VITALINFO: Can the RBI innovate?

VITALINFO: Can the RBI innovate?It is not just in the area of credit risk assessment, measurement, management and the rising NPAs that require innovative and out-of-the-box thinking. sometimes it is better we go back to the basics and introduce new measures that would have relevance for future and the present. 
Even after the core banking solutions are across the board in all the banks, why should different accounts have different cheque books? One cheque book should be adequate that can be used against all the deposit accounts of the account holder. This would save a few millions of rupees of secured stationery apart from the customer having to face litigation for issuing a cheque in one account where the balance dried up  on account of application of a standing instruction or even some miscalculation but having adequate balance in other account. This is a very simple innovation that can be immediately introduced. 
There will be many more simple customer friendly innovations that existing technologies can bring forth saving costs for both the bank and the customer.

Interest Rate debate begins

INTEREST RATES DEBATE BEGIN IN INDIA FOLLOWING ABENOMICS

B. Yerram Raju

Annual credit policy is due by May 13. The demand for easy money policy is on pressure zone following what Japan did. The Economist in its issue dated 6^th April 2013 is emphatically unsupportive of the cheap money policy ushered in by the new governor of Bank of Japan. The lower interest rate regime in the post-recession period 2008-09 would appear the new normal. Bank of England and the European Central Bank also tweaked lower interest rate regime to last longer than expected. Does this justify the cry of corporate community in India to follow suit to give boost to the manufacturing sector and growth? Will the current inflation rate allow such intervention? What has been the result of the brief interest rate cuts that had already surfaced?

The lowest bank rate that Indian economy witnessed was 2.5% in 1936 – during war time. The target of rate cut was not growth of the economy but the sovereign balance in the British colony. Now Indian economy has come of age but the global integration left the so-called decoupling with the rest of the world a near impossibility.

Kenneth Rogoff, a Harvard University Professor says: “Like most economists, Bernanke believes that if policymakers try to keep interest rates at artificially low levels for too long, eventually demand will soar and inflation will jump. So, if inflation is low and stable, central banks cannot be blamed for low long-term rates.” But the Indian situation is different. We have inflation soaring. Growth is down and under. Current account deficit is raising its ugly head with 6.7% last month and a bourgeoning fiscal deficit that refuses to be reined in with General Elections less than a year away from now.

The so-called economic resurgence and effective regulatory interventions that kept India’s growth rate high in the Eleventh Plan period are now turning out to be only things of the past. Manufacturing growth is at just 2.5%. Agriculture and services sectors are not in any rescue mode.

The priority for the monetary authority is clear as has been repeatedly asserted by the Governor, Reserve Bank: reining in inflation for its impact on the poor is far more than any direct tax imposed on them. The rate cuts in the past though in small bouts of 0.25% every time, has not triggered credit growth in the areas most desired. The risk appetite is at the low end because of the high NPA levels in corporate and infrastructure credit. Even the corporate debt restructuring indulged in liberally and the capital refurbishing by the government to the public sector banks would not leave enough confidence in the regulator to resort to a rate cut as a panacea for the current imbroglio in growth.

What will the rate cut do anyway?

If the Banks were to respond positively, they should reduce their base rates and lending rates correspondingly. The rates on deposits of key segments will have to be lowered to ensure that the net margins do not erode. If the interest rates on deposits are lowered, propensity to save will take a backseat. Bond rates in this scenario despite being attractive,  are not safe bet for investors in the context of high debt-GDP ratio. There is need to increase the incentive to save as the domestic savings rates have been coming down during the last two years consecutively. Low interest rates are not certainly going to help the situation. If the inflation is at 9% and interest rates for term deposits are on average at 8.5% the negative return is 1.5% or the depositor paying this much for safety and security of his funds to the bank.

When the market rates of interest are not influenced by official rates even marginally credit is unlikely to spur production of goods and services. Further tighter regulation of lending standards and Basel III implementation deadlines also force banks to step up bank lending to the much starved SME sector increasingly difficult. This will give rise to the operation of a vicious cycle.

Monetarists strongly believe that a mere reduction in the quantity of money is a dangerous device to stop an inflationary development. Moderately used, as Hansen says: ‘it courts the failure of ineffectiveness; pushed to the needed fanatical extremes, it courts disaster.’

There should be a many-sided programme to control inflation:

1.      First hold down government expenditure to what is urgently necessary so that budgetary surplus can emerge.

2.      Resist the temptation of incentivizing FTAs through tax-cuts. There is a demand to reduce taxes on luxury goods like CKD SUVs to 30% and such demand should not be conceded.

