes. Schemes like Rajiv Awas Yojana, Rajiv Grameen Vidudikaran Yojana, Provision of Latrines, Sanitation scheme do not get delivered to the same beneficiary although the target group of each scheme is the same poor.
Financial Inclusion – a major initiative with commercial banks in the forefront since 2005 – moved only a shade better in 2012 according to Inclusix – an index developed by CRISIL. Branch penetration, deposit and credit penetration have been brought under one metric in Inclusix. This index clocked 42.8 on a scale of 100. But the disparities stare at us: Southern States accounted for 58% of the credit accounts. The bottom 52% of districts has merely 2% of bank branches. The Bank Correspondents (BCs) have a long way to go in taking the poor closer to the Banks’ door steps. There are unresolved issues between the BCs and Banks. The instrument is not robust enough to go near the goals of financial inclusion. Commercial banks proved that their pie does not lie in these efforts and they preferred to go slow. The Mor Committee recommendations tended to be more academic.
But are we desperate? Certainly not. Every problem has solution if we search for the solution in the area of the problem. Centralised schemes and existing delivery instruments have to be modified. While the poor live in rural areas and urban slums the schemes and resources originate from the Central Government and State Governments. But the very identification of the poor – visible in villages – have to be identified in villages and the lists of such persons should be displayed with their requirements – housing, safe drinking water, sanitation, education, electricity, health and insurance duly tabulated. Against these requirements the concerned officers should mention when and how these needs would be met and the government releases would be reaching their bank accounts. Against each name the bank account number has also to be mentioned. Various existing Schemes should all be combined into no more than twenty schemes and should be directed at the remedying poverty irrespective of caste or creed. The Budget for such schemes should be released timely online to the Villages for implementation within a month after the approval of the budget by the Parliament/Legislature. If the identified poor does not have a bank account, the nearest BC/Bank branch shall open a savings bank account and a Rupiya Card with a limit of Rs.50000 shall be issued within a fortnight after the list is cleared by the Gram Panchayat.
At the Village level social audit of each such scheme should be done once in 3months by an independent agency. The Audit results shall be thereafter put on the website of the State Government as is done for some schemes even now. There must be a Lok Pal type agency recognized as equivalent to a quasi judicial body to enquire into the errands of the officials for the release of grants or subsidies or loans under various announced government schemes and punishment awarded at the village level within one month and no enquiry into the lapses should take beyond two weeks. Lok Pals’ verdict should be made beyond appeal when alone justice will be delivered fast. Necessary legal jurisprudence should be put in place. It is possible to distance poverty but certainly not possible to eliminate it. Efforts and sincerity should not be found wanting.
I will conclude by saying that It would do well for the UN to have not fifteen MDGs but take to just two or three; provide resource required to achieve them; monitor their achievement once in every three months; render the technical support required, if need be. Such goals according to me would be provision of safe drinking water; universal primary education; and protecting women’s property rights. Further, ‘Financial inclusion has still to travel miles and miles more to see the smiles on the faces of the poor!’ Regional imbalances would take time to set right. But economics is often driven by politics.
India, at the moment, is jubilant. The new Government under Narendra Modi with an agenda of development and good governance has just assumed charge with hopes riding high. His ride on such massive mandate not making him complacent should ere long push the economy to reduced poverty and increased dispersed wealth as opposed to the built-up of billionaires in Parliament and State Legislatures that was generated by the IMF-World Bank driven strategies leading to highest limits of tolerance to corruption and inefficiency. In fact the population of rich in the country has been estimated to be the population of UK.
This is no time for war and this message has gone round well with SAARC on the very second day of the new Government when Modi and his few ministers met with the SAARC chiefs on economic agenda. Hopefully, the emerging model of India’s development would be watched keenly by the emerging economies in reducing poverty.
Presidential Address to both the sessions of the new Parliament mentions it all:
“Poverty has no religion, hunger has no creed and despair has no geography. The greatest challenge is to end the curse of poverty in India. My government will not be satisfied with mere ‘poverty alleviation’ and commits itself to the elimination of poverty”.

Text of the talk delivered at the International Conference on Free Trade - Opportunities and Challenges held at the IICT by Andhra Mahila Sabha, Hyderabad on the 13th June 2014.

Appetite for Profit: The pathway for profit.


