Cumbersome Guarantees and Insurances for MSEs Need Redress

This Blog was published in the Times of India ( see the link below)

Micro, Small, and Medium Enterprises (MSMEs) are extolled as the engines of employment, growth, and key to the supply chain management of medium and large corporate enterprises, leading exporters, manufacture over 6000 products. They have been redefined during the first Covid-19 disruptions to the economy in terms of investment and turnover, replacing the earlier definition restricted to investment in plants and machinery. This sector is next to agriculture which employs the largest number of persons. 98% of enterprises are micro, mostly owned by proprietors or partners. Even partnerships are to a large extent family partners.

Access to credit for the sector is the Achilles Heel. To provide easy and better access the GoI and SIDBI have set up Credit Guarantee Trust for Micro and Small Enterprises in 2000 (CGTMSE). Even during the pandemic, GoI introduced Emergency Credit Linked Guarantee Scheme under Atma Nirbhar Bharat Abhiyan with CGTMSE holding the baby.

But did the sector gain much from the insurances and guarantees in their existing shape? This needs a probe.

Insurance:

When the small-scale industries of Yester decades used to take out insurance cover for the plant and machinery against fire, riot, and risks, through the liability jointly owned by both the credit institution and the borrowing enterprise. After universal banking was ushered in, several banks took to Bank Assurance. A transparent joint insurance policy gave place to a policy that just lists the names of the borrowing MSME firms with the amount insured. The firms are ignorant of their liability under such policy and its renewal terms annually.

There is no evidence of any insurance claim of such bank insurance of enterprise machinery as a primary asset response. On the other hand, as several MSMEs noted that banks have over-booked insurance premium amount upfront with every loan sanction – whether term loan or working capital. Never did such insurance pay off for the MSE in trouble.

Both the MSMEs and the Banks have debated their mutual deficiencies in several media discussions, and they are plagued by mutual distrust.

While the redefinition helped many scale up their enterprises and move to exports quickly, there were lakhs that shut their doors during the pandemic. The impact of redefining has been such that a negative 1.8% MSE outstanding loan in FY20 has moved to 4.8% year-on-year by the third quarter as the existing.

Guarantees:

The 'strength' of a guarantee that allows credit to the enterprises without collateral or third party, is context-dependent: it depends on its nature, the legal environments that are relevant, current practices, and the context when the lender exercises his right. Yet, for twenty years, institutional credit to the sector leaves a gaping hole of Rs.279 trillion according to the International Financial Corporation (2015) study.

RBI mandated Banks to extend credit to micro-enterprises under CGTMSE up to Rs.10lakhs per enterprise. While the CGTMSE can extend guarantees to MSEs up to Rs.2crore, the covers range from 75 to 85 percent of the loans. During the last three years (2018-21), even retail loans and the service sector are being covered with guarantees while the extent of such guarantees is limited to 50% of retail loans. One hundred Member-Lending institutions (MLIs) that include 23 NBFCs are availing of the facility and yet several of them express serious reservations over such ailment.

Annual Report of CGTMSE for Fy2021 reveals that 47 percent of guarantees pertained to loan amounts of less than Rs.10lakhs (mandated by the RBI to extend without any collateral); 18% are in the range of loan amount of Rs.10lakhs-25lakhs; 14% are in the range of Rs.25lakhs-50lakhs; 12% are in the range of Rs.50lakhs-100lakhs, and 9% are in the range of Rs.100lakhs-200lakhs. Rs.45,851crore have been provided guarantee cover during the year 2020-21.

MLI concerns:

The guarantee portfolio increased after the retail, hybrid-collateral, and NBFCs joined, as these three constituted 49% of the guarantees extended during FY 21. It is the 1.18crore of the 6.3crore MSMEs that need a guarantee more than the rest. MLIs opine that the guarantee premium of 1-1.25 percent involved a lot of paperwork, follow-up for receiving the claim amount that too, after declaring the asset as NPA.

Banks have to prove that they have taken all the measures that include issuing legal notices, follow-up on recovery, provisioning for the loans, and proceeding against the borrowers under SARFAESI Act where the assets are partially guaranteed. These factors lead to a lack of trust by the CGTMSE both the MSEs and Banks.

The Way Forward

MSEs in manufacturing that forms an important component of sustainable supply chain management of Industry 4.0 need different forms of credit acceleration and insurance mechanism.

While the Banks should evaluate the credit risks of such enterprises on transparent parameters and extend credit to MSEs along with counseling, mentoring, and follow-up, the enterprises should digitize their operations and derive benefits from a large number of schemes recently floated by the Ministry of MSME, GoI.

