The Economy in Dilemma amidst Political Stability.

Union Budget by the first lady FM in 50 years is amidst great expectations in this era of political stability. For her, all is not hunky dory. GDP growth is projected by the RBI at 7.1% for the current fiscal. We can set aside for a moment the arguments of Arvind Subramanian and the controversies surrounding the calculus of GDP.

CEIC data reveals that consumer confidence grew at 14.8% in March 2019 compared to the earlier quarter although Business Confidence declined to -1.1% in June 2019 compared to the earlier quarter of a growth of 0.4%.

The dilemma: household debt was 10.9% of GDP while external debt was 20.1%. Private consumption declined to 59.3% of its nominal GDP in March 2019 declining by 2 percentage points from the previous quarter. Gross savings rate was at 30.9% of GDP. With the number of census towns increasing by 186% in 2011, urbanization of India moved to 31% space.

World poverty statistics show that poverty declined to some 70mn in June 2018 from 306mn in 2011. This should mean that spending money to keep people above poverty line, euphemistic subsidies should sharply decline. But the Union and several States are releasing unemployment allowances and loan write-offs along with caste-based dole-outs in the name of poverty!!

NCAER statistics place the middle-income population at around 153mn while the lower middle-income population is at 446.3mn (Krishnan & Hatekar, EPW 2017). The salaried persons constitute still the dependable taxpayers. There is only a marginal increase in tax to GDP ratio between 2008 and 2018 from 17.45% to 17.82% while the GDP and per capita income have doubled during this period. Relentless efforts are needed against tax havens.

We have seen the way audits are conducted calling for disqualification of the so far reputed Deloitte, PWC not excluded. Hiding incomes has become honourable and paying taxes honestly unwise. This situation unfolds great opportunity for the FM to see new frontiers in taxation. Direct Tax code is expected to change and it may tilt the scales.

All the legislators and Parliamentarians with very few exceptions are billionaires. It is time to start rationalizing subsidies and incentives for this group. There is also a case for taxing the rich among farmers – defining them at a threshold of six times to eight times the salaried. The mechanics are difficult but not impossible. Of course, most of them being in politics, irrespective of party affiliation, would engineer ghost rallies against even any modicum of such thought but should be fought over by a stable government trading off with the benefits for the rest of the farm sector.

Manufacturing growth is almost stunted amidst continuously declining credit for the last five years but for the recent marginal increases. Incentives to manufacturing start-ups should be more fiscal than financial and rebuilding the eco-system for sustainable manufacturing growth brooks no delay.

The rural-urban hiatus can be addressed adequately by encouraging investments in modernizing agriculture and value addition initiatives in rural areas. Rural industrial enterprise clusters or Rural Enterprise Zones (like the SEZs) can be the best answer and therefore, fiscal concessions for such investments will two birds at one shot: achieving employment and economy growth.

Actual projections for such fiscal outgoes would be far less than the bonanza that the urban and rich as also the corporates expect from the FM. In addition, as I have been untiringly mentioning since 2005, a percentage of share transaction tax in a rising economy and growing stock market would fetch to the exchequer instantaneous revenue with no tax administration expenditure.

Government should stop incurring public debt to save irresponsible lenders with capital infusion just because it happens to be the owner. Any additional capital from government should go with stringent conditions on the Chairpersons. Governance improvement shall be the focus and the RBI should withdraw its executives on all Bank Boards so that its regulatory rigour can be on par with a food regulator at the time of introduction of new products.

Women have more courage than men when it comes to the question of saving a child from a disaster. Madam Finance Minister should be able to pull it off.

*The Author is an economist and risk management specialist. The views are personal.

https://www.moneylife.in/article/will-political-strength-lead-to-a-bold-budget/57522.html

Published on 24^th June 2019

Banking Reforms

 Banking Needs New Direction

Monetary Policy breathed a fresh air and for once customers felt that some comfort existed for them too. Post-liberalization Banks went on investing in technology and realizing the costs of such investments through various types of charges. Even after realizing the cost of investment in technologies over the last two decades and over, it is time to pass on the benefits to the customers in whose name and style they infused technologies. Waiver of electronic transaction charges for a year at least to start with, has been viewed as a big relief.  ‘No Frills’ accounts norms also changed. Though interest rate changes disappointed the depositors, borrowers expect some rate reduction transmission soon.

