Revisiting India's Growth - A Flip Flop Story

India’s growth A flip flop story:
B. Yerram Raju
India was the cynosure of the rest of the world when it clocked an average annual growth of 8.5% during 2005-10. When it fell precipitously to less than 5% expectation this fiscal it equally became a point of discussion. The bubble of growth got pricked with scams, scandals and charges of corruption among the rulers and ruling gentry. Supreme Court said over 30% of the Members of Parliament are tainted and cannot afford to be in the ruling galleries based on the Right to Information Act petition. While all the progressive legislations aimed at further reforms to the economy are waiting in the corridors of the Parliament, the RTI Act was amended to provide reprieve to the affected Members and also allowing even those in Jails to contest the elections. Why in any case India should interest the world in the first place? It has 350mn Middle Class and around 300mn the poor and not-so-poor providing a huge domestic market for any FII seeking entry. The present Government has been very accommodative to the FDIs, FIIs to come into the retail markets and bending backwards for the hitherto barred defense sector. In order to balance the social and economic forces, the Food Security Act has been brought into position that involved a huge subsidy flow that could easily up set its fiscal deficit calculations.
IMF and World Bank also downsized their growth expectation to 3.5 from 3.7 percent during the current fiscal. Emerging economies in general have been steadily slowing with India and China in the lead. Not long ago the IMF said that global growth would be driven by the emerging economies growth and there is a sudden volte face. It is this contextual reference that would make the flip flop of India’s growth story interesting for the rest of the world to take note of.
Inflation continues to be a major worry with the country’s topmost economic advisor Dr Rangarajan warning of the likely stagflation. Domestic savings are not growing at sustainable rate any longer and this is a serious cause for worry. Banks’ short term deposits are on the increase but the medium and long term deposits are on decline whereas the demand for long term credit is increasing with housing, real estate, infrastructure denting the AML of Banks. Decline in savings rate is loss of fundamentals of the economy. There is keenness to do all that is necessary to let it grow to no less than 28-30 percent and this can be done in two ways: incentivize savings through fiscal policy and protect the deposit rates against rising prices. Raghuram Rajan, the new Governor, Reserve Bank in his first Monetary Policy statement on the 20th September 2013 confirmed that controlling inflation and improving the savings and pushing financial inclusion agenda are critical to the economy by raising the rate by 25 basis points contrary to the expectation of pushing the interest rates down. Markets were in fact shocked.
The Flop Side:
Post-liberalization trended towards a sustainable growth in the services sector while the country has to look for investors from developed countries for growth in infrastructure not supported by right policies.
Even to stay where they are in growth trajectory, India needs multiple times of investments in school buildings (most public school buildings in villages and towns are in dilapidated state: some with collapsing roofs; some with no basic amenities like safe drinking water and wash rooms for children; no play grounds; no teaching aids etc.); primary health clinics; safe drinking water; drainage and sewerage systems; sanitation; highways – both central and state; repairs to rail tracks and replacement of train compartments at galloping speed to catch up with the new trains and emerging demands on rail traffic; goods transport coaches; airport maintenance etc., most of which are with the governments, State and Centre. The resources have to be found either through public borrowing or increase in taxes. If it has to borrow, it will be of long term nature as all such assets have no prospect of returning either the principal or interest. Its capacity to indulge in fiscal deficit is peaking. The virtuous moves of right to employment, right to education and food security have their loopholes in the systems that were created to result in their effectiveness.
The country’s natural resources are declining in productivity: rivers are silting more at the nose-end where they join the sea; minerals like coal to generate the thermal energy are inferior although the stocks are assured till 2050 but these are environmentally hostile; the country has very little natural gas, fossil fuels and has to depend on such of these depleting resources of the West and Middle East; soils are also depleting in energy with regeneration requiring huge organic resources; nuclear and solar energy are proving to be highly expensive.
