My blogs are only subject oriented - Finance, agriculture, MSMEs, Cooperation, Corporate Governance etc. Do not relate to any comments on caste, religion, sex etc.
Wednesday, April 15, 2020
Thursday, April 9, 2020
Lock down to Continue
The Lock-down to Continue or Not?
B. Yerram Raju*
Lockdown declared on 25th March
2020 has proved reasonably effective in India due to the two important
initiatives: social distance and staying at home apart from wearing masks while
going out for any emergency. The lifeline was kept alive – all emergency
services, food supplies and medicines are kept available at the hands of the
citizens. Police, Doctors, paramedical and sanitization staff have been
rendering round the clock. Still, a few violations are seeing here and there
and they are being tacked as they should. Even new ‘Normal’ has to wait for a
long time. Precaution continues as philosophy of life.
Hon’ble PM Modi asked for suggestions for
staggered lifting of lock out and your team should be working on it. CM KCR in
a very detailed press conference clearly voted against opening the Lock-out
now. In Telangana, people will obey the CM direction without demur.
There could be several other States wanting
a partial lock-down till June end to fight the Covid-19 effectively. In such
case, it is imperative that we should ensure that the spread is prevented
effectively even during the lock-down. Even if lockdown is opened with the
precaution given below, it should be re-imposed after five days for a period of
one month. During this period, those in home quarantine and several hospitals
should be supplied the masks and aprons. All Small enterprises should be
permitted to refurbish their machines for production or may be permitted to go
in for production of covid-combat materials where they can.
My suggestions for meeting the eventuality
of lifting lockdown are:
1.
All schools, colleges and technical education
and management education institutions shall remain under lock out till further
notice.
2.
Lockout should be lifted every day between 5am
and 10am and 4pm to 7p.m.
3.
All religious centres, temples, public offices
should be kept open between 5am and 7pm.
4.
Only 10 percent of liquor shops with special
approval from the concerned authority may alone be opened.
5.
All Malls should be opened between 11am and 5pm
who shall ensure social distance for purchase. Any mall found crowded shall be
ordered closure instantaneously.
6.
All public transport duly sanitized may be
allowed occupation only to 35% extent to maintain social distance among commuters.
The buses should stop only at the specified bus stops and not everywhere on the
route.
7.
All Senior citizens, citizens with deformities
and women should have separate transport facility. The mini school buses should
be used for the purpose.
8.
Metro to colonies connectivity should be
arranged through commissioning all the school and college operated private
fleet with tariffs well displayed.
9.
Inter-district movement should be restricted
between 6am and 6pm either side meaning thereby that the terminal time to reach
is 6pm
10.
.All Rythu Bazars should function as now – with
2 hours a day in the morning.
11.
All goods transport across districts shall be
given entry up to 8a.m into the city and all goods transport may be permitted
to start at 7pm in the night. At each checkpost (may have been abandoned, tea
stall may be allowed for the truck drivers to make use of. They should be
provided special facility.
12.
All sick persons or patients of any disease
other than Carona should be allowed free access and they should show their ID
and mobile communication from the Doctor to consult or take medication.
Supplementary list:
1.
No restrictions on movement of dead bodies during
any time of lockout for purposes of funeral rights.
2.
The already opened windows for vegetables,
fruits and essential commodities and medicines should continue.
3.
Transportation:
4.
Any auto should not carry more than two; no
motorcycle should carry more than the driver;
5.
All cars whether government or private or taxis
shall not Carry more than two persons with masks in the rear.
6.
All sanitized buses public or private should
carry one third of the capacity with everyone wearing masks.
All these vehicles shall be sanitized for
every trip before boarding new passengers.
7.
All trains should allow only one third of the
capacity in all three tier coaches. All coaches should be sanitized every eight
hours and washrooms kept clean with hot water cleaning of the commodes.
8.
Offices can operate between 10 & 4.
9.
Factories can work 2 shifts following due
precautions. The shop floor supervisor of the shift shall make sure that the
toilets and wash rooms are clean, loaded with the required sanitary materials,
with clean up every two hours. All employees, labour, executives shall wash
their feet before entry and sanitize
their hands both while entering and exiting.
All enterprises should display Cleanliness
is Godliness and saves their lives.
Exceptions: -
Companies' staff with ID's and vehicles
should be permitted to travel.
Postal service/couriers and electricity and
telephone maintenance staff should also be permitted from 6am to 9pm.
