Thursday, August 15, 2013

Journey of Indian Re - the long and short of it


Journey of Indian Rupee: the long and short of it.

For 14 years rupee was linked to British currency.

1948-1966: US$1: Rs. 4.79

1966: $1: Rs.7.57

1971 rupee was directly linked to US$.

1975 rupee got linked to three major currencies: US$, Japanese Yen and German Mark.

1985: $1: Rs.12

1990- $1: Rs.13

1991: $1: Rs.17.90

1993: Exchange rate freed for market to take its course.

$1: Rs.31.37

$1: Rs.40-50 during 2000-2010.

$1: Rs.61.80

What a fall my countrymen?

Speed of action required to:
Fight endemic corruption and promote institutional wealth and punish endemic corruption. Would the next elections do these?

Friday, July 26, 2013

India's growth story has lessons to learn

India’s growth story has lessons to learn:

The most vocal protagonist of India’s growth and the architect of planning in India during the current UPA regime Monteksingh Ahuluwalia conceded that the expected growth would not reach for the current fiscal. Quickly following, at ASSOCHAM the Prime Minister Manmohan Singh conceded that all is not well with the economy and India’s current growth is a serious concern.
The Reserve Bank of India, country’s central bank has been consistently downplaying the growth story due to uncertainties in the farm and manufacturing sector and the adverse influence of the overall global slowdown. But is that all? IMF and World Bank also downsized their growth expectation to 3.5 from 3.7 percent. Should China’s slowing growth be a concern for us akin to a boy getting 10 percent comparing with another getting only 2 percent and feel satisfied?
Reminded of J.S. Mill (1806-73): “It must always have been seen, more or less distinctly, by political economists that the increase in wealth is not boundless: that at the end of what they term the progressive state lays the stationary state.”
Inflation continues to be a major worry with the country’s topmost economic advisor Dr Rangarajan warning of the likely stagflation. Domestic savings are not growing at sustainable rate any longer and this is a serious cause for worry. Banks’ short term deposits are on the increase but the medium and long term deposits are on decline whereas the demand for long term credit is increasing with housing, real estate, infrastructure denting the AML of Banks. Decline in savings rate is loss of fundamentals of the economy. We should do all that is necessary to let it grow to no less than 28-30 percent and this can be done in two ways: incentivize savings through fiscal policy and protect the deposit rates against rising prices.
Post-liberalisation trended towards a sustainable growth in the services sector while the country has to look for investors from developed countries for growth in infrastructure not supported by right policies. Now after averaging to 8.5 percent growth in the five years 2004-09, the next five years have been witnessing year after year the slowing down.
Even to stay where we are in growth trajectory, we need multiple times of investments in school buildings (most public school buildings in villages and towns are in dilapidated state: some with collapsing roofs; some with no basic amenities like safe drinking water and wash rooms for children; no play grounds; no teaching aids etc.); primary health clinics; safe drinking water; drainage and sewerage systems; sanitation; highways – both central and state; repairs to rail tracks and replacement of train compartments at galloping speed to catch up with the new trains and emerging demands on rail traffic; goods transport coaches; airport maintenance etc., most of which are with the governments, State and Centre. The resources have to be found either through public borrowing or increase in taxes. If it has to borrow, it will be of long term nature as all such assets have no prospect of returning either the principal or interest. Its capacity to indulge in fiscal deficit is peaking. The virtuous moves of right to employment, right to education and food security have their loopholes in the systems that were created to result in their effectiveness.
The country’s natural resources are declining in productivity: rivers are silting more at the nose-end where they join the sea; minerals like coal to generate the thermal energy are inferior although the stocks are assured till 2050 but these are environmentally hostile; the country has very little natural gas, fossil fuels and has to depend on such of these depleting resources of the West and Middle East; soils are also depleting in energy with regeneration requiring huge organic resources; nuclear and solar energy are proving to be highly expensive. Agriculture production though has potential still left in the virgin soils of Bihar and eastern UP on the Ganges plains, frequent flooding of rivers and mismanagement of rivers does not leave enough hope for sustainable growth here. Forest wealth is also degenerating. Animal and bird population to maintain ecological balance in the biosphere suffers from disease and malnutrition due to wanton neglect in most cases and in others due to the ravages of nature like floods, cyclones, tsunamis and earthquakes. Claims just keep growing while resources keep depleting – and real prices of energy and commodities have begun looking to north with little prospect of looking south. It would appear as though we are peaking limits of growth if we would like to measure growth only by the GDP figures.
Gross Domestic Product is something we need to look at: Is this the right measure? GDP defined as the market value of all goods and services produced in one year by the labour and property in a geographic space – the country. It is therefore more space related than ownership related. If the number went up economists consider that all was well whereas the decline meant that something was going wrong somewhere. GDP does not distinguish between waste, luxury and satisfaction at fundamental levels and there is no accounting for the costs and benefits. It builds inequalities and the glaring examples: the more the rich accumulate riches the GDP increases and takes for granted that this would lead to the poor reducing in numbers; the companies may invest and grow but the employment may go down with every unit of increase in production and the market index rises with no guarantee that employees would have their share equal to their contribution. There is no guarantee that there would be happiness around with growth measured by GDP increases. It was a tiny neighbor Bhutan that first thought of Gross National Happiness has to be measured and now the UN Human Development Index is taking this into account but the nations like ours still find it difficult to move to such measure.
Let me hasten to mention here that we are not alone in this journey of stagnation. Several developed countries with US no exception sail in the same boat. This means that the capability of developed nations to come to the aid of India or other developing nations in the midst of their own problems would be on the wane. This is not to say that we have no options but to draw consolation. I would not like to sound pessimistic but would like to caution on the realities to move to sustainable development that depends inherently on our culture both social and economic.
Technology and innovation have shown the way, no doubt but have also been pointing to certain destructive dimensions that needed to be guarded against. High salaries at the start of the careers before the earners could know the value of the rupee led to squandering the resources through lavish living, pubs and clubs. If the technological advantage should continue there should be stable structures and adequate and timely incentives as substitutes for resource degeneration could result in regeneration and welfare all round. Growth sans happiness leaves the economy in the hands of touts and terrorists that every citizen has a responsibility to prevent.

If demographic dividend that we are likely to have till at least 2025 should give the advantage, we should invest more in education and health sectors and this would in turn help people think of rationalizing and practicing austerity led growth. We have to learn the lessons of growth, even if they are the hard way. 

