Risk Profiling of Manufacturing Micro and Small Enterprises

 

India’s Micro, Small and Medium Enterprises (MSME) viewed as the lifeblood of the Indian economy, contribute 30 percent to GDP and of them micro enterprises alone are estimated to employ 23 percent of India’s total workforce, according to the data of the Union Ministry of MSME. Access to credit has been the most contentious issue discussed on public platforms and IMF estimated that only 23 percent of the total number of enterprises in this segment got formal access to credit.

 

Post-pandemic, government of India has been laying lot of emphasis on the growth of micro, small and medium enterprises and extending incentives and products for easing the conduct of their business. The Union Finance Minister, in her usual meetings with the bankers, draws her untiring attention to the need for increase in credit to these enterprises. Banks, on their part, do not lose the opportunity to exhibit their fancy to lend to such enterprises.

 

Trust deficit was the major contributory factor from the lenders’ perspective. It is therefore considered expedient to look at the risk profile of such enterprises and see the possible mitigating factors.

 

Latest Profile of the Sector

Interestingly, TransUnion CIBIL-SIDBI MSME Pulse Report for July-September presents a very hopeful perspective presenting a growth of 24 percent year-on-year (Y-o-Y). Credit to ‘micro’, viewed as unmoving window of Banks for five continuous years since 2017 and even on the negative window, reported a 13 percent growth in credit outstanding y-o-y as of September 2022 versus 10.6 percent y-o-y for all the MSMEs y-o-y. Growth in disbursements for micro, small, and medium enterprises had been at 54 percent, 23 percent, and 9 percent respectively during the period.

 

According to RBI’s Financial Access Survey, 72.83 percent of MSME Credit is concentrated in ten states: Maharashtra, Gujarat, Tamil Nadu & Pondicherry, Uttar Pradesh, Delhi, Karnataka, Rajasthan, West Bengal, Telangana, and Haryana. Maharashtra takes the major slice of 26.19 percent. This obviously means that government assistance to the sector also reached these states in a significant measure, at least proportionately viewed.

 

Very small (with aggregate credit exposure not exceeding ₹ 10 lakh), micro1 (with aggregate credit exposure between ₹ 10-50 lakh) and micro2 (with aggregate credit exposure between ₹ 50 lakh-1 crore) experienced growth of 20 per cent, 15 per cent and 11 per cent y-o-y respectively showing sudden spurt in micro lending, which is not just a post-pandemic bounce back, it added.

 

Delinquency rates dropped y-o-y across all the three lender categories (public sector banks/PSBs, private sector banks(PVBs) and NBFCs); the highest drop was in PVBs segment (from 2.8 per cent in FY22-Q2 to 1.5 per cent in FY23-Q2).[i] Street Vendors’ financing programme, MUDRA loans (Rs.3.4cr sanctioned during FY21-22), 59-Minute loan programme for the MSMEs contributed to the steady uptick that was presented apart from the Union Finance Minister dinning into the ears of bankers that credit to MSMEs has been sluggish. There was a pressure on the banks to perform.

 

This positive vibration whittles down suddenly when we hear the Union Minister of State for MSME submits to the Parliament, duly reported in the Financial Express dated 23.02.23: “The number of Udyam-registered MSMEs closed in the current financial year has nearly doubled from the last financial year’s count, showed official data. From 6,222 MSMEs shut during FY22, the count has jumped to 12,307 as of March 9 in FY23 while only 175 units were closed between July 1 (when the Udyam portal was launched) and March 31 in FY21, taking the total number of MSMEs closed to an all-time high of 18,704. Maharashtra had the highest number of casualties with 4,871 Udyam-registered MSMEs shut since July 2020 followed by Tamil Nadu (2,326), Uttar Pradesh (1,568), Gujarat (1,558), Rajasthan (1,297), Bihar (1,075), and more.”

 

Gross Non-performing Assets ratio  (the ratio of total gross NPAs to the total advances made during a particular period by the lender) in MSME loans in FY22 stood at 7.6 per cent, 7.3 per cent in FY21 and 8.9 per cent in FY20. 

 

Resilience and sustainability of industrial growth is inextricably linked to the healthy growth of the manufacturing micro and small enterprises (MMSEs), that happen to front-end the supply chains of the industry at large. The data and analysis of the Transunion report does not provide information on how much is the share of growth of manufacturing MSEs. September 2022 PMI data shows that industrial growth has not kept pace with the overall growth of the economy. The growth obviously occurred in the services sector, due to the digitization of the highest scale, entry of FINTECHs, formalization of the MSMEs, widely dispersed 200-odd incentive schemes from the Union Ministry of MSME, and the unique success of unified payment interface system (UPI). Despite the U.K. Sinha Committee Report calling for cash-flow based lending of working capital to the MSMEs, RBI creating public credit registry, and pushing the banks to move to data-based lending instead of security-based lending, MMSEs did not catch the eye of the banks. Hence, risk profiling of the MMSEs would be necessary to understand the reasons for the trust deficit in the manufacturing sector.