Extraordinary times require extraordinary
solutions and require tolerance and forbearance. The country so far, has
handled the situation exceedingly well and it is our duty to keep the
protecting staff in good health. Stop spitting in public; wear mask when outside;
maintain social distance and keep clean.
*The Views are personal and the author is
economist and risk management specialist.
Friday, April 3, 2020
Coping with post-COVID-19 Disruption
Coping with
post Covid-19 Disruption
Post
pandemic prediction can’t be a soothsayer’s job. Preparing the economy from a
tremendous shock and staying inside home for nearly a month in some States and
could be longer as we see the accelerated rate of spread of Covid-19 hit
persons, is the biggest challenge. India is not a city state like Singapore or
Finance hub like Hong Kong. The optimists expect the lockdown to be lifted by
the 14th April while the less optimistic put it to the end of April.
We need to think of the strategies and actions phased over short, medium and
long term with matching resources right now. This should be both sectoral and
geographical specifics.
While we
are the leading global pharmaceutical suppliers, the low and inefficient health
sector management with historically low outlays suddenly got the awakening call
with the CVD spread and the need for public health systems to step up their
capabilities. Yet, the call of the nation has been very ably responded to the
greatest consternation of the rest of the world.
The country,
with diversity nowhere else existing, is the biggest challenge and opportunity
to the governments. Diversity has capacity to cross hold risks across segments
and has innate resilience when calamity befalls. It also provides scope for
innovation as people think more actively under pressure than leisure. When none
can be in laid back comfort that existed before, people keep working out
differently different things. For example, there have been more webinars during
the last one month than during the last six months. There have also been more
video conferences and skype calls as people started working from home. This may
gradually turn out as new order of functioning.
One of my
nieces from Bengaluru tells me that as Director of a Union Government
organization working from home became a true challenge as deliverables rest
with her than with other members of her team. Even the forgotten kitchen started
demanding her time with children demanding newer tastes and new dishes. This is
making her work for 14 hours instead of 7 hours in office. There is a whole
paradigm shift in the work environment., not for one but many like her – with
no gender discrimination.
What would
be the future like? Very many organizations could find new economies of scale
in a combination of work from home and work at office. More factories will have
to think of reworking their supply chains that thoroughly disrupted due to the
CVD, New leadership paradigms emerge. The 10 percent manufacturing small
enterprises manufacturing gloves, sanitizers, masks, medical emergency kits to
combat CVD will find near extinction of such market. They should expect this to
happen and therefore prepare from now on the way to re-engineer their process
to newer products and new markets. They will notice that institutions and
persons that were after them during their need will turn their faces and likely
to hold up their bills in their search for finding cash margins for fresh
initiatives.
Our country
will have to reinvent itself in workspaces and relationships like never before.
In this process, at the micro level, enterprises will re-engineer their
production and processes and search for new markets. Many will find the exit to
be a problem.
Amidst a
supply driven crisis, the unrest and plummeted resources of all kinds, as also
eroded markets, MSMEs will require sustainable process consultants to rescue
them at affordable costs. Here, the governments in looking at the sovereign
dues and the banks looking at the stuck balance sheets of MSMEs should learn
the art of turn around management or seek recourse to experts in turn around
management.
Every
nation will be on the uncertainty horizon. Risk mapping will be difficult.
Everyone has been a looser. Non-performing loans will surge unless the
thresholds change. Indian regulators need not wait for the world to guide them.
They can guide the world. BCBS has already provided for applying the thresholds
for SME sector as per the needs of the country. The time for action is now. The
threshold should move to a 180day horizon till December 2020 subject to a
review after six months. This will automatically provide for higher leverage in
lending for the MSME sector, the nerve wire of production that has been contributing
35% of GDP, 45% of exports and employing 112mn persons.
The poor
and daily wage earners, the hawkers, the wayside eateries, many disabled,
contract workers – both skilled and unskilled, need government subsidies, even
salary buffers, supplies and cash to meet their daily needs for at least three
more months until the industries and enterprises re-look for employing them.
Fiscal
responsibility under these circumstances of both the State and Union
governments already hit by the lowest ever tax returns requires out-of-the-box
thinking to meet the situation. Several relief funds of the CMs and PM, private
donors and even CSR funding even amidst the near 10 percent hit on most
corporate balance sheets would be inadequate for revival of the economy. It may
take at least nine months to one year to cone to a new normal which would be
far less than that we had in the slowing economy.
