FINCOP

Monday, May 30, 2022

Bright Future for Indian Agriculture But Reforms Imminent

Future is bright for Indian Agriculture – But Reforms Imminent.

B. Yerram Raju*

Agriculture is one sector that takes all the four factors of production – land, labour, capital, and organisation/management - in full measure, and consumes the scarcest resource water additionally. Several limitations surround the future of agriculture. Land is limited and there are several claims from dwellers to industrialists. So is water and capital. Management depends on the absorption of the latest technologies.

India has only 4 percent of world’s wate resources. Its present population of around 1.39bn is likely to escalate to 1.69bn according to population experts. Improving (a) water resources’ optimization, (b) productivity of the small holdings that constitute 50 percent of the arable land, (c) technologies unique to the production systems of India, (d) integrating all types of agricultural activities and (e) resilience to climate change, is imperative.

India’s agricultural growth (1950-2020) can be seen in many areas: the second largest horticultural production in the world; the highest milk production in the world, witnessing twelve-fold growth; the second largest fish production in the world. It is now a net exporter and its agricultural production is 44 percent higher than that of the US. According to Praveen Rao, Vice Chancellor, PJTS Agricultural University, Hyderabad, India’s agricultural GDP rose from US$ 15bn in 1960 to US$101bn in 2000. During the next sixteen years, the growth was 350 percent more than that registered during the preceding thirty years.

A.K. Singh, Director, Indian Agricultural Research Institute of ICAR, in his most recent J. Raghotham Reddy memorial lecture at Hyderabad, highlighted that despite 32.7 percent increase in the area during 1951-2021, the production increased by almost six times, and productivity increased by 4.5 times during the same period, maintaining the food security. The period did not saw pestilence and famines in the country. Market-assisted Selection (MAS) is now an integral part of the cultivar development programmes at the ICAR institutions and several agricultural universities, developing 74 crop cultivars in seven different crops -rice, wheat, pearl millet, chickpea, soybean, groundnut, and maize. This still leaves the challenge of India producing 333mt of food grains to feed its projected 1.64bn population by 2050.

As per the NSSO (2014), about 232 million persons are employed still in agriculture (49 per cent of the workforce), contributing about 17 per cent of the GDP. The number seems to have come down to about 219 million in 2015, which is still a very significant number (Kapoor, 2017). A NITI Aayog study estimated the agricultural labour productivity is one-third of the non-agricultural sectors. There is severe shortage of farm labour either to cut the sugarcane crop or cotton picking – the two largest labour-absorbing crops.

Telangana State is the first state to commence growing single-pick cotton from this year, thanks to the intense research by the PJTSAU under the specific directive of the farmer-Chief Minister, K. Chandrasekhar Rao. Farmers are eagerly looking for assured yields of this variety to save the labour costs.

Farming has been the focus and not the farmer of all the research that no doubt yielded excellent results. Doubling of farmers’ income by 2025 is still a dream, because reforms in agriculture sector were just ignored for the last three decades. Small farmer and tenant farmers realised that they have to turn as entrepreneurs for sustainable growth. Several start-ups in farm field have lately come up. Still, aggregators at the farm gate, marketing reforms and easy access to credit beg attention of the policy maker, more so, when we look at the technological innovations that A. K. Singh spoke off: 1. Molecular breeding, 2. Crop biofortification, 3. Microbial technologies, 4. Climate change and mitigation strategies, 5. Satellite remote-sensing technology, 6. Precision agriculture, and 7. Improving irrigation efficiency.

In addition to speed breeding, genome breeding, and use of remote sensing techniques, drone technology for smart agriculture is making deep inroads. A. Drone Sensing for mapping and discrimination of crops, monitoring crop stress – biotic and abiotic, yield damage assessment, soil fertility, and for agri-input applications are some of the drone-based technologies.

While it is true that a century beyond will see the disruptive technologies shaping agriculture growth, the way forward would be in investing in human resources and infrastructure for disruptive innovations (at least 1.4 percent of GDP in agriculture), like Internet of technologies (IoT), AI, ML, Block Chain leading climate, smart, regenerative and remunerative agriculture, adoption of management practices integrating small farm holdings, and mainstreaming the biofortified crops and nutrition literacy.