 

Definitional Risk:

Manufacturing and Services have been combined in the way the MSMEs are defined. The changes to the definition adopting the twin criteria of investment and turnover to redefine them have given an escape window for the banks to keep at bay the MMSEs with investment below Rs.1crore (Rs. Ten million). The turnover threshold for such enterprises is five times the investment level – Rs.5cr per annum. While this definition coupled with the insistence of any new enterprise shall register on Udyog-Aadhar portal of Government of India, has enabled only the organized to have access  credit and incentives, it is yet to bring many unorganized MMSEs into the organized fold. Lenders still have their own definition – micro enterprises are those that have outstanding credit of less than Rs.1cr. The law of proportionality demands that the micro enterprises be brought under a separate statute so that the benefits meant for them reach without infringement.

 

By nature, micro manufacturing enterprises are owner-led proprietary or family partnerships. They do not distinguish their firm expenditure from family expenditure. Their books of accounts are also not well organised. Their maintenance of record of stocks of raw materials and finished products is less systematic than their counterparts in the small and medium enterprises even. They are mostly sub-contractors as their scale of production does not permit them to participate in private or public tenders directly. But their working capital cycle accommodates this unorganised way of running their enterprises. They lack counselling and guidance from their lenders as the later have little time for these large numbers in their books of accounts that tend to slip to non-performance at the turn of the hat. Thus, these enterprises have origination risk. Information asymmetry and adverse selection, the two factors that adversely affect the credit risk need mitigation.

 

Covenant Risks: These MMSEs in their eagerness to borrow money sign on the dotted line before their lender. They do not understand the implications of the covenants they are agreeing for. Earlier they were not knowing even the rates of interest. At least now, thanks to the widely publicised monetary policy interventions periodically, they know the interest rates. But they are ignorant of the insurance clauses and their implications. They do not, in many a case, know that their machinery and stocks are jointly insured with the lender and the premium is directly deducted annually from their working capital account. The extent of insurability is least known to them. Such insurance is invariably made with the insurance arm of the Bank that lends the enterprise. But the covenants of the policy are little known to them as the Banks do not share any copy of the insurance policy. This is a grey area.

 

Compliance Risk: MMSEs fail to comply with the regulations relating to products, processes, and finance more out of ignorance than out of own volition. Neither the regulatory institutions nor the financial institutions spare time to explain the implications of non-compliance of the rules and regulations. Environmental regulations and financial regulations are the most breached. Labour Code that has four components are least explained to the MMSEs. It is not uncommon to find that these enterprises fail to maintain even a muster roll and even where maintained does not agree with the reality. The number of persons actually engaged and the number in the roll rarely tally. There is a cost involved in compliance and such cost is felt onerous by the micro manufacturers. When the cost of compliance is more than the cost of avoidance, they prefer the latter. Transparency in the cost of compliance is also found wanting. These are areas of immediate correction to take these enterprises to the globally competitive levels.

 

Human Resource Risks: MMSEs employ on average 8-10 workers including the owners. They invariably depend on migratory labour instead of labour because of the low wages they demand and reliability. Many studies have indicated that they spend little resources on skilling, re-skilling, and up-skilling as the cost of such human resources development is beyond their capacity to absorb. In fact, these MMSEs act as providers of skilled persons to the Small and Medium Enterprises as the labour learn their art of working on the machine duly trained by the proprietors. Some States have insisted on engaging locally available skills and their experience with such persons on the production front has become counter productive and costly. They cannot afford to train their labour in reputed institutions. They require peripatetic trainers who are rarely available.

 

Product Risk: According to a number of studies, 60-70 percent of the MMSEs may conform to the quality of the product requirements but fail in packing and forwarding requirements. This puts the buyers at risk and therefore, the related payments.

 

Pricing Risks: Several manufacturing MSEs adopt neighbourhood pricing of their products as they would not like to lose out in competition with the peers. They lack abilities to cost their products. They also do not much understand the leakages that occur in their supply chains. The product is not priced cost plus. Since debt is their major source of capital they always look to loan swaps and interest subsidy as a major source to beat the pricing competition.

 

Technology Risks: While several enterprises are aware that new technologies have the potential to increase their efficiency, their ability to finance those new technologies is very limited. Quite many are scared to approach their lenders as they would have been in arrears already either of the interest or principal payment. They must have already availed one or two name-sake restructuring of their loans. Their ability to calculate return on investment in technology is also extremely limited. Banks hardly find time to spend time with the entrepreneur and guide him.

