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 5^th February 2020.

Balanced Growth is Essential for Democracy

https://www.thehindubusinessline.com/opinion/balanced-growth-is-essential-for-democracy/article30705183.ece

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 71^st 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 ) 

Inclusive Agenda

Dedicate the Decade to Women

Seven decades of Federal Republic made India sterner stuff. Optimists invariably look at the half full glass while pessimists see the other half that is empty. But in the other half lie the challenges and opportunities. This retrospect becomes necessary in the backdrop of the latest Oxfam Report on Inequality released on the eve of Davos World Economic Conference that just concluded, putting India in somewhat bad light.

India always proved its might and solidarity in every type of crisis. From Bengal famine and pestilence to fighting Pakistan, from Bhuj earthquake to Tsunami, continual floods of Brahmaputra, Ganges, and Godavari the huge diversity of the nation did not come in the way of overcoming all the crises.

India’s growth and poverty reduction with by far the second largest population in the world, has contributed even to reducing global inequality. Famous economist Surjit S. Bhalla is the first to differ from the international wisdom and establish that ‘if poor defined as fraction of population in 1980, then for each 10% rise in consumption by the non-poor, consumption by the poor rose by 18%. Millennium Development Goals (headcount ratio) target of less than 15% poor by 2015 was reached quite ahead and only 10% of the developing world was poor. Such reduction, however, has no parity when it came to reduction of inequalities.

World Development Report 2000/2001 mentioned: the average income in the richest 20 countries is 37 times the average in the poorest 20 – a gap that doubled in the previous 40 years.

Union and State Governments have independently and together evolved schemes benefitting the poor and absolute poverty in India declined substantially. Poverty levels have gone down in India from 50% in 1993-94 to 23% in 2016-17 in rural areas and in urban areas correspondingly from 32% to 13%. The unrecognized fact is that even rural infrastructure in terms of roads constitute 72% of the road length of the country. These developments need not lead us to complacence as there is lot more ground to cover.

Oxfam Report 2020 highlighted two aspects: the gap between the rich and the poor and even among poor, gender inequality. 2153 persons had more wealth than 4.6bn people. Report on India omits to mention the political constituency that is full of billionaires. If the perverse subsidy regime has to be reversed, it should start from this constituency in favour of poor women of the country.

The wide divergence is attributed however to the underpaid and unpaid care work of women in homes. The Report patently ignored the intangible contribution of women in India – a culture of caring for home and bringing up the family to prosperity.

V.V. Giri, the fourteenth child of the family became the President of India and he married a SC woman who was also a poet. While this is not to mention that there was virtue in big family, upbringing of the child to the expectation of the Mother is still sacred in many a Indian home. Mother is the first teacher in the home. Monetising her ‘care’ is the value she creates for the human resource.

During the last three decades, influenced by globalization and imbibing western culture, the otherwise high value and culture of Indian youth suffered such care. Indian women demonstrated in the past a unique balance between home and work, whether in rural or urban areas. This balancing act is at the core of the ‘care’. The feminist and human values argued by the Oxfam report needs a relook at least in India. It is not right to belittle the role of Mother.

My Mother, who gave birth to six sons and six daughters, though studied only class V, studied the Indian epics Mahabharat and Ramayana, Bhagavatham and Bhagavadgita apart from several books in Telugu literature and learnt English with her children. She always used to say with pride that her contribution to the GDP of the country was substantial and lay in the NRI remittances of her two sons who went abroad and the grandchildren working in the Information Technology sector abroad, her other sons and daughters traveling throughout India at different points of time in the year either on leisure holiday or pilgrimage. The progeny of my parents is 100 and half of them are working in different parts of the globe. She brought us up when my father started his income at Rs.23 per month in 1936 of British India to Rs.250 per month on the day of retirement in 1974!!

Measuring women’s contribution to India’s GDP terming as one of the lowest in the world at 17% needs correction as GDP hides more than what is revealed. The issue, it rightly says, at one point is not just limited to women’s participation in the workforce alone.

Violence against women is another aspect that has been widely reported both in the Report and outside. There is also regional difference and across the castes in such reports. Dalit women were invariably the target and mostly in northern and western India compared to the rest of India.