Since fourteen states take 88 percent of MSE outstanding credit, and these MSEs reported less NPAs than their elder brothers in the corporate sector, each enterprise can be insured for various risks that include, fire, riot risks, natural calamities, the pandemic-like situations, plant and machinery, storage, other supply-chain disruptions, and cash flows on a graded scale. Once the enterprise pays the premium based on the risk it chooses to cover, and such risks are well-measured, insurance will ensure that the enterprise will be a going concern, and banks can extend the needed help duly assessing their risk cover as well. It is time for a change the guarantee is looked at and replaced it with Insurance, for which purpose, the GoI may appoint a High-powered Committee.

The policy should be transparent and discussed with the stakeholders in at least ten of the fourteen MSME-dominant states before introduction.

https://timesofindia.indiatimes.com/blogs/fincorp/cumbersome-guarantees-and-insurances-for-mses-need-redress/

 

 

Future Agenda for Cooperatives

FUTURE CO-OPERATIVE AGENDA

B. Yerram Raju*

 

The Home Minister and Union Minister for Cooperation, Amit Shah held a meeting of state ministers to reformulate and revise the National Co-operative Policy, 2022 in the aftermath of the resistance of the states to the  97^th Constitutional Amendment 2012 and the consequential changed milieu in the Co-operative movement of the Country.

 

The widely spread Co-operatives from brooms to looms; from fertilizer to food; from production to consumption; from milk to silk and from labour to power have their roots lie in the setting up of Primary Agricultural Co-operative Credit Societies (PACS) in 1904. Entire cooperative legislation has been catering more to the credit cooperative structure al bait several imbalances and irregularities and faulty accounting practices. Urban Cooperative Banks (UCBs), like the community banks in the US, has been serving the limited requirements of the interested cooperators and have become symbols of mismanagement and poor governance, requiring continual intervention and regulatory architecture from the RBI to protect the interests of the depositors who invested in those banks.

‘Cooperatives are operatives in misappropriation’, bemoaned some famous cooperators like L.C. Jain and eminent bankers like Burra Venkatappapaiah, in the yesteryears. After the Third Five-Year Plan, the Five-Year Plan (FYP) documents removed the chapter on Cooperation. After NABARD assumed charge of supervision of the rural cooperative credit structure, their size and contribution to agriculture and rural development significantly declined giving more space to the less-interested commercial banks. There has been a strategy retreat from ‘Farmers’ Service Societies’ (multi-purpose cooperatives) financed earlier by the commercial banks

Context, Rationale, and the problems

The lofty ideal of Gram Swaraj embedded in Panchayats and Cooperatives came to occupy secondary status despite the 73rd and 74th Amendments to the Constitution of India, mired in confusing objectives and corrupt practices. Cooperatives originally started with the laudable socio-economic goal of helping the unreached and as effective instruments of financial inclusion, are today under the seizure of the political elite and became in fact the seedbeds of political power. The elected representatives like the Presidents, Vice Presidents, and Board of Directors appointed secretaries would do the things they want and not what the members legitimately expected of them.

Cooperative Federalism demands that the states have to be taken on board over any new policy changes as the subject of cooperation falls in the domain of the states and not the union government.

Martin Luther King Jr, once stated, “Almost always, it is the creative dedicated minority that has made the world better.” The largest food brand in India – AMUL proved that cooperatives are the best bet for survival. “If you want to be incrementally better, be competitive. If you want to be exponentially better, be cooperative,” a Canadian Lesson Book on Cooperatives quoted.

Recommendation:

            The Government should reformulate its Future Co-operative Agenda to professionalize and democratize the Co-operatives and also to facilitate the development of the Co-operatives as Self-reliant and economically sustainable organizations in order to provide an environment for the members to have improved access, economies of scale, insuring them against unforeseen risks, safeguarding them against market imperfections and bestowing the advantages of Co-operative Collective Action, based on International Co-operative Principles.

Policy on Future Co-operative Agenda:

 

Definition of cooperatives should avoid their classification that gives a long arm to the regulator.

 

* While upholding the values and principles of Cooperation, the Policy recognizes the Cooperatives as an autonomous association of persons, united voluntarily to meet their common economic, social, and cultural needs and aspirations through a jointly-owned and democratically-controlled enterprise.

 

This Policy addresses the hitherto unaddressed or neglected issues of management, governance, audit, and member-run democratic structure of the cooperatives in the country through legal, accounting, technological and structural changes and therefore would prove its supremacy over other economic instruments in the interest of inclusive growth, a goal not to be missed by any democratic government.

 

Registrar of Cooperatives – role shall not be so much of intervention as registration, maintaining membership data and arbitration over the issues that arise among the co-operators and cooperatives.

 

Key Risk Areas:

1. The political will to implement such policy throughout the length and breadth of the country.
2. Speed of action
3. Resources for implementing change – Budgetary provisions; Endorsement of Niti Aayog – the think tank of the present government and
4. Approvals from RBI and SEBI, where required.