Even if
people have cash in their hands, which itself is doubtful, they will not get
the goods and services as the lockdown succeeding the slowdown of the economy,
there will be supply driven inflation. Scarcity stares in all areas.
Courage is
the watch word. In times of distress people display amazing unity while
immediately after normalcy is restored the same set of people will most likely
diverge. While the demand to lift the lockdown in toto will surface with more
vigor than now, it would be prudent to release in parcels to rework on the
efficiency of the health sector infrastructure, doctors, nurses, para medical
staff on one side and on to ensure that the wheels of production get back to
normalcy gradually, on the other. Second, the discipline enforced should be
redirected to finance, transport and manufacturing sectors.
The focus
of trade will suddenly think of new protectionism, new direction of
investments, newer regional allies in trade and new relationships. The denuded
investor firms and the huge number of corporates off-loading the bonds in the
markets for liquidity are bound to put pressure on the financial sector. This
recession is very unlike the 2008 or even 1930 and it will be a prolonged and
widely spread across 200 nations in the globe.
Banks are
systems driven and not enterprise driven, Unless the instructions are fed to
the system, the concessions do not take effect. In several Banks, even the
usual half-yearly reviews of several accounts on a regular basis did not take
place. The disaster today is extraordinary and requires extraordinary speed of
action post new normal.
At a time
when the demand for credit is at the lowest level due to several manufacturing
and trading enterprises shut their shops due to lockdown and are seeing future
as more uncertain than now, liquidity doors have been kept open by the RBI as
though that was the problem area that required urgent attention. Even during
the last six months RBI has been extremely accommodative to Banks both in
capital buffer and liquidity commitments. But the credit did not move to a
higher zone in non-food segments.
“These capital and liquidity buffers are designed to support
the economy in adverse situations,” as the Fed said in a statement. Fed’s other
hope is exactly what the India incorporated is looking for: less rigidity from
the banks in extending the required debt, post pandemic. COVID-19 has caused
serious disruption to global supply chains and has a huge impact on financial
markets and trade ecosystem. It is important to retain the customers and
governments post pandemic and rebuild their lost supply chains to operate
sustainably.
India’s biggest advantage is its demographics and therefore,
the future needs to be addressed with alacrity so that entrepreneurship will
not be governed by the hoary past but a bright future.
The Author is an economist and risk management specialist.
The views are personal.
Published in Money Life 2nd April 2020; www.moneylife.in
Monday, March 30, 2020
Impact of Covid -19; Review of Measures taken
RBI in its
Monetary Policy statement on the 27th March 2020 front-ended the
effort of banks through pumping liquidity, 3-month moratorium on term loan
instalments, working capital while interest will continue to accrue during the
moratorium period with a further clarification that instalments will
include the payments falling due from March 1, 2020 to May 31, 2020: (i)
principal and/or interest components; (ii) bullet repayments; (iii) Equated
Monthly instalments; (iv) credit card dues; review of working capital limits of
all enterprises. 3% CRR recommended by Narasimhan Committee, Tarapore and Ashok
Lahri at different points of time has been announced.
Interest will continue to be charged on the EMIs and they
would to that extent enlarge the instalments that follow the moratorium. To
expect the industry to recover immediately after the lockdown period is over
will be an overestimation. McKinsey says:” Restarting production facilities can be more challenging than
shutting them down. It requires a thoughtful approach to revive the supply
chain, match volume to actual demand, and, most importantly, protect the
workforce.” They require minimum six months to get back into the full supply
chain. Banks’ sagacity to reassess working capital lies here. Banks should not
cut down the limits because the size of the Balance sheets of all firms will be
downside of the previous years including their own.
Future lending shall be cash flow based and not Balance
sheet ratio based or even just turnover based (Banks are asked to extend
minimum of 20% of projected turnover while most have adopted this as the
maximum and this includes SIDBI).
RBI February data indicates that as of January 2020 credit
growth to agriculture and allied activities decelerated to 6.5% from 7.6% in
January 2019; to industry more than halved during the same period; to services sector decelerated to
8.9% from 23.9% whereas for personal loans it grew by 16.9%. This position prevails despite liquidity infusion measures
during the last two monetary policy initiatives. Therefore, risk aversion and
not liquidity is the problem with banks.
The already risk-averse banks can hardly lend
during this period of lockdown seeing temporary shutdown of 90% enterprises.