Tuesday, July 23, 2013

Shri M. Ramakrishnaiah is no more - a tribute


Shri M. Ramakrishnaaiah, a retired Chief Secretary to Government of Orissa was the founder Chairman of NABARD and former Dy. Governor of RBI.
An intellectual with compassion for the poor he always believed that the country needs to grow with savings and the right institution to reach the poor is cooperatives in villages that are democratically run and owned by them. It is a great loss to all those who know Shri M. Ramakrishnaiah, the man with a vision who shaped NABARD in the first few years. He chaired the Committee set up to review cooperative legislation when N.T. Rama Rao was Chief Minister of Andhra Pradesh and was instrumental in formulating the first liberal Act on Cooperatives - Mutually Aided Coop Societies Act that is now a parallel Act in nine States of the country and on its foundations the 97th Constitution Amendment Act 2011 has been formulated. An ardent believer in the capabilities of Cooperative system as a saviour of the country sans the political seize it currently holds. 

Saturday, July 13, 2013

Time we return to 'Austerity led Growth'

The Governor, RBI in a recent address pleaded for austerity led growth. Culturally we were aligned to austerity led growth. But post liberalization, we embraced consumption led growth. It had its virtues in seeing that we tasted the western riches; we embraced even their culture in welcoming pubs and casinos. We thought we would move to export led growth. Manufacturing sector could not match up to the task not because we lacked intellect and strategy but because our technologies continue to be outmoded and the needed investments were hindered a the right time through untimely and inaccurate policies. When speed was the essence we moved slow and when we have to move slow we are now wanting to move with speed.

Indian economy continues to be agrarian though the share of agriculture is now at around 15% of GDP. The growth in services sector is the benefit we got out of liberalization during the last two decades and odd but its unsustainability stares at us in the wake of pull down in manufacturing sector. Our imports continued to surge and exports drag their feet. CAD continues to rise and is causing ripples in the economy. Our priorities in investments changed without simultaneously putting in place the needed regulations. When scams after scams occurred and when we realized that the real estate sector, the growth trigger is also responsible for a steep rise in misdirected investments and black money the regulations started moving into the needed directions and for implementing the new regulations the bureaucracy is ill equipped at the moment.

We have also misplaced our direction in education and health sectors aping the west. We have to make these two sectors within the easy reach of the poor and unreached. The real inclusive growth would occur when this happens. Therefore, the whole of Government spending has to have increasing proportions in these two areas and we should move to strengthening regulation and governance structures more responsible, responsive and accountable in these two sectors. The primary and secondary education should be the concern of the government accompanied by all the needed incentives to prevent child labor, migration from rural to urban areas and education to move with culture that is strength of India. The teacher training has to upfront move in those directions so that the teachers find environment conducive for growth in such a situation. We have to realize and recognize that the growth that we attained has become unsustainable because of certain inherent policy misdirection that needed correction.

While seeing the writing on the wall is important, we have to decide on the policy front that it would be advantageous to move in the direction where we emerge as future leaders of the world both economically and culturally. Healthy regulations and rigorous implementation of such regulation through accountability and transparency are important at the moment. Let us move along. We have the advantage of being the youngest nation of the world and the youth needs the right direction, incentive and investments. Let us put them in place. We would be a great nation and India would be truly  the nation that the world of future would look to.

Thursday, July 11, 2013

Markets only misbehave

Markets only misbehave
The other day I was at Niagara Falls. I found at least six tall men of seven feet and a little over and more than twelve to fifteen women of three and half feet width ( no accurate measurement but near approximation of a statistician) in a visitor crowd of over fifty thousand on that sunny day. As a traveler from India, such proportion of odd dimension figures is a rarity. Their food intake would certainly be more than the average person. Wealth follows a fat distribution meaning thereby that there are disproportionately more very rich people than there are, say, very tall people. The reasons are not hard to find why. Wealth has a tendency to gravitate to the wealthy through self-reinforcing mechanism; the more you have of it, the more you acquire. The fat tails of the bell curve of markets oft referred to as Gaussian distribution based on fractals may imply a similar thing: the more they trend in one direction, the more, the trend persists.

I distinctly recall the Economist survey of ‘The Frontiers of Finance’ published nearly two decades ago wherein some such arguments led to three hypotheses: (1) it undermines efficient markets theory – Mrs. Joan Robinson long before emphatically proved that markets are imperfect; (2) it rocks the capital-asset pricing model because that model depends on something called standard deviation as a measure of risks; and (3) it reveals that something is causing the stock market to be predictable. (The Economist: A Survey of the Frontiers of Finance, October 9th 1993). The arguments are used to prove that computerized models are leading to market predictions of a different genre on the basis of a set of non-linearity (“Non-linearity simply means that effect is not proportional to cause”). Non-linear statistics is nothing but a child of the computer. Financial engineers emerged on the scene to produce derivatives of student loans that generate more non-performing assets quickly, mortgage loans where the underlying assets had no value over the time due to fall in rentals and excessive initial rating of such assets ( the sub-prime loans) that led to the great recession of 2007 engulfing the whole world. The trends have time dimension and the time zones differ across the world. Prediction based on the trend obtaining in the US markets can provide useful information to those working in Asian markets and such information gets traded more than the data and the multi-national companies stocks behave differently across the markets providing incentive or otherwise for the investors. It is not as though that the GARCH theory (Generalised Auto-Regressive Conditional Heteroskedacity) which simply means that the volatility is clustered. Believers in this theory straddled securities. In the late 1990s this theory went out of fashion due to embedding time in the computer driven models.

The predictability of markets is like the prediction of the almanac pundits of South India at the beginning of the year when the Chief Minister and opposition leader listen to the sweet prediction of their preferred persons who predict their win and they do win. But only one of the parties they belonged to pick up the majority to stay in power for the next five years. There are pre-election soothsayers on the TV channels whose predictions are based on a survey of the miniscule of the electorate and yet their prediction comes to close to the actual outcome. These are based on computer manipulations.

The markets are volatile in nature and the computers predict based on the manipulations of data that the operator ingeniously does. Very many lose in the market and few only gain like those playing in the Casino. The investors of Casino never lose while most players lose. The few winners are like the broking firms who never lose. The investors employ jobbers who manipulate the prices during the day.
How else do you describe the movement of prices of stocks that move up in anticipation of the budget announcement of the Finance Minister and as he starts reading the budget speech, the stock prices keep oscillating with the up-end averages moving south or north and at the end of the speech, one may find a huge drop in the stock index. Actually, no trading might take place but the prices move. Similarly when there is a statement by the Governor of the central bank that inflation decline is still to be reliable a couple of days before the announcement of the mid-quarter monetary policy, the prices of stocks rise or drop.


All this only demonstrate that the markets only misbehave and not behave as you wish them to be. It is after all the individuals who play on the computers dexterously to make the prices look what the powerful investors like them to be. Changes in the balance sheets of firms like the Wipro, Infosys, Tatas, Reliance etc., when released affect the prices of stock index. The Index bases built by S&P based on fractal and chaos theories have descended on markets and instruments based on such indices also entered the markets. Whether these are signs of growth of the markets or the economy is a big question as it is the few wealthy that determine them and minority shareholders whose numbers may be large would have little voice in making or breaking the volatility.  The trade risks are no better than the weather risks. 