 

Strategies To Achieve The Objectives:

          Technology offers a level playing field and therefore, there must be a plan for technology infusion. Co-operatives being financially weak enterprises owing to their excessive obligations enjoined upon by the state governments, funds for technology management should come from the State Government as a one-time grant/support with conformance to certain discipline by the leadership in Co-operatives from the primary to the apex levels in all the spheres.

          The Investment in technology can come as a grant or soft loan assistance from either the government or an international organization. Co-operatives that have adequate collaterals to offer can be enabled to do so with the approval of their respective General Body. The tenor of assistance can be mutually agreed upon between the giver and taker.

Monitoring and Implementation

There shall be a Policy Review Committee, meeting at half-yearly intervals, at the State and Union Government levels with the concerned Secretary-in-charge to chair the deliberations at quarterly intervals. The concerned Minister shall present to the Parliament’s first session of the year, a review of the efficacy of the delivery instruments under the Cooperative Act.

 

Conclusion

The vision for the twenty-first century should withstand the challenges of a competitive business environment where excellence, efficiency, and high productivity parameters will be the priority. Emphasis will continue to be laid on an improvement with co-operative governance through the process of restructuring and rejuvenation.

  

Draft MSME Policy falls short of reality

 MSME vision falls short of reality 

BY TELANGANA TODAY

21 FEBRUARY 22

By B Yerram Raju

The Draft National MSME Policy, targeting V-shaped recovery after the Covid pandemic and the $5-trillion economy by 2025 (since extended by two years to 2027), seems to have seen the world more than India. There is a virtue in looking at the policies of other countries during the pandemic. However, the policy nowhere mentions the reasons for not adopting some of the policies, particularly employment as one of the criteria for defining the sector, when we say from rooftops that MSMEs are employment-intensive.

The virtue of the document is the Vision: “Stimulate efficiency and productivity of MSME sector to generate income, employment and become part of domestic and global value chains taking into account structural transformation, competitive edge, demographic dividend, and regional balance.” The objectives highlight building an eco-system for the growth of the sector, sensitising stakeholders, creating physical infrastructure and linkages amenable to MSMEs, developing a framework for accessible and affordable technology upgradation, and an appropriate institutional mechanism

Historical Data!
It wants to develop a platform to create an integrated database under a uniform format. It nowhere mentions that a census of the sector will be taken. Its data for the present is historical – a mess-up of manufacturing and services. 63.9 million enterprises and 111 million employment are figures of 2015. Where could one find the six crore units while one finds only 70 lakh on the Udyam portal? According to the NSSO data (73rd round), 14 States account for 88% of the MSMEs. While 98% are micro-enterprises, only 11-12% are in the reckoning for manufacturing.

We must have a periodical census of the MSMEs that spread across several sectors – agriculture, KVIC, artisans, rural development, technology, food processing — as none is aware of the mortality of enterprises. A study of 1,079 units of Sidbi in the wake of the pandemic revealed that 63% of units are closed and 67% lost 50% revenues. ISID (Bengaluru) found out only 16% of micro manufacturing units (as defined in July 2020) are functional. The mortality of units is not captured in any reliable data frame. This will be possible only when a census is taken periodically.

It has extensively given the facilitation to the SMEs in several countries but mentioned only 6 States’ policy innovations in Annexure-IV that represent 28% of MSMEs in India (NSSO). It is good to see the extensive reference to the Prabhat Kumar Committee (2017) to which no reference has been made during the last five years and very useful inputs have found a place in the draft. Widening the Tool Room set-up is a welcome policy intervention.

Legal Reform
As the MSME Development Act (2006) has dealt with the MSEs, an important subject of the Act, disproportionately, a separate law should be enacted and while so doing, redefine the sector in terms of the twin criteria of employment and turnover as investment by them will not cross Rs 5 crore. This would facilitate scaling up as well.

Existing EPF is hardly adequate to take care of eventualities as we noticed in the pandemic. Like in the farm sector, all such enterprises should be covered with specific insurance for employees. This would also enable data on employment more dependable for synchronisation of other benefits to the sector.

Definition
The consequence of the revised definition on the twin criteria of investment and turnover has been dealt with but failed to emphasise its effect on the manufacturing sector. Till date, many do not know whether it is retrospective, if so from which date and if not, from which prospective date it is applicable. While we welcomed the change in July 2020, six months after the first Covid attack, micro enterprises in the pre-July 2020 period were virtually the most hit.

Relief Measures
Banks did not extend the Atma Nirbhar Bharat Abhiyan scheme -1 covering moratorium and 20% increase in working capital to the micro manufacturing enterprises. Among the small, those who had collateral securities and the medium enterprises or mid-corporate enterprises were extended the benefits, according to a few sample surveys conducted by RBI (they did not reach out to the micro), Sidbi, ILO, Skoch, IMT, etc.

A sample study of 1,079 units in the country over the effect of Covid-19 that Sidbi presented should unnerve the economy: 67% of the MSMEs are half-shut, and 63% closed. Where did the money spent under Atma Nirbhar Bharat to the extent of more than Rs 3 lakh crore go?