Villagers invariably debate on the need for girls getting engaged in wedding at the age of 15-16 to provide security to them. It is not so much the unpaid care work of women that is the source of violence and to support such argument citing Krishnaraj report of 1990-91 EPW is perhaps a travesty of the current trend.

During the last three decades, self-help group movement has substantially gained traction in empowering women economically. Economic empowerment for sure is the best way of providing sustainable intervention in women development.

Of course, what needs correction certainly is to make sure that ‘40% of 15-18 year-old-girls go to school. Empowering women will be empowering the nation. It is this context that calls for reservation to women in every field to move to one-third of the population irrespective of caste or creed in the place of all existing reservations. Once this happens, women in SCs, STs, backward castes, and OBCs will automatically fall in the reserved category and would rectify the societal imbalance. If this decade is dedicated to women, 71^st Republic Day 2020 will write the future history differently.

*The Author is an economist and the views are personal. Published in Telangana Today on 25.01.2020

Vision 2030: Unfinished Agenda that is fair, just and egalitarian

The 71st Republic Day makes me reflect on the unfinished agenda for growth before the nation and a vision for the next decade. It is one thing to set a quantitative goal post and quite another to move higher on a qualitative agenda.

 

Such a qualitative goal requires more inclusivity and higher sensitisation than what we have at present. 

 

As a citizen, I would like to dream of an India, where peace and tranquility prevail; where transparency in governance exists in all fields; where there would be 100% food security and 100% self-sufficiency for food; where market forces do not devour the poor and the weak in society. 

 

India should be a country where better water and farm management would lead to better employment and least migration to urban and metropolitan areas from the rural areas; where population growth would not stand as an impediment for further growth of the economy; where all the employables get fully employed and the less employables would be endowed with appropriate skills and knowledge for full employment; where there is free entry and exit for firms in the economy with no parasites. 

 

Also it should be a country where women can walk freely even at midnight anywhere in the country; where values of life fall in tune with the culture and ethos of the nation and where the digital divide between the rural and urban vanish; where information asymmetry and moral hazard do not exist and where all the sectors of the economy realize their mutual dependence to their mutual benefit and the growth rate of the economy would move to a double digit figure as a matter of practice. 

 

I recall what Swami Ranganadhananda said once: “I look forward to the day when rural people stop easing themselves in public and start eating in public.” 

 

The statement is profound and carries with it an agenda for action: provision of good sanitation, safe drinking water, crossing the caste and other societal barriers and food within the reach of all. 

 

Fortunately, during the last few years, the Swachh Bharat mission has taken the open-defecation-free (ODF) areas close to 80-90% in several cities, although a lot remains to be done in many rural areas. 

 

Aspirational Districts program would similarly make several lagging districts to come to the forefront. Still, a lot needs to be done for an ODF India and safe drinking water being universally available. This calls for a synthesis between social and economic budgeting.

 

The barriers to realising such a vision would be:

• Fragmented political will;

• High population growth;

• Poverty and low level of literacy;

• Inadequate resources;

• Weak financial sector mired in unrecovered corporate debts and frauds;

• Poor governance;

• Improper structural plans;

•  Institutionalization and harmonization of legal aspects to set up monitoring systems.

• Deficiencies in implementation.

 

Some of our strengths recognized worldwide are:

 

• A middle class estimated at 350 million out of a total population of over 1.2 billion providing a stable market;

• The second largest English-speaking scientific, technical and executive manpower in the world;

• An abundant supply of raw materials;

• An extensive rail and road network;

• A stable political system based on parliamentary democracy;

• A common legal system with English as the court language;

• India is emerging as a major market and investment destination;

• The dramatic economic reforms initiated in 1991 have left a wide canvas of positive thinking and affirmative action.

• India is one of the top five in the world’s growing economies even after this temporary slowdown (5% of gross domestic product (GDP) at the end of FY2020).

• The sweeping change from unorganized to organized ways of doing businesses with the introduction of the goods and services tax (GST), Real Estate Regulatory Authority (RERA) and the Insolvency and Bankruptcy Code (IBC).

• An ardent desire to pursue financial inclusion agenda and 

 

Another major strength is India’s ability to respond to crises:

 

When there was a crisis in meeting the food requirements against the backdrop of colonial misrule, with severe famine and large patches of drought, we fought it out valiantly through the green revolution and made India self-reliant in food; we are now on the threshold of food exports. When we had a crisis in foreign exchange, we ably steered through. 

