Thursday, February 14, 2013

Governance in Agriculture


Prof M.S. Swaminathan recalling the combat with Bengal famine observes rightly: ‘If agriculture goes wrong, nothing else will have a chance to go right in this country”.[1] Excepting the unleashing of a National Policy for Farmers in 2007[2] that still is crying for implementation, nothing seems to have gone right in agriculture sector. Farmers’ suicides continue still in agriculture-intensive States like Andhra Pradesh, Karnataka, Punjab etc. There are regions where the farmers declared a crop holiday to demonstrate their anger against poor governance. The purpose of this article is to address the issue of governance in this sector.
Ministries influencing the farm sector:
There is no other sector than agriculture in the country that is in the stranglehold of a number of inter-connected Ministries at the Centre: Union Ministries of Agriculture and Cooperation; Water resources; Food Processing Industries; Rural Development; Commerce (dealing with international trade) & Industry; Environment and Forests; Micro, Small and Medium Enterprises; Consumer affairs and Public Distribution; Science and Technology; Non-conventional Energy Sources; Finance and above all the Planning Commission. Agriculture being a concurrent subject in the Constitution of India, the States has as many corresponding Ministries that interact with the Central Government in governing this farm sector. I have not come across another country that governs the farm sector through such a web of governance. Each Ministry and each State Government has its own last word that rarely matches with the other. The farmer stood at a disadvantage finally.
It is politically infeasible to reduce the number of Ministries either at the State or Centre for the simple reason that each stratum of the fragmented democracy should get a berth in the seat of power. But after six and half decades of independence, having successfully combated the famine, having moved to impressive ranks in the world like milk, poultry, horticulture etc in production we are far away from providing food security. 40% of production is still wasted or rotting in the government warehouses that invited the wrath of the Supreme Court to correct the situation with expedition.
The Cabinet Sub-Committees at the Centre and States that constitute a coordinated mechanism for releasing the policies relating to agriculture or for that matter any other policy are the only coordination forums now functioning. The oversight mechanism for monitoring and concurrent evaluation of the functioning of regulatory institutions suffers from lack of such coordination. There is no regulatory impact assessment of any policy and regulation as an ongoing exercise like in the UK.
We are living in a fast changing and dynamic world requiring quick and correct responses. Land and water resources, the principal factors of production in the farm sector are scarce but the bourgeoning population adds pressure year after year on these scarce resources. Resources like water, soil, plants and animal life have the capacity to regenerate but the speed may not cope with the ever-increasing demand on them. Sub-division and fragmentation of holdings, riparian water resources and shrinking farm labour coupled with rising consumer expectations for quality food and water make the governance complex. If the farmer has one cow in his backyard, it will take care of his organic manure requirements of one acre of cultivable land. But the cow is with department of animal husbandry department; backyard is with panchayati raj department, manure is with department of agriculture and biodiversity; and land is with the revenue department. This is where governance matters as each department moves to regulate its own area according to what it thinks right and not what is right.
What do we mean by ‘governance’?
Wikipedia defines: “Governance is the act of governing. It relates to decisions that define expectations, grant power, or verify performance. It consists of either a separate process or part of decision-making or leadership processes.” Governance relates to consistent management, cohesive policies, guidance, processes and decision-rights for a given area of responsibility. This stands on the four pillars of decentralization, accountability, transparency, and coordination. It embraces action by executive bodies, legislatures and Parliament and judicial bodies (from the local levels to the Supreme Court, the highest judiciary).
In the post-liberalisation era, governance has been the most discussed subject but is like the four blind men trying to defining elephant. It has resulted in assertion and acceptance of certain rights for good: the right to work; the right to information; the right to safety and security for every citizen. Some have already taken the effect of legal sanctity and yet trying to find space for functional existence. Since my focus is on governance in the farm sector, I would try to look at areas that need reform viewing from the interest of the farmer, the centre of attention.
The reform in governance in so far as the farm sector is concerned should start from understanding the complexity of farming, farmer and his family and the society in which he lives and to which he contributes most. Philosophically speaking, if I receive something, I should be in a position to return something to the giver. The farmer gives me food and makes me live and therefore, the least I can give him is to provide conditions that continue to enable him to live happily and continue to giving me all that I want to feed myself, my family and my dependents.
How does this happen in the diverse and complex of governance that we have today?  Implementation of multiple schemes and programmes by different departments and Ministries for the farmer has led to centralization. Decentralisaton of administration, the first principle of governance in the absence of the focused attention on the target led to maldistribution of scarce resources and the equity has become a casualty in the name of equality. Conceptual correction is required at the point of decentralization. How is the decentralization process involving the farmer at the lowest level of administration – the panchayat?
Accountability is the next principle demanding performance not just from the point of view of financial goal but from the point of view how this target of governance has improved – the lot of the small farmer, the marginal farmer, the landless labour, and the tenant in the overall framework of farming.
Transparency is the third principle of governance: How is this achieved? Has information technology been effectively used in communicating to the farmer all that he needs to produce, store and market and earn a cost plus to continue in production with dignity and honour? Mobile technology has made rapid strides in passing on information from the learned to the learning and also for effecting payments and receipts. How much of investment is required to take this technology within the operating convenience of the illiterate and semi-literate soiled palm of the farmer?  Responses to these questions have the potential to resolve the information asymmetry of the farmer in remunerative technology adoption.
Coordination is the fourth principle of governance, the real villain of the piece. How can this be achieved?
In all the States – that is, nearly about twelve that have preponderance of agriculture as the driving force of their growth and are also carrying the burden of growth of the rest of the economy and at the Centre, agriculture vision document should be prepared after a thorough inquest by the Agriculture, Animal Husbandry and Horticulture Universities in the State as a first step. This vision document should be shared with all the stakeholders and the scientists within a set timeframe. This document shall lay down the objectives and goals of farm policy and coordination mechanism.
Second, each of those States shall prepare annual agriculture sector survey with the farming related universities in the lead and this annual survey should be presented before the Legislative Assembly, a day ahead of the presentation of the Agriculture Budget that should also be presented every year ahead of the General Budget session. This Budget shall be subsumed in the General Budget. This process would make sure that the finances of the state move in tandem with the requirements of the farmers.[3]
Third, once in two months the Coordinating Forum on Agriculture (COFA) with the Minister of Agriculture ( could be designated as Deputy Chief Minister in such States) presiding should review the budget releases and ensure that the lowest level of delivery gets the physical resources to be in the reach of the farmers. This COFA shall be vested with the authority of vetoing any proposals and censuring any actions of those that run counter the effective implementation of the policy goals in agriculture.
Networking is the name of good governance. Technology should help taking innovations and research on the field to the lab for commercial assessment and the Indian Council of Agricultural Research and the farm extension wings in the States should spearhead this area and for backward integration.
Agriculture Marketing needs to move to farmers from the politicians. This would require change in the Agriculture Marketing Acts of the States and huge investments in technology at each market yard where the farmer finds comfort to unload his produce with the swiping of his SMART card and walk away with cash into his bank account. Improving governance in this area holds the key as, in all the other areas we have reached some milestones that can be moved forward more by miles than inches faster than a few decades ago. Let us resolve to make agriculture right to make sure that everything else in the country goes right. 