Monday, July 8, 2013

Corporate Governance

Kumar Mangalam Birla is on the Board of RBI at the time of applying for a license to open a bank under the new licensing policy. He was the Chairman of the Committee that worked on Corporate Governance for SEBI and the same was adopted by SEBI. He should have practiced what he preached by stepping down from the Board on the day of signing the application for license. 

Calgary, nay Coolgary!

Calgary, nay Coolgary!

Lush green lawns front-end most houses
Flush out discomforting mind
Fresh thoughts walk into the doors of happiness
Moved out in hot Sun
Trapped in the drizzle midway
Drenched in rain reaching the destination
Threatened stampede a damp squib
Fun and frolic rule roost in jostling crowds
Ran into the train to reach back Edge Valley
The gateway to Hampton Heights
Lovely and short journey to become shorter
As Calgary turned Coolgary
La, la, la La Vita: The home of the near and dear.


Saturday, July 6, 2013

VITALINFO: Kaun Banega RBI Governor ?

VITALINFO: Kaun Banega RBI Governor ?
Dr Subba Rao has passed through a critical phase in the economic history of the country with unabated inflation, intransigent and mute fiscal regime, rising CAD and governance deficit. He ran with legs and hands tied with speed that any person would have hardly expected. There are serious undercurrents at reducing the autonomy of the central bank and he may be really wanting to have rest for a while.

Greed untamed builds Casinos and breeds chaos

The huge Casino towers on the Canadian side of Niagara Falls stand tall to assert that the soothsayers have long life to bring seeming riches to some, standing riches to the investors of Casino and catastrophe to millions. Over 66 percent of the Toronto citizens voted against its entry as they are convinced that their hard earned valets vanish in a jiffy and move to unknown territory of unpredictable and unproductive investments.

Real money is being bet on the strength of computers. The mobiles did it all for the betting on IPL in India. Several reputed players stand in the jury box if the investigations go right ere long. All the betting is done on a  series of predictions in simulated situations and several won and most lost. This is just akin to trading on derivatives of sorts that had no originating asset in the pre-crisis 2007.

Human behavior is never consistent. Riches get entrenched in greed. Greed can never be regulated nor can virtue. But the system can halt the greed if rightly regulated. Ethics can tame it. Riches are visible but ethics are invisible though inherent. Every person looks at the visible and goes after it. A 'Narayana Murthy' takes over two decades to build an ethical empire in Infosys for another person to bring it down in three years!

How do we develop consistency in hierarchy and governance? When can we have institutions to have choices instead of individuals to positions that matter for growth of institutions?  When can we have ecstasy instead of agony in choosing persons who refuse to identify themselves with caste, creed or religion, reserved or unreserved category to claim positions of leadership in organisations and governments? When can Indian Constitution that is tethering with more than 100 amendments outpaging the original constitution be re-written to provide the next generation protection of a strong tripod of democracy? These questions do not defy an answer if at all the people are willing to find an answer. It starts with good education and building healthy minds from the childhood.

The problem of excess greed has become universal. Even Mr Carney, while assuming charge as Governor of  central bank of Canada said: " Trust has screached out of the parking lot  with the collapse of the investment bank that left the global financial system teetering." He added: "Integrity cannot be legislated but it also certainly cannot be bought in a market place however free the markets are." A change in culture is individual's responsibility.

The aim of the blog is to set people thinking on these issues and acting in their own limited spheres to bring the needed change in thinking and approaches.

Sunday, June 30, 2013

Lake Louise:wonder wanders in splendor

Lake Louise: wonder wanders in splendor

Wonder wanders in splendor
Thunder blows cold
Grandeur greets the lake
Humility dancing on its lips
Thou art Lake Louise.

Beauty in bounty waves its lily white hands
Smiling skies beckon thee
To the snow-clad mountains
Lush green meadows
And windy pines dance to your tunes
Thou art Lake Louise.

Life is lovely
Views are piety
Misty mountains
Green valley welcome
Thou art Lake Louise.

Wearing the white gowns
You Rocky Mountains
Marry the green meadow
Only to divorce on a shining Sun
Leaving waters high
Into the lakes to turn jade
Thou art Lake Louise.

As the day gets into dusk
Clouds gather to shower
Defining their joy with nature bounty
Thou art Lake Louise.

Returning to Calgary
 The memories of the Lake
Enchant the mind
Pristine glory unwinds
Thou art Lake Louise.

Snowy mountains shine
Sun feeling shy
Waters soft stunt the rocks on shore
Pines in heights in humble the flowing water
Waves’ silver streaks all in smiles
Thou art Lake Louise.

Greeting hands clasping with nature
Hills of Louise clad in while
Drill in shrill send no shivers
Waves’ silver streaks all in smiles
Thou art Lake Louise.

Shriya’s locks of hair
Down her lovely looks
Chintu on heights of joy
Hiding on smiling lips
Gunnu laughing wanting to mount the glaciers
Daunting and daring
Put on hold by loving mom and dad.

Drenching the feel in freezing waters
A joy forever
Lovely lake Louise waters in all its charms
Greeting hands clasping with nature
Hills of Lewis clad in white
Dancing kids jumping into waters
Put on hold by loving mom and dad.

Lo and behold!
From the bottom of the lush green farms
Raise the full scale rainbow
What a sight!
The lovely bow wanted to see unto itself
Mirrored in the sky a wider reflection
The sight you can never erase in life
Thou art the Lake Louise.