 

Most of the natural calamities – recurring floods in several States or hard-hitting recurring cyclones in Andhra Pradesh (AP), Assam, West Bengal, Bihar, Tamil Nadu, earthquakes of Latur in Maharashtra or Bhuj in Gujarat; the Tsunami of 2004 in Tamil Nadu -- have been ably handled with domestic resources.

 

Gross inadequacies are noticed in terms of value addition due to inadequate attention to crop specific infrastructure and post-harvest technologies like pre-cooling, cold storages with assured power at uniform voltage, price hedging operations, and market reforms in the farm sector. 

 

Some States have initiated special studies in this regard to prioritize their investments in these areas and deploy the needed resources. The impacts of these initiatives would be felt in due course. However, there is a regulatory overhang in India with more than twelve Union ministries, corresponding state ministries, laws framed by the Union government with rules framed by the state governments for implementing them. 

 

Still, due to the several food control orders governing the production and trade of those commodities and crops into which the farmers would like to diversify, the farmer, rural industry and farm trade are virtually strangulated. While there is an awakening in respect of these areas, the speed of reforms and actions in these areas deserve urgent attention.

 

Farmers benefit from more accurate weighing, faster processing time, and prompt payment, and from access to a wide range of information, including accurate market price knowledge, and market trends, which help them decide when, where, and at what price to sell. E-NAM has not fully absorbed the e-Choupal model.

 

Farmers selling directly to ITC Ltd through an e-Choupal typically receive a higher price for their crops than they would receive through the mandi system, on an average about 2.5% higher. The total benefit to farmers includes lower prices for inputs and other goods, higher yields, and a sense of empowerment. The e-Choupal system has had a measurable impact on what farmers chose to do. The system also provides direct access to the farmer to information about conditions on the ground, improving planning and building relationships that increase its security of supply. Farmers Producers Organizations (FPO) are gaining ground, albeit slowly. FPOs need clusterisation to derive greater advantage. 

 

Every Law should stand the test of the Constitution and stakeholder consultation a priori and should be subject to regulatory impact assessment at the beginning of the first Parliament session of the year.

 

Increased urbanisation during the last five decades has not diminished the rural space significantly. Comprehensive connectivity of village complexes providing economic opportunities to all segments of people remains unfulfilled. 

 

The integrated method that will bring prosperity to rural areas envisages four types of connectivity: physical connectivity through quality roads and transport; electronic connectivity through telecom with high bandwidth fibre optic cables; knowledge connectivity through education, skill training for farmers, artisans and craftsmen and entrepreneurship programmes, where the future roadmap of economic growth lies. 

 

It is not so much globalisation that is important as global competitiveness that is the need and healthy growth of manufacturing micro, small and medium enterprises (MSMEs), empowering women and reordering the subsidy regime in all the fields. We have no room for complacence. 

https://www.moneylife.in/article/vision-2030-unfinished-agenda-for-an-india-that-is-fair-just-and-egalitarian/59226.html

 

Banking reforms the Budget should not miss

Banking Reforms the Budget should not miss

Former President of India, Pratibha Patil, in her address to the Lok Sabha on 4^th June 2009 said: “Our immediate priorities and programmes must be to focus on the management of the economy that will counter the effect of global (domestic) slowdown by a combination of sectoral and macrolevel policies.” She laid emphasis on accelerating growth that is ‘socially and regionally more inclusive’. 

The objective of overall policy in India is accelerated inclusive growth with macroeconomic stability. This approach is likely to reverberate in the ensuing Budget Session.

FM needs to give a measured response to the imperative outlined. In order to take the States on board, she may announce clearance of all the dues on GST to the States once the present audit of GST concludes. She may also like to give a new financial sector reform agenda to resolve the existing imbroglio. A few of the available options will be the focus of this article.

FM is at crosshairs between fiscal austerity and enhancing public spending to stimulate growth. Discomfort lies in the worst performance of Public Sector Banks (PSBs) and failure of NBFCs. While the RBI is balancing inflation and growth objectives, the recently released Financial Stability Report re-emphasis on the need for ‘good governance across board’, improving the performance of PSBs and the necessity to build buffers against their disproportionate operational risk losses.