[1] M.S. Swaminathan: From Bengal Famine to Right to Food’, The Hindu 13th February , 2013
[2] M.S. Swaminathan: Agricultural Strategy, internal security & Sovereignty, The Hindu 1st January 2008
[3]B. Yerram Raju: Forthcoming publication: “ Getting the Perspective Right: Comprehensive History of Agriculture Banking”, Konark Publishers,p.27

Inclusive Growth and the Missing Goals

Inclusive Growth and Missing Goals
The cab stopped at the Traffic signal in Mumbai while on my way to the venue for my meeting at Mumbai from Santacruz west to BCK. A few boys peeped into my window with a few books – all of them are unauthorized print versions of famous novels at reduced prices. Since there was some traffic  jam, the car stopped for more time than usual. I thought I would ask the boys how much they earn per day through the sale of books and what margins they get. Sab, ‘hum ko roti, chaval milta with some pocket money of about Rs.50 to Rs.70 per day depending on the sales we get. There could be some days when we don’t get any margin. 
The next day I happened to visit Crawford Market and took a stroll on pavements where a string of shops and anything and everything one wants is available and all one may have to do is to do a bit of bargaining. I asked about fifty such shops whether they have a bank account; they answered in the negative. Then I asked them where from they get the money to do their business. The reply was simple: ‘we get money for the asking as long as we promise a good return at the end of the day.’ I asked them what is the price they pay for this money. The answer was no surprise: They get Rs. 900 to even Rs.9000 in the morning to return Rs.90 to Rs.10000 in the evening as they fold up their shops for the day. The person who gives money in the morning comes and collects it back. Sometimes the transaction is carried out on weekly basis. Where do all these businesses figure in the country’s GDP? Nowhere. Neither the small retail businesses they do nor the money transactions that take place between the dealers and shops.
A friend of mine narrated to me his experience with some of the other big shops – the scrap dealers. Everything is transacted in cash and cash alone. Then move the Zheveri Bazar. Most un-branded shop keepers do not accept cheques nor do they give receipts. Where does their purchase or sale get taxed? Do they pay income tax? Do they pay service tax? Some do. But many do not. Where they pay taxes, they pay on whatever record they choose to disclose and with a certificate from a Chartered Accountant!!
There are high pried doctors in private clinics where even income tax officers would not dare ask for receipt or insist on tax liability to be recorded scrupulously; lawyers; even Chartered Accountants and the movie actors. Most do not dish out receipts. To the list movie actors we can now add the TV anchors. The grapevine that we see often in print in most weekly popular news tabloids that some of the leading actors demand as much as Rs1-5crores or even more is also beyond the tax net. 
These listings are the surest routes of black money and this is the colour that most seem to like. Will the Finance Minister look at these guys to fulfill his growth dreams and enlarge his budget receipts? The time is ripe but the routes are rough.
Published in the digital journal: Business Advisor dated February 10, 2013