Agriculture production though has potential still left in the virgin soils of Bihar and eastern UP on the Ganges plains, frequent flooding of rivers and mismanagement of rivers does not leave enough hope for sustainable growth here. Forest wealth is also degenerating. Animal and bird population to maintain ecological balance in the biosphere suffers from disease and malnutrition due to wanton neglect in most cases and in others due to the ravages of nature like floods, cyclones, tsunamis and earthquakes. Claims just keep growing while resources keep depleting – and real prices of energy and commodities have begun looking to north with little prospect of looking south. It would appear as though we are peaking limits of growth if we would like to measure growth only by the GDP figures.
Gross Domestic Product is something we need to look at: Is this the right measure? GDP defined as the market value of all goods and services produced in one year by the labour and property in a geographic space – the country. It is therefore more space related than ownership related. If the number went up economists consider that all was well whereas the decline meant that something was going wrong somewhere. GDP does not distinguish between waste, luxury and satisfaction at fundamental levels and there is no accounting for the costs and benefits. It builds inequalities and the glaring examples: the more the rich accumulate riches the GDP increases and takes for granted that this would lead to the poor reducing in numbers; the companies may invest and grow but the employment may go down with every unit of increase in production and the market index rises with no guarantee that employees would have their share equal to their contribution. There is no guarantee that there would be happiness around with growth measured by GDP increases. It was a tiny neighbor Bhutan that first thought of Gross National Happiness has to be measured and now the UN Human Development Index is taking this into account but the nations like ours still find it difficult to move to such measure.
Let me hasten to mention here that we are not alone in this journey of stagnation. There are concerns about the sustainability of economic recovery both in the US and Europe, still worse. In the recent G-20 meet Indian leaders made successful noise that US should not hasten to withdraw the stimulus measures and resort to the threatened Quantitative Easing. This means that the capability of developed nations to come to the aid of India or other developing nations in the midst of their own problems would be on the wane. Indian economy basically is domestic market driven rather than export-driven. Its neighbor China though recovered from the shocking decline is not to see the earlier double-digit growth.
India’s slowdown in such context is not seen as a big worry while new-normal advocates see the alarm bells dinging in the ears. Inflation in terms of CPI is still a worry. Oil prices uncertainty also can throw the expectations bizarre.
The Flip Side:
Technology and innovation have shown the way, no doubt but have also been pointing to certain destructive dimensions. Coming to the Services sector, there has been a fall in growth rate on global cues. It is unlikely that this sector would deliver growth rates of the nature seen in the last decade and half. It would appear that we have to contend with lower growth rates in the next few years unless dramatic essentially Indian innovations surface. The innovations are taking place more in the mobile technology areas and they are all in countries other than India. Trade gap has lessened by 23% during last month. All the hope of rebound is contingent on oil prices not upsetting our import basket.
The big guess of agricultural sector pushing growth to the expected level would seem a bit hasty considering the time lag between production and its reach to the markets. Second, its estimate of manufacturing sector does not look realistic. The capital goods imports that have surged by75% the last eight years could be generating yields in the next six months. Its survey of 2841 companies reveals that the rupee depreciation had impacted only 6% of them. Therefore, it is just logical that CAD did not have adverse impact on the manufacturing sector as feared. However, what happened actually is the neglect of SME sector by the financial sector on one side and inadequate linkage from the large corporate sector on the other. If the capacity utilization of the capital goods sector improves with core sectors like coal, energy, oil and infrastructure showing a mark-up, it is possible that the growth of manufacturing sector could surge.
The key exports that have great potential are in readymade garments and pharmaceuticals. Wherever one goes in the world, we would find the Chinese and Bangladesh readymade garments with local brand linkages. Actually, this sector has been our forte historically. It is the curse of the sector that it did not have a stable encouraging policy for investments and appropriate incentives. This is an area that does not brook delay. Pharmaceuticals are already on the march and hopefully they would establish as global leaders in export markets.