None of the recent bank mergers added to her comfort. Hence there is need to look at the unfinished earlier reform agenda suggested by various Committees since 1991 and announce either a Reform Agenda or appointment of a High-Level Committee with a specific timeframe for actionable agenda that could stonewall criticism against the PSB failures, bank frauds and twin balance sheet problems. 

The issues surrounding banking are not peripheral.

The moral hazard consequence of banks receiving bailout is worrisome now and therefore, she may refrain from any further bailout announcement. Stress in the NBFCs and Cooperative banking seemed to have forced re-look at the Financial Resolution and Deposit Insurance Bill, 2017. While the Bill proposes to establish a Resolution Corporation to monitor the health of the financial providers on an ongoing basis, the bail-in by depositors and stakeholders is worrisome.

Increasing stress in various buckets of assets stands unabated and calls for a surgical strike. Banks’ credit origination risks need urgent evaluation. It is important to relook at the universal banking model the country adopted aping the west. Customer preferences and customer rights have taken a back seat.

Market-led reforms of the past have replaced social banking with profit-banking objective. 2025 $5trn GDP target should look at more efficient performance of banking as key to its achievement. There is a need for reconciling satisfactorily the dilemma of policies appropriate for short term with those suitable for the long term.

Governor, RBI in a recent address indicated that he would like to look at the priority sector categorization afresh to ensure that it delivers the intended. This assumes greater importance in financial inclusion agenda as efforts hitherto like Jandhan, Mudra etc could make only numerical and not qualitative advances. Provision of adequate and timely credit to the rural areas in general and agriculture, micro and small enterprises and weaker and vulnerable sectors, remained a major challenge for Indian banks for decades.

Direct credit programmes in Korea, Japan in 1950s and 1980s revealed the need for narrowly focused and nuanced programmes with sunset clauses delivered the results. The problem with directed credit is essentially three-fold: First, pricing at its true market level, second, avoidance of the persons who are not credit-constrained, and third, selection of focused areas and regions without political interference in undefined democracy.

Credit discipline and equity, the twin principles of credit dispensation suffered a systemic failure with politically motivated loan write-offs in several States. Both farm and micro and small enterprises require credit with extension, handholding, monitoring and supervision as key deliverable. This calls for out-of-the-box thinking.

While there has been broad recognition that increasing supply to cope with the rising demand through diversified lending institutions like small finance banks, and NBFCs of various hues, ever-increasing demand to cope with new technologies, low labour productivity, and absence of aggregators structurally to resolve the pricing of produce at the farmer’s doorstep, are all issues that require comprehensive solutions. Resources should not fall short of the requirement for such effort. Budget 2020-21 should make a bold and strategic announcement regarding the direction of investments in farm sector supportive for responsible credit flow. FM would do well to avoid announcing any crop loan targets and leave it to the RBI’s priority sector reformulation.

Supply-side issues cannot be adequately and appropriately addressed without institutional reforms focusing restructuring NABARD and giving a new mandate consistent with the future goals of the economy. SIDBI the second surviving DFI is living on interest arbitrage and enjoying the munificence of the Finance Ministry to the detriment of the sector it was intended to protect and promote. This also begs either closure or restructuring.

As regards governance of banks, the unattended reforms of Narasimham Committee -II deserve attention: Removing 10% voting rights; reducing the legally required public shareholding in PSBs from 51 to 33 percent; improving the Boards qualitatively with well-defined independent and functional directors’ roles.

Since the FM already announced that she is exploring the amendment to the Cooperative Act to skip the duality of regulation of cooperative banks by both the Registrar of Cooperative Societies and RBI, she would be going one step further in eliminating similar duality between her Department of Banking and RBI in so far as the PSBs are concerned, particularly because the RBI created separate Departments of Supervision and Regulation and College of Supervisors to improve the supervisory skills of RBI personnel.

the Hindu Business Line, 16.1.2020 https://t.co/eNEANVcaW8?amp=1

Uion Budget 2020 worrisome

Hardly the time for a tight fisted Budget 2020-21

FM in her second year of budget presentation has very unenviable task in performing a balancing act. GST revenues are looking southwards and the input tax credit, the key for success of GST is mired in data upload controversy and hostile inverted duty structure. Markets do not seem to worry about this going by the forward movement of indices, blowing against the wind.