Monday, May 27, 2013

Governance in Banks is hollow

Corporate Governance in Banks?
Reserve Bank of India recently reiterated the Risk Based Supervision would be pursued vigorously in the backdrop of Basel III. All Bank Boards have put in place Risk management committee and Audit Committee as a regulatory compliance measure. Now most District Central Cooperative banks and the State Cooperative banks under the supervision of NABARD are also expected to fall in line with such regulatory compliance measures. Apparently it looks as though that the financial sector in India is way ahead of several emerging economies in Basel III implementation management.
Go deep into the functioning of Boards: one realizes that the measures are hollow. The seriousness of these measures fall flat when one realizes that the Supervisor who does annual audit, namely, NABARD sits on the Boards of the State Cooperative Banks and so does the RBI representative sits on the Boards of all public sector banks. In respect of one-time-settlements as out-of-the-court compromise settlements in respect of the non-performing loans, there would seem to be regulatory arbitrage.
The difference between the market value of realizable securities and the loan outstanding plus interest due till the date of settlement, could be negligible. But because of the delays in the judicial process, a series of discussions take place to compromise the loan amount taking into account the ability of the NPA account holder to pay up the amount immediately after considering all options, so that the bank’s balance sheet becomes cleaner and capital provisioning gets humbled. Here lies the catch: the assessment of the CEO in regard to the ability of the enterprise to honor the commitment after providing for all the guarantees and counter guarantees and other collaterals depends on the support that he or she gets from the Board and the willingness of the Board to write off the difference between the outstanding dues and the compromised amount. In several cases such gap runs into huge amount – millions of rupees.
Illustratively, the outstanding loan amount is INR40mn. The easily realizable market value of collaterals and guarantee is INR 110mn. But the CEO convinces the Board: the Court is likely to take a long time to settle this and therefore a compromise is desirable as it would save the bank the ordeal of delay, court expenses, advocate-briefings etc. etc. the compromise amount arrived at is INR6mn, meaning thereby that the Board has to write off INR 34mn. The Board signs off the proposal and accords approval for this write-off. The supervisor sitting on the Board is a party to this transaction. In several cases, the actual amount that the borrower settles is a few notches up over the six million rupees. The difference between the actual settled amount and that appearing in the books as long as it is far below the outstanding amount, the borrower is comfortable. The sharing of this booty between the CEO and the Board could be anybody’s guess. Such cases are more in cooperative banks and in respect of medium and large enterprises as well in corporate loans of commercial banks. It is not unlikely that somebody accuses me of a wild and senseless allegation against responsible Boards. But if one goes through the OTS settlements that were cleared by the State Cooperative Banks’ Boards, within a few months after the elections to the Boards are announced, the allegations have a chance to stand the test.
Since the supervisors/regulators are on the Boards, even if some intelligent auditors bring to light such losses the remarks have the chance of being either ignored or expunged lest the RBI or GoI can pull them up for being party to the resolution that resulted in the loss!!

The best way to arrest these types of transactions is to strengthen the corporate governance by the regulators/supervisors at once disassociating themselves from being on the Boards of all categories o f Banks. Will this ever happen? The non-executive directors abound in Indian Boards but they end up as spectators and rubberstamp signatories. 

Inflation - the index and the real

Inflation – the index and the real:
Chidambaram-Montek led inflation index came down to push for a rate cut from the RBI in its impending monetary policy. The inflation indexed bonds (IIB) making their corporate entry initially would ere long move to individual investments as well, to distract from investments in gold. But this IIB is linked to wholesale price index instead of Consumer price index.

Just this week when I went to buy my rice and vegetables I noticed that my valet emptied in no time and had to resort to my credit card. Fine rice is at Rs.50 a kg. Dals range from Rs.60 to 80 a kg. Oils range from Rs.80-220 for Til oil. Vegetables soared to the highest with just two vegetables in the range of Rs.25 a kilo and the rest are all at Rs.40 a kg. Small savings are getting eroded fast, more painfully for the retired.
Politicians take comfort either in jails or public meetings not withstanding the soaring day temperatures. They keep on making promises that can hardly be fulfilled. 

Middle class are fast moving into the lower stratum. This is the level playing field of the government. Governments that indulge in this luxurious game may have to pay a very heavy price in the days to come when elections would be round the corner.

Thursday, May 2, 2013

VITALINFO: Can the RBI innovate?

VITALINFO: Can the RBI innovate?It is not just in the area of credit risk assessment, measurement, management and the rising NPAs that require innovative and out-of-the-box thinking. sometimes it is better we go back to the basics and introduce new measures that would have relevance for future and the present. 
Even after the core banking solutions are across the board in all the banks, why should different accounts have different cheque books? One cheque book should be adequate that can be used against all the deposit accounts of the account holder. This would save a few millions of rupees of secured stationery apart from the customer having to face litigation for issuing a cheque in one account where the balance dried up  on account of application of a standing instruction or even some miscalculation but having adequate balance in other account. This is a very simple innovation that can be immediately introduced. 
There will be many more simple customer friendly innovations that existing technologies can bring forth saving costs for both the bank and the customer.

Saturday, April 13, 2013

Interest Rate debate begins


INTEREST RATES DEBATE BEGIN IN INDIA FOLLOWING ABENOMICS
B. Yerram Raju
Annual credit policy is due by May 13. The demand for easy money policy is on pressure zone following what Japan did. The Economist in its issue dated 6th April 2013 is emphatically unsupportive of the cheap money policy ushered in by the new governor of Bank of Japan. The lower interest rate regime in the post-recession period 2008-09 would appear the new normal. Bank of England and the European Central Bank also tweaked lower interest rate regime to last longer than expected. Does this justify the cry of corporate community in India to follow suit to give boost to the manufacturing sector and growth? Will the current inflation rate allow such intervention? What has been the result of the brief interest rate cuts that had already surfaced?

The lowest bank rate that Indian economy witnessed was 2.5% in 1936 – during war time. The target of rate cut was not growth of the economy but the sovereign balance in the British colony. Now Indian economy has come of age but the global integration left the so-called decoupling with the rest of the world a near impossibility.

Kenneth Rogoff, a Harvard University Professor says: “Like most economists, Bernanke believes that if policymakers try to keep interest rates at artificially low levels for too long, eventually demand will soar and inflation will jump. So, if inflation is low and stable, central banks cannot be blamed for low long-term rates.” But the Indian situation is different. We have inflation soaring. Growth is down and under. Current account deficit is raising its ugly head with 6.7% last month and a bourgeoning fiscal deficit that refuses to be reined in with General Elections less than a year away from now.

The so-called economic resurgence and effective regulatory interventions that kept India’s growth rate high in the Eleventh Plan period are now turning out to be only things of the past. Manufacturing growth is at just 2.5%. Agriculture and services sectors are not in any rescue mode.
The priority for the monetary authority is clear as has been repeatedly asserted by the Governor, Reserve Bank: reining in inflation for its impact on the poor is far more than any direct tax imposed on them. The rate cuts in the past though in small bouts of 0.25% every time, has not triggered credit growth in the areas most desired. The risk appetite is at the low end because of the high NPA levels in corporate and infrastructure credit. Even the corporate debt restructuring indulged in liberally and the capital refurbishing by the government to the public sector banks would not leave enough confidence in the regulator to resort to a rate cut as a panacea for the current imbroglio in growth.
What will the rate cut do anyway?
If the Banks were to respond positively, they should reduce their base rates and lending rates correspondingly. The rates on deposits of key segments will have to be lowered to ensure that the net margins do not erode. If the interest rates on deposits are lowered, propensity to save will take a backseat. Bond rates in this scenario despite being attractive,  are not safe bet for investors in the context of high debt-GDP ratio. There is need to increase the incentive to save as the domestic savings rates have been coming down during the last two years consecutively. Low interest rates are not certainly going to help the situation. If the inflation is at 9% and interest rates for term deposits are on average at 8.5% the negative return is 1.5% or the depositor paying this much for safety and security of his funds to the bank.
When the market rates of interest are not influenced by official rates even marginally credit is unlikely to spur production of goods and services. Further tighter regulation of lending standards and Basel III implementation deadlines also force banks to step up bank lending to the much starved SME sector increasingly difficult. This will give rise to the operation of a vicious cycle.
Monetarists strongly believe that a mere reduction in the quantity of money is a dangerous device to stop an inflationary development. Moderately used, as Hansen says: ‘it courts the failure of ineffectiveness; pushed to the needed fanatical extremes, it courts disaster.’
There should be a many-sided programme to control inflation:
1.      First hold down government expenditure to what is urgently necessary so that budgetary surplus can emerge.
2.      Resist the temptation of incentivizing FTAs through tax-cuts. There is a demand to reduce taxes on luxury goods like CKD SUVs to 30% and such demand should not be conceded.
3.      It is necessary to resist wage-inflation: periodic increases of DA at Central Government level triggers demand at State government levels and this spiral would lead to price-wage increases – both a symptom and a further cause of inflation.
4.      Inflation indexed bonds should be sold vigorously.
5.      There is no room for relaxed credit standards.  In the context of board-sanctioned credit triggering huge NPAs, all the proposals that go to the board should be scrutinized by risk management committee and credit committee separately and a balanced view on entertaining such proposals shall be taken. There is need for looking at Board accountability.
6.      Speculative areas of credit like the real-estate howsoever tempting should be avoided.