 

Payment Risk

Global Alliance for Mass Entrepreneurship (GAME) estimated that the problem of delayed payments to MSMEs is in the magnitude of Rs. 10.7 lakh crore, with 80 percent of this being attributable to delays to micro and small enterprises (MSEs). The problem of delayed payments is exacerbated by the lack of credit, specifically working capital facilities, that are available to these businesses. Reports such as the IFC’s 2018 Financing India’s MSMEs estimate that the total addressable debt requirement of micro and small enterprises was Rs. 24 lakh crores in 2018, with an estimated 70 percent attributable to the elevated working capital needs of these businesses.

 

Sovereign Risk: Industrial policies, Budgetary announcements, Export-Import policies, Trade Policies and not-so-enriching interface between various government departments that deal with the MSMEs and the Union Ministry of Finance, inter-state coordination issues are the various factors that impinge on sovereign risk. Enterprises have to adjust themselves and accommodate for the changes in the way they function rather than seeking instantaneous remedies to their business dealings.

 

Policy formulation for the MSMEs is at risk because of lack of reliable data. There has been no census of the units since 2004, the year of last Census. The data on the Union Ministry of MSME portal is that of 2012. While the data on Udyam registration is captured in isolation, its integration with the existing data did not take place. There is no data of mortality in the figure of 6crore-odd enterprises mentioned on the website.

 

While several state governments and union governments announce a host of incentives, the reach is suspect due to a variety of constraints: 1. Expediency decides the allocated budget for release to the sector and the first hit is the MMSEs, the most vulnerable. 2. There is invariably lack of information relating to the cost of securing these incentives – in terms of number of visits the entrepreneur has to make to the concerned department; the cumbersome approach to the person who actually decides on the sanction and release of the incentives. 3. Weak negotiating ability of the Industrial Associations over the incentive releases, etc.

 

Digitalization of enterprises, Account Aggregators (yet to mature in its access and use), Open Credit Enablement Network (OCEN), Co-lending with NBFCs, Factoring, Trade Related Exchange System (TReDs), have lately entered the Risk Mitigation instrumentality. Yet, the ability of the MMSEs to take advantage of these mitigants is way behind both in terms of awareness and the skills.

 

Therefore, there is a need for developing a separate framework for the MMSEs and a broad-based ecosystem involving policy makers, institutions that act as policy instruments, RBI, Indian Banks Association, NBFCs, Ministry of Agriculture and Cooperation, Ministry of Electronics and Information Technology, Ministry of Environment, Ministry of Energy of the Union Government and the ten state governments that have the major share in MMSEs. This framework should be discussed with the stakeholders in the leading ten states before firming up. Separate line of budget should be provided to meet the announced incentives and institutions like the NIMSME, NIRD, Central Universities and those that are licensed to run technology hubs should monitor the working of the framework.

*The author is an economist, risk management and SME Turnaround Specialist.

 

https://www.moneylife.in/article/risk-profiling-of-manufacturing-micro-and-small-enterprises/70258.html

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[i] https://www.thehindubusinessline.com/money-and-banking/loan-disbursements-to-msme-sector-grew-24-in-q2fy23-transunion-cibil-sidbi-report/article66652635.ece

 

Disappointing Union Budget 2023

 

Bluster Budget

BYTELANGANA TODAY

B. Yerram Raju

PUBLISHED: 6TH FEB 2022 12:02 AM | UPDATED: 5TH FEB 2022 10:27 PM

Budget leaves these ladies in search of viable options

Usually, the Economic Survey presented a day before the Union Budget is expected to lay the foundation for a policy direction. It acknowledges the challenging times for policymaking – this time against the backdrop of the pandemic impact, especially on the vulnerable sections, fall in consumption in the medium term and serious supply-side disruptions. There are some half-truths as well when it said that government expenditure has pushed consumption by 7% in 2021-22. Even credit flow was tepid till the end of the second quarter of this fiscal.

The Union government’s debt crossed 59.3% of GDP from 49.1% a year ago. Recovery of the economy is unlikely to contain fiscal deficit as the major item of investment is through public debt and less through tax revenue. The Finance Minister’s Budget speech has little substance to combat either inflation or inclusivity. It also seemed to ignore several suggestions from the pre-Budget meetings.

Roads, highways, and railways are dependent on States for making available the land but the States have not been taken into confidence and several State-led projects were not supported by the Union government

The Budget has laid, of course, a foundation for large investments in infrastructure to flow under public-private partnership. But roads, highways and railways are dependent on States for making available the land, and the States have not been taken into confidence. Several State-led projects were not supported by the Union government during the year. The same is the case with the integration of rivers —Godavari, Krishna and Cauvery.

Missing Mentions

The Budget disappoints on inclusive development and climate change. Waste management has no incentive and de-carbonisation too was little talked about. Infrastructure development leads only to temporary employment and in the context of migratory unemployment that saw people dying on railway platforms and highways, literally starving during the first Covid-19 lockdown, and their returning to work, there are no clues. Inflation is least talked about.