Facilitation, Promotion Councils
The objective of the facilitation council – resolving delayed payments of MSEs – has been side-tracked and the policy contours expected from the States has been expanded to converting them into promotion/development councils in coordination with the National MSME Promotion Council. They should have first targeted strengthening the MSEFCs, as they are quasi-judicial, and then considered establishment of MSME Promotion Councils with specific institutional framework and objectives of functioning.

Funds and their utilisation
No evaluation of various funds and Fund of Funds released during 2020-22 through Sidbi and SBI has found a place, either for continuance, modification or enhancement. Which sector has benefited the most? And what further steps are needed to get effective returns on such investments and incentives? Answers are needed to these questions.

Budget Utilisation
Of the Rs 7,572.20 crore earmarked for the MSME Ministry in the Budget 2020-21, Rs 5,647.50 crore was spent across various schemes while the remaining 25% or around Rs 1,924.7 crore was left unspent. In comparison, 99.39% of the allocated Rs 6,552.61 crore during 2018-19 and 95.81% of the Rs 7,011.29 crore allocated during 2019-20 were spent with only less than 1% and 4% of underspending respectively, said the MSME Minister in the Lok Sabha.

Equity should flow to the sector from the Fund of Funds at the lowest cost to the MSEs. Following suggestions of the Prabhat Kumar Committee, meeting a part of listing expenses for small enterprises scaling up to medium or for raising equity in the stock exchanges, establishment of SME Equity Fund, modifications to the rating scheme specific to manufacturing MSEs, and creating a separate fund for Revival and Restructuring through a separate Industrial Health Clinic like in Telangana need incorporation in the policy.

State-specific Brand Equity Fund from Fund of Funds should be set up by Sidbi on the following norms:
•All SMEs can co-brand with this if they have ISO certification or any other globally accepted certification standard.
•Share in the equity would be dispensed by the State government through a specially constituted committee in proportion to the size of the business.
•Misuse or abuse of the Brand would entail heavy penalties including criminal prosecution where warranted.

The Market Development Fund currently in operation has not reached many units in the small-scale sector. This fund should be accessed by the State government and dispensed through the same expert committee constituted for the Brand Equity Fund. Like the Trade Development Board of Singapore, this MDF should be made available for those SSI units co-branding and joining for large tenders of other State governments or any global contracts as a loan for matured tenders and as subsidy for unmatured tenders.

The author is an economist and risk management specialist. Views are personal.

 

Disappointing Union Budget 2023

 

Bluster Budget

BYTELANGANA TODAY

B. Yerram Raju

PUBLISHED: 6TH FEB 2022 12:02 AM | UPDATED: 5TH FEB 2022 10:27 PM

Budget leaves these ladies in search of viable options

Usually, the Economic Survey presented a day before the Union Budget is expected to lay the foundation for a policy direction. It acknowledges the challenging times for policymaking – this time against the backdrop of the pandemic impact, especially on the vulnerable sections, fall in consumption in the medium term and serious supply-side disruptions. There are some half-truths as well when it said that government expenditure has pushed consumption by 7% in 2021-22. Even credit flow was tepid till the end of the second quarter of this fiscal.

The Union government’s debt crossed 59.3% of GDP from 49.1% a year ago. Recovery of the economy is unlikely to contain fiscal deficit as the major item of investment is through public debt and less through tax revenue. The Finance Minister’s Budget speech has little substance to combat either inflation or inclusivity. It also seemed to ignore several suggestions from the pre-Budget meetings.

Roads, highways, and railways are dependent on States for making available the land but the States have not been taken into confidence and several State-led projects were not supported by the Union government

The Budget has laid, of course, a foundation for large investments in infrastructure to flow under public-private partnership. But roads, highways and railways are dependent on States for making available the land, and the States have not been taken into confidence. Several State-led projects were not supported by the Union government during the year. The same is the case with the integration of rivers —Godavari, Krishna and Cauvery.

Missing Mentions

The Budget disappoints on inclusive development and climate change. Waste management has no incentive and de-carbonisation too was little talked about. Infrastructure development leads only to temporary employment and in the context of migratory unemployment that saw people dying on railway platforms and highways, literally starving during the first Covid-19 lockdown, and their returning to work, there are no clues. Inflation is least talked about.

The increase in GST (Goods and Services Tax) on which there was wide applause is more on account of inflation than due to the increase in productivity going by the drop in IIP. There was no mention of the revival of manufacturing NPAs in Atma Nirbhar Bharat Abhiyan though the extension of the guarantee mechanism under CGTMSE (Credit Guarantee Fund Trust for Micro and Small Enterprises) modification and Sovereign Bond replacing the guarantee for tender participation in public sector markets are most welcome for MSMEs. It is the medium enterprises that got the best of the bargain. The agriculture sector received an apologetic approach — a rise in MSP for wheat and rice accompanied by a fall in subsidy for fertilizers by Rs 35,000 crore.