3.      It is necessary to resist wage-inflation: periodic increases of DA at Central Government level triggers demand at State government levels and this spiral would lead to price-wage increases – both a symptom and a further cause of inflation.

4.      Inflation indexed bonds should be sold vigorously.

5.      There is no room for relaxed credit standards.  In the context of board-sanctioned credit triggering huge NPAs, all the proposals that go to the board should be scrutinized by risk management committee and credit committee separately and a balanced view on entertaining such proposals shall be taken. There is need for looking at Board accountability.

6.      Speculative areas of credit like the real-estate howsoever tempting should be avoided.

What can’t be cured must be endured. We must learn to live with existing rates of interest for some more time to come until the fiscal corrections come about and policy initiatives to secure more foreign investments bear fruit. Japan now is no guide for India’s future. 

That is Mother

MY MOTHER

Yerram Raju (written in 1987 on her 60th birth day)

Thoughts of Mother lovely

Her acts affection in bounty

The recall makes me

Travel in thrills

Wonder how she made life

So sweat for all of use

Notwithstanding all the odds

She had to face

Well, that is Mother.

My boyhood friends surprisingly

Swamp on our house

Not because they love me

But my Mother's choicest recipes

Deliciously served for them

All of them recall their juicy taste

Yearning to reach after

Three decades again

Well, that is Mother.

My dad would invariably

Look angry - the anger

Of impatience for results from

His wards -

The anger of a tiresome and

Exacting Bank job in pre-seventies

The anger of affection

All the anger off-loaded

Day after day on the

Most indulgent lady

She absorbs and distributes

All smiles and love

Well, that is Mother.

A thoughtful prayer — her wont

An erudite Religious scholar

Unto herself the treasures

Of knowledge bequeath

Emits light in thoughts

Showers wisdom in words

Affection in Action

Who else can do it

Well, that is Mother.

Taught humility and forbearance

To twelve of her children

And the other twelve that joined their lives

To make life sweet and welcoming

Life is great and lovely

What else can it be with

She ruling the destiny of all of us

Well, that's Mother.

If patience is a vice, she has it in abundance

If love is a crime, she commits every minute

If prayer is bad, she does it every moment

If talking sweet is intolerable

We have to bear it

If service to neighbours is unsocial,

She is highly indulging

Seeing God all around her is of least of privileges,

She enjoys it

Who else can I think of

Well, That is my Mother.

Post Budget Analysis 2013-14

Union Budget 2012-13-On Expected Lines and little to cheer.

B. Yerram Raju

Budget is generally viewed in the backdrop of the Economic Survey. The Economic survey presented yesterday did not hide the failings thus far in the economy and just fell short of telling that the governance deficit would something beyond the FM. It laid bare the retarding growth and rising inflation and also agreeing with  the CSO estimate of depressing 5% growth expectation during the current year. As at the quarter ending December 2012, actual growth figures ended at just 4.5%. It attributes the retardation to the declining contribution of services sector from 8.2% in 2011-12 to 6.6% in 2012-13 and in part from the fall in growth in agriculture and industries sectors. It complements the medium term fiscal consolidation effort that pegged the fiscal deficit at 5.3%. It expects that the growth would be in the range of 6.1%-6.7% in the coming year. It leaves us the hope that the downturn of the economy is ‘more or less over.’ ‘Economic slowdown is a wakeup call for stepping up reforms,’ the Survey mentioned.

It also predicts that the global economy is also likely to recover setting at rest that the shadow of continuing global failure would be a drag on the Indian economy. Core Inflation shown to be at 4.2% and wholesale price index at 7percent with food inflation at double digit figures leaves one in doubt regarding the inflation figures mentioned in the Budget speech of the FM .

This optimism left hope in the markets that the Budget would be in the direction of spurring investments and domestic savings, measures to increase the consumption to spur growth and fiscal prudence to contain inflation. But alas, the index fell by 1% and the currency fell equally after the presentation of the Budget.

It hoped that the fiscal targeting and the likely downtrend in inflation would help RBI to look at rationalizing the interest rate structure.