INTRODUCTION
This fiscal, the whole nation started off with a bang. Election euphoria ended with the grand announcement of single largest party in majority ascending to power after a gap of over two decades. A cultural transformation started off with Narendra Modi bowing before the Parliamentary stairs in reverence. Then there was historical swearing in of the Prime Minister, the first ever in independent India with all the invited SARC countries representing their nations for that ceremony. Minimum government and maximum governance, bringing down inflation, policy stability and clean government are all promises held out. All the Secretaries to the Government have been asked to make a presentation to the Prime Minister the status of various projects, in case of delays causes for the delays, when and how they are likely to be completed and for such closure what plan of action is with them and what supports are needed. To me, it looked as though a new tough CEO is assuming charge of GoI Inc. The risks at the moment would appear to have been addressed up front: first, a change in the culture; second, outlook and third, outspokenness and fourth, firm on implementation agenda. Objectives would be set; strategies would be discussed by the various ministries; tracking and tracing mechanism would be put in place; stress tests would be applied; and accountability and visibility with real time monitors and reports would follow eventually. The PMO website appeared within minutes of the swearing in ceremony beamed by all the TV channels. The whole world watched the biggest democracy in full strength determined to change the destiny of India into a formidable political and economic power. Why am I starting my paper with all this known stuff? The reason: a weak financial sector and strong economy can hardly co-exist; and the biggest deficits of all, the TRUST DEFICIT is fast eroding.
GROWTH CONCERNS
Indian economy has clocked just 4.5-4.6 percent growth during 2013-14 with the projection of 6 percent for the next fiscal. IMF and the World Bank predicted a GDP growth of 3.2 percent in the current fiscal. The shadow of recession is still on. The quantitative easing impacting the emerging economies is bound to affect adversely. The solace is that even QE is receding if we were to go by the latest reports. Morgan Stanley in its latest assessment stresses the imperative of growth of healthy banking sector as a precondition for growth of the economy:
India can clock a growth of over 6.75 percent over the next ten years, meaning a $5trillion economy by 2025 if financial services can be an integral contributor, says Morgan Stanley.


"However, to fix the banking system and therefore to give economic growth the greatest chance of success, the new government will need to use that mandate to act decisively in the next few months and years. These are not going to be easy steps, but with the right policy choices from the government and prudent financial management from the banks, earnings growth averaging in the high teens is possible," the report says.
Still, there are concerns and concerns; Basel III demands on liquidity, stability and capital in the backdrop of not so encouraging enterprise risk culture among the corporate entities and SMEs and the banks still riding on short term resources’ basket to finance long term assets like infrastructure and housing, the rising NPA curve just to highlight the most essentials. Strange but true: for a month since the 15th General Elections were announced, markets were on ascendency. Sentiments prevailed over sensitivities. “Corporate boards and senior leaders face unprecedented challenges, including geopolitical threats, new laws, and increasing shareholder demands. To meet these challenges, organisations must successfully manage risk – including strategic risk, process-level risk, and regulatory risk.”


