VITALINFO: BRAKES ON BANKING BY POST OFFICES
While the spread may be attractive argument for financial inclusion agenda its ability to be part of mainstream is rightly suspect in the backdrop of poor financials and inefficient financial management. It has proven abilities in postal delivery although its savings portfolio touted by its minister Kapil Sibalas a platform for entry through bank license route. It would have caused systemic risk as well.
Wednesday, October 16, 2013
Tuesday, October 15, 2013
Will Rule Based CSR be Effective?
Will Rule Based CSR be Effective?
In 1975, in the wake of emergency, Mrs Indira Gandhi, the then Prime Minister thought of a slogan to win the masses – ‘Garibi Hatao’ (eradicate the poverty) and it worked her win the elections back from the barracks. At that time she shifted the budgetary responsibilities to the banks and newly set up State owned corporate entities – a Minorities welfare corporation, a corporation for SCs, another for STs and the other for Women and so on. All that these corporate entities were asked to do was to distribute margin money or grant assistance for the related individuals with a matching loan from a nationalized bank. The trick worked and she continued her rule for more than a decade later. Now, stung by huge scandals and scams, Union Government hastened the enactment of long pending comprehensive Companies Act 2013 shifting the responsibility of the government to provide education and health within the reach of the unreached in the name and style of CSR.
Most corporate undertakings express the view that their main business is to focus on its core activity and enhance value to the shareholder. But is that all? For whom is the company creating products or services? For the vast diverse consumers, whose interests guide the future of the company and in turn contribute to the value to the shareholder. Then does not the society matter? Yes; it does and history has proved many a time so. The companies that cared for the welfare of the society developed niche markets and eventually became icons of permanence in markets. Community is a larger stakeholder than all. Recognising this, even in the 1970s commercial banks like the State Bank of India, introduced innovative banking window to reward communities that guided the welfare of the citizens. Over the years this window has been strengthened in the name of Community Services Banking under which the bank helps blood donation camps through its employees and others; distributes medicines to the poor and the needy under the guidance of its own medical officers; it helps the resident welfare associations in their endeavor to help their members with state-of-art technology in some cases; furniture and fixtures; water coolers; summer camps etc. Canara Bank too has a long such history. The other public sector banks here and there have showcased some but not comparable to the SBI in the reach of CSR. It is not what percentage of the profit that goes to this end but how much of felt need of the community under its fold is met. Here the record is creditable.
The list is long and a careful evaluation follows. Same is the case with organizations like Tata group of companies, TVS Motors; Gujarat Ambuja Cements; Wipro, Infosys to site a few. Several leading pharmaceutical and chemical companies put up road shows of social responsibility though ironically we find several of the essential medicines are beyond the affordability of the poor and even the middle class for the most common ailments. Public sector companies like the IOC, Coal India Company, Steel India etc which are spending around 3-4% of their annual profit would reduce their commitment to the mandated 2%. This is what mandates can sometimes deliver the unintended results.
Rig Veda Samhita tells it all: “Wealth has to be won by deeds of glory”; “One who helps others, win wealth.”(p.198, ‘A Saint in the Board Room’ by R. Durgadoss and B. Yerram Raju)
“When the capital development of a country becomes the by-product of the activities of a Casino, the job is likely to be ill-done” avers John Maynard Keynes, the classical economist. Today no country is an exception to the ill-gotten wealth driving the ills of the growth of economies. But can laws and rules bring the overt acts of greed under control? Or will such acts be clothed in the garb of CSR commitments under Law?
Good Governance requires more than rule fixes.
Prof Colin Mayer of Said Business School at Oxford University feels that the model of corporation that developed as the 20th century unfolded is fundamentally flawed and is responsible for both the recent world financial crisis and the breakdown in trust in business that now exists. Taking an historical perspective, Mayer notes that corporations were originally established to serve public purposes and evolved into family-run entities with long-term holdings before coming under the control of individual shareholders. Later, companies became dominated by pension and life assurance corporations, but increasingly share registers feature a large number of short-term traders.
The current model, he says, aligns the interests of shareholders with management and those companies that on the surface have the best corporate governance structures, are often the worst offenders when it comes to the wider good.
Mayer says the corporations have to work with a remit wider than that of maximising returns for their shareholders and pay for senior management and have to consider the interests of a wide group of stakeholders including employees, customers, suppliers and society in general.
Profit, he argues, is a product, not a purpose, of the corporation that is derivative from its fundamental activities.
"We need corporations whose values we all value, for which we are proud to work, from which we are confident to purchase and in which we can expect a fair return on our investments," he says in an interview to Irish Times recently.
"We need companies whose shareholders appreciate that there are responsibilities as well as rewards for being owners and who are committed to promoting the interests of the corporation, not just their own.” The contextual discussion also takes me to the series of debates that the FT has been conducting lately on ‘Better Boards’, where several chairmen called for clarity over the status of corporate governance rules. “Governance should be rooted in laws, not codes: ‘comply or explain’ is too ‘fluffy’ and not practical when you are dealing with an international investor base.
The non-binding ‘comply or explain’ requirements of the Corporate Governance Code were deemed too vague and permissive of idiosyncratic behaviour by boards. This affects international investors who are unfamiliar with this model and are not able to deliver the style of stewardship that ‘comply or explain’ requires. It also means investors with a large number of small equity holdings do not have the capacity to fulfill their stewardship duties.”
Is this the raison de ‘etre for the Companies Act 2013 to prescribe the CSR as part of Law? One wonders.
This takes me to the provisions of the new Companies Act 2013 covering CSR.
The Law states that all the companies with a net worth of Rs 500crore ($80 million) or more, or turnover of Rs 1,000crore ($160 million) or more, or a net profit of Rs 5crore ($0.8 million) or more during the past three financial years must spend at least 2 percent of their average net profits from the three preceding years on CSR, or corporate social responsibility initiatives. According to Union Minister of State for Corporate Affairs Sachin Pilot, this stipulation makes India, the first country in the world to legally mandate corporate spending on social welfare. Many Companies feel that their dharma (the Hindu word for duty) is to provide value to the share holder to which a mention has already been made earlier in this article. Openly no company would go on record that this provision is either onerous on them or do not agree with, for the fear of being branded as anti-development.
Among the activities for CSR under Schedule VII are reducing child mortality and improving maternal health and contribution by companies to the Prime Minister’s National Relief Fund or any other fund set up by the central or state government for socio-economic development. Out of a total of 800,000 companies in the country, around 15000 of them would qualify for CSR activities and an amount of Rs.15-20000crores per annum is the likely spend on these activities.
Education is another area of the directed-spend. There were some who argued that art and culture as also religious activities should be in the basket. There were rightful protests against the religious activities in the garb of CSR. In effect, it means that temples, mosques or churches or gurudwaras cannot be built out of the mandated CSR.