They can only provide online comfort following the policy announcement, al bait
for three months! For a running industry to increase capacity is easier than a
re-opened industry after lockdown. Further, investment required after
re-starting is also going to be much more than now. Therefore, banks must
prepare to lend more aggressively immediately after the current period. But can
they move away from aversion to appetite in taking legitimate credit risk,
without improving their lending infrastructure?
A few special efforts that still beg attention
are:
· Banks to stop all SARFAESI
proceedings and developing forbearance for the manufacturing MSEs.
· Extension of NPA threshold to 180
days, effective January 2020 quickly that will keep accounts standard for any
further booster doses to flow to the industry.
T
Special Mention Accounts 1 &
2 categories will also need uniform forbearance.
· Unfunded limits – LCs, Guarantees,
ECGs falling due between January and May 2020 should not be revoked for
non-compliance but their periods extended by another six months. RBI directive
is imperative.
·
A All viability tests shall be done by
State Government accredited agencies
· GST should be reduced to 5% till the
end of December 2020 for all the enterprises that would submit their quarterly
returns as required under law, even if at exempted thresholds. Review of impact
should be based on an evaluation study by all the Industry Chambers.
· All MSMEs that maintain record of
manpower employed verifiable with EPF and ESI registrations.
· All MSMEs may be permitted to engage
contract labour with the social security burden absorbed by the State
Government on reduced commitments annually by 20% provided they all are
digitized for all transactions.
· Power Tariff should be cut by 50%
for all the manufacturing enterprises provided they are all digitized and
registered under Udyog Aadhar or TSiPASS.
· All MSME Funds should be maintained
and monitored by the DC-MSME through NSIC instead of SIDBI.
GoI may
focus more on cleaning up the financial sector with a sense of urgency to
render its services effectively in tackling this uncertainty effectively. At one
end, cash relief from the exchequer should flow to all digitized Jan Dhan and
Mudra loan accounts and at the other end, credit shall pump prime the economy
with responsible and timely deployment post lockdown.
More
digitized developed economies are redirecting their efforts to containing the
spread and holding people in discipline using WhatsApp, digital alarms at the
Carona Control Rooms etc.
South Korea
has transferred cash to all the SMEs to pay for their labour for one month. US
has announced a $2 trillion package to combat the new war. Several nations
across the world – with 196 affected by this monster Carona - are seriously
contemplating the relief packages. G-20 announced $5trn relief package. For
once everyone stopped thinking of fiscal deficit. Extraordinary problems
require extraordinary solutions.
No time for
Hobson’s choice. Saving lives is more important than saving the economy, no
doubt. But preparing the economy to respond to the post COVID-19 very
effectively also brooks no let-up in efforts.
*This is
part of the article published on the 30th March in
Telangana Today with some additions. A Response write up to the CII.
Monday, March 16, 2020
Fight the good fight against Covid-19
The Economist in its latest edition titled ‘Dropping the Ball’ rightly mentions – “Talking down the issues is not winning strategy.” India with a population of about 130 crore has around 100 coronavirus cases and two deaths. The awareness created by the Union and State governments and the proactive prevention and curative measures, coupled with friendly hot weather in most parts of the country barring up-North, have stood in good stead.
But it is unfortunate for a slow-growth economy where inflation is down and IIP up that this new scare has caused market mayhem pulling it down to pre-1930 levels. Several weaklings and numerous of MSMEs could see the prospect of unpaid bills. It may be difficult for them to keep the labour engaged with obstructions to the moving machines, more particularly, the export-led ones. Time to seek way out is right now and not later.
Paid Sick Leave
Will it be possible for India to take the call of US democrats – notwithstanding its total unpreparedness and niggardly health system – “paid sick leave rules, expanded payments for programmes like unemployment insurance and the nutrition assistance, and guaranteed payment of all testing and out-of-pocket costs”?
In fact, McKinsey’s March 9, report, anticipates that the global GDP growth in 2020 could fall as deep as -1% to -1.5% even if socio-economic impacts get localised and effective and timely countermeasures are initiated.
A large number of NRI families in several countries — Middle East, UK, US, Canada, New Zealand just to cite a few — are all dependent on imports for their essential food requirements. China and India have been their source. Now that the flights have stopped; visas have been cancelled, and even local movements in several nations restricted, the information is that all big malls like Lulu, Walmart, etc, have even emptied their stocks!