The cabinet sub-committee has just cleared about $2bn of investments in infrastructure just on the eve of this report. The FDIs started looking up and the FIIs also started flowing in during the last ten days. The capital markets looked consistently buoyant during the last five days. If this trend continues, it is very likely, that the forex markets also stabilize. To expect FDIs and FIIs within the next six months to surge would be over-expectation considering the political scenario dancing on uncertainty with General Elections slated in February 2014, just about six months hence.
If demographic dividend that the country is likely to have till at least 2025 should give the advantage, it should invest more in education and health sectors and this would in turn help people think of rationalizing and practicing austerity led growth. The country has to learn the lessons of growth, even if they are the hard way.
In the short term, however, expectations seem to have been changing for the better.
Different agencies have raised varying growth expectations of the Indian economy at the end of the current fiscal. World Bank placed it at 4.5%; CRISIL in its latest analysis reports that the growth rate could at best stabilize at 4.8% at the end of the current fiscal and the rupee may rally back to Rs.60 a dollar. Prime Minister’s Economic Advisory Council has put it at 5.3% while the Reserve Bank of India in its monetary policy of July 30 placed it at 5.5%. Most estimates are on the basis of a rebound of growth of agricultural sector to more than 4% stabilizing the food prices and the CPI, a bizarre guess indeed for there would be certain time lag between the growths in farm production to reach the consumer windows!
The newly appointed Governor Raghuram Rajan would also seem to have anointed the economy a bit in a fortnight of his assumption of charge with the announcement of a slew of intentions to liberalize the banking sector. But his maiden monetary policy told it all.
But there is some hope on the horizon for the manufacturing sector, I am prepared to buy. The capital goods imports that have surged by75% the last eight years could be generating yields in the next six months. Its survey of 2841 companies reveals that the rupee depreciation had impacted only 6% of them. Therefore, it is just logical that CAD did not have adverse impact on the manufacturing sector as feared. However, what happened actually is the neglect of SME sector by the financial sector on one side and inadequate linkage from the large corporate sector on the other. If the capacity utilization of the capital goods sector improves with core sectors like coal, energy, oil and infrastructure showing a mark-up, it is possible that the growth of manufacturing sector could surge.
The key exports that have great potential are in readymade garments and pharmaceuticals. Actually, this sector has been our forte historically. It is the curse of the sector that it did not have a stable encouraging policy for investments and appropriate incentives. This is an area that does not brook delay. Pharmaceuticals are already on the march and hopefully they would establish as global leaders in export markets. Hopefully there would be corrections.
The cabinet sub-committee has just cleared about $2bn of investments in infrastructure just on the eve of this report. The FDIs started looking up and the FIIs also started flowing in during the last ten days. The capital markets looked consistently buoyant during the last five days. If this trend continues, it is very likely, that the forex markets also stabilize. To expect FDIs and FIIs within the next six months to surge would be over-expectation considering the political scenario dancing on uncertainty with General Elections slated in February 2014, just about six months hence. Fiscal profligacy cannot be ruled out.
Reminded of J.S. Mill (1806-73): “It must always have been seen, more or less distinctly, by political economists that the increase in wealth is not boundless: that at the end of what they term the progressive state lays the stationary state.”
Investors taking interest in India should look at the following sectors keenly:
Energy sector; Real Estate Sector; Pharmaceuticals; Ready Made Garments sector; Automobiles and Precision Instruments Industry and Financial Sector. These stocks have been showing less volatility lately and the trend is likely to continue.
The SME Exchange offers equally good scope for their stocks to expand because of support from Government in SME Markets and global tie-ups. The stocks that should be of interest would be in Automobile sector and Manufacturers of precision instruments and Ready Made Garments.
This is also on blog: http://seekingalpha.com/Yerram Raju/instablog.