APPETITE AND GROWTH
Two reports of Deepak Kurup published in the Hindu on May 26, 2014 caught my eye. Mr Sachin Bansal, of the Flipkart acquiring the e-tailer Myntra.com for $330mn is all about the risk appetite and the way he worked for it. His appetite does not end: he is eyeing at Alibaba Group of China. Most Indian entrepreneurs are ‘focused and not obsessed, with eliminating risks.’ And as long as you do this, you will remain yet another small company. What made Sachin Bansal big? “Taking big decisions with little information at hand” made all the difference. Similarly, Snapdeal.com grew at a pace that surprised competition. Kunal Bahl, the CEO of the Company attributes the six-time growth of the company in the twelve month period that preceded, to the ’zero inventory model’ while e-commerce in India grew at 88 percent correspondingly (according to ASSOCHAM). The pure market place strategy is not regulator driven. According to him, “ a pure market place is not a regulatory structure. It is a philosophy that you want to offer equal opportunity to any business that wants to supply locally and sell nationally.” …”Market is ahead of us and not behind us.” He concludes his interview telling that technology, scale, size and ambition and the kind of growth trajectory are all driven by the Board.
Backed by FIIs, the rupee started on its ride although the forex balances are yet to gain that comfort level. Complacence has no place. The new Finance Minister made no bones while talking shop to the public sector banks on the rise in NPAs and the need to contain them. National Asset Management Company to silo the NPAs may be a beginning but does not really take off the risks nor would it create new appetite. Radical out of the box thinking may be necessary to move to profit curve on risk map.
RISK CULTURE
Banking basically is about people – whether customers, clients or staff. Money spills through these three categories with systems connecting them. Products are created to take money and give money.
Risk perceptions underwent a thorough change with the onset of recession in 2008 and its shadow is still hanging. While Banks in India and emerging economies in general have embraced the precautions set against the west-led recession in the financial sector, they did not indulge in the luxuries that enveloped those developed nations. The known unknowns – credit risk, and the unknown unknowns – market risk, are on the increase despite technology inroads reflected in core banking solutions, centralized processing platforms, video conferencing with clients, improved risk ‘governance’ claims on the part of banks and financing institutions. It is well known that financial sector is a haven of risk. Further to the acceptance and introduction of Basel Committee norms, risk management departments have been set up. RBI issued detailed guidelines. General Managers/Executive Directors have been kept in charge of the Risk Management Departments in Head Office. Risk Management Committees are part of the Board Management. But, ask any employee of the Branch of a Bank about Risk Management: you will still get a stock reply: “Oh! Risk Management is looked after by the Head Office. We submit whatever returns are required in this regard.” Here and there, some younger generation is attempting to pursue professional certification courses in risk management from IIBF, PRMIA or GARP. All the globally placed banks have moved to Advanced Approach to Risk management under Basel II and claim to be ready for Basel III. Yet, bulging NPAs, increasing cyber frauds, interest rate risks, forex risks, inflation risks, and retarding economic growth have been causes of great worry in 2011-14.
It is important that every employee in a bank understands that he is working in an institution that is exposed to risk everywhere. He or she has to be conscious that his or her neighbor is also a potential risk to the same degree as provider of a kinetic energy. In several branches of the banks or insurance companies, transfers take place periodically. Even within the branch, staff would keep changing the desks. Such shifts and transfers have potential to expose the lapses and reduce risks in the organization. If any employee does not apply for leave for a full year, he needs to be keenly watched for transactions handled by him and his personal accounts. Every employee’s personal accounts would need scrutiny to make sure that there are no abnormal credits or debits in his or her account. All these acts of vigilance contribute to developing risk culture.
Therefore, superior risk management demands that organizations must embrace risk culture in the first place. In a typical risk culture, people will do right things when risk policies and controls are in place. In good risk culture, people will do right things even when risk policies and controls are not in place. In a bad risk culture, people will not do right things regardless of risk policies and controls.
How do we foster risk culture? It can be done by encouraging open discussion on key risk areas identified by different business heads among their own teams and across the teams. It is not enough if the risk culture is promoted within the four walls of the financing institution. It also calls for encouraging Enterprise Risk Management in the client bases. The FI-client interface on ERM platform makes lot of sense for risky businesses churning profits at both ends on a win-win platform.
One would still ask: how do we ensure that risks turn healthier to result in profits? The first step is to understand risk/return in normal and abnormal markets. Second, profiling risk in all its facets and dimensions. Third, the banks should have clarity and deep understanding of the authorities and escalation processes. The whole objective should be not to eliminate risk but to manage it. “Our purpose should be not to eliminate risk, but to manage it, which we must do if want to prosper.” Madeleine Albright, Former US Secretary of State said. Banks must switch from defense-selling to offence-selling business strategies. Mere cost reduction through head count reduction may turn out to be counterproductive. Instead, focusing on customers to achieve competitive advantage with cloud computing and high tech tools could help optimizing returns. In January 2014, Sarah Todd a KPMG study put out in American Banking Journal highlighted this aspect.
Even according to BIS quarterly assessments, Indian financial sector gets good rating on compliance – regulatory compliance. Compliance is more a make-believe effort than intrinsic to integration with business growth. Every Bank has a Risk Management Department with a General Manager or even a Chief General Manager in charge, whose basic responsibility is to ensure compliance. Whether each product of the bank, in deposits or credit bears the stamp of risk analysis and review, is left to the concerned department. This simply brings us to the discussion of governance, risk and compliance as integral aspects of organizational enablement and empowerment in the risk assessment for product for earning profit.
GOVERNANCE, RISK AND COMPLIANCE (GRC)
GRC mapping deals with relationships between risks, controls, policies, requirements, assets, processes and other objects. Compliance basically deals not just with regulatory compliance but with corporate compliance, environmental compliance and social responsibility. Analysis of vast information is necessary for business decision makers, auditors, regulators and board of directors. This analysis in a way should track material risks, quantify risk costs and impacts. It also emphasizes the necessity to streamline documentation and process automation with a flexible risk framework. The Chief Risk Officer should in a way drive accountability and visibility with real-time monitors and reports in a non-threatening fashion.
CYBER SECURITY
Technology risks have been overwhelming and the discussion of operational risk mapping centering round people moved to technology with increase in cyber security dilemmas. The clients and the institutions dealing with those clients, payment and settlement platforms, private, public and civil institutions have all become digital. Security has become the choke point of business innovation. Large institutions lack facts and processes to make effective decisions on cyber security. Security controls actually reduce frontline productivity by slowing employees’ ability to share information.