The increase in GST (Goods and Services Tax) on which there was wide applause is more on account of inflation than due to the increase in productivity going by the drop in IIP. There was no mention of the revival of manufacturing NPAs in Atma Nirbhar Bharat Abhiyan though the extension of the guarantee mechanism under CGTMSE (Credit Guarantee Fund Trust for Micro and Small Enterprises) modification and Sovereign Bond replacing the guarantee for tender participation in public sector markets are most welcome for MSMEs. It is the medium enterprises that got the best of the bargain. The agriculture sector received an apologetic approach — a rise in MSP for wheat and rice accompanied by a fall in subsidy for fertilizers by Rs 35,000 crore.

Gujarat is Nation!

No wonder the Chief Minister of Telangana in a deservedly hard-hitting address, highlighted the thinking and approach of the Union government on several issues, and particularly, those relating to Telangana. For eight years, ie, since the inception of the State, Rs 42,000 crore is all that was given under Central schemes. This is far below the disbursements made by the State under the Rythu Bandhu scheme alone. Jal Shakti, the much-touted scheme of the Union government, had an allocation of just Rs 60,000 crore while Telangana spent Rs 40,000 crore on Mission Kakatiya and Mission Bhagiratha. The country holds 65,000 TMC of water with just around 35,000 TMC utilised. The water policy of the nation is in a shambles.

When the International Arbitration Centre was officially launched at Hyderabad and the State government has allotted enough space for it, it is strange that the Budget announced it as a gift to the GIFT city of Gujarat!

Uniform GST rate for toys, a policy framework for the toy industry and targeting at least 1% of the market share from China would mean a Rs 10,000-crore opportunity for the MSEs. The Budget has done little

Bihar Special Package, Gujarat Bullet Train, Karnataka Metro, Bundelkhand Defence Corridor had space but nothing for Telangana. Gujarat is the only State that received a mention in the allocations to the States as if Gujarat alone represents the nation!!

Further, the Budget should usually consider a few recommendations of statutory bodies like the Finance Commissions and the NITI Aayog. This Budget quietly slipped the recommended allocations to Telangana both under the 14th and 15th Finance Commissions depriving the legitimate share of the State in the Union Budget.

Even under the AP State Reorganization Act, 2013, allocations for important projects like IIM, IIT, IT corridor, Warangal-Hyderabad industrial corridor are forgotten despite repeated representations from the State. This squint-eyed approach of the Union government makes one wonder whether we are under a federal democracy or a unitary rule. This is the reason for K Chandrashekhar Rao calling for rewriting the Indian Constitution, which has seen more than 120 amendments.

The International Arbitration Centre was officially launched at Hyderabad but it is strange that the Budget announced it as a gift to the GIFT city of Gujarat!

Devils that lie in details

Legitimising Crypto

The Budget legitimised the illegal cryptocurrency that has the potential for killing the monetary stability of the large population by taxing 30% of those assets. Finance Minister Nirmala Sitharaman said a “digital rupee using blockchain and other technologies” will be issued by the Reserve Bank of India in 2022-23. “It will also lead to a more efficient and cheaper currency management system.”

The RBI coming up with digital currency would add fuel to the fire, as it may help only the fintechs. This could lead to financial instability in the days to come. Digital literacy is at a 32% level and general literacy at more than 45%. There is a cyber-fraud every day draining the hard-earned savings of lakhs of persons hurting their livelihoods as well.

NEP Neglected

There has been no increase in the allocation for the education sector. The National Education Policy demands at least 4-5% of allocation for the education sector but it ended up with less than 2%. The pandemic led to several uncertainties in education — a mix of institutional and digital education — and the complicity of some digital institutions awarding MBA degree that has been rightly discredited by the AICTE.

Poor Health

The health sector, despite all encomiums in her speech for the remarkable speed and efficiency in delivery of vaccines and improvements in health infrastructure during the year, did not receive even 6% allocation.

Uncertain Jobs

Employment had a serious setback due to the pandemic. Employment expectations on account of infrastructure projects under the PPP model will be project-driven and not stability and security for the persons employed. Fifty lakh persons to be employed in such projects and services sector would be a mythical figure. The Budget is hollow here.

Takers for Tourism

Tourism and hospitality sectors received a big-ticket. But all of it would depend on the people’s confidence in safe travel and safe food. Supply chains for this sector are in serious problems. The allocations would give a psychological boost for the sectors and would not materially alter their fortunes at least for six months after the Omicron settles down without any further variants hitting the economies around the globe.

Globally, commodity markets indicate a slump and have all portends of inflation.