Gujarat is Nation!

No wonder the Chief Minister of Telangana in a deservedly hard-hitting address, highlighted the thinking and approach of the Union government on several issues, and particularly, those relating to Telangana. For eight years, ie, since the inception of the State, Rs 42,000 crore is all that was given under Central schemes. This is far below the disbursements made by the State under the Rythu Bandhu scheme alone. Jal Shakti, the much-touted scheme of the Union government, had an allocation of just Rs 60,000 crore while Telangana spent Rs 40,000 crore on Mission Kakatiya and Mission Bhagiratha. The country holds 65,000 TMC of water with just around 35,000 TMC utilised. The water policy of the nation is in a shambles.

When the International Arbitration Centre was officially launched at Hyderabad and the State government has allotted enough space for it, it is strange that the Budget announced it as a gift to the GIFT city of Gujarat!

Uniform GST rate for toys, a policy framework for the toy industry and targeting at least 1% of the market share from China would mean a Rs 10,000-crore opportunity for the MSEs. The Budget has done little

Bihar Special Package, Gujarat Bullet Train, Karnataka Metro, Bundelkhand Defence Corridor had space but nothing for Telangana. Gujarat is the only State that received a mention in the allocations to the States as if Gujarat alone represents the nation!!

Further, the Budget should usually consider a few recommendations of statutory bodies like the Finance Commissions and the NITI Aayog. This Budget quietly slipped the recommended allocations to Telangana both under the 14th and 15th Finance Commissions depriving the legitimate share of the State in the Union Budget.

Even under the AP State Reorganization Act, 2013, allocations for important projects like IIM, IIT, IT corridor, Warangal-Hyderabad industrial corridor are forgotten despite repeated representations from the State. This squint-eyed approach of the Union government makes one wonder whether we are under a federal democracy or a unitary rule. This is the reason for K Chandrashekhar Rao calling for rewriting the Indian Constitution, which has seen more than 120 amendments.

The International Arbitration Centre was officially launched at Hyderabad but it is strange that the Budget announced it as a gift to the GIFT city of Gujarat!

Devils that lie in details

Legitimising Crypto

The Budget legitimised the illegal cryptocurrency that has the potential for killing the monetary stability of the large population by taxing 30% of those assets. Finance Minister Nirmala Sitharaman said a “digital rupee using blockchain and other technologies” will be issued by the Reserve Bank of India in 2022-23. “It will also lead to a more efficient and cheaper currency management system.”

The RBI coming up with digital currency would add fuel to the fire, as it may help only the fintechs. This could lead to financial instability in the days to come. Digital literacy is at a 32% level and general literacy at more than 45%. There is a cyber-fraud every day draining the hard-earned savings of lakhs of persons hurting their livelihoods as well.

NEP Neglected

There has been no increase in the allocation for the education sector. The National Education Policy demands at least 4-5% of allocation for the education sector but it ended up with less than 2%. The pandemic led to several uncertainties in education — a mix of institutional and digital education — and the complicity of some digital institutions awarding MBA degree that has been rightly discredited by the AICTE.

Poor Health

The health sector, despite all encomiums in her speech for the remarkable speed and efficiency in delivery of vaccines and improvements in health infrastructure during the year, did not receive even 6% allocation.

Uncertain Jobs

Employment had a serious setback due to the pandemic. Employment expectations on account of infrastructure projects under the PPP model will be project-driven and not stability and security for the persons employed. Fifty lakh persons to be employed in such projects and services sector would be a mythical figure. The Budget is hollow here.

Takers for Tourism

Tourism and hospitality sectors received a big-ticket. But all of it would depend on the people’s confidence in safe travel and safe food. Supply chains for this sector are in serious problems. The allocations would give a psychological boost for the sectors and would not materially alter their fortunes at least for six months after the Omicron settles down without any further variants hitting the economies around the globe.

Globally, commodity markets indicate a slump and have all portends of inflation.

Budget quietly slips the recommended allocations to Telangana both under the 14th and 15th Finance Commissions depriving the legitimate share of the State in the Union Budget

MSME Sector

The MSME Sector has some things to cheer about but much to mourn. Extension of ECLGS (Emergency Credit Line Guarantee Scheme) till March 2023 is welcome but they expect that the banks should extend the facilities to the most beleaguered micro and small manufacturing enterprises. Rs 6,000 crore over the next five years for a rating tool for the sector creates more fears as 98% of enterprises are proprietary and partnerships (family concerns).

The organic databases of G to C, B to B, and B to C would perform as portals with interlinkage of Udhyam, e-Shram, National Career Service (NCS) and Aatamanirbhar Skilled Employee Employer Mapping (ASEEM) portals, giving data a big push. There is no indication whether data itself would provide security instead of collaterals or guarantees sought by banks. The proposal to initiate a completely paperless, end-to-end online e-Bill System in all central ministries will greatly help MSME suppliers as it is to reduce delays in payments and make the process transparent. It is, however, doubtful whether this step would boost skilling, re-skilling, up-skilling and promote new enterprises because of the present levels of digitisation of the MSEs.