Investment should come either from the farmer’s equity or his ability to raise the debt. Debt markets in India are deeply suspicious of the farmer and small entrepreneur. Therefore, there is need for a cultural shift in lending to the farm sector. Second, all the above technologies still carry the risk of adverse weather and climate. They are also subject to the cyclones, tsunamis, floods, and holocausts. While crop related technologies are of short term nature, rest are all medium to long term capital investments. Agri-entrepreneurs should look to investments from angel funds, patient capital investors and social capital entrepreneurs. Green House Gas reduction from the climate-resilient agricultural practices have the potential to earn carbon credits (CC) up to 5CC/ha and 1 carbon credit is equal to US$37. 15000 hectares have this potential, according to A. K. Singh.

Further, integrated farming on small farm holdings – crop, horticulture, household dairy, backyard poultry, small pond-culture, and home-grown ducks – will cross-hold risks and pave the way for farmer doubling his income erelong. Sustainability of agricultural growth is assured thus through heavy capital investments in climate resistant technologies, cashing in carbon credits sooner than later, change in the mind-set of lenders and farmers to accelerate lending, and appropriate insurance mechanisms that are farmer-friendly.

*This article is based largely on a couple of lectures: 1. V. Praveen Rao, at the Fifth International Agronomy Congress and A.K. Singh, at the Farm and Rural Science Foundation’s J. Raghotham Reddy Memorial Lecture. The views expressed are mine.

Future is bright for Indian Agriculture – But Reforms Imminent.

B. Yerram Raju*

Future is bright for Indian Agriculture – But Reforms Imminent.

B. Yerram Raju*

https://timesofindia.indiatimes.com/blogs/fincorp/future-is-bright-for-indian-agriculture-but-reforms-imminent/

Monday, May 9, 2022

Farm Loan Waiver - No longer, the need.

Courtesy: The Hindu

Farm Loan Waivers – No longer the need

B. Yerram Raju

From corporates to the individuals, irrespective of activity, want their loans to be waived. Who wants to live in debt? But can the economy giving such waivers live without debt? Simply put, a firm ‘No’. The rising public debt of the sovereign puts not just the present but the future citizen in debt for it is the next generation that has the responsibility to repay. Farm sector is not just exception, but the future is not just generation away but only a crop season away. This should clear the way for the argument against the loan waivers of any kind save very serious exceptions.

Politicians and farmers are good friends close to the elections and bad enemies to farm economics. Rahul Gandhi stirred the hornet’s nest at Warangal on the 6^th May while announcing that if Congress is elected to power in Telangana, it would waive off Rs.2lakhs for each farmer from his debt portfolio. Such slogans pre-elections are not new to the farmers, ever since V.P. Singh/Charan Singh duo indulged in crop loan write-off in 1990s. The scheme received the ire of Comptroller and Auditor General for its bad implementation. RBI repeatedly advised the political parties not to indulge in this luxury as the states do not have that much resource apart from encouraging bad borrower behaviour. But do all farmers look for such write-off? What exactly they need?

Doubling farm income remained a far-cry leading scores of farmers to double-up to Delhi to fight against what they considered as bad farm laws. The much-needed farm reforms that were bypassed during the first phase of reforms in the 1990s could have been triggered had there been political sagacity and cooperative federalism. Be that as it may, it has become difficult for governments to do what the farmers want, save the exception of government of Telangana, that I would explain latter. There are good number of farmers who took to mixed farming, organic farming, natural farming, and use of technologies intensely.

Farmer is generally short of cash at the beginning of the crop season. This leads him/her to go to the money lender who is wont to give credit on his own terms. The revenue from his previous crop would not be to hand at that moment as it would have been up for sale but not sold. If he had no dairy or poultry or allied activity to come to his rescue, even family would be on the brink of starvation despite his four or five acres of land!

Government of Telangana is the first government to think of giving Rs.10000 at the beginning of the season in cash. It also arranged for insurance against untoward calamity in the family while working on the farm - may be a snakebite or an accident or loss in family up to Rs.5lakhs. Both these schemes are monitored by the Chief Minister to ensure that there is no slip up in the releases. The result is that farmer does not have to wait at the banker’s gate for a loan! On top, all the 789 Primary Agricultural Cooperative Societies in Telangana have been digitized and linked to core banking solutions of around 298 DCCB -branches and State Cooperative Bank. This opened a reliable credit window for the farmers when credit is needed. Marketing paddy, the principal crop of the state is engaged in a street fight between the union and state. The result, however, is good as the farmers realized that they should go more for alternate crops that have better markets and yield better price. When asuras and devas churned the ocean, both milk and poison emerged and the churning is still on.