VITALINFO: How the money flows from banks

VITALINFO: How the money flows from banks

Growth Expectations Rebound

Growth Expectations rebound:

 CRISIL in its analysis reports that the growth rate could at best stabilise at 4.8% at the end of the current fiscal and the rupee may rally back to Rs.60 a dollar. This estimate is on the basis of a rebound of growth of agricultural sector to more than 4% stabilising the food prices and the CPI.

This is a big guess considering the time lag between production and its reach to the markets. Second, its estimate of manufacturing sector does not look realistic. The capital goods imports that have surged by75% the last eight years could be generating yields in the next six months. Its survey of 2841 companies reveals that the rupee depreciation had impacted only 6% of them. Therefore, it is just logical that CAD did not have adverse impact on the manufacturing sector as feared. However, what happened actually is the neglect of SME sector by the financial sector on one side and inadequate linkage from the large corporate sector on the other. If the capacity utilisation of the capital goods sector improves with core sectors like coal, energy, oil and infrastructure showing a mark-up, it is possible that the growth of manufacturing sector could surge. The key exports that have great potential are in readymade garments and pharmaceuticals. Wherever one goes in the world, we would find the Chinese and Bangladesh readymade garments with local brand linkages. Actually, this sector has been our forte historically. It is the curse of the sector that it did not have a stable encouraging policy for investments and appropriate incentives. This is an area that does not brook delay. Pharmaceuticals are already on the march and hopefully they would establish as global leaders in export markets.

The cabinet sub-committee has just cleared Rs.1.20lakh crores of investments in infrastructure just on the eve of this report. The FDIs started looking up and the FIIs also started flowing in during the last ten days. The capital markets looked consistently buoyant during the last five days. If this trend continues, it is very likely, that the forex markets also stabilise.

Coming to the Services sector, there has been a fall in growth rate on global cues. It is unlikely that this sector would deliver growth rates of the nature seen in the last decade and half. It would appear that we have to contend with lower growth rates in the next few years unless dramatic essentially Indian innovations surface. The innovations are taking place more in the mobile technology areas and they are all in countries other than India.  Trade gap has lessened by 23% during last month. All the hope of rebound is contingent on oil prices not upsetting our import basket.

I foresee that the growth in view of the above at the end of the year can stabilise at around above 5percent this fiscal – could be at what the Monetary Policy of last quarter predicted at 5.5percent

 Published in Business Digest September 10, 2013

Need Bank Branches that deliver Inclusive growth

Do we need more bank branches or branches that work for financial inclusion?

 Raghuram Rajan in his maiden policy brief mentioned that the banks would be free to open branches at places of their choice without seeking license within certain boundary commitments.  The predecessor policy has been that the private bank licenses would be with the condition that they open 25 percent of their branches in rural areas in the pursuit of financial inclusion. Both emphasise on the reach of the banks to enlarge.

Post liberalisation nationalised banks folded up un-remunerative branches in the rural areas first and the restructuring of RRBs, in two bouts, led to closure of branches in rural areas. In the name of viability, Primary Agricultural Cooperative Societies, the only outfits closer to the rural population, have been truncated in various States under the efficient guidance of the NABARD, a dedicated supervisory arm for RRBs and rural Cooperatives. This situation begs the question do we need more branches of commercial banks under a fully de-licensing regime or a co-ordinated lending system in rural areas for financial inclusion?

The option at the moment should weigh with the second: a co-ordinated lending system in rural areas for financial inclusion. Let me explain: PACS are age-old institutions capable of performing the dual role of extending credit and also take care of the backward and forward linkages to farming: supply of inputs and marketing of agricultural products and produce under a single roof. NABARD clearly acknowledged that the small and marginal farmers have been served better by the PACS than others. But they lack financial resources, managerial, technological and governance skills.

Commercial banks of all hues have resources but found the brick and mortar structure in rural areas not profitable. Earlier experiment of ceding some PACS to the Commercial Banks, and some of them still continue, has been partly successful. The Farmers’ Service Societies is their avatar. Those that are still functioning offer a role model for enlargement to bridge the gap of presence of bank with service in the rural areas through the rural cooperative credit system.