Micro and small manufacturers or service providers are sub-contractors and the FM’s announcement of substituting guarantees demanded by the governments and PSUs by a surety bond at the hands of insurance companies could be saving the working capital gap. It is important to see the fine print here and that the subcontractors get their due share.

A fund with blended capital raised under co-investment model facilitated through Nabard to finance startups in agriculture and rural enterprises for farm produce value chain is proposed. Startups will be promoted for Drone Shakti. It will be the large among the SMEs that may take advantage of this scheme. It also depends upon the way the co-investment model is structured by Nabard.

We have not seen much traction of PE/VC investments in manufacturing MSEs and hope that the Expert Committee proposed would provide sufficient comfort for the sector’s access to these funds. Extension of tax redemption by one more year for startups beyond the existing three years would help many service sector enterprises.

Micro and small manufacturing enterprises were the worst hit during the pandemic and many have not been able to revive. While speaking about Atma Nirbhar Bharat Abhiyan, the FM chose to ignore the failure of the subordinate debt scheme meant to revive the NPAs as all banks have woven a wet cloth around it. The manufacturing sector, due to severe supply chain disruptions, has grown only by a modest 1.3% (IIP).

MSEs have sought the lowest cost of capital of which, there was no mention in the Budget. Uniform GST rate for toys, a policy framework for the toy industry and targeting at least one per cent of the market share from China would mean a Rs 10,000 crore opportunity for the MSEs. The sector has been demanding cash-flow-based working capital assessment from the banks as recommended by UK Sinha Committee on which there was no word.

The Budget has done little for pushing consumer demand, particularly in the context of McKinsey estimate of a fall in the retail grocery market by 20% in the next five years.

If GST has peaked to Rs 1.40 lakh crore, it is because of inflation and not because of high buoyancy in production and productivity of the industry. Industry is struggling to stay afloat

Doing Business will be Difficult

To establish a globally competitive business environment for certain domestic companies, a concessional tax regime of 15% was introduced by the government for newly incorporated domestic manufacturing companies. The FM extended the last date for commencement of manufacturing or production under section 115BAB by one year, ie, from March 31, 2023, to March 31, 2024.

The ‘One Station One Product’ concept is laudable as a souvenir shop will help generate business and spread awareness about local art and craft.

Although the Budget 2022-23 proposes several initiatives for ‘Ease of Doing Business’, including modernisation of building byelaws, Unique Land Parcel Identification Number for IT-based management of land records, Accelerated Corporate Exit and introduction of new ‘Updated return’ — a provision to file an Updated Return on payment of additional tax, the cost of doing business is bound to go up and this will dampen the initiative.

The country needs judicial reforms and several regulatory reforms to make us highly competitive. The Budget was silent on these. The issue of high Customs duties and non-tariff barriers on basic raw material, other than steel, such as copper, aluminum, and polymers also remain largely unaddressed.

Poor, earning less than $1.90 a day as per purchasing power parity of 2011, have nothing to cheer. The Union government seems to be for the rich, of the rich, and by the rich. While rich by itself is no evil as everyone would like to be one, the road to such reach should be laid by governments. Some old tools, like more investment through PPP and disinvestment, to ensure a level playing field have been dusted off to provide the companies some cheer. The Budget is deceptive in approach and has less prospects of success.

(The author is an Economist and Risk Management Specialist)

Bluster Budget (telanganatoday.com)

Prof. R. Radhakrishna, Eminent Economist

 

A Tribute to Prof. R. Radhakrishna, Chairman, Centre for Economic And Social Studies

A treasure trove in economics and econometrics – he has left a big void with his sudden demise on 28th January 2022. It is difficult to imagine he is no more. I had three interactions after his movement to Visakhapatnam following his illness. Pandemic did upset him greatly. Even in our brief interaction, he expressed his deep distress over the impact on the poor and migrant labour that the pandemic has been causing.

My first association with him was when he worked with the Agro-Economic Research Centre, Andhra University in the company of Prof. G. Parthasarathy, a great economist of the times. “Professor Radhakrishna’s life-long work on Growth, Inequality, Food Security, Poverty, and wellbeing is widely recognized as illuminating, authentic and credible.” (Ch. Hanumantha Rao, in a blurb on his book – The Essays on Indian Economy). 

During my association with Farm and Rural Science Foundation, I invited him to deliver the first J. Raghotham Reddy Memorial Lecture. He readily agreed and laid a firm foundation for further work of the FRSF. After my joining Administrative Staff College of India, my interaction with him became closer. He invited me on a few occasions to talk to the researchers of CESS on the research ideas and methodologies on credit to the poor.