Rising Unemployment
The 73rd NSS 2015-16 mentions that 110 million were employed in the MSME sector. This is despite the sector’s inhibition to disclose the actual number employed for saving regulatory costs and the countless contract labour engaged to keep themselves afloat in the market competitively. According to the RBI Governor, around 50% cent of the total MSMEs operate in rural areas and provide 45 per cent of total employment. Therefore, industrial hygiene needs to improve significantly.
Micro enterprises, which account for 97% of the total employment in the MSME sector, in the context of Covid -19, faces most of the heat. Even if banks have restructured or revived them in the recent past, they should be given further restructuring by way of reduced instalments elongated dues in their working capital accounts.
India is uniquely fortunate thanks to the hot climate catching up down the Vindhyas and in a month even the North would see about 30 degrees. Moreover, with adequate stocks of foodgrains, starvation will be afraid of staring at us unless we mismanage public distribution. Opportunity awaits the MSMEs but their preparedness needs unstinted support from the lenders – be it banks or NBFCs.
Active Banks
Banks cannot be sitting ducks talking of collateral security and failing to convert risk into reward at the right time. Industry associations should aggressively put their strategies in position and rebuild trust between their member entrepreneurs and lenders. The time is for more leg work; more buyer-seller meets; more enterprises must adopt affordable ERP and move to digital platforms because these platforms alone enable speed of transaction and delivery.
Second, they should also be handheld for capturing the local domestic market to the maximum extent by coordinating with the State government concerned under the public procurement policy. The unmoved stocks thus should be quickly turned into cash.
MSMEs should be made not merely preferred creditors under IBC and NCLT but should also get at least 75% of the pendency cleared within 30-60 days of accepting the case on merits. Third, the moratorium period for the new MSMEs and restructuring in manufacturing should be extended by six months to ward off project and cost overruns.
The MSMEs financed by the NBFCs and digital payment platforms should quickly reassess the status of the loans from a practical point of view by speaking to the entrepreneurs concerned to resolve any payments likely to get stuck due to Covid-19.
Worst Hit
The services sector, where the banks and NBFCs lent heavily under retail market and MSME (services) portfolios, would be worst hit. Training-led conferences and seminar-dedicated institutions, which run mostly on promised payments from their hosts, would renege on payments as they are either not held or least attended.
Here, along with the earlier manufacturing MSME credit, it is important that the RBI quickly takes corrective policy decisions and guide banks, financial institutions and NBFCs to postpone NPA thresholds to 120 days and review the position at the end of April, 2020.
Banks beleaguered as it is due to unsustainable NPA levels would be worst hit if Covid-19 impacts their assets right away. Globally, central banks are already ahead of the curve in providing relief to the financial sector both through the zero/least interest rates for bond and credit markets and even Basel may be moving in some unusual remedial stand.
“One scary thing facing us is demand contraction. People will buy only essential goods. New purchase orders will drop further. Payment cycles will get disrupted. Job losses are ahead. All this could be a possible fallout of coronavirus. Also, the loss of GDP may be equivalent to one month of GDP,” says Sameer Kochhar of Skoch Group. But production cannot stop if employment is to be preserved and future demand is to be adequately met.
‘When winter comes, can spring be far behind’? Next monetary policy, notwithstanding comfort on inflation headwinds, could see a rate cut. At least the Chief Economic Adviser asked for it!
Thursday, March 12, 2020
MSMEs Need Cash Flow Based Finance
Cash Flow
Based Finance to MSMEs:
The Need
and the Deed
Access to
finance is the Achilles Heel of the MSMEs not just in our country but entire
world. U.K. Sinha Committee has recommended cash flow based finance (CFB) as
the best possible way of resolving the working capital issues of the sector. The
term simply means that the finance starts with cash-in to cash-out, normally
referred to as the working capital cycle by the lenders.
This is a form of financing in which a loan is backed by a firm's
existing and expected cash flow. This loan is very different from asset-backed
loans where the collateral of the loan is based on business assets. The
repayments are going to be based on business-projected cash flows. The debt
covenants of these kinds of loans are focused on manageable levels of interest
rates.
Charting the cash flow helps in entering the fixed costs,
operating costs, accounts receivables and existing accounts payable into the
future weeks/months realistically.
It is important to understand that financing cash flow is
somewhat unique for each business depending on the industry, business size,
stage of business, model size, owner's resources, among other factors. It is
therefore important for each enterprise to assess its resources of financing
cash flow: owner investment or equity; government incentives and remittances;
inventory financing, trade financing, deposits on sale, receivable discounts,
factoring, or purchase order finance etc.
Several
MSMEs do not have uniform flow of cash for doing their business throughout the
year. It is set with lows and highs in the stream. If they want to buy the raw
material when it is available at low price, it needs storage space and lender’s
tolerance for high stock. Unmoving stock is always viewed with suspicion.
Whenever the turnover is low, the firm faces stress because it cannot afford
the luxury of unloading the excess raw material.
Whenever
the finished goods are not rolled out, it can be for a variety of reasons:
either the buyer is not satisfied with the quality specified at the time of
order; or the buyer is starved of resource to buy at the time of receipt of
goods or he has himself shifted his line of activity and therefore, trying to
find fault with the product somehow to escape his obligation. Payments get
delayed. There are also number of cases where the payments are delayed even
after acceptance of goods. If the goods are not returned within the specified
period of contract, it will be deemed acceptance after that period is over.
If the
contractual relationship between the buyer and seller that is invariably
conditioned by the provisions of the Indian Contract Act, comes into dispute, the
amount gets stuck under litigation. MSMED Act has provisions to tackle delayed
payments under MSME Facilitation Council but has been ineffective. Therefore,
at the tail end of production, where the sale occurs, the cash gets stuck.
E-marketing
that is fast making inroads through institutions like Amazon, Flipkart, etc.,
and e-invoicing that is getting popularized through GEMS and TReDS are yet to
significantly change the fate of manufacturing MSMEs.
Several MSMEs,
pre-GST were indulging in buying raw material in cash and selling finished
product in cash. This simply means that they have been bypassing the lenders’
books. This unorganized way of business is gradually transforming with GST
introduction, notwithstanding several issues locked up in GST dispensation
itself. It is expedient for an enterprise to have a revenue-based financing
program to ensure that cash flows are not hurt for want of a loan from the
bank/FI.
It is very
easy to lend on cash flows for business enterprises right from the flower
vendor or vegetable vendor to a trader dealing in gas cylinders or furniture.
Same can’t be that easy if one would like to fund the cash flows of a
manufacturing enterprise. This segment can also afford higher interest for
their loans as they invariably pass on the interest to the buyer through sale
price. If they want to offer competitive price, they indulge in discounts.
In other words, the
cash conversion cycle (CCC) of MSMEs has many aspects for the lender to understand.
This requires (1) change in mindset of the bank field staff, managers and (2)
continuous follow up of the cash flows systemically with a consent-based ERP
architecture. MoMSME that offers ZOHO ERP book free of cost to enterprises with
turnover of Rs.1.5cr could increase the threshold to Rs.5cr. The initial cost
of such shift could result in transforming 55-60 percent of the micro and small
enterprises getting into organized finances when CFB lending becomes reliable
data based and data monitored lending. Data itself will be the security. Its
credit rating and collateral is either not required or based on movable
short-term assets such as inventory, floating debentures (for limited
companies), debtors etc.
Cash is the king. It is cash that repays the loan and not
collateral as the latter takes enormous time, cost and effort to repay a
facility. Documentation is also simple: in the form of invoices issued by the enterprise;
sales records; supplier and customer references in addition to a thorough
interview of the enterprise owner. It may be necessary to crosscheck with the
suppliers the invoices provided. All this simply means that in CFB, banks should spend more time with
the entrepreneur and they don’t have the wherewithal to do this now.
While the
RBI has been working on Public Credit Registry the way it captures the data,
the veracity and verifiability of the data it captures and ease with which it
becomes accessible would make firm data itself as collateral for the banks and
FIs.
The writer is author of ‘The Story of Indian
MSMEs’. The views expressed are personal.
Wednesday, February 5, 2020
Hopes, Aspirations and Disappointments - Union Budget 2020
Hope, Aspirations
and Disappointments
Nirmala
Sitaraman starts on Aspirational Note. The two hour forty minute long budget
speech creating record could perhaps prove the dictum: ‘if you fail in logic
resort to rhetoric.’ Let me deal with the hopes and aspirations first and then
with the disappointments later.
It has for
first time addressed the farm sector comprehensively providing end-to-end
solutions but leaves no assurance for income in the hands of the farmer. Allied
activities get a boost. If a farmer were to hold a few animals in the backyard,
a fishpond and a small poultry in addition to crop farming or horticulture, he
has everything in the budget to cheer. There is every chance to cross-hold
risks among the farming and allied activities.