PSBs absorbed all the capital that the government buffeted and yet did not perform. On top, some banks have acquired the notoriety in manipulating balance sheets. Frauds have surfaced like never before to Rs.71,543cr – a rise of 74% over the previous year in the financial sector. NBFCs too joined the cry for capital or regulatory relaxations.

Through legal process – IBC, SARFAESI Act, DRT and Lok Adalats, 14.9% in 2017-18 and 15.5% in 2018-19 is the amount recovered out of the claims lodged. Recovery through IBC at 42.5% is the highest, while it is 3.5% through DRTs, the lowest, according to RBI -M&M Economic Research.

No economic recovery will be possible with a crippling banking sector like the one we have today. Some Banks having Insurance and Mutual Funds are still entrusting targets under these subsidiaries to the regular banking staff taking away their productive time for selling banking products like deposits, credit and digital services.

Creating demand in rural, semi-urban, and urban areas would occur when the people have enough money in their hands. Credit has not moved in tandem with the demand from farmers and MSMEs in manufacturing. RBI doing its job by reduction of 135 basis points in the base rate has no spread effect in retail lending market as there is no risk appetite among banks.

Knowledge in banking products and services has come down significantly among line staff and this is the reason for credit origination risk escalating to failure in repayments. Capital infusion without rectification of the basic malaise and governance, will not address the problems.

Why worry about fiscal deficit when the denominator GDP has many undisclosed data escaping entries? Several economists make mountain of mole hill while speaking about fiscal deficit. Right from the Union Finance Ministry to the regulators, all converge on the fact that the slowdown of the economy is real and need demand boosters. There were occasions when we reached around 6-6.5 percent (2008-11) of GDP and the economy registered growth thereafter.

The worry on employment growth is real. Unemployed youth hitting the streets would exacerbate the security risks. Industry, despite the skill development initiatives, bemoans that they do not find the right persons for the right job.

Sector-wise, agriculture grew 2 percent while manufacture showed less than 1%. Make in India, the flagship manufacturing initiative has not shown uptick during the last four years in continuum. Services sector too is showing decline.

Priced education and health have made increasing demands on the government. Several States and Union Government have schemes like Arogya Sri, Kutumba Sri, Ayushman Bharati etc., and yet their reach to the intended is still facing issues in payment for the services to the hospitals. Affordability is still an issue.

What should be the measures in the budget to boost employment? Which sectors need focused attention from such perspective by way of fiscal incentives? How can the States be brought on the same page as the Union Government?

The slowdown is both cyclical and structural. There should be consensus between the States and Union Government on the way forward. Union Government should release post-haste all the payments for the pending works under MNREGS.

Several States and Union Government have huge arrears to suppliers, contractors and sub-contractors for several project works that has choked the bank working capital releases and all these payments should be released to the last pie.

The paltry pension to farmers at Rs.6000 per annum should be altered to Rs.12000 per cultivator whereby even the tenant farmers would be eligible for pension payment after 60 years. Since the scheme envisages payment by the farmer between 40 and 60 years of age his/her contribution, several farmers who are of 60 and above right now, would not be benefitting from the scheme. The scheme should benefit those who are above 60 now. Adequate budgetary provision is necessary.

Budget allocation for health sector should significantly go up to a minimum of 6% of the total outlay from both the States and Union. Health infrastructure is pretty poor and needs improvement.

Education budget should target universal education up to Class 12 and this happens when teacher pupil ratio significantly improves, and school infrastructure also improves. National Education Policy shall indicate the prospect of resource allocation as well.

Ensuing Budget should convert intent into actionable allocations in the critical sectors and lay a path firmly for cleaning up the banking sector. Frustration should not be at the breaking point.

Published in the Hindu Business Line, 3.1.2020

www.thehindubusinessline.com

Enhancing Competitiveness of MSMEs in Slowdown

Strategies for enhancing Competitiveness of Manufacturing MSMEs:

Muted manufacturing with PMI just around 51, a fall from about 54 almost couple of years back, increasing protectionism of the US, UK with the BREXIT winning a thumping majority for Boric Johnson and global trade winds heading to recession have taken the toll of India’s growth story. Industry would face more challenging times than before due not merely to adverse headwinds on external trade but the turbulence in the domestic economy. Enhancing competitiveness for manufacturing firms in the small sector has several challenges and these can turn into opportunities for growth.