When he moved to IGIDR, he associated me for a meeting to discuss the syllabus of Law And Economics Course. He involved me in a couple of Committees he chaired: Agricultural Indebtedness and AP Agriculture. He is a great leader and effective coordinator. His commitment to research and a concern for the common man, and belief in institutions that could contribute to the development of the poor, like the cooperatives, FPOs leave an imprint on the Indian economy.

When I requested him to write a Foreword to my book on India’s Economic Resurgence, he readily agreed and released it in the CESS Auditorium.

His erudition on Poverty Studies and Agriculture gave me immense benefit. My interaction with him at the Andhra University, University of Hyderabad as Vice Chancellor, as Director, CESS and IGIDR, Chairman, ICSSR, and Chairman of Indian Society of Agricultural Marketing gave the new angle in him. He is a great administrator, researcher,  a good teacher, affable person, a good conversationalist, and a great human being. I am sure the galaxy of researchers built by him would carry on his legacy. I bow to him in all humility. May his soul rest in peace.

Union Budget 2022-23

 

Union Budget 22-23

Backdrop:

The expected growth rate of 11 percent in the Economic Survey 20-21 is now pegged at 9.5 percent by RBI and several global rating institutions in the backdrop of negative 7.7% growth rate of 20-21 whereas the World Bank upgraded India’s outlook for the year to grow by 8.3 percent in FY 2022. The V-curve expectation of the Chief Economist of India, in an online seminar in August 2021 would prima facie appear real, with health infrastructure measuring up to withstand the second wave of Covid-19 and the inescapable third wave of Omicron variant of the pandemic rescue in full swing. It is inflation that led the GDP growth instead of production and productivity increase. HBL headline of the 16^th instant shows decline of IIP to 1.3 percent.

Retail inflation index scaled to 5.9 percent; a five-month high during December 2021. OECD has leagued India among the four nations that would cross 6.4 percent inflation this fiscal. The share of private consumption has been steadily falling since the pandemic struck according to the latest RBI Survey. SBI Report says that per capita income dented due to covid-19 effect by as much as 5.4 percent.

The ratio of private consumption to GDP fell to 54.7 percent in ‘21-22 from 55.6 percent in ‘19-20. Demand for MNREG from all the states confirm that rural wages for agricultural and non-agricultural workers have been flat. Pandemic has also inflated both debt and deficit levels. IMF estimates that India’s debt is around 90 percent of GDP, the highest among the peer group of nations similarly placed, even by the end of the third quarter of FY21-22, an unsustainable level.

Financial Stability Report of the RBI and Morgan Stanley economist leave the hope in financial sector. Last Budget has seen the mergers of PSBs, setting up of Development Finance Institution to finance infrastructure and National Asset Reconstruction Company (euphemism for Bad Bank) to reduce the non-performing assets of banks. The quality of assets of banks improved and the NPA accretion during the year saw a decline. However, micro, and small manufacturing enterprises got a raw deal at the hands of banks and NPA levels of NBFCs and Fintech companies are on the rise.

While India could save the lives of many, it is efforts to save the livelihoods has only marginally impacted going by the CMIE Working Paper from A. Gupta et.al quoted by the Economist, 14^th January 2022. First wave 20-21 saw stagnation in poverty (measured by $1.9 per day in 2011 purchasing power parity) and oscillated in rural poverty whereas both urban and rural poverty declined with urban poverty nearing zero and rural poverty reaching 18-19 percent, during the second wave. It is a moot point whether increase in gross fixed capital formation post 2019-20, a proxy for private and public investment in absolute terms and as percentage of GDP, has led to the reduction in the number of the poor in the country.

Budget Hopes

“.It was the spring of hope and the winter of despair,” to recall Charles Dickens’ description in the Tale of Two Cities. Markets responded very positively with several startups and IPOs in the green. Then, what could be the expectation from Sitharaman, the FM? Everyone expects that taxes could be lowered and incentives to pep up consumption should be increased! What is the balancing trick that the FM would do?

Revenues:

GST revenues have been buoyant, but the states want the compensation for loss of revenue that could end by this fiscal to continue for two more years! With elections in five states announced, and general elections that would follow two years hence, the FM has little scope to cut revenues on this front. She can expect dividends from all the PSBs and profit-making PSUs to make up the revenue deficit to an extent of at least 1.5 -2 percent of GDP.

The FM should increase non-tax revenues very discreetly. She is hamstrung on fiscal deficit. This is likely to surge to 6 percent from the stated level of 3.5 percent as the State Survey of RBI also mentioned that all the states crossed the benchmark level of 4 -4.5 percent of public debt.

Investor sentiment will not be hit badly even if she increases the share transaction tax to 2 percent. This measure does not involve tax administration expense but earns revenue every day instantaneously into government account.