Budget quietly slips the recommended allocations to Telangana both under the 14th and 15th Finance Commissions depriving the legitimate share of the State in the Union Budget

MSME Sector

The MSME Sector has some things to cheer about but much to mourn. Extension of ECLGS (Emergency Credit Line Guarantee Scheme) till March 2023 is welcome but they expect that the banks should extend the facilities to the most beleaguered micro and small manufacturing enterprises. Rs 6,000 crore over the next five years for a rating tool for the sector creates more fears as 98% of enterprises are proprietary and partnerships (family concerns).

The organic databases of G to C, B to B, and B to C would perform as portals with interlinkage of Udhyam, e-Shram, National Career Service (NCS) and Aatamanirbhar Skilled Employee Employer Mapping (ASEEM) portals, giving data a big push. There is no indication whether data itself would provide security instead of collaterals or guarantees sought by banks. The proposal to initiate a completely paperless, end-to-end online e-Bill System in all central ministries will greatly help MSME suppliers as it is to reduce delays in payments and make the process transparent. It is, however, doubtful whether this step would boost skilling, re-skilling, up-skilling and promote new enterprises because of the present levels of digitisation of the MSEs.

Micro and small manufacturers or service providers are sub-contractors and the FM’s announcement of substituting guarantees demanded by the governments and PSUs by a surety bond at the hands of insurance companies could be saving the working capital gap. It is important to see the fine print here and that the subcontractors get their due share.

A fund with blended capital raised under co-investment model facilitated through Nabard to finance startups in agriculture and rural enterprises for farm produce value chain is proposed. Startups will be promoted for Drone Shakti. It will be the large among the SMEs that may take advantage of this scheme. It also depends upon the way the co-investment model is structured by Nabard.

We have not seen much traction of PE/VC investments in manufacturing MSEs and hope that the Expert Committee proposed would provide sufficient comfort for the sector’s access to these funds. Extension of tax redemption by one more year for startups beyond the existing three years would help many service sector enterprises.

Micro and small manufacturing enterprises were the worst hit during the pandemic and many have not been able to revive. While speaking about Atma Nirbhar Bharat Abhiyan, the FM chose to ignore the failure of the subordinate debt scheme meant to revive the NPAs as all banks have woven a wet cloth around it. The manufacturing sector, due to severe supply chain disruptions, has grown only by a modest 1.3% (IIP).

MSEs have sought the lowest cost of capital of which, there was no mention in the Budget. Uniform GST rate for toys, a policy framework for the toy industry and targeting at least one per cent of the market share from China would mean a Rs 10,000 crore opportunity for the MSEs. The sector has been demanding cash-flow-based working capital assessment from the banks as recommended by UK Sinha Committee on which there was no word.

The Budget has done little for pushing consumer demand, particularly in the context of McKinsey estimate of a fall in the retail grocery market by 20% in the next five years.

If GST has peaked to Rs 1.40 lakh crore, it is because of inflation and not because of high buoyancy in production and productivity of the industry. Industry is struggling to stay afloat

Doing Business will be Difficult

To establish a globally competitive business environment for certain domestic companies, a concessional tax regime of 15% was introduced by the government for newly incorporated domestic manufacturing companies. The FM extended the last date for commencement of manufacturing or production under section 115BAB by one year, ie, from March 31, 2023, to March 31, 2024.

The ‘One Station One Product’ concept is laudable as a souvenir shop will help generate business and spread awareness about local art and craft.

Although the Budget 2022-23 proposes several initiatives for ‘Ease of Doing Business’, including modernisation of building byelaws, Unique Land Parcel Identification Number for IT-based management of land records, Accelerated Corporate Exit and introduction of new ‘Updated return’ — a provision to file an Updated Return on payment of additional tax, the cost of doing business is bound to go up and this will dampen the initiative.

The country needs judicial reforms and several regulatory reforms to make us highly competitive. The Budget was silent on these. The issue of high Customs duties and non-tariff barriers on basic raw material, other than steel, such as copper, aluminum, and polymers also remain largely unaddressed.

Poor, earning less than $1.90 a day as per purchasing power parity of 2011, have nothing to cheer. The Union government seems to be for the rich, of the rich, and by the rich. While rich by itself is no evil as everyone would like to be one, the road to such reach should be laid by governments. Some old tools, like more investment through PPP and disinvestment, to ensure a level playing field have been dusted off to provide the companies some cheer. The Budget is deceptive in approach and has less prospects of success.

(The author is an Economist and Risk Management Specialist)

Bluster Budget (telanganatoday.com)

Prof. R. Radhakrishna, Eminent Economist

 

A Tribute to Prof. R. Radhakrishna, Chairman, Centre for Economic And Social Studies

A treasure trove in economics and econometrics – he has left a big void with his sudden demise on 28th January 2022. It is difficult to imagine he is no more. I had three interactions after his movement to Visakhapatnam following his illness. Pandemic did upset him greatly. Even in our brief interaction, he expressed his deep distress over the impact on the poor and migrant labour that the pandemic has been causing.