In fact, whenever any expenditure is mandated it has a knack of compliance burden more than serving the noble objective behind it. But does the government have to go this way only to achieve the CSR when there are certain companies that have already distinguished themselves in charitable activities? After all, all the contributions to the Prime Minister’s or Chief Ministers’ National Relief Fund programmes enjoy hundred percent tax rebates. On the other hand, would it have not achieved much more by making the lobbying bodies like the CII, FICCI etc responsible to ensure such goal? It could have. But the Act and Rules are now in place and therefore very little can be on the argument side. The purposes need not be mandated under the rules. In fact the budgetary responsibilities should not be passed on to the companies under the garb of CSR. It should be the responsibility of each Board to resolve on which items it should spend and not necessarily out of the basket it suggested. Remember, the targeted spending on this count is as much as half of the disinvestment programme of the Government during the current year. Employee participation in CSR would depend upon the HR policies each company adopts and the comfort it gives. Some companies have established separate trusts to take care of the CSR to which the Board transfers every year specified sums for such purposes. The Government would do well to allow all options for the companies to implement CSR as a noble and voluntary effort.
Published in the Business Advisor dated 10th October 2013.
In 1975, in the wake of emergency, Mrs Indira Gandhi, the then Prime Minister thought of a slogan to win the masses – ‘Garibi Hatao’ (eradicate the poverty) and it worked her win the elections back from the barracks. At that time she shifted the budgetary responsibilities to the banks and newly set up State owned corporate entities – a Minorities welfare corporation, a corporation for SCs, another for STs and the other for Women and so on. All that these corporate entities were asked to do was to distribute margin money or grant assistance for the related individuals with a matching loan from a nationalized bank. The trick worked and she continued her rule for more than a decade later. Now, stung by huge scandals and scams, Union Government hastened the enactment of long pending comprehensive Companies Act 2013 shifting the responsibility of the government to provide education and health within the reach of the unreached in the name and style of CSR.
Most corporate undertakings express the view that their main business is to focus on its core activity and enhance value to the shareholder. But is that all? For whom is the company creating products or services? For the vast diverse consumers, whose interests guide the future of the company and in turn contribute to the value to the shareholder. Then does not the society matter? Yes; it does and history has proved many a time so. The companies that cared for the welfare of the society developed niche markets and eventually became icons of permanence in markets. Community is a larger stakeholder than all. Recognising this, even in the 1970s commercial banks like the State Bank of India, introduced innovative banking window to reward communities that guided the welfare of the citizens. Over the years this window has been strengthened in the name of Community Services Banking under which the bank helps blood donation camps through its employees and others; distributes medicines to the poor and the needy under the guidance of its own medical officers; it helps the resident welfare associations in their endeavor to help their members with state-of-art technology in some cases; furniture and fixtures; water coolers; summer camps etc. Canara Bank too has a long such history. The other public sector banks here and there have showcased some but not comparable to the SBI in the reach of CSR. It is not what percentage of the profit that goes to this end but how much of felt need of the community under its fold is met. Here the record is creditable.
The list is long and a careful evaluation follows. Same is the case with organizations like Tata group of companies, TVS Motors; Gujarat Ambuja Cements; Wipro, Infosys to site a few. Several leading pharmaceutical and chemical companies put up road shows of social responsibility though ironically we find several of the essential medicines are beyond the affordability of the poor and even the middle class for the most common ailments. Public sector companies like the IOC, Coal India Company, Steel India etc which are spending around 3-4% of their annual profit would reduce their commitment to the mandated 2%. This is what mandates can sometimes deliver the unintended results.
Rig Veda Samhita tells it all: “Wealth has to be won by deeds of glory”; “One who helps others, win wealth.”(p.198, ‘A Saint in the Board Room’ by R. Durgadoss and B. Yerram Raju)
“When the capital development of a country becomes the by-product of the activities of a Casino, the job is likely to be ill-done” avers John Maynard Keynes, the classical economist. Today no country is an exception to the ill-gotten wealth driving the ills of the growth of economies. But can laws and rules bring the overt acts of greed under control? Or will such acts be clothed in the garb of CSR commitments under Law?
Good Governance requires more than rule fixes.
Prof Colin Mayer of Said Business School at Oxford University feels that the model of corporation that developed as the 20th century unfolded is fundamentally flawed and is responsible for both the recent world financial crisis and the breakdown in trust in business that now exists. Taking an historical perspective, Mayer notes that corporations were originally established to serve public purposes and evolved into family-run entities with long-term holdings before coming under the control of individual shareholders. Later, companies became dominated by pension and life assurance corporations, but increasingly share registers feature a large number of short-term traders.
The current model, he says, aligns the interests of shareholders with management and those companies that on the surface have the best corporate governance structures, are often the worst offenders when it comes to the wider good.
Mayer says the corporations have to work with a remit wider than that of maximising returns for their shareholders and pay for senior management and have to consider the interests of a wide group of stakeholders including employees, customers, suppliers and society in general.
Profit, he argues, is a product, not a purpose, of the corporation that is derivative from its fundamental activities.
"We need corporations whose values we all value, for which we are proud to work, from which we are confident to purchase and in which we can expect a fair return on our investments," he says in an interview to Irish Times recently.
"We need companies whose shareholders appreciate that there are responsibilities as well as rewards for being owners and who are committed to promoting the interests of the corporation, not just their own.” The contextual discussion also takes me to the series of debates that the FT has been conducting lately on ‘Better Boards’, where several chairmen called for clarity over the status of corporate governance rules. “Governance should be rooted in laws, not codes: ‘comply or explain’ is too ‘fluffy’ and not practical when you are dealing with an international investor base.
The non-binding ‘comply or explain’ requirements of the Corporate Governance Code were deemed too vague and permissive of idiosyncratic behaviour by boards. This affects international investors who are unfamiliar with this model and are not able to deliver the style of stewardship that ‘comply or explain’ requires. It also means investors with a large number of small equity holdings do not have the capacity to fulfill their stewardship duties.”
Is this the raison de ‘etre for the Companies Act 2013 to prescribe the CSR as part of Law? One wonders.
This takes me to the provisions of the new Companies Act 2013 covering CSR.
The Law states that all the companies with a net worth of Rs 500crore ($80 million) or more, or turnover of Rs 1,000crore ($160 million) or more, or a net profit of Rs 5crore ($0.8 million) or more during the past three financial years must spend at least 2 percent of their average net profits from the three preceding years on CSR, or corporate social responsibility initiatives. According to Union Minister of State for Corporate Affairs Sachin Pilot, this stipulation makes India, the first country in the world to legally mandate corporate spending on social welfare. Many Companies feel that their dharma (the Hindu word for duty) is to provide value to the share holder to which a mention has already been made earlier in this article. Openly no company would go on record that this provision is either onerous on them or do not agree with, for the fear of being branded as anti-development.