Monday, February 11, 2013

Elections to AP Cooperatives are over: What Next?

Notwithstanding the Constitutional impropriety in the wake of the 97th Constitutional Amendment Act 2012 that should take effect from February 14 2013 in the States, Andhra Pradesh in the name of democracy, forgotten for two and half years, conducted the Elections to the Cooperative Societies in the State. 

All the newly enrolled members were voters to the extent of 100 percent while the active members, that is, those who availed services from the cooperative societies for which they were members, who constituted around 40% muted the queue at the election booths. The candidates report having spent lakhs of rupees to win the election and are eager to run up to the Chairman and Board positions to recover their expenses.

A day after the elections one District Collector, a functional Registrar of Cooperative Societies, made an anguished public announcement that the applications for gas and public distribution would not be accepted if they bear the account numbers of the cooperative banks! The Government any way does not allow deposits of public institutions to be kept with the Cooperative Banks – urban or rural! This is the trust that the Government has in the system to which it enthusiastically conducted the Elections. The Government feels that these institutions are fragile and have weak governance. Democracy makes it weak in governance?
Public memory lives short – the debacle of Charminar Cooperative Bank, Prudential Cooperative Bank, and a few more in the State and elsewhere alerted the financial regulator to put in a strong coordinated mechanism to revive the Urban Cooperative Banks through the Task Force on Cooperative Urban Banks. While there is no such mechanism for the District Central Cooperative Banks, with lackadaisical implementation of Vaidyanathan Committee recommendations that called for professionalization in all the States, the non-professional Chairpersons now elected would like to make a fast buck in credit sanctions and releases for the large number of vulnerable farmers, small business owners, weavers, and artisans apart from the greedy real estate builders. Most of those elected keep their own deposits with the commercial banks, both of their own and of their families!! These trusted ‘public servants’ have to revive the trust in the cooperative banking.
Over and above this, the DCCBs are today licensed by the RBI unlike in the past and this would require strict conformance to statutory ratios, liquidity norms, a strong relationship with the Apex Bank and credit and financial discipline. They can no longer indulge in the luxury of postponing their annual closing in their books to window dress their recoveries. The RBI after a few warnings and punishments to the errand would not hesitate closing down such banks. Even the Maharashtra State Cooperative Bank today is in trouble for getting its license.

Government does not trust cooperatives but conducts elections for political mileage:

The Chairpersons of the Commercial Banks, with private and local area banks being no exception, are selected following certain due diligence and fit and proper criteria to hold such positions. In the case of DCCBs, now licensed, the Chairpersons are elected through the ballot. 

If the Chairpersons of these cooperative banks were to be transparent and knowledgeable, they should be on the roll-call of the Bank. It is desirable to put them on monthly salary and defined perks with certain boundaries of personal expenses. This would make them accountable to the institution. None of them shall have any personal security guards at the expense of the Bank. They should be trained to read the Bank’s Books of accounts and balance sheets. They should submit their statement of election expenses; should declare their personal and family assets and liabilities in a sealed cover to the CEO of the Bank. . They should take oath before assuming their position as Chairman regarding a well defined code of conduct to be prescribed by the RBI.