Illustratively, Saritha, a commerce postgraduate from Rapakapalle village in Hanumakonda district took to zero budget natural farming on her four-acre land. She collected rainwater to farm a fishpond; honeybee-keeping, polyhouse for vegetable cultivation and an acre of paddy cultivation. She established two retail outlets for her farm produce and multiplied her farm income. She is proud to say that she could hedge the risks of farming through mixed farming as one or the other agricultural activity gets her sustainable income year-long. She also influenced two thousand farmers in and around her village. There are many more of her ilk in Telangana.

Credit for farming is a necessary but not sufficient condition for sustainability because farmer’s liquidity is always locked up either in soil or silo. As long as farmer’s credit requirement is viewed in exclusion for production purposes alone, the empty valet of farmer stares at the banker. In spite of nearly five decades of engagement of banks with farmers, bankers have no trust in them. Similarly, farmers also lack confidence in banks that they would meet their genuine requirements in time. It will be interesting to see from the RBI data that the banks lent to farming mostly in irrigated tracts – nearly 83% of lending took place in just twelve states. National Bank for Agriculture and Rural Development (NABARD) took up watershed programme on a mission mode that helped many water-starved tracts could get crop-relevant water using latest technologies. Kisan Credit Card has become a fancy instrument that did not give credit comfort to the farmer. Revisiting this instrument and modifying its delivery mechanism is more imminent now than ever.

The banks’ concerns are equity and discipline while the farmers’ concerns are adequacy, timeliness, and multipurpose credit – production, consumption, and marketing. Farming unlike any other activity is prone to risks arising from natural calamities and each calamity is different in nature and dimension.

Chanakya in his magnum opus Artha Sastra clearly mentions that if a natural calamity like cyclone, holocaust, continuous drought for over two years, repeated floods, tsunami etc., it is the responsibility of the state to bail out the farmers by relieving him from all the debt and give cash to him for sustenance. He never advocated loan write-off as it would debilitate the farmer of his own capacities and creates trust-deficit with his lender. Strengthen the insurance mechanism for farming sector. Make available lending to farmer at no more than four percent per annum. Announce the produce price well ahead of the season. Interest reimbursement is a budget game and put an end to it.

It has become a fashion for all the political parties to announce loan write-off from the state exchequer. It is difficult to imagine that they are ignorant of the consequences. But they indulge in this political ploy. A responsible democracy like ours shall refrain from such sloganeering and Election Commission should impose a ban on such announcements.

The views are author’s own.

https://timesofindia.indiatimes.com/blogs/fincorp/farm-loan-waivers-no-longer-the-need/

Friday, May 6, 2022

Recession - Far and yet Near.

Opinion: On edge with recession fears https://telanganatoday.com/opinion-on-edge-with-recession-fears

Recession? Near and yet Far.

B. Yerram Raju

Several economists, in the wake of Russia-Ukraine war and the rise of global inflation index, have been talking of recession. It is important to understand the meaning of recession. It occurs when there is contraction of demand for goods and services consecutively for two quarters; employment falls precipitously; consumption declines; both exports and imports fall; credit markets shrink and finally, the GDP declines. This means that all the macro-economic indicators show an alarming trend.

In layman’s language, when your neighbour loses his job, it is recession, while depression is, when you lose your job. Before going into the macro-economic indicators that prompted such prediction, the discussion is timely because price stability is viewed as necessary precondition for growth by the authors of the Currency and Finance Report (RBI), 2021-22. This is the wake up call to the Monetary Policy Committee meeting on May 2 and 4 calling for a rate hike close to the rate hike in Fed-US.

Impact of global recession is seen in the backdrop of Covid-19 variants making aggressive re-entry unnerving many economies. Externalities like Russia-Ukraine war, collapse of Sri Lanka in our immediate neighbourhood, strained global value chains added fuel to fire. Fuel prices are not likely to relent in the short term and edible oil prices are touching the roof.