Agricultural growth declined from 2.7% last year to 1.8%. It called for appropriate policies in the farm sector to reach the 12^th plan target of 4% per annum: for improved agricultural growth, the survey underlines the need for stable and consistent policies where markets play an appropriate role, private investment in infrastructure is stepped up, food prices, food stock management and food distribution improves, and a predictable trade policy is adopted for agriculture. The high dependence of employment in the backdrop of a declining share in GDP to 14.5% is a cause for worry and this requires consistent policy to develop alternate skill-sets in farm labour to migrate to rural livelihoods programmes on one side and increasing mechanization on the other. Its analysis of agricultural credit is however flawed: in the face of declining area and deficient monsoon, if the banks claimed achievement of credit targets for agriculture, something is seriously wrong and the Survey should have lent a word of caution instead of praising the banks for reaching the targets.

The FM had to provide for capital refurbishment to the Banks in the public sector at no less than INR 1.17crores to meet up with the Basel III norms from April 2013 and the drift in the composition of NPAs from the erstwhile priority sectors that anyway do not cross 40% of lending portfolio to the corporate debt hiding mostly in the power and infrastructure sectors is the biggest worry. He has to provide for the railway deficit of Rs.26000crores apart from the revenue deficit. Implementation challenges of Food Security Act would also leave no room for containing the deficit. Of this, he provided Rs.26000cr to PSB capital in the Budget. Moving up on the revenue front against an incremental 1 to 1.7% of growth is not going to be substantial. Therefore, containing the fiscal deficit at the expected 4.8%  would appear unattainable.

The supply side issues as were made out to be the key factors for food inflation at the current growth in agriculture but had little mention in the budget.

In this backdrop, it would be interesting but at the same time highly disappointing to see the Budget neither growth oriented nor towards containing fiscal deficit. There are also very few indications as to when and how the current account deficit would be brought down to a reasonable level of, say,3%.  Inflation anyway the economy has to reconcile with during the year, notwithstanding any interest rate cuts that the RBI may like to offer. Let us now look at the Budget figures as to why I have to come to such conclusion.

How the pie of rupee gets divided between revenues and expenditure gives us a clear picture. 27% of the Rupee in budget 13-14 comes from borrowings while it was 29% in 2012-13. The question that now confronts us is whether this marginal reduction in borrowings would contain the fiscal deficit? The straight answer would be a natural ‘no’. Let us see the other avenues vis-à-vis last year: There is no change in the corporate tax pie- at 21%. Income tax has a marginal rise of 12%. Revenue from customs has come down from 10 to 9 percent while the Union Excise duties are estimated to come down by another 1%. Service taxes and other taxes are expected to go up by 2% compared to last year at 9% in 13-14. Non-tax receipts remain at 9% while the non-debt capital receipts are up by a percentage. In so far as expenditures are concerned, non-plan assistance to State and Union Territories and Plan assistance remain at the same share of 4 and 7% respectively. Same is the story of State’s share of duties and taxes at 17%; other non-plan expenditure at 11% in the year just concluding and in 13-14. Defence expenditure comes down from 11% in 2012-13 to 10% and he spent ten minutes in his speech. Central Plan outlay has also come down by a percentage point from 22% in 12-13 to 21% in 13-14. Do these figures give any confidence that growth will be spurred? No way. At the same time, the growth projection is 6.4% - 1.4% more than the current year! He defended the lower growth rate as part of global phenomenon. China alone is credited with higher growth. How can fiscal deficit come down to 4.8 percent in the backdrop of such uncertain growth picture?

Yet, let me list out some of the best things that this Budget announced:

The FM assured higher employment for youth. Health sector has secured the highest attention. Integrated development of women got an allocation of Rs.91.134crores, the highest share in the recent years. He has even promised an exclusive Women Bank with Rs.1000cr in the public sector. He may have already identified the Woman CEO for the Bank!! It would work for the women and by the women.

Investment incentives have found their due share and the stock markets have everything to cheer up which they did just for a short while. The MNREGS got an allocation of Rs.80184crores. This allocation is not backed up by any specific direction. Actually the scheme objective specifies creating livelihood opportunities but has confined itself to providing wage distribution with no asset creation. This has led to serious imbalances in agricultural labour wages and the farmers have been demanding a mechanism by which the scheme gets dovetailed with the crop cultivation and horticulture in measurable terms. Rajiv Gandhi equity Scheme has been liberalized. Household savings have also found a new route. Interest deduction for investment in housing up to Rs.25lakhs is also on cards and is likely to be announced after discussing with the RBI. Rs.2000 tax credit at the lower end of the Income tax bracket would bring cheer to the wage earners. Inflation Index bonds and Inflation indexed National Savings certificates are the new instruments of savings for households are welcome features. On the infrastructure side two ports – one from West Bengal and another from Andhra Pradesh found mention. National waterways development for bulk cargo transport to ease the road transport burden has also been announced. MSMEs get a better deal in terms of allocation of higher refinance from the SIDBI and Micro Finance Equity Fund, credit guarantee fund  and Rs.2200crs for 15 additional technology centres and incubation centres as also waiving the IPO offering for getting listed on SME Exchange are worthy to note. KVI artisan clusters also received an allocation of Rs.800crores; handloom sector to get working capital and term loan at 6% covering 1lakh individual weavers and Rs.26crores interest subvention.

Another sector that got rich attention is Finance Sector: He proposed setting up a Standing Council of experts in the finance ministry to analyse the international competitiveness of the Indian Financial Sector.  He also proposed a Committee to provide clarity on the treatment of Investment as FDI or FII.

The most disappointing attention is for the farm sector that got an allocation of just 1.4-1.5% of the total budget outlay. Although growth of farm sector at 4%per annum on average for the 12^th Plan is held imperative for attaining 8% growth, there are no indications to spur such growth in the budget. One can argue that agriculture being a State subject much depends upon what the States allocate. But the Economic Survey as we noticed above desired specific policy direction for food prices, food storage and food distribution. In the wake of 1.8% growth in the sector in 12-13, and with a drop in the area cultivated how he expects a lofty target of 275mn tons in 13-14 is a big question mark, On the top of it once the Food Security Bill is passed how he proposes to meet the nutritious food and grains at the promised level in the Act for the poor can at best be a wild guess.

It was not also clear as to how he presumed that the current year’s credit allocation for short term agriculture at Rs.5.75lakh crores when the area under cultivation has come down is not clear. On the top of it he proposed to raise such short term loans for crops that too at concessionary rates of interest to farmers to Rs.7lakh crores. In any case this does not come from the budget. There is no allocation for interest subvention for such huge outgoes to the Banks.  Continuing 4%interest scheme on farm credit and treating investment in cold storage as infrastructure funding may be welcome but he could have treated investment in cold storage transport also as infrastructure funding.  This would have made the movement of perishables and vegetables, meat etc easier and faster and would have stabilized their prices for the farmer. 

On the manufacturing front, the budget allows for deduction of investment allowance of 15% on investment of Rs.100cr or more in plant and machinery during the next two years 13-15. Incentives for semiconductor manufacturing facilities including zero customs duty for plant and machinery to promote domestic manufacturing of hardware much of which is currently imported.

He chose to announce recapitalization of the public sector banks to partially meet the requirements of Basel III. But when the required recapitalization is of the order of Rs.1.17lakh crores, Rs.26000cr allocation would be just a little less than one fourth of the requirement.  Another similar incentive that might be counter-intuitive is, increase in the rural infrastructure development fund.  The Expert Committee on Agriculture Indebtedness 2007 suggested de-linking of RIDF from the lending to priority sector. As long as this does not happen, there is a window of opportunity for the commercial banks to dress up their figures for lending to agriculture. Third, although cooperative credit structure, occupying a little over 12% of financial space, is in the hands of States, the FM would have done well to release recapitalization of such rural credit cooperatives who have moved forward in effective legal and structural reforms in that sector because it is they that are within the easy reach of the farmer and they are the best instruments of financial inclusion if shaped properly.  Excluding cooperatives in the effort of financial inclusion and dependence on the unwilling commercial banks would for sure delay the process by a decade more if not less.

The announcement that GST would find its entry in the midstream of the Budget year having covered good ground to get acceptance of States and an allocation of Rs.9000crores symbolically is a good push for this important reform measure. He kept to his word regarding the direct tax by conforming to the code and a marginal increase at the lower threshold has been noticed to be not upsetting his revenues on this count. He introduced voluntary disclosure and payment of service tax for filing a declaration of past dues for the past five years by waiving penalties and interest on the hope of a million tax payers joining the stream, enhancing the pass through privilege, providing for bringing jewelry up to Rs.50000 for men and Rs.1lakh for men as part of baggge that will be welcomed by the middle class. Similarly mobiles costing Rs.2000 and below would not get into additional tax levied. Other luxury goods have been taxed. But the rich have been let off. He is himself rich and would not like to tax himself. 

Governance in Agriculture

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 13^th February , 2013

[2] M.S. Swaminathan: Agricultural Strategy, internal security & Sovereignty, The Hindu 1^st 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

Elections to AP Cooperatives are over: What Next?

Notwithstanding the Constitutional impropriety in the wake of the 97^th 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 yerramr@gmail.com)

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 8^th 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.