CONCLUSION
The critical question: how does an institution generate risk appetite under such circumstances to generate profit? The seven tenets of McKinsey come in handy:
1. Provide information assets based on business risks;
2. Provide differentiated protection based on importance of assets;
3. Deeply integrate security into the technology environment to drive scalability;
4. Deploy active defenses to uncover attacks proactively;
5. Test continuously to improve incident response;
6. Enlist frontline personnel to help them understand the value of information assets and
7. Integrate cyber resistance into enterprise-wide risk management and governance process.
Adopting a granular approach would help. It is therefore necessary that the banks’ risk departments are helped to construct an assessment tool that assigned ratings to each component of the risk management process, starting with risk culture down to data quality and everything in between.
However, institutional reforms and governance reforms hold the key for creating the right appetite for risk. As long as Government of India, who acts both as owner and regulator calls the shots as to what the business the banks should do and how they should do – and this constitutes over 80 percent of total banking industry – profits thin down. Efficiency takes toll. P.J. Nayak committee Report on Governance reforms provides a road map for ushering in banking reforms to ensure growth with profit. Hopefully, the Government and the RBI would ere long take decisions in this regard.
*Text of the Address at the TACtics Conference of Tata Consultancy Services, Pune on 13.06.2014.



Saturday, May 31, 2014

The New Governments and the Loan Waiver

The New Governments and the Loan Waivers
B. Yerram Raju & M.L. Kanta Rao
Competitive populism compelled Rahul Gandhi while canvassing for the Congress party announced that he would write off up to Rs.2lakhs all individual farm loans. So did KCR, the CM-designate of the upcoming Telangana promised waiver of crop loans up to Rs.1lakh per farmer.
Seemandhra farmers are in a mood to rejoice: Voter bait won’t be voter wait – Chandrababu Naidu promises to sign the crop loan waiver for farmers as the first file as CM of Seemandhra (it would be however nice to christen the new State as Telugu Nadu). in Navyandhra and Nava Bharat where from now on people would be counting on the election promises of the winning parties, there will be no compromise on the promise. The NDA that met in Delhi on the eve of electing the leader of the BJP parliamentary party Viz., Narendra Modi, declared unequivocally that the poll promises would be realised and all the partners of NDA promised full support for the same.
Many sensible question both possibilities and extent of loan waiver for farmers. First, farmers’ loan waiver was introduced in 1990 with a waiver of Rs.10000cr for the small and marginal farmers. It was revealed that the beneficiaries were not the intended group but the large and medium farmers and also some non-farmers. The second time such waiver announcement came was in 2008 under the UPA regime, just before the 2009 General Elections – Rs.70000cr. Andhra Pradesh has its share of the “irregularities” committed in the implementation of the Agricultural Debt Waiver and Debt Relief Scheme (ADWDRS), 2008. The Comptroller and Auditor General, in his report submitted to Parliament on Tuesday on ADWDRS, found that, among other things, one private Scheduled Commercial Bank (name not mentioned) received reimbursement for loans which were extended to Micro Finance Institutions (MFIs) in five states, including Andhra Pradesh. The amount reimbursed was Rs 164.6 crore (for all the five states). In AP, the total number of farmers who benefited from the scheme was 77, 55,227 and the total loan waiver and relief given to them was Rs 11,353.75 crore. All over India, the total amount waived was Rs 52,000 crore and the number of beneficiaries were 3.45 crore. As regards benefiting the MFIs, we should first know how much our share is in the Rs 164 crore that was paid to the bank towards loans advanced to the MFIs. We are yet going into details,” the then Union Finance Minister said. Doubts linger whether all the waivers would get into the right accounts. This requires integrity of data from the banks and promptness in disbursal of the waiver from the government, easily verifiable by the State Government authorities before actually releasing the waiver amount.
‘Reserve Bank of India has issued a circular in pursuance of the budget announcement made by the Finance Minister relating to the Interest subvention Scheme 2013-14, Interest subvention 2% p.a. will be made available to Public Sector Banks (PSBs) and Private Sector Scheduled Commercial Banks (in respect of loans given by their rural and semi-urban branches) on their own funds used for short-term crop loans up to Rs.3.00 lakhs per farmer provided the lending institutions make available short term credit at the ground level at 7% per annum to farmers.’
Interest subvention will not be available once the waiver is announced by the State Government and therefore, to that extent the State Government will have to bear this additional burden as well. It will be hazardous for the GoI to provide for loan waiver of AP as other States would not hesitate for raising similar demand. The existing fiscal position of the GOI can ill afford this luxury.
So far, loan write-offs or waivers occurred whenever there were natural calamities like floods, cyclones, severe drought or at the banks’ discretion in case of severe social calamities of some affected families of farmers either by reschedulement, one-time settlement or even full waiver. But the present situation is different. It is a promise made by a leader of stature and farmers believed and voted for him. The promise has to hold and ways have to be found to uphold the promise.
Farmers continue to be in distress not because of just burden of institutional loans against which the waiver is now promised but on account of huge private debt at usurious rates of interest with no credible documentation. What is now promised is waiver of crop loans by the upcoming Naidu government. First, the data: The outstanding crop loan amount in thirteen districts of seemandhra State covering around 23lakh accounts is to the tune of Rs.56838.23cr of which leaseholders numbering to 1.44lakhs had loan outstanding of Rs. 305.99cr. The actual amount overdue from the farmers in 22.56lakh accounts is Rs.20,288cr. It is most likely that the figures would have included gold loans given and classified as crop loans and these can be deleted from the claims for write-off.
Government of AP announced zero interest for kharif 2012 and the banks are not supposed to collect interest for Kharif 2012 for all crop loans up to Rs.1lakh per farmer. The interest subsidy will be calculated oon the crop loan from the date of disbursement to the date of actual repayment by the farmers up to the due date fixed by the banks whichever is earlier, up to a maximum period of one year. NPAs classified (that is loans overdue for payment beyond two crop seasons as per RBI instructions) in agricultural segment up to 30th September 2013 total to Rs.3329cr covering 5.16lakh farmers.
In so far as SHG groups are concerned, 14.70lakh members owe to the banks an amount of Rs.21245cr as on 30.09.2013,
If the CM would like to avail the interest subvention available for banks in case of promptly repaid loans with a cap of 7% then he has to seek approval for waiver of entire loan outstanding from Government of India bargaining for this subvention to be made available to the State Government as part of the write-off proposal. Second option is that he has to provide for entire outstanding crop loan amount of Rs.56838.23cr in the budget 2014-15. Appropriate revenue has to be raised from floating bonds to the tune of the entire waiver with a ten year tenor – whether they are zero coupon bonds or carry 8-9 percent interest per annum with a cap of 3years on redemption – is a matter for finalisation.
In any case, the FRBM norm has to be waived for at least two years to go to the market for raising these resources. Both waiver of crop loans of all banks and PACS/DCCBs and the SHG loans also require clearance from the RBI and Government of India. However, such waivers in good times perpetrate indiscipline among borrowers though in bad times like natural calamities prove the much needed relief.
Source for the data is from the 182nd SLBC meeting Review in January 2014.
Published in the New Indian Express dated 30th May 2014.


Wednesday, May 21, 2014

The Winner and the Vanquished

The Winner and the Vanquished

Decidedly the World’s greatest democracy has just finished its biggest General Elections – the fifteenth in a row. It attracted lot of attention of the western media – the Economist, the Financial Times, The Guardian, The New York Times just to name a few. Money, liquor and raining promises like never before greeted the electorate. It was however the last NDA alliance – the TDP-BJP combine with an emotional entrant into the political confabulations that has been greeted with enthusiasm from some and contempt by several. Narendra Modi the first ever PM designate to bow to the Parliament stairs before his entry, demonstrated cultural excellence unparalleled setting the tone for virtuous move forward.

The nation tired of the scam-ridden Congress is yearning for change – a change for freshness in thinking, approach and direction. The youth has upped its antenna against corruption. AAP has made the other political parties rethink on their future, even if it had failed to realize its dream of demonstrating an agenda that people longed to have. Enthusiasm could not translate into action due to immaturity. Now that the battle is over, it is time to think of a solid agenda. But what would it be?

The first obviously is governance; a clean-up of the bureaucracy; rebuilding trust in the administration and quick delivery. The policy paralysis would end. The World Bank ranked India in their ‘Doing Business’ Survey (October 2013) under various parameters that should help the new Government in pitching their goalposts indicated in column 3 of the following table. Delivery instruments have to be strengthened with transparency and accountability writ large on them. Economic reforms of a new genre and financial sector reforms preserving the autonomy of RBI are imminent.
Parameter Rank out of 189 Nations Ideal Goal Post in the next five years
Starting a Business 179 25
Ease of Doing Business 134 25
Property Registration 82 25
Trading across borders 132 35
Dealing with Construction permits 182 25
Enforcing Contracts 186 25
Getting Electricity 111 15
Tax Compliance 158 20
Resolving Insolvency 121 15
Access to Credit 28 15

Farm sector suffering neglect thus far falls next in line. In the immediate short term the loan write-off promised by the NDA partners could be in order but in the long term it would prove disaster.

The farmer is groaning under excessive private debt at high rates of interest and this has to change. Institutional credit has to improve – one, in the areas of neglect thus far, namely, the rain-fed farming zone; preventing irrational use of groundwater; introduction of new technologies with ease and speed; improving soil nutrition; rationalising input supplies to prevent spurious seed and pesticides spoiling the farmers’ investments; promoting research and innovation with appropriate incentives; most importantly, the market intervention to provide the right compensation when the market fails the farmer. The existing disaster management and insurance mechanisms are far too inadequate and need thorough revamping. Farmer Associations have to be involved in the new think tank groups sans their political affiliations for such exercise. The Rural Cooperative Credit Structure has to be brought back to health with investments in technology at PACS level and improving governance through depoliticization.
In order that employment target of 10lakhs per annum is realised, it is important that the structural transformation of the rural economy should evolve without migration of labour to the urban areas. Each District should have a Rural Industrial Estate. The Industrial plots should be 1000-2000 sq.yds with water, power and drainage facilities fully provided. Since land prices have soared to unaffordable prices, such plots should be made available to the rural entrepreneurs on leasehold basis for ten years renewable for another ten years or outright sale in easy instalments with alienable leasehold rights in favour of financial institutions in order to access credit easily. These Rural Industrial Estates should have within a radial distance of 5km multi-storeyed residential complexes under PPP mode. There should be tripartite agreement between the owners of the rural industrial enterprises and the builders and workers for allotment of flats on lease basis for workers so that recovering rent would not pose problems. These RIEs would have testing laboratories, quality certification and packaging units, labelling and branding facilities within the easy reach of enterprises and they would be linked to the logistics hubs in the nearby urban and metro centres. Goods carriers and tempo operators would also be drawn from the rural work force.

Enactment of Bankruptcy Law and Exit policy do not brook any delay.

Critical Infrastructure being power, water and transport – road, rail, sea and air – has to be brought in with heavy infusion of capital from specific development finance institutions with participation from World Bank, ADB and the like. The commercial banks mobilising short term resources cannot afford the luxury of lending for long term projects if we were to go by their experience thus far and keep their hopes on government for refurbishing capital.

Urban and metro centres will have the logistic facilities and market facilitation centres for providing easy access to both domestic and international markets. The growth of service sector can peak to 60 percent and manufacturing sector can reach 25 percent in the next five years. The farm sector would retain its share of 15 percent. This facilitates the growth of the economy at a sustained rate of 9-10 percent within five years. If these happen people would be the winners and the vanquished without mending their ways would have to sigh in despair.


An Open Letter to Modi

Prime Minister designate Narendra Modi inherits bad governance; almost empty treasury as the UPA-FM has drawn in advance all the dividends of the PSUs six months in advance (2014-15 first half) to arrive at the magic figure of fiscal deficit of 4.5 percent promised by him; inflationary economy contributed by more the supply side factors; lowest growth of manufacturing sector continuing for the preceding two quarters; the burden of Food Security Act and the MNREGS to which the BJP is also a party; chaotic primary education to higher education; scamsters sitting right in front of him in the Parliament benches; election promises of the NDA partners hitting the roof and unnerving agriculture sector. At the moment, on the external front, the issues do not pose urgency.
Budget formulation in the wake of division of the State of Andhra Pradesh poses another major challenge. His hopes are in the youth that ascended him to power; women who have put tremendous faith in his promise of a safe walk in midnight even; and a corporate sector willing to lend him a helping hand. He has a strong central bank to lend support to sensible fiscal policies. Sixty eight laws waiting in the Parliament thus far, lapse. A new genre of economic and financial reforms requires to be put in place. Politically, the NDA partners would like accommodative policies. UPA still having its majority in the Upper House has potential to come in the way of speed of action. Fortunately, we are a nation with enormous intellect to find solutions to most of the ills plaguing the economy. Sorting out short term and long term issues and setting priorities in a chaos is difficult but has to be done. People who joined him with a hope to grab power and he knows who they are, should be kept at a distance through negotiation and tact that he has in abundance.
Priority obviously is governance and this starts with the fragile bureaucracy. Corruption has become a way of life and therefore difficult to tackle in one go. Nevertheless message has to go that it would not be tolerated. Rebuilding trust in honest and sincere bureaucrats would require insulating them for decisions taken in good faith and without negligence. Cleansing the corridors of power starts from the PMO, Ministries of Finance, Corporate Affairs and Industry and Commerce. It is advisable to set up an empowered Ethics Committee to take stock and act briskly. This should be chaired by the Union Minister of Home. Let the errand be punished first if the Ethics Committee finds immediate ground for action. If such persons would like to take the government to Courts, let the Government’s advocates take the cases forward.
Second in line is Education. Primary to higher secondary education has been experimented upon with no one to face the consequences of failure. The cultural fabric of the nation is on the brink of collapse. Universal primary education demands the Canadian model to be followed. According to this model, all the primary schools have to admit children within radius of 5km in different classes. All the students residing within 2km distance are not entitled to school bus. All those who opt for the school bus have to purchase the bus pass. All these schools have their own libraries and the students have to buy only work books. There is no distinction between the rich and the poor; nationality and religion. No donations and no public schools of the nature that we see in India exist. Whether Prime Minister’s son or peon’s son, he has to study in the same school if they are within the command area of the school. There shall be no primary or secondary school without a playground. The schools commence at 9a.m with a prayer and national anthem and end up at 3p.m. Once in a week the meal is provided by the school most hygienically prepared. Rest of the days the students get their packed food. There will be one break at 11.30 for 45minutes when they can play around in-door or out-door games depending on the weather. They will have a lunch break at 1.30p.m again for 45 minutes. The parents have to provide the standard note books and tools like the geometry box or calculators etc and should promptly respond to the call of the teacher whenever required to check the ward. The whole curriculum deals with the essentials – culture; history, geography, basic sciences and mathematics and sports. All the students are provided grades duly notified to the parents. All students would be subject to health check up regularly. There is no school fees or donation. Admission is accorded at the rate of 24 students in a section. The Student: Teacher ratio is 1:15-20 and the class teacher is held responsible for the performance of the students. Although primary education falls within the State domain, Union Government should take the initiative to usher in reforms in this area by opening a dialogue with the State Governments. This would lay a good foundation for the next generation.
The Higher Secondary Education should follow suit. There will be no policy of reservations in any school as the school education is universal. The Budget for education sector should be 6 percent of the total outlay for the next five years in each State that should go for bringing about improvement in the school buildings and environment. Several schools – 80 percent of them and more so in rural areas- do not have roof and where it existed it is with cracks and leaks profusely in rainy season. There are no clean toilets and well maintained play grounds. There are no benches, white panel boards and market pens. If all these exist by chance, there are no qualified teachers. Teacher posts should be filled by merit and not by caste reservations. Budgetary grants for schools should be released well in time so that the teachers’ salaries never, never get delayed. They should have proper social security when alone the teachers would be able to devote their energies towards building a new generation with good values and culture.
In line comes the farm sector. This is again a concurrent subject. The Union Government would do well to retain only Research and Development in its fold and leave the rest to the State Governments to handle. The State Governments on their part should devote their attention to extension, timely input supply and market support. Budget allocation for this sector should scale up from the current measly 2 percent or less to at least 4 percent of the total outlay. The target for the State Governments should be suicide-free farming sector. Crop planning, minimum support prices, crop and weather insurance should all move to the State Government domain. The Union Government should only be a coordination agency where required.
In view of the large number of rivers flowing across the States it is important that the Union Government should enact a suitable Law to protect the water rights and with the power of resolution resting with the Tribunals set up under such Law. Recourse to Courts shall be the last resort and in any case the State Governments should resist the temptation to be the petitioners. Arbitration mechanism should be fully explored for quick resolution of any disputes on such account.
In order that employment target of 10lakhs per annum is realised, it is important that the structural transformation of the rural economy should evolve without migration of labour to the urban areas. Each District should have a Rural Industrial Estate. The Industrial plots should be 1000-2000 sq.yds with water, power and drainage facilities fully provided. Since land prices have soared to unaffordable prices, such plots should be made available to the rural entrepreneurs on leasehold basis for ten years renewable for another ten years or outright sale in easy instalments with alienable leasehold rights in favour of financial institutions in order to access credit easily. These Rural Industrial Estates should have within a radial distance of 5km multi-storeyed residential complexes under PPP mode. There should be tripartite agreement between the owners of the rural industrial enterprises and the builders and workers for allotment of flats on lease basis for workers so that recovering rent would not pose problems. These RIEs would have testing laboratories, quality certification and packaging units, labelling and branding facilities within the easy reach of enterprises and they would be linked to the logistics hubs in the nearby urban and metro centres. Goods carriers and tempo operators would also be drawn from the rural work force.
Enactment of Bankruptcy Law and Exit policy do not brook any delay.
Critical Infrastructure being power, water and transport – road, rail, sea and air – has to be brought in with heavy infusion of capital from specific development finance institutions with participation from World Bank, ADB and the like. The commercial banks mobilising short term resources cannot afford the luxury of lending for long term projects if we were to go by their experience thus far and keep their hopes on government for refurbishing capital.
Urban and metro centres will have the logistic facilities and market facilitation centres for providing easy access to both domestic and international markets. The growth of service sector can peak to 60 percent and manufacturing sector can reach 25 percent in the next five years. The farm sector would retain its share of 15 percent. This facilitates the growth of the economy at a sustained rate of 9-10 percent within five years. If these happen people would be the winners and the vanquished without mending their ways would have to sigh in despair. Long live the Indian democracy.
Published in EENADU of 20.05.14