A bit of History

Unprecedented banking crises in the past triggered recession both in advanced economies and emerging economies. Advanced economies: Herstatt crisis in Germany, Japan in 90s, Norway in 1988-92, Spain in 1985, Sweden in 1985, UK in 1995, USA in 1980s to early 90s, and emerging economies: Brazil 1994, East Asian Crisis in 1997 hitting Korea, Thailand, Malaysia, Vietnam, and the subprime crisis of 2006 hitting the whole world are examples of recession if we leave 1930 recession way behind. The Economist, London in its special report of May 16,2009 said: ‘the dirty secret of the golden age of finance was that it was obscenely easy to make money.” Interest rates rose and housing prices fell.

Rate Hike:

Latest hike in the basic rates announced by Governor Shaktikant in a huddle on May 5,2022 shocked the stock markets. Lenders, rating agencies, and investors commented that this hike is just the beginning in the wake of unrelenting inflation for the past three quarters in a row.

Gross Domestic Product:

The most important macroeconomic factor is decline in GDP {[C+I+G+(x-m)], where C= consumption; I=investment; G=Government spending; x= exports and m=imports} . Total goods and services produced in the economy declines. Currency and Finance Report (CFR 21-22), mentioned that economic growth slowed down since the second half of 2016, taking the average of GDP growth between 2017-20 fiscal to 5.7 percent. There is understandable decline post 2020 due to Covid-19 that saw irrecoverable loans in all segments, rents prohibited for more than a year in several states in 2020-21, unoccupied hotels and unmoved airbuses hitting tourism and aviation industry, several drivers losing their jobs and cabs parked in sheds with a steep fall in fuel consumption.

Inflation:

One must begin with inflation. Data released four days after the MPC's April 8 decision showed Consumer Price Index (CPI) inflation saw a seventeen-month high of 6.95 percent in March. Wholesale inflation index rose to a four-month high of 14.55 percent the same month. This data was in the RBI’s pages even three weeks before. Should it be behind the curve in announcing the rate hike for so long? A question that would have few answers from the powers that be. Money Control, a financial blog, vents its disappointment over the RBI Governor’s statement:” CPI inflation has been above the medium-term target of 4 percent for exactly two-and-half years. In these 30 months, CPI inflation has been above 5 percent 27 times and above the 6 percent upper bound of the RBI's flexible inflation target 16 times. So, to state now — after not saying anything in the last two years — that inflation expectations could get unanchored is a tad disconcerting.”

Unemployment:

CMIE data released almost simultaneously reveals that urban unemployment rate was 9.22 percent, and rural unemployment rate was at 7.18 percent.

International Trade

Trade balances were hit badly all over the world. Thanks to seizing the right opportunities, India’s trade balances moved to $400bn in April 2022. Several measures taken under Atma Nirbhar Bharat Abhiyan (self-reliant India) started yielding results. Startups swelled to encouraging levels. Thanks to agriculture and pharmaceutical sectors, the economy looked up during the covid time. There were no deaths due to hunger. More than 4.58crore population had been vaccinated – first, second, and precautionary and child vaccines together. To keep the export markets diversified, PM Modi is on Europe tour. This may also signal export markets that India is keen to see that the war between Russia and Ukraine ends sooner than later.

India’s consumption, growing at 12 percent pre-pandemic, nose-dived during the pandemic. But it recovered fast and is at 17 percent with a likely 10 percent annual growth in the next decade, according to Managing Partner, Boston Consulting Group. E-commerce is on the rise. It is likely to reach US $130bn by 2026.

For recession to set in there are certain conditions: Foreign capital should flee; people’s confidence should evaporate; stock markets should take a deep dive continuously; melt-down of global markets; tumbling currencies; flight of assets to safety; financial institutions blowing cold on credit; increasing government interventions in every sphere; federal politics on hostile note; and trust deficit in the governments. Banks will be on the nervous hook. Banks have always been on a weak wicket because of their inherent mismatch between the assets and liabilities. After digitalization, the risks went beyond their normal reach and added to that are the crypto currencies and cybercrimes.

Government asserts that and the RBI reinforces its argument in that growth is here to stay as banks, corporate enterprises and agriculture are all looking up. Credit from institutions for the second month in a row saw a rising trend. But unlike in 2006 crisis, Indian financial system is not a closeted financial system but exposed to global value chains.

Globally, forex markets nose-dived. Commodity markets are on continuous decline. Industrial production everywhere wears a disappointing look due to the war and continuing Covid-19 variants making economies nervous. Volatility exists in all the stock markets. Several FIIs are keen to pull back their investments.