Among the activities for CSR under Schedule VII are reducing child mortality and improving maternal health and contribution by companies to the Prime Minister’s National Relief Fund or any other fund set up by the central or state government for socio-economic development. Out of a total of 800,000 companies in the country, around 15000 of them would qualify for CSR activities and an amount of Rs.15-20000crores per annum is the likely spend on these activities.
Education is another area of the directed-spend. There were some who argued that art and culture as also religious activities should be in the basket. There were rightful protests against the religious activities in the garb of CSR. In effect, it means that temples, mosques or churches or gurudwaras cannot be built out of the mandated CSR.
In fact, whenever any expenditure is mandated it has a knack of compliance burden more than serving the noble objective behind it. But does the government have to go this way only to achieve the CSR when there are certain companies that have already distinguished themselves in charitable activities? After all, all the contributions to the Prime Minister’s or Chief Ministers’ National Relief Fund programmes enjoy hundred percent tax rebates. On the other hand, would it have not achieved much more by making the lobbying bodies like the CII, FICCI etc responsible to ensure such goal? It could have. But the Act and Rules are now in place and therefore very little can be on the argument side. The purposes need not be mandated under the rules. In fact the budgetary responsibilities should not be passed on to the companies under the garb of CSR. It should be the responsibility of each Board to resolve on which items it should spend and not necessarily out of the basket it suggested. Remember, the targeted spending on this count is as much as half of the disinvestment programme of the Government during the current year. Employee participation in CSR would depend upon the HR policies each company adopts and the comfort it gives. Some companies have established separate trusts to take care of the CSR to which the Board transfers every year specified sums for such purposes. The Government would do well to allow all options for the companies to implement CSR as a noble and voluntary effort.
Published in the Business Advisor dated 10th October 2013.
Saturday, September 28, 2013
Revisiting India's Growth - A Flip Flop Story
India’s growth A flip flop story:
B. Yerram Raju
India was the cynosure of the rest of the world when it clocked an average annual growth of 8.5% during 2005-10. When it fell precipitously to less than 5% expectation this fiscal it equally became a point of discussion. The bubble of growth got pricked with scams, scandals and charges of corruption among the rulers and ruling gentry. Supreme Court said over 30% of the Members of Parliament are tainted and cannot afford to be in the ruling galleries based on the Right to Information Act petition. While all the progressive legislations aimed at further reforms to the economy are waiting in the corridors of the Parliament, the RTI Act was amended to provide reprieve to the affected Members and also allowing even those in Jails to contest the elections. Why in any case India should interest the world in the first place? It has 350mn Middle Class and around 300mn the poor and not-so-poor providing a huge domestic market for any FII seeking entry. The present Government has been very accommodative to the FDIs, FIIs to come into the retail markets and bending backwards for the hitherto barred defense sector. In order to balance the social and economic forces, the Food Security Act has been brought into position that involved a huge subsidy flow that could easily up set its fiscal deficit calculations.
IMF and World Bank also downsized their growth expectation to 3.5 from 3.7 percent during the current fiscal. Emerging economies in general have been steadily slowing with India and China in the lead. Not long ago the IMF said that global growth would be driven by the emerging economies growth and there is a sudden volte face. It is this contextual reference that would make the flip flop of India’s growth story interesting for the rest of the world to take note of.
Inflation continues to be a major worry with the country’s topmost economic advisor Dr Rangarajan warning of the likely stagflation. Domestic savings are not growing at sustainable rate any longer and this is a serious cause for worry. Banks’ short term deposits are on the increase but the medium and long term deposits are on decline whereas the demand for long term credit is increasing with housing, real estate, infrastructure denting the AML of Banks. Decline in savings rate is loss of fundamentals of the economy. There is keenness to do all that is necessary to let it grow to no less than 28-30 percent and this can be done in two ways: incentivize savings through fiscal policy and protect the deposit rates against rising prices. Raghuram Rajan, the new Governor, Reserve Bank in his first Monetary Policy statement on the 20th September 2013 confirmed that controlling inflation and improving the savings and pushing financial inclusion agenda are critical to the economy by raising the rate by 25 basis points contrary to the expectation of pushing the interest rates down. Markets were in fact shocked.
The Flop Side:
Post-liberalization trended towards a sustainable growth in the services sector while the country has to look for investors from developed countries for growth in infrastructure not supported by right policies.
Even to stay where they are in growth trajectory, India needs multiple times of investments in school buildings (most public school buildings in villages and towns are in dilapidated state: some with collapsing roofs; some with no basic amenities like safe drinking water and wash rooms for children; no play grounds; no teaching aids etc.); primary health clinics; safe drinking water; drainage and sewerage systems; sanitation; highways – both central and state; repairs to rail tracks and replacement of train compartments at galloping speed to catch up with the new trains and emerging demands on rail traffic; goods transport coaches; airport maintenance etc., most of which are with the governments, State and Centre. The resources have to be found either through public borrowing or increase in taxes. If it has to borrow, it will be of long term nature as all such assets have no prospect of returning either the principal or interest. Its capacity to indulge in fiscal deficit is peaking. The virtuous moves of right to employment, right to education and food security have their loopholes in the systems that were created to result in their effectiveness.
The country’s natural resources are declining in productivity: rivers are silting more at the nose-end where they join the sea; minerals like coal to generate the thermal energy are inferior although the stocks are assured till 2050 but these are environmentally hostile; the country has very little natural gas, fossil fuels and has to depend on such of these depleting resources of the West and Middle East; soils are also depleting in energy with regeneration requiring huge organic resources; nuclear and solar energy are proving to be highly expensive.
Agriculture production though has potential still left in the virgin soils of Bihar and eastern UP on the Ganges plains, frequent flooding of rivers and mismanagement of rivers does not leave enough hope for sustainable growth here. Forest wealth is also degenerating. Animal and bird population to maintain ecological balance in the biosphere suffers from disease and malnutrition due to wanton neglect in most cases and in others due to the ravages of nature like floods, cyclones, tsunamis and earthquakes. Claims just keep growing while resources keep depleting – and real prices of energy and commodities have begun looking to north with little prospect of looking south. It would appear as though we are peaking limits of growth if we would like to measure growth only by the GDP figures.