BCs performing as ambassadors of financial inclusion would seem to be meeting the same fate of earlier Janata or pigmy deposit schemes. There are issues of remunerative fees, prompt payment of it to the BCs and the BCs fulfilling their role to the point of expectations.

The role of BCs as mentioned in the 2012-13 first quarter monetary policy  emphasizes on quality of services, setting up ICT-based BC and proving as an intermediate brick and mortar structure  between the present base branch and BC locations so as to provide support to about 8-10 BC units at a reasonable distance of 3-4 km. The forms can vary but should have a minimum infrastructure such as a core banking solution (CBS) terminal linked to a pass book printer and a safe for cash retention for operating larger customer transactions leading in turn to efficiency in cash management, documentation, redressal of customer grievances and close supervision of BC operations.

The business correspondent model allows banks to do cash in-cash-out transactions at a location much closer to the rural population, thus addressing the last mile problem. As on March 31, 2013 banks have reported deploying 195,380 business correspondents that covered 221,341 villages, according to the latest available RBI data.

In 2010, RBI allowed PACS to function as BCs but the takers are few. Recently, taking a cue from the Report of the RBI Expert Committee on restructuring of STCCS, NABARD advised the DCCBs/StCBs to separate the core and non-core functions of PACS and let only those PACS that take on the role of BCs to perform the core functions, for it defines the core function as lending for farming and rural activities. There would seem to be little realization that the core function would be ineffective without the accompanying non-core functions and it is members’ mandate for functioning that is crucial in the democratically run cooperatives.

While the States that continue to be the regulators of the PACS and the PACS themselves have expressed dissent openly over such intrusive instructions, the fact remains that the latter including the DCCBs lack financial muscle comparable to the commercial banks for taking up technology infusion and credit risk assessment abilities. Therefore, a hybrid model of allowing PACS to function but with effective and efficient linkages to both the licensed cooperative and commercial bank branch system would provide the best reach to the rural areas and deliver the financial inclusion initiative, with the required legal facilitation from the State Cooperative Laws. The existing under-performing BCs can be subsumed with such a system. Institutional inclusiveness is the need of the hour.

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Reforms Needed Most in Education Sector

Reforms to Governance in Education Imminent

Prime Minister Stephen Harper of Canada apologized to his Parliament for coming late by fifteen minutes and the reason adduced by him was that he had to drop his child in a government school on an intense rainy day with traffic snarls coming in the way in Ontario. President Obama’s daughter and his private secretary’s son study in the same school and sit side by side. There is no discrimination among the children of different classes of people in these parts of the world.

In India, we had an education system where the primary schools in villages and towns and high schools were all in the fold of government or Panchayat or Zilla Parishad (the old name District Boards)- the local bodies. But during the last three decades, private schools have come up at their places of choice, many a time with the munificence of the local politicians. The fees for admission in the name of quality started touching the roof and took the shape of donations. This has spread to the higher and technical education as well.

Public Schools, with the support of government came up. Most public servants and politicians started taking pride in putting their wards in such public schools using their influence. In several public schools it is not uncommon to find somebody from the education department in their Boards. The spouses of some of the civil servants get plum teacher posts in such schools. On the other hand, if these politicians and civil servants had sent their children to the government schools, they would have certainly ensured that enough budget releases for the improvement of infrastructure in schools. The uncared for attitude of bureaucrats and politicians is solely responsible for the dilapidated primary and high school buildings owned by the government and the related infrastructure.

Teachers of appropriate qualifications and interest became a rarity due to poor pay scales initially in this sector compared to the other sectors notwithstanding the primacy of this sector.  By the time the scales started improving, the quality of teachers and teaching deteriorated beyond repair. Qualification took precedence over quality and interest in profession. Dedicated teachers despite annual awards for best teachers announced by the Government have become a rare breed. Respect for teachers started declining with a few incidents of teachers beating up children, committing atrocities on the girls etc have been repeatedly surfacing and such incidents were unheard of in the past.