It is this backdrop that still makes economists nervous to feel that recession is very likely. India is far and yet near. It’s export thrust in the wake of volatile forex markets is enough cause for worry. Further, the freebies, rising public debt, indiscrete valuations of public assets put to sale, large official haircuts in official IBC resolutions need rethinking if India would escape recession. Next two months in a row, we may witness rate hikes to contain the galloping inflation.

The views expressed are author’s own.

Saturday, April 30, 2022

Inflation - the hydra

Inflation – the hydra

B. Yerram Raju

Times of India Blogpost dated 29.04.2022.

Sweltering heat makes us look to June’s first monsoon showers as much as the monetary policy of the RBI looking at taming the inflation as its uppermost task. When Bloomberg mentions that the world is experiencing a synchronised inflation outbreak that previously seemed related to the US and Europe, and that producer prices are rising in Japan, South Korea, India, and all economies are feeling the heat of fuel and food prices, it has to be viewed seriously.

I tried to look at it from what is happening in the working class both in urban and rural areas in our country. Several state governments are indulging in competitive populism, notwithstanding the ever-rising fuel prices.

My house cleaner has a couple of acres of land in Mahbubnagar district of Telangana. She gets her minimum wages when she abstains from the work in our house, at least four days a month and seven days at least once in a quarter. Her logic: Every office has one Sunday and two second Saturdays as holidays. Why should I not get the same? She works as house cleaner for ten houses with an average income of Rs.2000 per month per household. She gets free ration; free medical treatment in the government hospital if she or her family members have illness or accident. Her husband is a fruit-seller on bicycle. His net income is Rs.15000 a month and recently he got a loan of Rs.10000 under the street vendors’ scheme that helped him buy a cooler to the house. She has put both her sons in a social welfare residential school. She is also not bothered about income tax though her family income exceeds the taxable income. She has Aadhar card and felt needless to have PAN card! She is least bothered about inflation.

In a chat with her, I and my wife realized that most house cleaners are in the same boat as her and they only have to pay rent. Some of them are also expecting to move to their own two-bedroom flat promised by the government. I went to a village on the way to a temple in Sangareddy district. That was a shandy day. Hence most villagers are in shandy either as buyers or sellers. I got down from the car, a little uncared for the anger of my wife. She knows that when I get down on such errand, I would take at least thirty to forty-five minutes to be back.

I enquired from around twenty persons regarding the price-rise. They mentioned only two things: one, Fuel price and two, Oil price. No others mattered to them. At least one person in every house has a motorcycle. Every family has a piece of land either owned or leased. They are bothered about the wages for the farm labour. They sky-rocketed. They are planning to go for farm machinery either in groups or go for hiring it to reduce farming costs. They are bothered more about increasing unrest in villages due to family feuds.

Inflation therefore has not figured much in the conversation. Rise in wages is an issue but related to inflation. Not that the rising inflation indices – consumer price indices crossing the RBI headline boundaries – is not a worry. The fact is that there are several factors that do not get into inflation accounting. The rents in urban areas are on the rise despite a boom in real estate and housing and cheap housing loans.

If interest rates rise, the cause will not be so much the inflation as the non-performing loans in the retail sector, protracted corporate loan recoveries after severe haircuts, under the most permissive route of Indian Bankruptcy Code proceedings.

Union government has a responsibility to look at the fuel prices beyond the revenues that are earned out of them. Most of the states have genuine concerns over the cess and it is time to be transparent and remove all the cess as the purpose for which cess is levied and spent are never coordinated. For example, look at the similar rise in fuel prices globally in 2014 and 2015 and the domestic prices. Can we get back to the comparable barrel prices and retail prices of fuel and gas?

Once the interest rates rise, the scope for real interest rates to pare up and comfort the savers exists and the hapless senior citizens will have a sigh of relief. Real interest rates are currently negative and hopefully the June monetary policy of the RBI will bend the hydra.

*Author is an economist and risk management specialist and the views are his own.

https://timesofindia.indiatimes.com/blogs/fincorp/inflation-the-hydra/

Thursday, April 21, 2022

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:

The political will to implement such policy throughout the length and breadth of the country.
Speed of action
Resources for implementing change – Budgetary provisions; Endorsement of Niti Aayog – the think tank of the present government and
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.

Tuesday, February 22, 2022

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.

Sunday, February 6, 2022

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)