Public money has proved a bane at the hands of a political executive, in most cooperative institutions and institutional mechanisms should be put in place to prevent abuse of power and resources.
(The Author is also Member, RBI Expert Committee on Short Term Cooperative Credit Restructuring; can be reached at

Sunday, February 10, 2013

Union Budget 2013-14 (3)

In my last article I have dealt with the direction in which the Budget 13-14 should move. Since the CSO has come up with the revised estimate for growth at only 5% by this fiscal end, and some reasonable estimates of revenue and expenditure during the current year have also come off from the Secretary Revenue on the 8th February, more can be added to the discussion. India is no longer in the league of fast moving economies. The IMF downsized it to 4.5% for the next fiscal. The Royal Bank of Scotland estimated however puts the next year’s growth on a higher pedestal at 6.3% on a lower base than before. Montek Singh's expectation is more a hope and hype than closer to reality and he feels that the CSO erred in its expectation downturn. But unlike the last few years when inflation was shown going down from January down to February, and rising growth expectations to tame the fiscal deficit, this time around, the CSO seemed to have pitched rightly.
The CSO lowered the growth in agriculture and allied activities to 1.8 per cent compared to 3.6 per cent last fiscal, while manufacturing is also expected to drop to 1.9 per cent, from 2.7 per cent. The most worrying phenomenon is the rate of savings in the economy that has been on the decline since last year when it moved to a 8-year low of 30.8% of GDP. This fiscal it is expected to move down to 30%. Inflation tripped the savings. The FMs moves to restore the savings to the previous high of 37% will be watched with interest.
Finance Minister hopes to contain the fiscal deficit at 5.3% as against the estimated 5.1% and has also announced that there would be no further divestment of stocks this year. The primary deficit is likely to be around 3% of the GDP.
The CGA data revealed that during April-December 2012, the revenue receipts stood at Rs 5,70,536 crore or 61 per cent of the estimate. This is less by 2% than in the corresponding period of 2011.
The government is eyeing Rs 935,685 crore revenue this fiscal. Tax collection (Rs 4,84,156 crore) slipped to 62.8 per cent of the Budget estimate compared to 63.3 per cent achieved in the same period last year.
Government receipts during the period totaled Rs 5,86,424 crore while the expenditure worked out at Rs 9,91,123 crore.
Fiscal Budgetary Management Responsibility and Outcome Budgets are the brain children of the present FM. While he has not succeeded in making the Output and Outcome Budgets with the various departments, he has been thriving to achieve the FRBM. What really came in the way of dilution of Direct Taxes Code and delay in introduction of GST. Even during the ensuing budget announcement the hope of introduction appears remote.
The Parliamentary Standing Committee on Direct Taxes has suggested the base income exemption limit to be Rs.3lakhs. Middle class and salary earning classes are sore with the Government due to rise in oil prices and severe impact of food inflation. This is a vote bank that cannot be ignored and therefore the FM may increase the threshold limit to Rs.2.5lakhs and keep Rs.3lakhs for the Senior Citizens. Since women constitute an important vote bank, he may like to give the same threshold as for senior citizens.
The Minimum Alternate Tax introduced after a gap between 1991 and 1996 by Chidambaram in 96-97 at 12% for profit earning companies may see only a marginal increase as he would like to see midsized companies to perform and contribute to the growth of the economy. This now stands at 18.5% and could move up to 20%.
Dividend Deduction Tax at higher rates could be a disincentive for investments. Growth orientation may prevent the FM to raise the DDT from the existing 15%. Even if he would like to exercise an option for raising this, it would be in the margin of 1-2% and would be more symbolic.
Inflation Indexed bonds as investment oriented instruments could get attention this time, with some exemptions in the investment ranges of Rs.2-5lakhs.
What he does for the farm sector is keenly looked at. Growth of farm sector is critical to the rest of the economy. Fertilisers moved away from the protected regime with the energy sector moving to market related pricing. This has put onerous burden on the farm. Additionally labour non-availability has put pressure on the farmer to move to farm mechanization. Rising input costs if not contained, the FM open the window on market stabilization. If he indulges in the luxury of loan write-off once again, the farmer would be distanced much more by the institutional lenders and their dependence on private money lenders at usurious rates would drive them to suicides that the country can ill-afford. Therefore, the FM has to calibrate his incentives in a transparent and on instant delivery mode. Most subsidies to the farmer move at a snail pace in delivery wherever they are available. The track should change. This Budget, the last in the current UPA regime as a full-fledged budget, should target and nurture this vote bank more carefully. It is desirable that the FM announces a fixed pension of Rs.10-15 thousand for the marginal farmers of sixty years age. The Pension Fund Regulatory Development Authority could be asked to look at avenues for mobilization and disbursement.
Direct Cash Transfer, the ‘game changer’ has become a non-starter in a few states as Aadhar the base instrument has not been delivered with the requisite integrity and speed. This may find some mention in the Budget.
This pre-election Budget is the most challenging for this experienced Finance Minister.