What can’t be cured must be endured. We must learn to live with existing rates of interest for some more time to come until the fiscal corrections come about and policy initiatives to secure more foreign investments bear fruit. Japan now is no guide for India’s future. 

Thursday, March 7, 2013

That is Mother


MY MOTHER
Yerram Raju (written in 1987 on her 60th birth day)
Thoughts of Mother lovely
Her acts affection in bounty
The recall makes me
Travel in thrills
Wonder how she made life
So sweat for all of use
Notwithstanding all the odds
She had to face
Well, that is Mother.

My boyhood friends surprisingly
Swamp on our house
Not because they love me
But my Mother's choicest recipes
Deliciously served for them
All of them recall their juicy taste
Yearning to reach after
Three decades again
Well, that is Mother.

My dad would invariably
Look angry - the anger
Of impatience for results from
His wards -
The anger of a tiresome and
Exacting Bank job in pre-seventies
The anger of affection
All the anger off-loaded
Day after day on the
Most indulgent lady
She absorbs and distributes
All smiles and love
Well, that is Mother.

A thoughtful prayer — her wont
An erudite Religious scholar
Unto herself the treasures
Of knowledge bequeath
Emits light in thoughts
Showers wisdom in words
Affection in Action
Who else can do it
Well, that is Mother.

Taught humility and forbearance
To twelve of her children
And the other twelve that joined their lives
To make life sweet and welcoming
Life is great and lovely
What else can it be with
She ruling the destiny of all of us
Well, that's Mother.

If patience is a vice, she has it in abundance
If love is a crime, she commits every minute
If prayer is bad, she does it every moment
If talking sweet is intolerable
We have to bear it
If service to neighbours is unsocial,
She is highly indulging
Seeing God all around her is of least of privileges,
She enjoys it
Who else can I think of
Well, That is my Mother.