States
should follow the intent and modify the Agricultural Marketing laws to make way
for the responsible aggregators and technology. Warehousing facilities in the
Agriculture Market Yards and cold storage facilities would insulate the farmer
from fluctuations in returns to the farm produce.
FM has
announced Rs.15lakh farm credit amidst unwelcoming banker in the rural areas
and banks that have learnt the art of showing up in figures that they do not
deliver to the intended customers. It is heartening to see the push for Primary
Agricultural Credit Societies that were almost forgotten for decades. NABARD
that has half of its fleet serving Mumbai Headquarters should have been
restructured for focused attention on farm credit. She should have forsaken
tolerance for not achieving priority sector targets to take the RIDF window.
This is a lost opportunity.
While the
erstwhile lost focus on Education, Health and Hygiene has been regained with
appropriate budget allocations and set a new direction through internships in
higher education, unless infrastructure for primary education and teaching
skills are enhanced the foundations will remain weak. Introducing internships
in higher education has potential to make education fit the employment bill. We
may hope for a correction through the National Education Policy the Government
is planning to introduce.
The
District Teaching Hospitals and para medical services planned will sow the
seeds for sustainable health interventions. This just marks only a good beginning
as the effect can be felt only after five years.
With the
measly allocation for MNREGS and not linking it to the farm sector the budget
left a void. It failed to kindle the appetite for consumption, the trigger for
growth. The consumer is not left with much surpluses either for increased
investment or consumption. Growth impulses are not generated significantly.
MSME sector
has got a new direction with the introduction of sub-ordinated debt or equity
funding but it remains to be seen whether the Banks that failed them in credit
would meet the new equity route and help scaling up process. TReDs and GEMs are
not new interventions to talk of. Unless all the government departments and
PSUs enroll on these platforms, MSM|E vendors would not get their due. For
those moving to organized way of doing business with just 5% in cash are exempt
from audit up to Rs.5cr turnover.
In the last
budget, the FM made a reference to U.K. Sinha Committee Report, but she skipped
it now. Neither Distressed Asset Fund to ensure that no viable manufacturing
MSME downs its shutters, nor Fund of Funds found allocation in the Budget. In a
slowdown, it makes lot of sense to ensure that no viable manufacturing MSME
exits so that the workforce engaged therein would not add to the
unemployed.
Economic
Survey 2020 made a very detailed analysis of the banking in the financial
sector. FM did not seem much worried over the increase in frauds and poor
credit risk of the Banks. Although it is heartening to see that no further
capital allocation is made cutting into taxpayer’s purse, it is disappointing
to see the absence of reforms in this sector. It would have been most
appropriate to reduce the Government equity in these banks and usher in better
governance than now. Bad banking and good economy are not good companions.
Banks
irrespective of their size, in the current status will pull down the growth of
the economy. The only solace is to the depositor whose Rs.5lacs is insured
instead of just a lakh of rupees thus far. NBFCs are empowered to recover their
bad debts through the SARFAESI Act provisions on par with Banks.
Extraordinary
push to the digital economy with District Cyber Parks, AI, MML and ITES in
addition to Travel and Tourism is likely to enhance the contribution of the Services
sector. Start up, Stand Up India and Make in India have not thus far led to
increase in the contribution of manufacturing sector and this budget also did
not make significant strides to reverse the negative growth. Telangana State
seemed to have provided inspiration on this count.
Agriculture
sector alone may not reverse the slow growth of the economy. Employment
intensity has little scope to increase. Unless 20% credit -GDP ratio is
attained with better risk appetite among banks, recovery from slow growth is
doubtful.
If both the
government and private entities depend on market for raising the resources as
indicated in the Budget, revised estimates of the budgeted revenues and
expenditure fall short of growth expectations. The Budget failed to institute a
monitoring mechanism for implementation of the ambitious projects. States
should be taken into confidence while formulating the Budget as it is the
States that should catch up and cooperate for the aspirational goals and
ambitious announcements to turn into actions.
Intention
of the FM to keep more money in the hands of the people did not result in
compatible actions. Overall on a ten-point scale the Budget scores a liberal six,
more due to comprehensive treatment to the farm sector than other sectors.
Published
in Telangana Today 5th February 2020.
Sunday, February 2, 2020
Balanced Growth is Essential for Democracy
The fabric of
democracy depends on the social and economic consequences of the amendments to
the Constitution at a critical time in India’s economic history. Agitations
have caused loss of lot of man-days and diversion of productive time. Timing of change is important for the success
of change. This article does not intend to discuss the merits or otherwise of
the latest amendments to the Constitution – either Article 370 annulment or
CAA. The focus will be on the consequences of the economics of democracy and
not so much the politics.
In democracy, it is
the voice of the people expressed through the electoral vote. We have seen that
the vote bank rarely touched even 30 percent of eligible population. People who
caste their votes have mostly been the less endowed and widely spread across
all religions and castes and this has little prospect of change.
One of the world's
largest democracies had to wait for its day to overtake china's growth rate as
consensus doesn't come about without discussion and lot of deliberation.
Centralised planning of the Maholnobis-Nehruvian model though conceived well to
usher in socialistic pattern of society let off the principles of federalism to
come up with an experiment with Niti Aayog whose results are yet to be on the
dashboard of India. Development is more than growth.
Ethnic, cultural,
and religious diversity apart multiple languages form the Indian Union. This
diversity is both its strength and weakness. States formed on linguistic basis
with some of them larger than several countries had uneven natural endowments,
and imbalances in the dispensation of resources at the hands of central
government.
Notwithstanding the
average nominal growth of 8% between 2007-12, human development indices ranked
India at 129. 12.1cr (2011) population is covered by 24.95cr households with
average habitat population of slightly less than 5 per household. Poverty
levels have gone down in rural areas from 50% in 1993-94 to 23% in 2016-17 and
in urban areas correspondingly from approximately 32% to around 13%. Rural
roads constitute 70.2% of the total length of roads across the country. Quite a
few States have made CC roads instead of metal roads. As per 71st
round of NSS, Literacy levels too have gone up significantly to 69.1% by 2014.
Goldman Sachs'
estimated an average of 8% per annum during 2016-20 notwithstanding the prevailing
global turbulence. So did all the leading predictions from KPMG and McKinsey.
Although the NDA government announced the goals of good governance and
cooperative federalism, both remain still at the goalposts.
Unless States are
taken on board in this second largest democracy of the world, prospects of
sustained growth remain elusive. As at the end of March 2018, eleven of the
twenty-nine States (now 31 and 7 Union territories) showed consistently high
growth during the period 2014-18. If the nation were to attain the lofty goal
of $5trn by 2024-25, the rest of 20 should also join the minimum 8% growth
level. Bihar (14.50%), Chattisgarh (11.20%); Goa (14%), Karnataka (12.00);
Madhya Pradesh (around 18%); Maharashtra (10.6%); Tamil Nadu (12.30%);
Telangana (14.10%); Uttarakhand (11.20); West Bengal (16.10%) and a few North
Eastern States like Assam, Meghalaya also lead the list.
Government of India
would do well to lend all support to these leading States and push the other
lagging States through sustainable interventions in infrastructure,
communications, transport and tourism without giving scope for them to feel a
partisan approach. All the Global Investment opportunities should have
equitable spread.
Vice President in a
recent Address mentioned that 479 Parliamentarians are crorepatis. The State
Legislatures also are crowded with such crorepatis. Latest Oxfam Report (Jan
20, 2020) laments “Economic inequality is out of control. In 2019, the world’s
billionaires, only 2,153 people, had more wealth than 4.6 billion people.” The
Report attributes this to gender inequality and unpaid Care work at home by
women. The richest 1% have more than twice the wealth of the
6.9bn people.
One good suggestion for the Finance Minister at the
right time: taxing 0.5% of the richer 1% for the next 10years would be equal to
investment needed for 117mn jobs in education, health and elderly care. Good
governance demands that these rich sections shall not receive subsidies of the
order currently prevailing.
Availability of
health services, supply of drinking water remains inadequate and costly.
Availability of liquor, however, has enhanced adding significantly to the State
revenues. Both are causes of concern for the future of a healthy democracy.
The World Bank
projected that India, along with Brazil, China, Indonesia, South Korea, and
Russia, will account for more than half of the global growth by 2025 with an
average annual growth rate of 4.7 per cent between 2011 and 2025. While this
prediction is likely to undergo change in the context of current slowdown not
just in India but in all the major economies in the world, there is no chance
for India to alter its growth vision.
Addressing
the resource constraints (mainly water, energy, infrastructure and investing
more in human development (mainly public health and education) is important to
realize India’s growth potential. Consensual approach is the essence of a
successful democracy. India does not have the luxury of being otherwise.
(All the
latest data is sourced from the Report of the Ministry of Statistics and
Program Implementation, Government of India, 2018: www.mospi.gov.in )
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