Inefficiency, increasing fraud rates and faulty Bank Balance sheets of almost all the major Banks in India compounded the woes of domestic debt markets. No surprise that the equity suppliers like the VCs and Angel Funds are distancing themselves. The impact is the most on the vulnerable – MSMEs, particularly in the manufacturing segment. The thriving or successful even in this current environment are those SMEs in the Defense, Aerospace, Gems & Jewelry, pharmaceuticals and a few agro-industries linked to market giants like the ITC.

Nobody can have a guess of how many MSMEs shut their shops due to the Banks’ unwillingness to revive despite the RBI and GoI instructions as no ‘exit’ statistics are captured. The corporate sector exits alone show up in the data because the Ministry of Corporate Sector statutorily demands it and IBC has become a barometer for industry and financial institutions’ health.

Banks never gave data on number of units financed or closed but only number of accounts. Each unit can have number of accounts: term loans for specified purposes; working capital – cash credit, overdraft, SME Plus, etc., and unfunded limits like LCs, Guarantees etc.

Since 98 percent of the MSMEs are either partnerships or proprietary and are linked to onetime registration on Udyog Aadhar, there is no way the closed shutters get into the data. Even the industry and trade associations do not get a wind of the closures as several so-called members are irregular in the payment of membership subscription annually.

This scenario leaves the policy maker to public noise and a wild hunch. Every State is concerned about improving the ecosystem for the MSME sector and more in conjunction with the Union Government. States do know that a robust MSME sector is a red carpet for the global investors. However, improving the MSME competitiveness remains the biggest challenge and it requires a more holistic approach than now.

Information asymmetry and adverse selection continue to be the biggest blocks for institutional interventions, both financial and non-financial. Several MSMEs complain of a serious setback due to demonetization and GST. The reasons for such a far cry should be seen in the advantages they got without them: cash sales not routed through the bank accounts and yet several MSEs thrived until their debtors ditched them; inventories over-invoiced could get into the recorded working capital cycle with banks as the banks have been going by what is shown to them instead of what they should see and count for want of field visits; there have been many qualified ‘account experts’ to show the convenient excel spread sheets for securing working capital limits from banks; the small volumes these enterprises produce and the small size of the firms have also distanced them from the reach to markets; and there have been very few mentors and counsellors to advise responsibly either from the financial institutions or others to advise the units right financial discipline would get them all the gains they are looking for as also their entry to new markets.

GoI on its part, unleashed MUDRA, SME99Minute Loans and whipped up the Shamiana Camps that could give the lever to the FM to announce that the Banks sanctioned 8lakh loans amounting to Rs.70000cr in just two months, which they could not do for years!! Future NPAs would show the unknowns and unseen among such crowd. Dy. Governor, RBI recently sounded the alarm on the growing MUDRA account NPAs.

MSMEs on their part should earn their right to grow by following best accounting practices. Working capital management basically rests on four important factors:

•       Predictability of Cycle

•       Material flows

•       Receivable – overdue

•       Independent Credit rating agencies’ assessments.

Some more essentials are set out below:

(i) Realistic Assessment of Morale Building Assurances: MSMEs would be well advised to cautiously assess morale building assurances during the current slowdown of the economy. MSMEs which accepted such assurances in the backdrop of global recession of 2008 and built up capacities and kept up production levels, resulting in very high inventories, were devastated. Furthermore, when demand for a product falls, there could be pressures on small enterprises not to cut output as this would eventually result in labour lay- offs. Units that accepted such suasion faced disastrous outcomes.

(ii) Capacity Expansion: Quite often, MSMEs come to the erroneous conclusion that their product would experience an unrealistically high increase in demand. Units which build up capacities on tenuous information invariably end up with serious problems. In a savagely competitive environment, it is these small units that end up in ‘fire sales’ which are available to buyers at attractive prices. There is merit in building up financial resources to avail of such opportunities rather than increasing the capacity of their existing units. It is time to realize that coopetition would bring better synergies among similar producers to meet up with temporary surge in demand.