Sunday, March 3, 2013

Post Budget Analysis 2013-14


Union Budget 2012-13-On Expected Lines and little to cheer.
B. Yerram Raju
Budget is generally viewed in the backdrop of the Economic Survey. The Economic survey presented yesterday did not hide the failings thus far in the economy and just fell short of telling that the governance deficit would something beyond the FM. It laid bare the retarding growth and rising inflation and also agreeing with  the CSO estimate of depressing 5% growth expectation during the current year. As at the quarter ending December 2012, actual growth figures ended at just 4.5%. It attributes the retardation to the declining contribution of services sector from 8.2% in 2011-12 to 6.6% in 2012-13 and in part from the fall in growth in agriculture and industries sectors. It complements the medium term fiscal consolidation effort that pegged the fiscal deficit at 5.3%. It expects that the growth would be in the range of 6.1%-6.7% in the coming year. It leaves us the hope that the downturn of the economy is ‘more or less over.’ ‘Economic slowdown is a wakeup call for stepping up reforms,’ the Survey mentioned.
It also predicts that the global economy is also likely to recover setting at rest that the shadow of continuing global failure would be a drag on the Indian economy. Core Inflation shown to be at 4.2% and wholesale price index at 7percent with food inflation at double digit figures leaves one in doubt regarding the inflation figures mentioned in the Budget speech of the FM .
This optimism left hope in the markets that the Budget would be in the direction of spurring investments and domestic savings, measures to increase the consumption to spur growth and fiscal prudence to contain inflation. But alas, the index fell by 1% and the currency fell equally after the presentation of the Budget.
It hoped that the fiscal targeting and the likely downtrend in inflation would help RBI to look at rationalizing the interest rate structure.
Agricultural growth declined from 2.7% last year to 1.8%. It called for appropriate policies in the farm sector to reach the 12th plan target of 4% per annum: for improved agricultural growth, the survey underlines the need for stable and consistent policies where markets play an appropriate role, private investment in infrastructure is stepped up, food prices, food stock management and food distribution improves, and a predictable trade policy is adopted for agriculture. The high dependence of employment in the backdrop of a declining share in GDP to 14.5% is a cause for worry and this requires consistent policy to develop alternate skill-sets in farm labour to migrate to rural livelihoods programmes on one side and increasing mechanization on the other. Its analysis of agricultural credit is however flawed: in the face of declining area and deficient monsoon, if the banks claimed achievement of credit targets for agriculture, something is seriously wrong and the Survey should have lent a word of caution instead of praising the banks for reaching the targets.
The FM had to provide for capital refurbishment to the Banks in the public sector at no less than INR 1.17crores to meet up with the Basel III norms from April 2013 and the drift in the composition of NPAs from the erstwhile priority sectors that anyway do not cross 40% of lending portfolio to the corporate debt hiding mostly in the power and infrastructure sectors is the biggest worry. He has to provide for the railway deficit of Rs.26000crores apart from the revenue deficit. Implementation challenges of Food Security Act would also leave no room for containing the deficit. Of this, he provided Rs.26000cr to PSB capital in the Budget. Moving up on the revenue front against an incremental 1 to 1.7% of growth is not going to be substantial. Therefore, containing the fiscal deficit at the expected 4.8%  would appear unattainable.
The supply side issues as were made out to be the key factors for food inflation at the current growth in agriculture but had little mention in the budget.
In this backdrop, it would be interesting but at the same time highly disappointing to see the Budget neither growth oriented nor towards containing fiscal deficit. There are also very few indications as to when and how the current account deficit would be brought down to a reasonable level of, say,3%.  Inflation anyway the economy has to reconcile with during the year, notwithstanding any interest rate cuts that the RBI may like to offer. Let us now look at the Budget figures as to why I have to come to such conclusion.
How the pie of rupee gets divided between revenues and expenditure gives us a clear picture. 27% of the Rupee in budget 13-14 comes from borrowings while it was 29% in 2012-13. The question that now confronts us is whether this marginal reduction in borrowings would contain the fiscal deficit? The straight answer would be a natural ‘no’. Let us see the other avenues vis-à-vis last year: There is no change in the corporate tax pie- at 21%. Income tax has a marginal rise of 12%. Revenue from customs has come down from 10 to 9 percent while the Union Excise duties are estimated to come down by another 1%. Service taxes and other taxes are expected to go up by 2% compared to last year at 9% in 13-14. Non-tax receipts remain at 9% while the non-debt capital receipts are up by a percentage. In so far as expenditures are concerned, non-plan assistance to State and Union Territories and Plan assistance remain at the same share of 4 and 7% respectively. Same is the story of State’s share of duties and taxes at 17%; other non-plan expenditure at 11% in the year just concluding and in 13-14. Defence expenditure comes down from 11% in 2012-13 to 10% and he spent ten minutes in his speech. Central Plan outlay has also come down by a percentage point from 22% in 12-13 to 21% in 13-14. Do these figures give any confidence that growth will be spurred? No way. At the same time, the growth projection is 6.4% - 1.4% more than the current year! He defended the lower growth rate as part of global phenomenon. China alone is credited with higher growth. How can fiscal deficit come down to 4.8 percent in the backdrop of such uncertain growth picture?
Yet, let me list out some of the best things that this Budget announced:
The FM assured higher employment for youth. Health sector has secured the highest attention. Integrated development of women got an allocation of Rs.91.134crores, the highest share in the recent years. He has even promised an exclusive Women Bank with Rs.1000cr in the public sector. He may have already identified the Woman CEO for the Bank!! It would work for the women and by the women.
Investment incentives have found their due share and the stock markets have everything to cheer up which they did just for a short while. The MNREGS got an allocation of Rs.80184crores. This allocation is not backed up by any specific direction. Actually the scheme objective specifies creating livelihood opportunities but has confined itself to providing wage distribution with no asset creation. This has led to serious imbalances in agricultural labour wages and the farmers have been demanding a mechanism by which the scheme gets dovetailed with the crop cultivation and horticulture in measurable terms. Rajiv Gandhi equity Scheme has been liberalized. Household savings have also found a new route. Interest deduction for investment in housing up to Rs.25lakhs is also on cards and is likely to be announced after discussing with the RBI. Rs.2000 tax credit at the lower end of the Income tax bracket would bring cheer to the wage earners. Inflation Index bonds and Inflation indexed National Savings certificates are the new instruments of savings for households are welcome features. On the infrastructure side two ports – one from West Bengal and another from Andhra Pradesh found mention. National waterways development for bulk cargo transport to ease the road transport burden has also been announced. MSMEs get a better deal in terms of allocation of higher refinance from the SIDBI and Micro Finance Equity Fund, credit guarantee fund  and Rs.2200crs for 15 additional technology centres and incubation centres as also waiving the IPO offering for getting listed on SME Exchange are worthy to note. KVI artisan clusters also received an allocation of Rs.800crores; handloom sector to get working capital and term loan at 6% covering 1lakh individual weavers and Rs.26crores interest subvention.
Another sector that got rich attention is Finance Sector: He proposed setting up a Standing Council of experts in the finance ministry to analyse the international competitiveness of the Indian Financial Sector.  He also proposed a Committee to provide clarity on the treatment of Investment as FDI or FII.
The most disappointing attention is for the farm sector that got an allocation of just 1.4-1.5% of the total budget outlay. Although growth of farm sector at 4%per annum on average for the 12th Plan is held imperative for attaining 8% growth, there are no indications to spur such growth in the budget. One can argue that agriculture being a State subject much depends upon what the States allocate. But the Economic Survey as we noticed above desired specific policy direction for food prices, food storage and food distribution. In the wake of 1.8% growth in the sector in 12-13, and with a drop in the area cultivated how he expects a lofty target of 275mn tons in 13-14 is a big question mark, On the top of it once the Food Security Bill is passed how he proposes to meet the nutritious food and grains at the promised level in the Act for the poor can at best be a wild guess.
It was not also clear as to how he presumed that the current year’s credit allocation for short term agriculture at Rs.5.75lakh crores when the area under cultivation has come down is not clear. On the top of it he proposed to raise such short term loans for crops that too at concessionary rates of interest to farmers to Rs.7lakh crores. In any case this does not come from the budget. There is no allocation for interest subvention for such huge outgoes to the Banks.  Continuing 4%interest scheme on farm credit and treating investment in cold storage as infrastructure funding may be welcome but he could have treated investment in cold storage transport also as infrastructure funding.  This would have made the movement of perishables and vegetables, meat etc easier and faster and would have stabilized their prices for the farmer. 
On the manufacturing front, the budget allows for deduction of investment allowance of 15% on investment of Rs.100cr or more in plant and machinery during the next two years 13-15. Incentives for semiconductor manufacturing facilities including zero customs duty for plant and machinery to promote domestic manufacturing of hardware much of which is currently imported.
He chose to announce recapitalization of the public sector banks to partially meet the requirements of Basel III. But when the required recapitalization is of the order of Rs.1.17lakh crores, Rs.26000cr allocation would be just a little less than one fourth of the requirement.  Another similar incentive that might be counter-intuitive is, increase in the rural infrastructure development fund.  The Expert Committee on Agriculture Indebtedness 2007 suggested de-linking of RIDF from the lending to priority sector. As long as this does not happen, there is a window of opportunity for the commercial banks to dress up their figures for lending to agriculture. Third, although cooperative credit structure, occupying a little over 12% of financial space, is in the hands of States, the FM would have done well to release recapitalization of such rural credit cooperatives who have moved forward in effective legal and structural reforms in that sector because it is they that are within the easy reach of the farmer and they are the best instruments of financial inclusion if shaped properly.  Excluding cooperatives in the effort of financial inclusion and dependence on the unwilling commercial banks would for sure delay the process by a decade more if not less.
The announcement that GST would find its entry in the midstream of the Budget year having covered good ground to get acceptance of States and an allocation of Rs.9000crores symbolically is a good push for this important reform measure. He kept to his word regarding the direct tax by conforming to the code and a marginal increase at the lower threshold has been noticed to be not upsetting his revenues on this count. He introduced voluntary disclosure and payment of service tax for filing a declaration of past dues for the past five years by waiving penalties and interest on the hope of a million tax payers joining the stream, enhancing the pass through privilege, providing for bringing jewelry up to Rs.50000 for men and Rs.1lakh for men as part of baggge that will be welcomed by the middle class. Similarly mobiles costing Rs.2000 and below would not get into additional tax levied. Other luxury goods have been taxed. But the rich have been let off. He is himself rich and would not like to tax himself. 

Thursday, February 14, 2013

Governance in Agriculture


GOVERNANCE IN AGRICULTURE:

Prof M.S. Swaminathan recalling the combat with Bengal famine observes rightly: ‘If agriculture goes wrong, nothing else will have a chance to go right in this country”.[1] Excepting the unleashing of a National Policy for Farmers in 2007[2] that still is crying for implementation, nothing seems to have gone right in agriculture sector. Farmers’ suicides continue still in agriculture-intensive States like Andhra Pradesh, Karnataka, Punjab etc. There are regions where the farmers declared a crop holiday to demonstrate their anger against poor governance. The purpose of this article is to address the issue of governance in this sector.

Ministries influencing the farm sector:
There is no other sector than agriculture in the country that is in the stranglehold of a number of inter-connected Ministries at the Centre: Union Ministries of Agriculture and Cooperation; Water resources; Food Processing Industries; Rural Development; Commerce (dealing with international trade) & Industry; Environment and Forests; Micro, Small and Medium Enterprises; Consumer affairs and Public Distribution; Science and Technology; Non-conventional Energy Sources; Finance and above all the Planning Commission. Agriculture being a concurrent subject in the Constitution of India, the States has as many corresponding Ministries that interact with the Central Government in governing this farm sector. I have not come across another country that governs the farm sector through such a web of governance. Each Ministry and each State Government has its own last word that rarely matches with the other. The farmer stood at a disadvantage finally.

It is politically infeasible to reduce the number of Ministries either at the State or Centre for the simple reason that each stratum of the fragmented democracy should get a berth in the seat of power. But after six and half decades of independence, having successfully combated the famine, having moved to impressive ranks in the world like milk, poultry, horticulture etc in production we are far away from providing food security. 40% of production is still wasted or rotting in the government warehouses that invited the wrath of the Supreme Court to correct the situation with expedition.
The Cabinet Sub-Committees at the Centre and States that constitute a coordinated mechanism for releasing the policies relating to agriculture or for that matter any other policy are the only coordination forums now functioning. The oversight mechanism for monitoring and concurrent evaluation of the functioning of regulatory institutions suffers from lack of such coordination. There is no regulatory impact assessment of any policy and regulation as an ongoing exercise like in the UK.

We are living in a fast changing and dynamic world requiring quick and correct responses. Land and water resources, the principal factors of production in the farm sector are scarce but the bourgeoning population adds pressure year after year on these scarce resources. Resources like water, soil, plants and animal life have the capacity to regenerate but the speed may not cope with the ever-increasing demand on them. Sub-division and fragmentation of holdings, riparian water resources and shrinking farm labour coupled with rising consumer expectations for quality food and water make the governance complex. If the farmer has one cow in his backyard, it will take care of his organic manure requirements of one acre of cultivable land. But the cow is with department of animal husbandry department; backyard is with panchayati raj department, manure is with department of agriculture and biodiversity; and land is with the revenue department. This is where governance matters as each department moves to regulate its own area according to what it thinks right and not what is right.

What do we mean by ‘governance’?
Wikipedia defines: “Governance is the act of governing. It relates to decisions that define expectations, grant power, or verify performance. It consists of either a separate process or part of decision-making or leadership processes.” Governance relates to consistent management, cohesive policies, guidance, processes and decision-rights for a given area of responsibility. This stands on the four pillars of decentralization, accountability, transparency, and coordination. It embraces action by executive bodies, legislatures and Parliament and judicial bodies (from the local levels to the Supreme Court, the highest judiciary).

In the post-liberalisation era, governance has been the most discussed subject but is like the four blind men trying to defining elephant. It has resulted in assertion and acceptance of certain rights for good: the right to work; the right to information; the right to safety and security for every citizen. Some have already taken the effect of legal sanctity and yet trying to find space for functional existence. Since my focus is on governance in the farm sector, I would try to look at areas that need reform viewing from the interest of the farmer, the centre of attention.

The reform in governance in so far as the farm sector is concerned should start from understanding the complexity of farming, farmer and his family and the society in which he lives and to which he contributes most. Philosophically speaking, if I receive something, I should be in a position to return something to the giver. The farmer gives me food and makes me live and therefore, the least I can give him is to provide conditions that continue to enable him to live happily and continue to giving me all that I want to feed myself, my family and my dependents.

How does this happen in the diverse and complex of governance that we have today?  Implementation of multiple schemes and programmes by different departments and Ministries for the farmer has led to centralization. Decentralisaton of administration, the first principle of governance in the absence of the focused attention on the target led to maldistribution of scarce resources and the equity has become a casualty in the name of equality. Conceptual correction is required at the point of decentralization. How is the decentralization process involving the farmer at the lowest level of administration – the panchayat?

Accountability is the next principle demanding performance not just from the point of view of financial goal but from the point of view how this target of governance has improved – the lot of the small farmer, the marginal farmer, the landless labour, and the tenant in the overall framework of farming.

Transparency is the third principle of governance: How is this achieved? Has information technology been effectively used in communicating to the farmer all that he needs to produce, store and market and earn a cost plus to continue in production with dignity and honour? Mobile technology has made rapid strides in passing on information from the learned to the learning and also for effecting payments and receipts. How much of investment is required to take this technology within the operating convenience of the illiterate and semi-literate soiled palm of the farmer?  Responses to these questions have the potential to resolve the information asymmetry of the farmer in remunerative technology adoption.

Coordination is the fourth principle of governance, the real villain of the piece. How can this be achieved?
In all the States – that is, nearly about twelve that have preponderance of agriculture as the driving force of their growth and are also carrying the burden of growth of the rest of the economy and at the Centre, agriculture vision document should be prepared after a thorough inquest by the Agriculture, Animal Husbandry and Horticulture Universities in the State as a first step. This vision document should be shared with all the stakeholders and the scientists within a set timeframe. This document shall lay down the objectives and goals of farm policy and coordination mechanism.
Second, each of those States shall prepare annual agriculture sector survey with the farming related universities in the lead and this annual survey should be presented before the Legislative Assembly, a day ahead of the presentation of the Agriculture Budget that should also be presented every year ahead of the General Budget session. This Budget shall be subsumed in the General Budget. This process would make sure that the finances of the state move in tandem with the requirements of the farmers.[3]

Third, once in two months the Coordinating Forum on Agriculture (COFA) with the Minister of Agriculture ( could be designated as Deputy Chief Minister in such States) presiding should review the budget releases and ensure that the lowest level of delivery gets the physical resources to be in the reach of the farmers. This COFA shall be vested with the authority of vetoing any proposals and censuring any actions of those that run counter the effective implementation of the policy goals in agriculture.

Networking is the name of good governance. Technology should help taking innovations and research on the field to the lab for commercial assessment and the Indian Council of Agricultural Research and the farm extension wings in the States should spearhead this area and for backward integration.
Agriculture Marketing needs to move to farmers from the politicians. This would require change in the Agriculture Marketing Acts of the States and huge investments in technology at each market yard where the farmer finds comfort to unload his produce with the swiping of his SMART card and walk away with cash into his bank account. Improving governance in this area holds the key as, in all the other areas we have reached some milestones that can be moved forward more by miles than inches faster than a few decades ago. Let us resolve to make agriculture right to make sure that everything else in the country goes right. 




[1] M.S. Swaminathan: From Bengal Famine to Right to Food’, The Hindu 13th February , 2013
[2] M.S. Swaminathan: Agricultural Strategy, internal security & Sovereignty, The Hindu 1st January 2008
[3]B. Yerram Raju: Forthcoming publication: “ Getting the Perspective Right: Comprehensive History of Agriculture Banking”, Konark Publishers,p.27

Inclusive Growth and the Missing Goals


Inclusive Growth and Missing Goals
The cab stopped at the Traffic signal in Mumbai while on my way to the venue for my meeting at Mumbai from Santacruz west to BCK. A few boys peeped into my window with a few books – all of them are unauthorized print versions of famous novels at reduced prices. Since there was some traffic  jam, the car stopped for more time than usual. I thought I would ask the boys how much they earn per day through the sale of books and what margins they get. Sab, ‘hum ko roti, chaval milta with some pocket money of about Rs.50 to Rs.70 per day depending on the sales we get. There could be some days when we don’t get any margin. 
The next day I happened to visit Crawford Market and took a stroll on pavements where a string of shops and anything and everything one wants is available and all one may have to do is to do a bit of bargaining. I asked about fifty such shops whether they have a bank account; they answered in the negative. Then I asked them where from they get the money to do their business. The reply was simple: ‘we get money for the asking as long as we promise a good return at the end of the day.’ I asked them what is the price they pay for this money. The answer was no surprise: They get Rs. 900 to even Rs.9000 in the morning to return Rs.90 to Rs.10000 in the evening as they fold up their shops for the day. The person who gives money in the morning comes and collects it back. Sometimes the transaction is carried out on weekly basis. Where do all these businesses figure in the country’s GDP? Nowhere. Neither the small retail businesses they do nor the money transactions that take place between the dealers and shops.
A friend of mine narrated to me his experience with some of the other big shops – the scrap dealers. Everything is transacted in cash and cash alone. Then move the Zheveri Bazar. Most un-branded shop keepers do not accept cheques nor do they give receipts. Where does their purchase or sale get taxed? Do they pay income tax? Do they pay service tax? Some do. But many do not. Where they pay taxes, they pay on whatever record they choose to disclose and with a certificate from a Chartered Accountant!!
There are high pried doctors in private clinics where even income tax officers would not dare ask for receipt or insist on tax liability to be recorded scrupulously; lawyers; even Chartered Accountants and the movie actors. Most do not dish out receipts. To the list movie actors we can now add the TV anchors. The grapevine that we see often in print in most weekly popular news tabloids that some of the leading actors demand as much as Rs1-5crores or even more is also beyond the tax net. 
These listings are the surest routes of black money and this is the colour that most seem to like. Will the Finance Minister look at these guys to fulfill his growth dreams and enlarge his budget receipts? The time is ripe but the routes are rough.
Published in the digital journal: Business Advisor dated February 10, 2013

Monday, February 11, 2013

Elections to AP Cooperatives are over: What Next?



Notwithstanding the Constitutional impropriety in the wake of the 97th Constitutional Amendment Act 2012 that should take effect from February 14 2013 in the States, Andhra Pradesh in the name of democracy, forgotten for two and half years, conducted the Elections to the Cooperative Societies in the State. 

All the newly enrolled members were voters to the extent of 100 percent while the active members, that is, those who availed services from the cooperative societies for which they were members, who constituted around 40% muted the queue at the election booths. The candidates report having spent lakhs of rupees to win the election and are eager to run up to the Chairman and Board positions to recover their expenses.

A day after the elections one District Collector, a functional Registrar of Cooperative Societies, made an anguished public announcement that the applications for gas and public distribution would not be accepted if they bear the account numbers of the cooperative banks! The Government any way does not allow deposits of public institutions to be kept with the Cooperative Banks – urban or rural! This is the trust that the Government has in the system to which it enthusiastically conducted the Elections. The Government feels that these institutions are fragile and have weak governance. Democracy makes it weak in governance?
Public memory lives short – the debacle of Charminar Cooperative Bank, Prudential Cooperative Bank, and a few more in the State and elsewhere alerted the financial regulator to put in a strong coordinated mechanism to revive the Urban Cooperative Banks through the Task Force on Cooperative Urban Banks. While there is no such mechanism for the District Central Cooperative Banks, with lackadaisical implementation of Vaidyanathan Committee recommendations that called for professionalization in all the States, the non-professional Chairpersons now elected would like to make a fast buck in credit sanctions and releases for the large number of vulnerable farmers, small business owners, weavers, and artisans apart from the greedy real estate builders. Most of those elected keep their own deposits with the commercial banks, both of their own and of their families!! These trusted ‘public servants’ have to revive the trust in the cooperative banking.
Over and above this, the DCCBs are today licensed by the RBI unlike in the past and this would require strict conformance to statutory ratios, liquidity norms, a strong relationship with the Apex Bank and credit and financial discipline. They can no longer indulge in the luxury of postponing their annual closing in their books to window dress their recoveries. The RBI after a few warnings and punishments to the errand would not hesitate closing down such banks. Even the Maharashtra State Cooperative Bank today is in trouble for getting its license.

Government does not trust cooperatives but conducts elections for political mileage:

The Chairpersons of the Commercial Banks, with private and local area banks being no exception, are selected following certain due diligence and fit and proper criteria to hold such positions. In the case of DCCBs, now licensed, the Chairpersons are elected through the ballot. 

If the Chairpersons of these cooperative banks were to be transparent and knowledgeable, they should be on the roll-call of the Bank. It is desirable to put them on monthly salary and defined perks with certain boundaries of personal expenses. This would make them accountable to the institution. None of them shall have any personal security guards at the expense of the Bank. They should be trained to read the Bank’s Books of accounts and balance sheets. They should submit their statement of election expenses; should declare their personal and family assets and liabilities in a sealed cover to the CEO of the Bank. . They should take oath before assuming their position as Chairman regarding a well defined code of conduct to be prescribed by the RBI.

Public money has proved a bane at the hands of a political executive, in most cooperative institutions and institutional mechanisms should be put in place to prevent abuse of power and resources.
(The Author is also Member, RBI Expert Committee on Short Term Cooperative Credit Restructuring; can be reached at yerramr@gmail.com)