Saturday, May 3, 2014

Manifesto for Agricultural Sector: Agenda for Future

Manifesto for Agricultural Sector: Agenda for Future

‘If farming fails nothing else succeeds in this country.’ Economic growth of this predominantly agrarian country depends on agricultural growth.
Target 6% growth of farm sector for an assured double digit sustainable growth of the economy.
Allocate Budget – at least 10% of the outlay should be devoted for agricultural sector.
Present Agricultural Budget in all the predominantly agricultural States preceded by Agricultural Survey.
Public Expenditure for farming should be significantly scaled up to cover the agri-related infrastructure, soil health management with localized soil mapping and solution matrix within the knowledge of the farmers and soil clinics widely dispersed and ICT solutions.
Targets to setting up bio-villages to take biotechnology closer to the farmers should be spelt out annually in the Agricultural Budget with allocable resources and monitoring mechanisms.
MNREGS should be linked with farming activity through a Voucher system administered by the Gram Panchayat where 75% of the wages would come through MNREGS and 25% from the farmer during the guaranteed 150 days of work under the scheme.
Direct cash subsidy shall be introduced for inputs and machinery.
Introduce certification courses in agricultural disciplines both online and offline – Agricultural, Horticultural and Veterinary Universities should work out such courses to develop skilled force in the villages, enrolling students after Tenth standard, akin to paramedical services.
Set up Disaster Mitigation Fund to engineer write-off of interest and principal amount of loan depending on the nature and intensity of the disaster.
Weather Insurance shall be provided by the Government – both the State and Central Governments should share equally the related premium.
Crop Insurance should be refined to make the claim process more transparent.
Set up an empowered Coordinated Forum for Farm Policy and Implementation at the State level and District Levels with participation from the Farmers’ Associations to free the farmer from the bondage of fifteen Ministries governing agriculture.
Rain-fed agriculture occupying nearly 60% of arable lands, it is eclipsed by the ineffective policy interventions and poor monitoring mechanisms. It is important that micro irrigation, tank desilting and protection of all lakes from any encroachments, specific cropping and credit plans need aggressive implementation drive with farmers’ associations’ involvement.
Since 82% of the holdings are with small and marginal farmers, ensure credit to at least 50% of them through Agricultural Credit Monitoring Mechanism under priority sector dispensation in terms of number of new accounts accessed within the next two years and to reach 75% in the subsequent two years through the Kisan Credit Card linkage with Rupiya/Master/VISA. There should be only two accounts for the farmer – one for investment credit and the other for short term expenses with outflow to get linked only through KCC comprehensive credit limit.
Interest subsidy should be credited online direct to the farmers’ accounts with the help of ICT solutions.
Computerisation of all Agricultural market yards should be done with the help of Agri-Infrastructure Bonds. Spot markets should be set up in all such markets with the help of MCX or NCDX to enable farmers’ price discovery. All the AMYs should have multi-level storage and cold storage facilities or should be tied up with the accredited warehouses.
Warehouse receipt financing at the doorstep of the facility should be available at the hands of the financing institutions.
De-bond the Agriculural Market Yards from the clutches of market wolves by instituting governance practices with only farmers’ participation. No person with political party affiliation should be heading these Market Yards.
Elections to the Market Yard Committees, PACS and Water Users Societies should be held by the State Election Commission once in every five years and the contestants should be independent of political affiliations.
97th Amendment to the Constitution Act 2011 should be implemented.
Farmers should
Social Security of farmers should be provided through:-
1. Pension of Rs.3000 for farmer family from the age of 60 of the farmer for all the small and marginal farmers, tenant farmers and women farmers, for which purpose the farmer should contribute 2% of the sale produce of the farm product – agriculture per se, animal husbandry, poultry, fisheries, bee-keeping, sericulture etc.- with matching contribution from the State Government through the National Pension Scheme.
2. Health Insurance of all these farmers shall be provided both through the existing schemes like Arogya Sree/Kutumba Sree etc.,, and through contributory premium from the farmer at 2%. Farmers’ participation would give him the right to claim the legitimate services and would not leave him to the mercy of the state government.
3. Women farm labour should be paid equal with their male counterparts for all activities on the farm.
*The Author is Member, Board of Governors, Farm And Rural Science Foundation. This document has been prepared for the FRSF, Hyderabad.
Published in India Microfinance April 2014.