(iii) Interest Rate Cycles and Excessive Dependence on Bank Credit: During the expansionary phase of the credit cycle, banks are only too willing to lend but during the downturn small borrowers are invariably the first casualties in being denied additional credit. As an abundantly prudent measure, MSMEs are well advised to seek bank credit essentially for inventory financing but be very cautious when using bank finance for capital expenditure. Excessive borrowing for capital expenditure generally puts MSMEs in to distress during cyclical movements in the economy. It is good to learn to build equity gradually from out of the revenues and avoid excess leverage. They should learn to conform to financial discipline when alone they will win the trust of investors. Strategic partnerships are best bet in times of stress and not overindulging in debt. It is good news for the MSMEs that Government of India has extended the Interest Subvention Scheme up to March 2021.

(iv) Importance of an Appropriate Exchange Rate: MSMEs account for about 40 per cent of exports. It is unfortunate that there is a widely held perception that a strong rupee exchange rate reflects good macroeconomic management. This is clearly erroneous. Large industry is generally import intensive while small industry is export intensive. Hence a strong exchange rate of the rupee (i.e. an overvalued rupee) helps large industry and hurts MSMEs. It is not as if the exchange rate should be excessively undervalued. As a rule of thumb, over the medium/long-term, the nominal exchange rate of the rupee vis-à-vis the major industrial country currencies, should be adjusted downward based on the inflation rate differentials between India and the major industrial countries. An overvalued exchange rate makes MSMEs uncompetitive in international markets. MSMEs should not attempt to be forex traders; they should concentrate on their own line of production.

As a staunch optimist and believer in the excellent capabilities of MSMEs in innovation, incubation and future growth, least expensive handholding, mentoring and counselling as process consulting tools have immense scope to become highly competitive both domestically and globally if certain synergies are built into the system. Telangana Industrial Health Clinic Ltd has adequate capabilities in this exclusive portfolio of handholding, mentoring and counseling as a preventive and stress relieving measure.

Supply Chain to Value Chain:

There is need for building ‘pools’ or aggregators to gain both cost advantage and brand image through co-branding of products.

India Mart are trying to do supply chain aggregation. MSME online Bangalore is also trying to evolve an ecosystem where a lot of questions of MSME are getting answered by about 50 consultants and they have started CEO Club for taking MSME entrepreneurs to next level by having a monthly meeting. Jeevan is trying to develop a 360' view for developing the ecosystem in Hyderabad on Hub and Scope model. These are welcome initiatives, no doubt. They need traction.

Many of the user population should not merely know such initiatives but should also know how best to access them. Second, by aggregators, I mean those that are fully capable of building a common brand for a set of products from the micro and small manufacturing enterprises through building also their capacities and capabilities to rise above their existing levels, introduce those practices and technologies that make them closer to the global standards even if sold in domestic markets and secure price at their doorstep within the promised wait-in period. These would mean investment on the part of aggregator and a price that the aggregator should legitimately get for such services without losing the competitiveness in the market. Ipso facto, it would mean that at the firm level, cost reduction should take place at each link in the value chain. There are different ways of doing it.

The Industry Associations can develop a Marketing Arm and establish net linkages with e-commerce players; 2. they can help the industry avail the host of incentives waiting to be used from the GoI-MSME schemes; 3. they can establish linkage with NSIC, MSME-DI and such other institutions. 

MSMEs should earn their right to grow. This happens only when they are quality conscious where precision, functionality and producing premium products will be their driving forces. Their passion and pride rest on satisfied customer. Intellectual property rights, improved technology processes and getting equity to fund such technologies are all their sustainable future. Employee retention strategies depend not just on higher remuneration but on building trust and social cohesion as also gender equity.

MSMEs should also realize that death is a process of development. They must know when to exit from the enterprise and how. Strategies to clear sovereign dues and realization of overdue creditors on a mission mode pre-exit have a clear role. Ignoring them will be suicidal.

*Author of ‘The Story of Indian MSMEs: Despair to Dawn of Hope’ (2019) is an economist and Adviser, Government of Telangana, Telangana Industrial Health Clinic Ltd., Hyderabad (www.yerramraju1.com)

https://www.moneylife.in/article/enhancing-competitiveness-of-manufacturing-msmes-i/58932.html 18.12.2019 and 19.12.2019