Prudential norms underwent change giving comfort to the banks and borrowers alike. Resolution process provided leeway for the corporates running after Bankruptcy Courts to resolve their debt and start production/services to their full capacities sooner than later. The present environment of banking is transiting from dissatisfaction to hope for the better. But the real challenge still remains: public sector banks realizing their raison de ‘etre of their existence: emerging context requires that banking is redefined to meet the specificities of farming, employment, entrepreneurship, infrastructure, and international finance as distinct entities. While retail banking, home loans, real estate and the failed infrastructure loans held sway during the last two decades the change should be in lending for agriculture, allied activities, MSME finance and segmentation of retail sector loans to the needy.

PSBs heaving a sigh of relief over their bad debt portfolio coming under control, should now be looking for new ways of doing businesses. But do they? Huge disappointment, however, is in the increase in bank frauds reaching >Rs.71500cr in 2018-19. Is technology facilitating frauds coupled with inability of banks to supervise staff and control them? Cultivating the technology to customers requires investment by banks in customer education, both online and offline.

Indian economy targeting double digit growth ere long has competing clientele bases in the current milieu of banking. Domain banking has moved to high tech banking. Men at counters have now become slaves of the machine instead of being masters.

Apex institutions like three and half decades’ old NABARD and almost thirty-year old SIDBI are yet to deliver the intended benefits to the sectors they are meant for. Major earnings of these institutions come from treasury business. Multiple funds held with SIDBI are yet to reach the micro and small enterprises. Both these institutions that have wealth of knowledge in their human resources, need thorough revamp and restructuring. Delaying the process would end up further wastage of huge organizational resource.

Manufacturing MSMEs are in negative growth for almost decade and half now. Several NBFCs focused on small business finance but the IL&FS and consequent failure of mutual fund promises left disappointment. PSBs have the option of exploiting the co-finance window but they are bogged by the mindset of collateralized loans. It is here they need change. Interestingly, one of the senior bureaucrats recently rued: ‘when did the banks fall in line with the aspirations and goals of the government – whether DRI loans, IRDP loans, SEEUY etc., until they were forced? Now is the time to look at the way to culture the banks into new ways of thinking and acting. This can come of only through change in governance and regulation.

With over 38% of the population still illiterate, Jan Dhan and Mudra Yojana as instruments of financial inclusion Banks are yet to treat them voluntarily favoured agenda. Institutional innovations like the Small Finance Banks, Small Payment Banks, India Post and the likes as also the MFIs have also proved inadequate to meet the needs of the present leave alone the future banking needs of the population.

India’s future still lies in rural areas; agriculture and allied activities and providing value addition to agriculture at the doorstep of the farmer; weaning away unproductive labour from farm sector to non-farm sector; revamping agriculture marketing with infusion of technology so that price discovery takes place at the source of production and building new skills and upscaling skills in farm sector with measurable outputs of such investments. Government, owner of over 82 percent of banking, should drive the sector towards this agenda.

The reach of banking should be tested in rural areas. Several PSBs are winding up rural branches. Regional Rural Banks that are supposed to cross-hold institutional risks with their principals and do social banking are set to merge with their principals. Institutions thus created for the rural areas will soon become extinct. The big question that RBI should think is – will double digit growth target of the Indian economy possible without mainstreaming rural banking efforts? Should there not be a rethinking on maintaining balance between proximate physical banking and digital banking? A committee of either RBI or GoI could look into this aspect and arrive at the future course of action.

The whole incentive system in HR in Banks should move towards such agenda. Selection of Managing Directors and Directors on the Board should discerningly look at the perceptions of such persons with such agenda.

Kisan Bank for farmers, allied agriculture and agriculture marketing; Udyog Mitra Bank for lending to micro and small manufacturing enterprises and small business finance, Vanijya Bank for retail banking, home, education and transport loans, Moulika Vitta Vitarana Bank ( revive the Development Finance institutions for lending to infrastructure) would make banking portfolio banking with capacities to cross-hold inherent risks of lending. GoI would do well to have brainstorming sessions on these areas as the sector is trying to breath fresh air now.

https://www.moneylife.in/article/banking-needs-new-direction/57446.html