My first association with him was when he worked with the Agro-Economic Research Centre, Andhra University in the company of Prof. G. Parthasarathy, a great economist of the times. “Professor Radhakrishna’s life-long work on Growth, Inequality, Food Security, Poverty, and wellbeing is widely recognized as illuminating, authentic and credible.” (Ch. Hanumantha Rao, in a blurb on his book – The Essays on Indian Economy). 

During my association with Farm and Rural Science Foundation, I invited him to deliver the first J. Raghotham Reddy Memorial Lecture. He readily agreed and laid a firm foundation for further work of the FRSF. After my joining Administrative Staff College of India, my interaction with him became closer. He invited me on a few occasions to talk to the researchers of CESS on the research ideas and methodologies on credit to the poor.

When he moved to IGIDR, he associated me for a meeting to discuss the syllabus of Law And Economics Course. He involved me in a couple of Committees he chaired: Agricultural Indebtedness and AP Agriculture. He is a great leader and effective coordinator. His commitment to research and a concern for the common man, and belief in institutions that could contribute to the development of the poor, like the cooperatives, FPOs leave an imprint on the Indian economy.

When I requested him to write a Foreword to my book on India’s Economic Resurgence, he readily agreed and released it in the CESS Auditorium.

His erudition on Poverty Studies and Agriculture gave me immense benefit. My interaction with him at the Andhra University, University of Hyderabad as Vice Chancellor, as Director, CESS and IGIDR, Chairman, ICSSR, and Chairman of Indian Society of Agricultural Marketing gave the new angle in him. He is a great administrator, researcher,  a good teacher, affable person, a good conversationalist, and a great human being. I am sure the galaxy of researchers built by him would carry on his legacy. I bow to him in all humility. May his soul rest in peace.

Making a Departure in Lock Down

Telangana makes a departure on Lockdown Strategy:

There are no two opinions on saving the humans should be of utmost importance when compared to saving the economy, although the economy lives longer than the human being. Therefore, strategically, saving the economy and saving the human life should run parallel as far as possible.

In the case of COVID-19, governments initially had no choice but to save lives by locking down to strictly enforcing people staying at home setting aside the economy’s interests very rightly. As things unfolded, there is broad realization that rescuing the economy from the recession and moving to V curve should also not brook any delay. In fact, compared to several States, Telangana has singular advantage moving on consistently high growth trajectory till April 2019.

The breather given by PM Modi on lockdown relaxation while extending the final date to May 3, 2020 allowed relaxations to keep several working populations in a new normal – barring the barbers who have the largest potential to spread the Covid. Welders, mechanics, electricians and even construction workers were all allowed to go back to work on the strict compliance of wearing the mask at work and maintaining social distance apart from frequent washing of hands with soap.

Those who open the workshops were asked to strictly follow the full sanitization of the area frequently and keeping the rest of the work-space tidy. It is expected that the discipline of 25-day lockdown will hold them in good stead. Telangana State differed on the agenda.

The State has a distinct place in the economic space in the country. Telangana's Gross State Domestic Product (GSDP) expanded at a Compound Annual Growth Rate (CAGR) of 13.40 per cent (in Rupee terms) to Rs 8.67 trillion (US$ 126.81 billion) between 2011-12 and 2018-19. At a CAGR of 16.00 per cent (in Rupee terms), tertiary sector has been the fastest growing sector from 2011-12 to 2018-19 and accounted for 63.68 per cent share in the overall GSDP. As of November 2019, the total installed power capacity of Telangana state was 15,855.87 MW. Out of this, 8,103.65 MW was contributed by state utilities, 5,637.37 MW by private utilities and 2,114.85 MW by central utilities. The second reason for a possible smoother stand is the very confident way in which the State has been tackling the pandemic. A dedicated war room to monitor the cases mandal-wise has been set up right under the glare of the CM.

Agriculture and allied activities have merited the required relaxation on lockdown norms ahead of every other State and the Union Government. Even procurement of paddy and other major crops of the State are receiving active attention. The State also merited appreciation of the Union Government in handling Covid-19 in exemplary manner.

As revealed by the Chief Minister, four districts are free from Covid patients. The intensity of the attack is more localized in Hyderabad Municipal Area and the Greater Hyderabad has already been divided into red and hot zones with intense policing and strict adherence to discipline.

Districts are gradually turning to near normal , which according to his press review, are having a better doubling rate (10days), death rate (2.44% compared to 3.22% for the whole country) and recovery rate of 22% and a larger 354 test rate per million. The State, after seeing the sudden upsurge in Suryapet district, doubled the quarantine period to 28 days, again the only and the first State to take such decision.

In and around Hyderabad, pharma, medical equipment and relating packing and packaging are any way allowed to function even before the relaxations. They are all working to around 50 percent capacity.