Gross Domestic Product is something we need to look at: Is this the right measure? GDP defined as the market value of all goods and services produced in one year by the labour and property in a geographic space – the country. It is therefore more space related than ownership related. If the number went up economists consider that all was well whereas the decline meant that something was going wrong somewhere. GDP does not distinguish between waste, luxury and satisfaction at fundamental levels and there is no accounting for the costs and benefits. It builds inequalities and the glaring examples: the more the rich accumulate riches the GDP increases and takes for granted that this would lead to the poor reducing in numbers; the companies may invest and grow but the employment may go down with every unit of increase in production and the market index rises with no guarantee that employees would have their share equal to their contribution. There is no guarantee that there would be happiness around with growth measured by GDP increases. It was a tiny neighbor Bhutan that first thought of Gross National Happiness has to be measured and now the UN Human Development Index is taking this into account but the nations like ours still find it difficult to move to such measure.
Let me hasten to mention here that we are not alone in this journey of stagnation. There are concerns about the sustainability of economic recovery both in the US and Europe, still worse. In the recent G-20 meet Indian leaders made successful noise that US should not hasten to withdraw the stimulus measures and resort to the threatened Quantitative Easing. This means that the capability of developed nations to come to the aid of India or other developing nations in the midst of their own problems would be on the wane. Indian economy basically is domestic market driven rather than export-driven. Its neighbor China though recovered from the shocking decline is not to see the earlier double-digit growth.
India’s slowdown in such context is not seen as a big worry while new-normal advocates see the alarm bells dinging in the ears. Inflation in terms of CPI is still a worry. Oil prices uncertainty also can throw the expectations bizarre.
The Flip Side:
Technology and innovation have shown the way, no doubt but have also been pointing to certain destructive dimensions. Coming to the Services sector, there has been a fall in growth rate on global cues. It is unlikely that this sector would deliver growth rates of the nature seen in the last decade and half. It would appear that we have to contend with lower growth rates in the next few years unless dramatic essentially Indian innovations surface. The innovations are taking place more in the mobile technology areas and they are all in countries other than India. Trade gap has lessened by 23% during last month. All the hope of rebound is contingent on oil prices not upsetting our import basket.
The big guess of agricultural sector pushing growth to the expected level would seem a bit hasty considering the time lag between production and its reach to the markets. Second, its estimate of manufacturing sector does not look realistic. The capital goods imports that have surged by75% the last eight years could be generating yields in the next six months. Its survey of 2841 companies reveals that the rupee depreciation had impacted only 6% of them. Therefore, it is just logical that CAD did not have adverse impact on the manufacturing sector as feared. However, what happened actually is the neglect of SME sector by the financial sector on one side and inadequate linkage from the large corporate sector on the other. If the capacity utilization of the capital goods sector improves with core sectors like coal, energy, oil and infrastructure showing a mark-up, it is possible that the growth of manufacturing sector could surge.
The key exports that have great potential are in readymade garments and pharmaceuticals. Wherever one goes in the world, we would find the Chinese and Bangladesh readymade garments with local brand linkages. Actually, this sector has been our forte historically. It is the curse of the sector that it did not have a stable encouraging policy for investments and appropriate incentives. This is an area that does not brook delay. Pharmaceuticals are already on the march and hopefully they would establish as global leaders in export markets.
The cabinet sub-committee has just cleared about $2bn of investments in infrastructure just on the eve of this report. The FDIs started looking up and the FIIs also started flowing in during the last ten days. The capital markets looked consistently buoyant during the last five days. If this trend continues, it is very likely, that the forex markets also stabilize. To expect FDIs and FIIs within the next six months to surge would be over-expectation considering the political scenario dancing on uncertainty with General Elections slated in February 2014, just about six months hence.
If demographic dividend that the country is likely to have till at least 2025 should give the advantage, it should invest more in education and health sectors and this would in turn help people think of rationalizing and practicing austerity led growth. The country has to learn the lessons of growth, even if they are the hard way.
In the short term, however, expectations seem to have been changing for the better.
Different agencies have raised varying growth expectations of the Indian economy at the end of the current fiscal. World Bank placed it at 4.5%; CRISIL in its latest analysis reports that the growth rate could at best stabilize at 4.8% at the end of the current fiscal and the rupee may rally back to Rs.60 a dollar. Prime Minister’s Economic Advisory Council has put it at 5.3% while the Reserve Bank of India in its monetary policy of July 30 placed it at 5.5%. Most estimates are on the basis of a rebound of growth of agricultural sector to more than 4% stabilizing the food prices and the CPI, a bizarre guess indeed for there would be certain time lag between the growths in farm production to reach the consumer windows!
The newly appointed Governor Raghuram Rajan would also seem to have anointed the economy a bit in a fortnight of his assumption of charge with the announcement of a slew of intentions to liberalize the banking sector. But his maiden monetary policy told it all.
But there is some hope on the horizon for the manufacturing sector, I am prepared to buy. The capital goods imports that have surged by75% the last eight years could be generating yields in the next six months. Its survey of 2841 companies reveals that the rupee depreciation had impacted only 6% of them. Therefore, it is just logical that CAD did not have adverse impact on the manufacturing sector as feared. However, what happened actually is the neglect of SME sector by the financial sector on one side and inadequate linkage from the large corporate sector on the other. If the capacity utilization of the capital goods sector improves with core sectors like coal, energy, oil and infrastructure showing a mark-up, it is possible that the growth of manufacturing sector could surge.
The key exports that have great potential are in readymade garments and pharmaceuticals. Actually, this sector has been our forte historically. It is the curse of the sector that it did not have a stable encouraging policy for investments and appropriate incentives. This is an area that does not brook delay. Pharmaceuticals are already on the march and hopefully they would establish as global leaders in export markets. Hopefully there would be corrections.
The cabinet sub-committee has just cleared about $2bn of investments in infrastructure just on the eve of this report. The FDIs started looking up and the FIIs also started flowing in during the last ten days. The capital markets looked consistently buoyant during the last five days. If this trend continues, it is very likely, that the forex markets also stabilize. To expect FDIs and FIIs within the next six months to surge would be over-expectation considering the political scenario dancing on uncertainty with General Elections slated in February 2014, just about six months hence. Fiscal profligacy cannot be ruled out.
Reminded of J.S. Mill (1806-73): “It must always have been seen, more or less distinctly, by political economists that the increase in wealth is not boundless: that at the end of what they term the progressive state lays the stationary state.”
Investors taking interest in India should look at the following sectors keenly:
Energy sector; Real Estate Sector; Pharmaceuticals; Ready Made Garments sector; Automobiles and Precision Instruments Industry and Financial Sector. These stocks have been showing less volatility lately and the trend is likely to continue.
The SME Exchange offers equally good scope for their stocks to expand because of support from Government in SME Markets and global tie-ups. The stocks that should be of interest would be in Automobile sector and Manufacturers of precision instruments and Ready Made Garments.
This is also on blog: http://seekingalpha.com/Yerram Raju/instablog.
B. Yerram Raju
India was the cynosure of the rest of the world when it clocked an average annual growth of 8.5% during 2005-10. When it fell precipitously to less than 5% expectation this fiscal it equally became a point of discussion. The bubble of growth got pricked with scams, scandals and charges of corruption among the rulers and ruling gentry. Supreme Court said over 30% of the Members of Parliament are tainted and cannot afford to be in the ruling galleries based on the Right to Information Act petition. While all the progressive legislations aimed at further reforms to the economy are waiting in the corridors of the Parliament, the RTI Act was amended to provide reprieve to the affected Members and also allowing even those in Jails to contest the elections. Why in any case India should interest the world in the first place? It has 350mn Middle Class and around 300mn the poor and not-so-poor providing a huge domestic market for any FII seeking entry. The present Government has been very accommodative to the FDIs, FIIs to come into the retail markets and bending backwards for the hitherto barred defense sector. In order to balance the social and economic forces, the Food Security Act has been brought into position that involved a huge subsidy flow that could easily up set its fiscal deficit calculations.
IMF and World Bank also downsized their growth expectation to 3.5 from 3.7 percent during the current fiscal. Emerging economies in general have been steadily slowing with India and China in the lead. Not long ago the IMF said that global growth would be driven by the emerging economies growth and there is a sudden volte face. It is this contextual reference that would make the flip flop of India’s growth story interesting for the rest of the world to take note of.
Inflation continues to be a major worry with the country’s topmost economic advisor Dr Rangarajan warning of the likely stagflation. Domestic savings are not growing at sustainable rate any longer and this is a serious cause for worry. Banks’ short term deposits are on the increase but the medium and long term deposits are on decline whereas the demand for long term credit is increasing with housing, real estate, infrastructure denting the AML of Banks. Decline in savings rate is loss of fundamentals of the economy. There is keenness to do all that is necessary to let it grow to no less than 28-30 percent and this can be done in two ways: incentivize savings through fiscal policy and protect the deposit rates against rising prices. Raghuram Rajan, the new Governor, Reserve Bank in his first Monetary Policy statement on the 20th September 2013 confirmed that controlling inflation and improving the savings and pushing financial inclusion agenda are critical to the economy by raising the rate by 25 basis points contrary to the expectation of pushing the interest rates down. Markets were in fact shocked.
The Flop Side:
Post-liberalization trended towards a sustainable growth in the services sector while the country has to look for investors from developed countries for growth in infrastructure not supported by right policies.
Even to stay where they are in growth trajectory, India needs multiple times of investments in school buildings (most public school buildings in villages and towns are in dilapidated state: some with collapsing roofs; some with no basic amenities like safe drinking water and wash rooms for children; no play grounds; no teaching aids etc.); primary health clinics; safe drinking water; drainage and sewerage systems; sanitation; highways – both central and state; repairs to rail tracks and replacement of train compartments at galloping speed to catch up with the new trains and emerging demands on rail traffic; goods transport coaches; airport maintenance etc., most of which are with the governments, State and Centre. The resources have to be found either through public borrowing or increase in taxes. If it has to borrow, it will be of long term nature as all such assets have no prospect of returning either the principal or interest. Its capacity to indulge in fiscal deficit is peaking. The virtuous moves of right to employment, right to education and food security have their loopholes in the systems that were created to result in their effectiveness.
The country’s natural resources are declining in productivity: rivers are silting more at the nose-end where they join the sea; minerals like coal to generate the thermal energy are inferior although the stocks are assured till 2050 but these are environmentally hostile; the country has very little natural gas, fossil fuels and has to depend on such of these depleting resources of the West and Middle East; soils are also depleting in energy with regeneration requiring huge organic resources; nuclear and solar energy are proving to be highly expensive.
Agriculture production though has potential still left in the virgin soils of Bihar and eastern UP on the Ganges plains, frequent flooding of rivers and mismanagement of rivers does not leave enough hope for sustainable growth here. Forest wealth is also degenerating. Animal and bird population to maintain ecological balance in the biosphere suffers from disease and malnutrition due to wanton neglect in most cases and in others due to the ravages of nature like floods, cyclones, tsunamis and earthquakes. Claims just keep growing while resources keep depleting – and real prices of energy and commodities have begun looking to north with little prospect of looking south. It would appear as though we are peaking limits of growth if we would like to measure growth only by the GDP figures.
Gross Domestic Product is something we need to look at: Is this the right measure? GDP defined as the market value of all goods and services produced in one year by the labour and property in a geographic space – the country. It is therefore more space related than ownership related. If the number went up economists consider that all was well whereas the decline meant that something was going wrong somewhere. GDP does not distinguish between waste, luxury and satisfaction at fundamental levels and there is no accounting for the costs and benefits. It builds inequalities and the glaring examples: the more the rich accumulate riches the GDP increases and takes for granted that this would lead to the poor reducing in numbers; the companies may invest and grow but the employment may go down with every unit of increase in production and the market index rises with no guarantee that employees would have their share equal to their contribution. There is no guarantee that there would be happiness around with growth measured by GDP increases. It was a tiny neighbor Bhutan that first thought of Gross National Happiness has to be measured and now the UN Human Development Index is taking this into account but the nations like ours still find it difficult to move to such measure.
Let me hasten to mention here that we are not alone in this journey of stagnation. There are concerns about the sustainability of economic recovery both in the US and Europe, still worse. In the recent G-20 meet Indian leaders made successful noise that US should not hasten to withdraw the stimulus measures and resort to the threatened Quantitative Easing. This means that the capability of developed nations to come to the aid of India or other developing nations in the midst of their own problems would be on the wane. Indian economy basically is domestic market driven rather than export-driven. Its neighbor China though recovered from the shocking decline is not to see the earlier double-digit growth.
India’s slowdown in such context is not seen as a big worry while new-normal advocates see the alarm bells dinging in the ears. Inflation in terms of CPI is still a worry. Oil prices uncertainty also can throw the expectations bizarre.
The Flip Side:
Technology and innovation have shown the way, no doubt but have also been pointing to certain destructive dimensions. Coming to the Services sector, there has been a fall in growth rate on global cues. It is unlikely that this sector would deliver growth rates of the nature seen in the last decade and half. It would appear that we have to contend with lower growth rates in the next few years unless dramatic essentially Indian innovations surface. The innovations are taking place more in the mobile technology areas and they are all in countries other than India. Trade gap has lessened by 23% during last month. All the hope of rebound is contingent on oil prices not upsetting our import basket.
The big guess of agricultural sector pushing growth to the expected level would seem a bit hasty considering the time lag between production and its reach to the markets. Second, its estimate of manufacturing sector does not look realistic. The capital goods imports that have surged by75% the last eight years could be generating yields in the next six months. Its survey of 2841 companies reveals that the rupee depreciation had impacted only 6% of them. Therefore, it is just logical that CAD did not have adverse impact on the manufacturing sector as feared. However, what happened actually is the neglect of SME sector by the financial sector on one side and inadequate linkage from the large corporate sector on the other. If the capacity utilization of the capital goods sector improves with core sectors like coal, energy, oil and infrastructure showing a mark-up, it is possible that the growth of manufacturing sector could surge.
The key exports that have great potential are in readymade garments and pharmaceuticals. Wherever one goes in the world, we would find the Chinese and Bangladesh readymade garments with local brand linkages. Actually, this sector has been our forte historically. It is the curse of the sector that it did not have a stable encouraging policy for investments and appropriate incentives. This is an area that does not brook delay. Pharmaceuticals are already on the march and hopefully they would establish as global leaders in export markets.
The cabinet sub-committee has just cleared about $2bn of investments in infrastructure just on the eve of this report. The FDIs started looking up and the FIIs also started flowing in during the last ten days. The capital markets looked consistently buoyant during the last five days. If this trend continues, it is very likely, that the forex markets also stabilize. To expect FDIs and FIIs within the next six months to surge would be over-expectation considering the political scenario dancing on uncertainty with General Elections slated in February 2014, just about six months hence.
If demographic dividend that the country is likely to have till at least 2025 should give the advantage, it should invest more in education and health sectors and this would in turn help people think of rationalizing and practicing austerity led growth. The country has to learn the lessons of growth, even if they are the hard way.
In the short term, however, expectations seem to have been changing for the better.
Different agencies have raised varying growth expectations of the Indian economy at the end of the current fiscal. World Bank placed it at 4.5%; CRISIL in its latest analysis reports that the growth rate could at best stabilize at 4.8% at the end of the current fiscal and the rupee may rally back to Rs.60 a dollar. Prime Minister’s Economic Advisory Council has put it at 5.3% while the Reserve Bank of India in its monetary policy of July 30 placed it at 5.5%. Most estimates are on the basis of a rebound of growth of agricultural sector to more than 4% stabilizing the food prices and the CPI, a bizarre guess indeed for there would be certain time lag between the growths in farm production to reach the consumer windows!
The newly appointed Governor Raghuram Rajan would also seem to have anointed the economy a bit in a fortnight of his assumption of charge with the announcement of a slew of intentions to liberalize the banking sector. But his maiden monetary policy told it all.
But there is some hope on the horizon for the manufacturing sector, I am prepared to buy. The capital goods imports that have surged by75% the last eight years could be generating yields in the next six months. Its survey of 2841 companies reveals that the rupee depreciation had impacted only 6% of them. Therefore, it is just logical that CAD did not have adverse impact on the manufacturing sector as feared. However, what happened actually is the neglect of SME sector by the financial sector on one side and inadequate linkage from the large corporate sector on the other. If the capacity utilization of the capital goods sector improves with core sectors like coal, energy, oil and infrastructure showing a mark-up, it is possible that the growth of manufacturing sector could surge.
The key exports that have great potential are in readymade garments and pharmaceuticals. Actually, this sector has been our forte historically. It is the curse of the sector that it did not have a stable encouraging policy for investments and appropriate incentives. This is an area that does not brook delay. Pharmaceuticals are already on the march and hopefully they would establish as global leaders in export markets. Hopefully there would be corrections.
The cabinet sub-committee has just cleared about $2bn of investments in infrastructure just on the eve of this report. The FDIs started looking up and the FIIs also started flowing in during the last ten days. The capital markets looked consistently buoyant during the last five days. If this trend continues, it is very likely, that the forex markets also stabilize. To expect FDIs and FIIs within the next six months to surge would be over-expectation considering the political scenario dancing on uncertainty with General Elections slated in February 2014, just about six months hence. Fiscal profligacy cannot be ruled out.
Reminded of J.S. Mill (1806-73): “It must always have been seen, more or less distinctly, by political economists that the increase in wealth is not boundless: that at the end of what they term the progressive state lays the stationary state.”
Investors taking interest in India should look at the following sectors keenly:
Energy sector; Real Estate Sector; Pharmaceuticals; Ready Made Garments sector; Automobiles and Precision Instruments Industry and Financial Sector. These stocks have been showing less volatility lately and the trend is likely to continue.
The SME Exchange offers equally good scope for their stocks to expand because of support from Government in SME Markets and global tie-ups. The stocks that should be of interest would be in Automobile sector and Manufacturers of precision instruments and Ready Made Garments.
This is also on blog: http://seekingalpha.com/Yerram Raju/instablog.
Monday, September 16, 2013
Saturday, September 14, 2013
Growth Expectations Rebound
Growth
Expectations rebound:
CRISIL in its analysis reports that the growth
rate could at best stabilise at 4.8% at the end of the current fiscal and the
rupee may rally back to Rs.60 a dollar. This estimate is on the basis of a
rebound of growth of agricultural sector to more than 4% stabilising the food
prices and the CPI.
This is a big
guess considering the time lag between production and its reach to the markets.
Second, its estimate of manufacturing sector does not look realistic. The
capital goods imports that have surged by75% the last eight years could be
generating yields in the next six months. Its survey of 2841 companies reveals
that the rupee depreciation had impacted only 6% of them. Therefore, it is just
logical that CAD did not have adverse impact on the manufacturing sector as
feared. However, what happened actually is the neglect of SME sector by the
financial sector on one side and inadequate linkage from the large corporate
sector on the other. If the capacity utilisation of the capital goods sector
improves with core sectors like coal, energy, oil and infrastructure showing a
mark-up, it is possible that the growth of manufacturing sector could surge.
The key exports that have great potential are in readymade garments and
pharmaceuticals. Wherever one goes in the world, we would find the Chinese and
Bangladesh readymade garments with local brand linkages. Actually, this sector
has been our forte historically. It is the curse of the sector that it did not
have a stable encouraging policy for investments and appropriate incentives.
This is an area that does not brook delay. Pharmaceuticals are already on the
march and hopefully they would establish as global leaders in export markets.
The cabinet
sub-committee has just cleared Rs.1.20lakh crores of investments in infrastructure
just on the eve of this report. The FDIs started looking up and the FIIs also
started flowing in during the last ten days. The capital markets looked
consistently buoyant during the last five days. If this trend continues, it is
very likely, that the forex markets also stabilise.
Coming to the
Services sector, there has been a fall in growth rate on global cues. It is
unlikely that this sector would deliver growth rates of the nature seen in the
last decade and half. It would appear that we have to contend with lower growth
rates in the next few years unless dramatic essentially Indian innovations
surface. The innovations are taking place more in the mobile technology areas
and they are all in countries other than India.
Trade gap has lessened by 23% during last month. All the hope of rebound
is contingent on oil prices not upsetting our import basket.
I foresee that
the growth in view of the above at the end of the year can stabilise at around
above 5percent this fiscal – could be at what the Monetary Policy of last
quarter predicted at 5.5percent
Published in Business Digest September 10, 2013
Monday, September 9, 2013
Need Bank Branches that deliver Inclusive growth
Do we need more
bank branches or branches that work for financial inclusion?
Raghuram Rajan
in his maiden policy brief mentioned that the banks would be free to open
branches at places of their choice without seeking license within certain
boundary commitments. The predecessor
policy has been that the private bank licenses would be with the condition that
they open 25 percent of their branches in rural areas in the pursuit of
financial inclusion. Both emphasise on the reach of the banks to enlarge.
Post
liberalisation nationalised banks folded up un-remunerative branches in the
rural areas first and the restructuring of RRBs, in two bouts, led to closure
of branches in rural areas. In the name of viability, Primary Agricultural
Cooperative Societies, the only outfits closer to the rural population, have
been truncated in various States under the efficient guidance of the NABARD, a
dedicated supervisory arm for RRBs and rural Cooperatives. This situation begs
the question do we need more branches of commercial banks under a fully
de-licensing regime or a co-ordinated lending system in rural areas for
financial inclusion?
The option at
the moment should weigh with the second: a co-ordinated lending system in rural
areas for financial inclusion. Let me explain: PACS are age-old institutions
capable of performing the dual role of extending credit and also take care of
the backward and forward linkages to farming: supply of inputs and marketing of
agricultural products and produce under a single roof. NABARD clearly
acknowledged that the small and marginal farmers have been served better by the
PACS than others. But they lack financial resources, managerial, technological
and governance skills.
Commercial banks
of all hues have resources but found the brick and mortar structure in rural
areas not profitable. Earlier experiment of ceding some PACS to the Commercial
Banks, and some of them still continue, has been partly successful. The
Farmers’ Service Societies is their avatar. Those that are still functioning
offer a role model for enlargement to bridge the gap of presence of bank with
service in the rural areas through the rural cooperative credit system.
BCs performing
as ambassadors of financial inclusion would seem to be meeting the same fate of
earlier Janata or pigmy deposit schemes. There are issues of remunerative fees,
prompt payment of it to the BCs and the BCs fulfilling their role to the point
of expectations.
The role of BCs as mentioned in the 2012-13 first quarter monetary
policy emphasizes on quality of
services, setting up ICT-based BC and proving as an intermediate brick and
mortar structure between the present
base branch and BC locations so as to provide support to about 8-10 BC units at
a reasonable distance of 3-4 km. The forms can vary but should have a minimum
infrastructure such as a core banking solution (CBS) terminal linked to a pass
book printer and a safe for cash retention for operating larger customer
transactions leading in turn to efficiency
in cash management, documentation, redressal of customer grievances and close
supervision of BC operations.
The business correspondent model allows banks to do cash in-cash-out
transactions at a location much closer to the rural population, thus addressing
the last mile problem. As on March 31, 2013 banks have reported deploying
195,380 business correspondents that covered 221,341 villages, according to the
latest available RBI data.
In 2010, RBI allowed PACS to function as BCs but the takers are few.
Recently, taking a cue from the Report of the RBI Expert Committee on
restructuring of STCCS, NABARD advised the DCCBs/StCBs to separate the core and
non-core functions of PACS and let only those PACS that take on the role of BCs
to perform the core functions, for it defines the core function as lending for
farming and rural activities. There would seem to be little realization that
the core function would be ineffective without the accompanying non-core
functions and it is members’ mandate for functioning that is crucial in the
democratically run cooperatives.
While the States that continue to be the regulators of the PACS and the
PACS themselves have expressed dissent openly over such intrusive instructions,
the fact remains that the latter including the DCCBs lack financial muscle
comparable to the commercial banks for taking up technology infusion and credit
risk assessment abilities. Therefore, a hybrid model of allowing PACS to
function but with effective and efficient linkages to both the licensed
cooperative and commercial bank branch system would provide the best reach to
the rural areas and deliver the financial inclusion initiative, with the
required legal facilitation from the State Cooperative Laws. The existing
under-performing BCs can be subsumed with such a system. Institutional
inclusiveness is the need of the hour.
.
Wednesday, September 4, 2013
Reforms Needed Most in Education Sector
Reforms to Governance in Education Imminent
Prime Minister Stephen Harper of Canada
apologized to his Parliament for coming late by fifteen minutes and the reason
adduced by him was that he had to drop his child in a government school on an
intense rainy day with traffic snarls coming in the way in Ontario. President
Obama’s daughter and his private secretary’s son study in the same school and
sit side by side. There is no discrimination among the children of different
classes of people in these parts of the world.
In India, we had an education system where
the primary schools in villages and towns and high schools were all in the fold
of government or Panchayat or Zilla Parishad (the old name District Boards)-
the local bodies. But during the last three decades, private schools have come
up at their places of choice, many a time with the munificence of the local
politicians. The fees for admission in the name of quality started touching the
roof and took the shape of donations. This has spread to the higher and
technical education as well.
Public Schools, with the support of
government came up. Most public servants and politicians started taking pride
in putting their wards in such public schools using their influence. In several
public schools it is not uncommon to find somebody from the education department
in their Boards. The spouses of some of the civil servants get plum teacher
posts in such schools. On the other hand, if these politicians and civil
servants had sent their children to the government schools, they would have
certainly ensured that enough budget releases for the improvement of
infrastructure in schools. The uncared for attitude of bureaucrats and
politicians is solely responsible for the dilapidated primary and high school
buildings owned by the government and the related infrastructure.
Teachers of appropriate qualifications and
interest became a rarity due to poor pay scales initially in this sector
compared to the other sectors notwithstanding the primacy of this sector. By the time the scales started improving, the
quality of teachers and teaching deteriorated beyond repair. Qualification took
precedence over quality and interest in profession. Dedicated teachers despite
annual awards for best teachers announced by the Government have become a rare
breed. Respect for teachers started declining with a few incidents of teachers
beating up children, committing atrocities on the girls etc have been
repeatedly surfacing and such incidents were unheard of in the past.
Teachers in the past, say up to 1960s at
all levels viewed their profession as sacred and never participated in strikes
and dharnas. They attached high values to their profession and concentrated on
imparting noble values to the students. The tragedy in those days was that some
of them suffered in penury until some of their students came to their rescue.
Now, when the sailing is good, values have vanished. In fact, it should go to
the credit of late Shri P. V. Narasimha Rao, when he was Minster of Human
Resources, he introduced Navodaya Schools with good intentions, largely based
on our traditional Gurukul. But his
experiment was allowed to suffer at the hands of politicians and bureaucrats
and the reforms, so called, concentrated on school drop-out reduction, that has
become a number game, mid-day meal programme to ‘incentivise’ the poor to reach
only the ill-equipped government schools – and the incentive ended up in badly
cooked and badly delivered food resulting in a few kids sacrificing at the
altar of mischief of the cooking ‘teachers’.
Still, there is scope for resurrection.
First, recognise this problem: find solution where the problem lies. Second,
allocate liberal budgets for immediate improvement to the government school
infrastructure. If the Government is prepared to be transparent, there is enough interest in NRIs
to adopt some schools for certain components in the infrastructure provided it
is willing to create a learning environment; cancel registration of all schools
that do not have play grounds and libraries;
change the curriculum in the primary and secondary schools to include
games, library reading, project work and internship from ninth class for taking
up social service and award marks for such assignments as part of the grades
and more importantly, have some illustrious leaders autobiographies of freedom
fighters like Madan Mohan Malaviya, Lok Manya Balagangadhara Tilak, Netaji
Subhas Chandra Bose, Mahatma Gandhi, Ambedkar,
Lal Bahadur Shastri to site a few. Include a few chapters from the
Glimpses of World History of Pandit Nehru in every standard from the 8th
onwards. Teachings of Swami Vivekananda, Ramakrishna Paramahamsa, Poems from
Gitanjali of Rabindranath Tagore, should be part of cultural readings for all
children right up to the College level. In each of the regional languages there
is great wealth and morals that should essentially be part of learning from the
childhood. The current day child has the sharpness and speed like none before.
They are unfortunately being turned into scoring machines and this is happening
sadly only in India.
Where is the need for transferring
teachers? What is needed is proper assessment and involvement of parents in
achieving the desired levels of excellence. Responsible teaching, responsive
administration and unburdening the child of cart load of books but enabling him
with knowledge load, flexible timings, audit and accountability, are the need
of the hour. Competitively the young nation is losing its verve. If we make available education free for all
girl children up to XII standard there need be no specific reservations. The
entire society would look up and grow culturally.
I visited the education system in Canada
and was amazed to find that education up to secondary school higher grade is
free. Children get report cards on their performance monthly and the report
card contains details about how they fared in curriculum, character,
punctuality, reading habits, project work (every student from the 4th
standard has to do project work in different fields), arts and crafts, games
and sports, dance, drama etc., and where the student needs to improve and how
they have come to such assessment. They are counseled right from the 8th
standard onwards as to how to help the parents at home, the suffering in the
communities, how important it is to provide charity in one’s own affordable
range etc. They are taught skills in cooking, carpentry, metal works as part of
their project work and this is part of the curriculum. From the 10th
standard, they can enrol for internship to take up any voluntary service. The elementary schools provide admission to
the children of households in the distance of 5km. For a cluster of 3-5
elementary schools there is one middle school. No child can be denied admission
without valid reason. There are no admission costs for any permanent citizen.
School buses would be available at concessionary fares for children staying
beyond 1k.m in elementary schools and for middle school children to those staying
beyond 2.7km from the school. Once in a week, a mid-day pizza or burger is
provided on nominal payment. All the schools have play grounds, gym and
library.
In each school a break of 45 minutes is
provided at 11.30a.m (the school starts at 9a.m) for children to play as they
wish in the playground. The school closes at 2.30-3.30p.m. The schools work for
five days in a week. Once in a year the middle school children are taken on
excursion after obtaining parent’s written consent. All children have free health
check-up and insurance. Why will not children develop in such environment? When
do we in India get this happy environment for education of our children?
Governance of higher and technical
education is a different ball game and needs different treatment.
Friday, August 30, 2013
Elephant Stops Dancing
Economy
on rocks, not necessarily, thinks the
Finance Minister even when the Re breached 68. We are still at an inflexion
point as Rupee is yet to touch the downslide to 70 a dollar, as predicted by Dr
Tarapore a month and odd ago in the Business Line. The inflation differential
between the two countries India and US has been steady over the last two
decades at 3.6% notwithstanding the great recession since 2008. This exchange rate adjustment, that is
largely market driven, need not be seen as a weakness of the economy. There is
a large domestic economy, if carefully nursed, could reverse the trend though
not in the immediate future. We cannot very much alter our import basket
governed by the crude oil that is rising, and edible oil whose consumption in
India far outstrips the production necessitating its continuing import and the
heavy capital equipment required for infrastructure sector, in the short run. In
sluggish manufacturing sector intensity, expecting recovery in the short run
would be a wild goose chase.
If
we look at the emerging economies’ trends ever since Ben Bernanke announced the
QE programme of unwinding bond purchases, global GDP all along etching its
hopes on them, now looks tamed at 2.1% even in 2013. Chinese economy, though
sent some shivers at the beginning of the year, started quick recovery and
would seem to be steady on stabilising and may be at 7.7% growth. Among the
BRICS, the other major, Brazil is looking for World Football Cup to come to its
rescue. It is down from 3.5% to 2.5%. Unfortunately, India does not have an
event like the Commonwealth or world tournament to milk the opportunity.
After
a long slumber on the policy front, India’s economic Czars announced a slew of
reforms that would move like the wheels of Lord Jagannath’s chariot. They have
been announced at a time when the sectors are not poised to respond. Now, the
rating agencies that have been on a simmering hope would appear too keen to
downgrade India’s sovereign rating. Although on some such hopefuls, the EIA
predicted GDP growth at 6% for Asia and Afroasia (excluding Japan) in June
2013, is likely to shift it at 5.5-5.7%. Although the RBI in its July 30
Monetary Policy predicted a downtrend to settle at 5.5%, even the most
optimistic projection does not now seem to cross 5%.
The
silver lining in the cloud of despair is that the NRI deposits are growing with
the downfall of Re. Even in the backdrop of double digit consumer inflation
index, domestic savings have not fallen yet; and the employment rate also
remaining steady. The core sectors grew by 1% last month. Electricity
generation showed improvement by 6.2% with the rise in hydel power backed by
steady inflows in the command projects. More than average rain fall also
predicts a hopeful growth of the farm sector. There is enough money rolling in
rural areas still, thanks to the MNREGS and a few rounds of State elections
that fuelled free money make a merry go-round.
What
is at danger, however, is the likely bourgeoning of fiscal deficit fuelled by
the implementation agenda of Food Security Act 2013. The Centre’s expected
funding of the order of Rs.900bn in 2013 on Food subsidies alone that has an
embedded 40% leakage if we go by the CACP study, rings alarm bells of
consequence. RBI’s Governor Subba Rao without mincing words said that the Act
would ‘eat into the finances’; while the incumbent Raghuram Rajan said: “there
is blatant flaw in the policy making.” While the tigers are mauled alright, the
elephant would stop dancing and get chained in the cage.
Can also be seen on VITALINFO
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