Teachers in the past, say up to 1960s at all levels viewed their profession as sacred and never participated in strikes and dharnas. They attached high values to their profession and concentrated on imparting noble values to the students. The tragedy in those days was that some of them suffered in penury until some of their students came to their rescue. Now, when the sailing is good, values have vanished. In fact, it should go to the credit of late Shri P. V. Narasimha Rao, when he was Minster of Human Resources, he introduced Navodaya Schools with good intentions, largely based on our traditional Gurukul. But his experiment was allowed to suffer at the hands of politicians and bureaucrats and the reforms, so called, concentrated on school drop-out reduction, that has become a number game, mid-day meal programme to ‘incentivise’ the poor to reach only the ill-equipped government schools – and the incentive ended up in badly cooked and badly delivered food resulting in a few kids sacrificing at the altar of mischief of the cooking ‘teachers’. 

Still, there is scope for resurrection. First, recognise this problem: find solution where the problem lies. Second, allocate liberal budgets for immediate improvement to the government school infrastructure. If the Government is prepared to be  transparent, there is enough interest in NRIs to adopt some schools for certain components in the infrastructure provided it is willing to create a learning environment; cancel registration of all schools that do not have play grounds and libraries;  change the curriculum in the primary and secondary schools to include games, library reading, project work and internship from ninth class for taking up social service and award marks for such assignments as part of the grades and more importantly, have some illustrious leaders autobiographies of freedom fighters like Madan Mohan Malaviya, Lok Manya Balagangadhara Tilak, Netaji Subhas Chandra Bose, Mahatma Gandhi, Ambedkar,  Lal Bahadur Shastri to site a few. Include a few chapters from the Glimpses of World History of Pandit Nehru in every standard from the 8^th onwards. Teachings of Swami Vivekananda, Ramakrishna Paramahamsa, Poems from Gitanjali of Rabindranath Tagore, should be part of cultural readings for all children right up to the College level. In each of the regional languages there is great wealth and morals that should essentially be part of learning from the childhood. The current day child has the sharpness and speed like none before. They are unfortunately being turned into scoring machines and this is happening sadly only in India.

Where is the need for transferring teachers? What is needed is proper assessment and involvement of parents in achieving the desired levels of excellence. Responsible teaching, responsive administration and unburdening the child of cart load of books but enabling him with knowledge load, flexible timings, audit and accountability, are the need of the hour. Competitively the young nation is losing its verve.   If we make available education free for all girl children up to XII standard there need be no specific reservations. The entire society would look up and grow culturally.

I visited the education system in Canada and was amazed to find that education up to secondary school higher grade is free. Children get report cards on their performance monthly and the report card contains details about how they fared in curriculum, character, punctuality, reading habits, project work (every student from the 4^th standard has to do project work in different fields), arts and crafts, games and sports, dance, drama etc., and where the student needs to improve and how they have come to such assessment. They are counseled right from the 8^th standard onwards as to how to help the parents at home, the suffering in the communities, how important it is to provide charity in one’s own affordable range etc. They are taught skills in cooking, carpentry, metal works as part of their project work and this is part of the curriculum. From the 10^th standard, they can enrol for internship to take up any voluntary service.  The elementary schools provide admission to the children of households in the distance of 5km. For a cluster of 3-5 elementary schools there is one middle school. No child can be denied admission without valid reason. There are no admission costs for any permanent citizen. School buses would be available at concessionary fares for children staying beyond 1k.m in elementary schools and for middle school children to those staying beyond 2.7km from the school. Once in a week, a mid-day pizza or burger is provided on nominal payment. All the schools have play grounds, gym and library.

In each school a break of 45 minutes is provided at 11.30a.m (the school starts at 9a.m) for children to play as they wish in the playground. The school closes at 2.30-3.30p.m. The schools work for five days in a week. Once in a year the middle school children are taken on excursion after obtaining parent’s written consent. All children have free health check-up and insurance. Why will not children develop in such environment? When do we in India get this happy environment for education of our children?

Governance of higher and technical education is a different ball game and needs different treatment.