As part of agricultural reforms, she should announce separate budget for the sector: 1. Assurance on MSP for a few commodities with a sunset clause; 2. Digital agricultural market incentive as part of Agricultural Market reform; 3. Agricultural Income Tax for income above Rs.25lakh per annum at 5 percent; 4. Incentive for farm mechanization and formalized lending to tenant farmers; and 6. Strengthening Rural Cooperatives and 7. Restructuring NABARD.

Allocations:

The FM should strengthen implementation of the budget proposals towards reforms in the areas of judiciary, police, and administration through even symbolic allocation.

Health sector should get at least 6 percent allocation both for infrastructure and functional efficiency.

Education sector, consistent with the National Education Policy 2021, should receive 3 percent allocation and mandatory schooling of the wards of the parliamentarians, legislators, and government servants in government schools. Mid-day meals programme should be strengthened.

The FM should be bold enough to introduce abolition of surcharge of all types to demonstrate the cooperative federalism.

Micro and Small enterprise sector

Micro Finance Association has already demanded Rs.15000 crores to make up their capital erosion, due to the pandemic. While conceding to this demand, she should also announce a new law to deal with the micro and small enterprises. While 98 percent of MSMEs are proprietary or partnerships (family-owned mostly), the benefits of the existing MSME Development Act 2006 have reached the medium and large among the small, to an extent of over 55 percent.

The threshold level of TReDs should be also reduced at the entry level to Rs.50cr turnover per annum to activate factoring and bill finance as independent finance channel. Cluster of manufacturing MSEs should be enabled to pool their limits and collaterals under a separate agreement with the banks and FIs so that they can access inputs at lower costs and sell on TReDs platform as a pool. All the government departments also should be mandated to purchase on this platform by registering on TReDs.

Indiscriminate application of SARFAESI Act by the Banks should be contained by announcing a state approved third party scrutiny of NPAs in the manufacturing MSE segment. SIDBI should be restructured as it hardly met the expectation of the sector during the last thirty-one years of its existence. Banks should be mandated to furnish data on the number of enterprises financed in manufacturing and services MSEs and not in terms of number of accounts.

While most queries on finance should be dealt with by the Department of Financial Services, Union Ministry of Finance, they are directed for response to the Ministry of MSMEs that does not have a voice with the banks to resolve the issues. The solution lies in resolving across the table all such issues through a monthly meeting between the DFS and DC-MSME on a pre-determined date.   

Priority sector targeting is a soaring point for the banks while they do not admit to this openly as it carries interest rate risk and loan origination risk. Lending MSEs has no charm for the PSBs and large traditional private sector banks. SFBs and NBFCs could be the best windows. FM may announce suitable measures for better regulation of the sector. FM should resist the temptation of state interventionism to bring big business to heels.

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

Coveted Corporate Governance Award to NATCO Pharma

 6th January is a day remembered for the unfolding of 'Satyam' Fraud. But the year 2022, thanks to Money Life Foundation, the day made a mark with the former Chief Election Commissioner, T.S. Krishna Moorthy presiding over the Corporate Governance Award function and M. Damodaran, Former SEBI Chairman delivering the Key Note Address. V. Ranganathan delivered the second best Award to Thejo Engineering at Chennai on behalf of Money Life Foundation (MLF).

I had the privilege of delivering the Award to the Hyderabad-based NATCO Pharma on behalf of MLF. R. Balakrishnan, Member of the Jury had this to say at the Award Function online:

"Every country has hundreds of laws that govern behaviour. The fact that thousands of cases are pending in various courts, while thousands more are filed every day, tells us that we, as people, find it difficult to behave in a fair manner with fellow human beings and self-interest dominates most human behaviour. "

Good Corporate Governance is essentially based on Ethics and represent the trust the investors repose in the Company. I have gone through the Annual Reports of NATCO Pharma and their various issues of Spandana representing their social activities that included support extended to the society and Anganwadis in Telangana and Andhra Pradesh.

Its VC and MD, Rajiv Nannapaneni, a very unassuming person, epitomizes the company both in attire and action. 

They are not just wealth creators but are health creators, with the Active Pharmaceutical Ingredients for Oncology and Diabetology. 

This multi-layered and multi-centered Company believes that excellence is journey and not destination and has been crossing its own benchmark in performance - financial and product performance - every year in a sustainable manner.

Its corporate governance is worthy of emulation with fifty percent of the Board wearing the hat of independent directors in diverse fields of experience, guiding its destiny. 

It withstood the impact of Covid-19 pandemic with tenacity, alacrity and social responsibility. 

Its risk management and accounting practices are best in the field of pharmaceuticals. 

Its claims in the Annual Report are factual and represent the Environmentally Sustainable Governance at its best. No wonder they bagged the coveted MLF Award for 2021 Best Corporate Governance. 

Reaching the peak is one thing and reaching it every time is another thing. The latter requires much more social cohesion and singularly ethical practices. I wish them best of luck all times.