MSMEs are the lifeline of the economy. The State has nearly 70000 of them and the most in micro and small sector with nearly 4 lakh employees. Therefore, allowing them to work in two stages - normal districts, near normal, which may commence after a week (27^th May), the State would have many micro and small enterprises from near extinction post- Covid.

Some events have no history; but they create one like the Covid-19 attack that has levelled 210 nations in one stroke. Globe turned upside down during the last two months. In the whole crisis, India of 31 States with several of them having specific strengths in different manufacturing and production spaces has a great opportunity having already become a savior of 55 Covid- 19 affected nations.

Efforts to re-invent our Health sector are already on way with the decision of converting Gachiboli Stadium Temporary Covid-19 hospital into an advanced Health Institute. It is the Hospitals, doctors, nurses, health workers, scavengers, Defense Hospitals, army doctors and nurses – all in the Union and State governments that quickly rose remarkably to the task and rescued millions of lives, where the America failed. With no offence meant, private sector was nowhere near the task.

Telangana’s ability to leverage its strength and create a huge health infrastructure in government that would create new supply chains and new value chains deserves aplomb. It has unique place again in producing vaccines very successfully and CCMB is actively working on a new vaccine along with quite a few others. The other investments that attracted the globe are aerospace, defense, ITeS and Biosciences. Disaster management could be the new strength of the State.

It would be appropriate if the State would review its decision and release the lockdown in stages in districts next week and in GHMC areas during the first week of May 2020.

Is rate cut desirable?

Is Rate Cut Desirable?

Monetary and Fiscal Policies are the two engines of growth. While the fiscal policy is annual and out with the Union Budget, Monetary policy is more dynamic and adaptive to the economic environment and conditioned by the inflation target. It matters little either for the FM or the RBI Governor whether tomatoes are sold at Rs.80/kg or potatoes Rs.12/kg. Inflation target of 4% still appears to leave headroom for the RBI to go in for further rate cut – a policy of continuity.

US Federal Bank opted for rate reduction signaling the need for buttressing the US economy in the wake of another impending recession, much to the chagrin and disappointment of Europe and UK. Will India have to follow suit or should it go on its own? What is desirable?

Exports are on the decline. Complacence in forex reserves at the present level at around  $450bn would appear misplaced viewed against the China’s reserves even against their declining growth rate and current trade war with the US. With the UK on Brexit mode for certain going by the promise of present Prime Minister by October 2019 would further alter the trade balances globally. The present trade balance looks only a temporary comfort.

Our careful management of exports and continuous search for new markets for Indian goods call for an aggressive manufacturing policy and prevention of asset deterioration in the corporate and MSME sectors. Export of culture related products and traditional artisan products would hold good prospect and this can happen in dynamic credit markets at affordable rates of interest and not so much the subsidies.

View this in the backdrop of major central banks’ similar exercises this season: whether US or Canada and Basel warnings. Financial columnists like Ian Mcguan warn the Federal Bank against further rate cut. Eric Lascelles, Chief Economist at RBC Global Asset Management says: “the longer that people go in an environment of lower rates, the more accustomed they get to them – and the more difficult it is to raise borrowing costs.” This should explain the reason for the Indian banks going slow on rate cut transmission to the borrowers.

Further, their net interest incomes of banks have been looking south for the last five years. On top, their off-balance sheet exposures are more than the balance sheet trending to a danger that the world economy saw in 2007 and 2008.

Stock markets largely influenced by global trends and the announcements in the Union Budget over the FPI are tottering. Bond yields are also not so attractive unless they are of longer duration than 10years. Increase in minimum public shareholding could trigger a sale of shares – but not when the market is poised for decline. Company valuations are causing a serious concern at the moment.

Major Banks including SBI transmitted Central Bank rate cut on deposits. Domestic Savings already on decline could slide down further. Depositors and investors looking for safe returns year after year are a disappointed lot, for they are at their near-zero return of the money held.

Consumer index and business confidence index for June 2019 are on the disappointing numbers. Indian economy is not on a borrowing spree during the last five years. Instances like Amrapali, Hiranandini, DHL, have enough caution on hold for lending aggressively for real estate. Real Estate and housing finance, if pushed beyond limits, would put the lending institutions in a more beleaguered position than now. Priority sector lending is any way on low yields.

IMF downgrade of global growth rate to 3.2% in 2019-20 is a pointer to bolstering growth through debt route with interest rate cuts by the central banks. It should however be kept in mind that Central Banks and Governments have actively encouraged debt-driven consumption and investment in order to prop up growth. Such policies alter the dynamics of credit markets.

Climate risks are accentuating credit risks. Indian banks are yet to poise themselves to cushion against such risks. When global banks take the climate risks seriously and Indian banks delay, the impact on Indian credit markets is going to be high risk driven.

Budget lines amply indicate the necessity of more private investments to flow to key infrastructure sectors like roads, railways, airways, ports and such investments need to come from more debt than savings and investments in the emerging low rate scenario. With the uniform corporate tax rate at 25% government expects that there will be more corporate participation. But the emerging context does not elude much confidence among several well meaning economists.