Thursday, February 7, 2013

NPAs loom large: spare the tax payer

During the recent meeting the Secretary, Financial Services had with the public sector bank chiefs anguished concern surfaced over the looming NPAs. As the owner of PSBs GOI is naturally upset since it has to refurbish the capital from its budgetary resources for the shortfall in capital. If the PSBs fail, it will be a sovereign risk. Can we look at the areas and causes for the rise in NPAs to the extent the RBI data has thrown up in its Report on Trend and Progress of Banking in India 2012?
PSB NPA data reveals that the actual amount of NPAs is equal at Rs.563bn for both the priority sector and non-priority sector credit dispensation. While accretion of further NPAs in priority sector is prevented by reducing the credit flow to such category, in respect of non-priority sectors, corporate debt restructuring has been liberally resorted to, to convert non-standard assets to standard assets. This is what made the regulator think of introducing 5% additional provisioning for the restructured assets classified as standard assets. That most Banks did not achieve the priority sector credit allocations stands in evidence for this reasoning. NPAs of 2012 compared to 2011 in agriculture moved up marginally by 0.2 percent while for the micro and small enterprises it declined from 17.6% to 14.9%. Correspondingly, the NPAs in non-priority sectors increased from 48.2% to 53.1%.
During the last ten years these banks moved to credit risk assessment of non-priority sector to technology platforms and due diligence of enterprises and directors is more by the data they have been able to secure and not by proper enquiry. Credit origination has gone more by macro analysis of the industry than by prudential micro analysis.
Public sector undertakings, real estate sector lending, infrastructure lending to airlines like the Kingfisher, roads and power sector take the blame. The origination process is through videoconferencing and group review of the credit parameters. Larger the credit faster it flowed. A more discerning analysis reveals that the export oriented manufacturing industries sharing approximately 8-10 percent of the credit to manufacturing sector are actually under the guaranteed mechanisms of ECGC and therefore, their migration from the standard to NPA would take more time than the normal. On the other hand, credit to the commercial real estate, tourism (tourist traffic increased during the last three years going by the increased occupancy in the star hotels), Hotels and restaurants, NBFCs are not impacted by the global economic forces. The asset value deterioration is more a result of faulty credit origination than global impacts to which recourse is invariably taken when accountability for rise in NPAs is sought. Fall in growth rate of the economy and inflation are the visitors to the rationale. Systemic risk and provisioning norms also join the blame game.
Despite introduction of risk management practices under the Basel regime, why the Banks are moving on the ascending graph of NPAs? This is because such risk management is viewed as the responsibility of CROs than of the risk assessers. It is the lack of proper risk appetite and risk culture across the organization that is responsible. Risk management is viewed more as regulatory compulsion than as an essential ingredient of their micro operations. Enterprise risk management is yet to sink in the banks. Learning processes in acquiring risk culture are also at very rudimentary stage. The officials feel overburdened with work on the system and seem to have no time for learning! A few of the corporate head offices earlier used to send periodical industry briefs to their officers. With the introduction of sectoral information flowing through the various networks and private researchers, banks’ CEOs expect that their officers should get better informed than ever on macro and micro prudential sectoral and industry appraisal. Somehow this seemed to have taken a backseat bowing to rigorous timelines for sanction more than for the rigour in monitoring credit flow.
Even if 50% of priority sector credit that constitutes 37-38 percent of the ANBC or off-balance sheet asset exposure this would be far less than the 50% of the balance credit portfolio. The concerns of the Ministry may be justified from this angle. But what is required for growth of the economy is the increase in credit to GDP ratio that is dependent on risk appetite. The other aspect requiring attention is the involvement of the Government in refurbishing capital whenever shortfall arises. As long as the CRAR is far above the required 9% is it necessary to refurbish the capital? Second, is it not prudent to shed some share in capital when the market is responding well to investments in banks than meeting out of the tax-payers’ money? It is time that the Government gives a re-look at the recommendations of Narasimham Committee I and II in this direction. Governance has scope to improve when this happens with a diversified Board taking more accountability.
*The author is an economist and Regional Director, Professional Risk Management Association, Hyderabad. Contact: