Saturday, January 28, 2017

Budget 2017 for MSMEs

MSMEs and the Union Budget 2017

This is the time of expectations amidst the gloom of demonetisation. MSMEs hit worst in post demonetisation are looking eagerly to the FM for careful crafting of fiscal policy to boost the morale of MSMEs, particularly those in the manufacturing sector.

Banks have almost shut their doors to the manufacturing micro and small enterprises by biting their teeth strong through the recently amended SAFRAESI Act provisions. Their courage melts in the case of corporate defaulters. Large corporate defaulters cast a shadow of default on their vendors in the small sector and the banks are unwilling to buy this argument though the NPAs in the small industry segment is not significant compared to their elder brothers.

MSME Credit Supply Shrinks

Commercial Banks proved sweet nothings in their offerings to the MSEs while a myriad of their loan products focused on medium enterprises or the mid-corporate sector. 

Manufacturing MSEs going by RBI November 2016 data reveals that they share 42.9% outstanding credit with a negative growth of 9.2%. Manufacturing sector was the largest employer providing employment to 30.3 million (23.1%) persons, 78.9% of whom are in proprietary enterprises – mostly MSEs (Sixth Economic Census). Notwithstanding Jan Dhan, financial inclusion viewed in this prism is yet to gain colours.

Demonetisation only added further woes upsetting the credit supply to the MSEs as acknowledged by all the Industry Associations and grudgingly by the banks. It is time to see what is in store for the micro and small enterprise sector in the coming year’s budget.  
Innovation holds the key for inclusive entrepreneurship. If ‘Make in India’ were to succeed it should happen in rural India as well. In several States rural entrepreneurship is very backward mainly because of the following reasons:

Land, the key input has become scarce and is highly overvalued for any rural enterprise to access. Affordability distances the enterprise set-up. The entrepreneur cannot access the needed infrastructure with full compliance to regulations because he is ignorant of the latter. He realizes the cost of compliance is going to exceed the cost of avoidance.

Start-up MSMEs find it almost impossible to invest in land because of its prohibitive cost. Building rural industrial townships by the States with the required infrastructure like, safe drinking water, industrial water, electricity, packaging, testing and branding or co-branding facilities, multi-storied residential complexes for the workers on lease basis with industry participation, primary and upper primary schools, crèches, play grounds and cultural spaces would be the best alternative to boost this sector. Fiscal incentives like income tax exemption for a five year period for investments in such infrastructure would be in order.

Saturday, December 24, 2016

The Demon of Demonetisation

In recent RBI history, some highlights: smooth transition to Basel regulations and efficient monetary policy under Bimal Jalan and Rangarajan, global aplomb post-recession under YV Reddy, preventing hyperinflation by Subbarao and taming of the NPAs by Raghuram Rajan. These achievements have put the RBI in prime position among central banks of the world. But the utter lack of planning and monumental mismanagement post-demonetisation by the same institution have tarnished its image.  

Banking operations other than currency operations in the country have almost come to a halt, barring exceptions. Credit is on a downturn. All the rating agencies, including Nomura, have down-rated the economic growth. The road to recovery sans GST is going to be difficult.

Wednesday, December 21, 2016

Asking the Right Questions on Demonetisation

This is what many in the country – both economists and non-economists – are doing. Strange indeed that fiction should overtake facts when an eminent economist and a popular columnist, Bibek Debroy chose to counter Manmohan Singh-likes that are just handful in the country in a column in the Hindu dated 12th December, '16. The fact is that majority of the population were in support of demonetisation. I demanded for it even in 2011 for three reasons that the PM mentioned. There was one more reason at that time – to contain inflation that was razing at 8.5% then.The fiction is that 98.7% of households have bank accounts that too with the proportions mentioned by him.

Wednesday, December 14, 2016

The Doyen Among Journalists No More

To imagine that V. Hanumantha Rao (Vihari) is no more, is hard to imagine. He is a journalist standing tall among the community. Till his last breath he was contributing to the columns. There is no Telugu daily without his article. 45 years of my friendship vanished yesterday to my utter grief.

He introduced the feature articles in Telugu as part of the triumvirate - Potturi Venkateswara Rao and ABK Prasad being the other two when EENADU daily was launched. Till then only the English dailies used to carry the features on editorial page.

When I was Agent (now the Branch Manager) of Agricultural Development Branch, SBI, in 1972, he visited my branch as a UNI correspondent. He inquired of the activities of my branch because ADB was a structural innovation in branch banking of the SBI to serve the farm sector different from the other sectors it used to engage in. After seeing the farmer crowd, he asked me how will the 2000 SF/MF would be financed their crop loans in a week or ten days - as seasonal lending is of utmost importance. I told him that we would be completing the documentation and due diligence process in the villages adopted by the Bank and they were 31 in number. He asked me whether he could accompany me on such visits. I said: yes and next day we started for the villages at 7a.m from my residence.

He saw the bank field staff and me filling up the 9 page application, taking signatures on 9 page document of hypothecation deed, Demand Promissory Note and Take Delivery letter involving no less than 400-odd signatures and thumb impressions ( inn respect of illiterate farmers). We could complete on that day documentation and disbursement of farm loans to the extent of just 50 farmers!

At about 3p.m he left telling that he has to file a story from the office. Next day, June 20, 1972 if I recall right, all the news dailies and weekly tabloids and monthly journals later carried a box item:

'A Farmer has to affix 420 LTI/signatures even to get a Rs.100 loan. B. Yerram Raju, Agent, ADB, confirmed in a village adopted by the SBI ADB in Thagarapuvalasa Block of Bhimunipatnam Taluk.'

My residential phone on that  day started ringing from the day dawn - all calls from the Regional manager, Development Manager (Agriculture), Secretary & Treasurer and so on. The RM asked me to fly to Hyderabad as the Chairman R.K. Talwar wanted me to meet him. I took the Indian Airlines mid-noon flight.

The worry of the Bank top management was that using all the influence, they had published a photo of the inauguration of State Bank Staff College with Y>B. Chavan, the then FM and the Chairman of the Bank and the Principal in the front page of the then widely circulated Deccan Chronicle and right underneath the photo the above box item appeared almost annulling all their PR effort.

The most progressive Chairman that the SBI ever had in post-independence India, discussed with me over lunch the way forward to reduce the misery in such documentation. The solicitors were summoned to the Central Office and the Development Manager Agriculture facilitating documentation was simplified within a month.

VH proved what a journalist could do. He established DNF and published my first book under that banner: Commercial banks and rural development - Issues & Trends in 1981. He has a penchant for statistics and his analysis beats some of the best analysts on the financial dailies even at his 91. What a loss to the world of Telugu journalism? He has established the School of Journalism and produced a large number of responsive journalists.

He was responsible for my subscribing to the columns of Telugu dailies feature articles on subjects of public interest and they are as many as 250 out of my all the other feature articles numbering over 2000. Even 15 days ago he called me up and had a discussion on the fundamentals of GST and its impact on the economy. He wrote a piece on GST in Prajavani next day. A journalist of unparalleled stature exited this world!

Wednesday, December 7, 2016

Debates, Discussions, Demonetisation and Distress

Debates, Discussions, Demonetisation and Distress

Most discussions and debates on demonetisation have a few things in common: the move is right; it is the worst planned event in India’s economic history; calculations on black money went wrong; and rural masses are in distress unable to meet their daily needs. I am a strong votary of demonetisation. I am, however, not a supporter of complete digitisation or cashless economy. Less cash economy can be a target of gradualism and not maximalism.

Former Governors of RBI, C. Rangarajan, Y.V. Reddy, and Subbarao also lent support to the move in their articulations in the Press and media. Kenneth Rogoff, renowned economist also supported the move, but the mechanism suggested was gradualism and not a sudden action like the currently engineered measure. However, would all these articulations, mine not excluded, alleviate the distress of the vast rural masses?

Both houses of Parliament demanded a discussion, but were unwilling to discuss demonetisation for reasons that the common man was unable to understand. The distress of those who had to bury their dead or had imminent marriages in the family, not to mention the plight labour on daily wages has been immense. 

Tuesday, November 15, 2016

How Demonetisation affected rural areas

How Demonetisation affected rural areas

By any standards and by all means demonetisation of 86% Indian Currency that affects the valets of 1250mn population is no ordinary decision. Union Government sent shock waves among not just the hoarders of unaccounted money but also among the state governments and the huge political constituency. The measure may have precedence but the dimension of the effect has no precedence and therefore, economic historians are watching in gaze for generating a new script.

Cash is dirty; banks keep Dettol or soap for their staff handling cash to wash off their hands because of the bacteria that causes pneumonia, or viruses or skin infections. Yet we would love to hold them. Most drug dealers, casinos or prostitutes or casual farm workers prefer to receive cash for they only receive small remunerations for their day’s labour or night’s pleasure. Under-ground economy does not stop these few known. Waste and scrap dealers, many steel merchants join the gang.

Sunday, November 13, 2016

Demonetisation hits road blocks in rural areas

Though late, demonetisation has hit as many bottom lines as the media headlines. Life will never be the same for those demanding gratis for nothing. No longer can the Private Medical Colleges sell the management quota for crores of rupees, for few are left with such crores. Even private money lenders would dispense credit at lower rates than before. NBFCs compete with banks getting their vaults overflowing with deposits in a couple of months from now. Institutional credit will be able to fall in line only banks change their mindset to serve the farmers, rural artisans, and MSMEs in a big way. While this is music to the ears, rural areas at the moment are in tears.

Out of 1,50,000 odd commercial bank branches, there are only other 1,30,000 access points with just 22 percent of them in the Post Office fold. Primary Agricultural Credit Cooperatives and District Cooperative Central Banks’ rural branches do not have currency holding capacities. A visit to the neighbouring villages on Thursday in Mahabubnagar and Nalgonda districts revealed the sob stories of the effect of demonetisation.

This being the season of marriages, several of those engaged in wedlock said that they took cash to buy the wedding clothes and decorations and they have to miss the Muhurtham if they were to draw exchange only Rs.4000 per day and that too travelling a distance of at least 20-30km to reach the Bank branch as the post office did not receive cash in lower denominations to substitute the withdrawn currency notes of Rs.500 and Rs.1000. And they have to do it every working day for at least 20 or 25 days if their dreams of marriage were to come true.

A tribal village in Adilabad served only by a Business Correspondent during the last ten months its banking requirements has a different story to tell today. The tribal families that are used to spending in Rs.500 denominations and remitting into the bank have no outlet to convert their Five hundred rupees into lower denominations.

Rural and tribal unbanked areas are not on the antenna of either the Union Ministry of Finance or the RBI when the demonetisation is announced. The FAQs of the RBI did not even make a mention of the Business Correspondents and Business Facilitators on the route map of monetising the demonetised currencies.

RBI should mobilise safe and secure Mobile cash dispensing vans to the rural unbanked areas for pre-specified and notified hours to exchange and remit cash up to the specified limits.

Presently, the BCs have limited holding capacity that is used for putting cash into the savings bank accounts of the villagers. The BCs since the early hours of 9th November stopped receiving the barred currencies. They also are losing their earnings by the day. Even they can exchange cash only to the extent of limits specified for individuals.

Several Indians staying abroad hold up to Rs.25000 per person in these withdrawn currencies. All the foreign banks and exchange kiosks abroad as understood from my daughters staying abroad have closed the counters for exchange of Indian currency. They also said that the currency to the earlier legitimised limit no longer holds valid and they can burn their Indian Rs.500 and Rs.1000. Our embassies and the RBI site does not provide appropriate answers.

Yet, the villagers and tribals are in great rejoice as they get money in smaller denominations hence forward to spend on consumables and liquor. Before it is late, the RBI would do well to immediately address the issue of replenishing the stock of old withdrawn currency wherever it existed with the new and lower denominations and also provide new outlets of exchange on war footing.  

For the first time after independence, the efficiency of Currency Department of the RBI and the Security Transport system are put to test and it is hoped that the central bank would live up to the expectations. Initial baby steps hold many lessons to correction.