If growth is a concern and if it should look only to credit markets then, infrastructure for lending needs to improve and this calls for re-positioning and reforming banks and setting up Development Banks where long term funds will be spent for long term purposes. Structural reforms should follow any impending rate cuts.

August first week is with expectation of a further rate cut to bolster the staring decline in growth. Is growth contingent upon debt or investment? This is a question that should deserve serious consideration in the context of risk-starved banks yet to recover from the self-built shocks of the NPA-overhang.

Published in Telangana Today, 5^th August 2019

Shadowy Growth Cloaking disparities

Growth Mystery and Imbalances

India has been the cynosure’s eye in regard to the announced growth of 7.1% for 2017-18 in spite of fall in manufacturing growth and wavering agriculture growth. Analysts have various expectations ranging from 7.5% for the next fiscal even amidst fears of rising inflation expectation from the RBI. For 2019, Goldman Sachs downgrades its estimate of growth to 7.6% from 8% made earlier.

The much touted macroeconomic fundamentals, EODB rankings not withstanding are shaken with frauds and scams surfacing day after day in the financial sector. Good economy and bad banking are strange bedmates.  

Contextually, Kenneth Rogoff aired concerns about ‘the ethical and social implications of material growth’ in his most recent Project Syndicate article. In a country where 500 billionaires are expected to take decisions for 23-34% of the population that is poor, such concerns surrounding inclusiveness of growth will be a concern.  

The way we measure growth appears faulty and the manipulative statistics to suit the political agenda giving macro economy the look of strong fundamentals and the increasing focus on the movement of share indices – that is basically an index of the corporate wealth movement, are distortionary providing a lever for the rich to play upon their resources adverse to the national interest of inclusive growth. We need to measure the Happiness Index. Increasing focus of budgets on health and education with definite measurable outcomes is the only route.

While the output related IIP and the input related PMI of recent times are showing up in the manufacturing sector, sustainability is on a weak wicket given the Corporate failures and tottering telecommunication sector. 

Focus on rural infrastructure and agriculture at this point become relevant. It is a moot point whether loan write off of some states is the right solution for the farmers’ woes. Farmers are misled and they unite only under sterile leadership. Little did they ever realize that by frequently demanding such write off they created a deep mistrust in lending institutions and walked into the trap of money lenders instantaneously because debt and farming are inseparable universally.  Solution lies in reforms to the Agriculture markets, price discovery mechanisms for the farmers, crop planning and efficient delivery of inputs. Government of Telangana could prove a worthy model in this regard and the future would decide the efficacy of institutional transformation results.

Another important aspect is that the injustice to the weaker sections has regional disparities. Some States like Tamil Nadu, Kerala, Telangana etc., have performed well while the others did not on Human Development Indices. Best practices of some states are not picked up by the other states that continue their feudalistic practices.

The Ma-Baap attitude of the Union and State Governments is now being questioned for good with the people asserting their rights due to higher literacy rates and visual media within the easy reach. Though the earlier marginalised sections have occupied seats of power both in politics and bureaucracy their contribution to correcting the situation is minimal and this aspect is mainly responsible for the imbalances in the economy.

In democracy, admittedly, consensus on issues concerning the inclusive agenda does not get so instantaneous approval as the salaries of Parliamentarians or gubernatorial posts. Whenever Elections are ahead, the interests of the poor get widely discussed. This is where ‘ethics’ come into play. This is manifest in unemployment growth; inflation; rural urban disparities and the social unrest in areas neglected and people unattended.

What worry me are the technological innovations like the AI and MMT, IoT that take away more jobs than they create. I love the technologies that really are helping access to information in real time, transparency and more accountability. But the perilous consequences of intrusion into privacy, scope for fraudsters and manipulators getting an edge over the right doers, making persons and institutions slave to technologies are no insurance for sustainable employment growth in the economy.

I notice that there is maturity in our democracy and more and more people are voicing their concerns and political activism could be the answer if there is proper leadership and mentoring of the activist groups. Protection to the activist groups from the powerful also needs emphasis in such context.

In spite of 73^rd and 74^th Amendments to the Constitution, those states who are seeking legitimacy of the Federal structure have been found to be defaulting in recognizing the power of local bodies both in political and financial terms.

In the Federal context, it is the view of some political analysts whether the country can have two Deputy Prime Ministers – one representing the North and the other South, as there is a feeling of total neglect of Southern States in certain key economic dispensations.

Alternate institutional mechanisms, political stability, bureaucratic reforms and eternal vigilance are the remedies and eminent persons of stature who have a vision for the future would make a significant contribution in driving them. They would eventually also reduce the sovereign risk and bring about stability in domestic markets.
Published by Telangana Today on 24th March 2018.