CURRENT AFFAIRS 21.11.2016
1. Financial pokhran hits neighbours
Demonetization
has impacted our neighbours too. And no, we are not talking about Pakistan,
where government printing presses churn out counterfeit Indian currency bills
to undermine the Indian economy and help fund terror. Nepal, Bangladesh, Sri
Lanka and even Bhutan are nations where signifi cant amounts of Indian currency
is held and circulated. Prime Minister Narendra Modi’s announcement banning
high value Indian bills with immediate effect has hit each one of them. While
banks and other fi nancial institutions in these nations holding Indian
currency should not face a problem, small traders, businessmen as well as
tourists are feeling the pinch. Let’s take Nepal, often seen as a transit point
for fake Indian currency printed in Pakistan. The 1700 km border is extremely
porous and unregulated, and many Nepalis living and working along it possess
Indian currency. Then there’s thousands of Nepalese who work in India and send
or take their earnings back home in Indian rupees. Nepal’s Rashtra Bank says
banned notes worth `33.6 million were within Nepal’s offi cial fi nancial
system, but the actual figures are likely to be much higher since Nepalese are
offi cially allowed to keep upto `25,000 in Indian currency. Bhutan, where the
Indian rupee is legal tender, acted quickly, with the Royal Monetary Authority
of Bhutan giving people time (initially till December 15, then revised it to
November 30) to deposit their Indian currency into the banks, which in turn
would send it to the India’s Reserve Bank for swapping with the new notes. The
RMA governor estimates that almost `100 crore would be deposited by Bhutanese
nationals. In Sri Lanka, small businesses that trade with India and hence keep
some Indian currency are likely to be the most affected. While the RBI has set
up a task force to help these neighbouring nations deal with the crisis, it
will take a while for the heartburn and unease to tide over
2. As tragedy sinks in, queries on fate of
Rs 1.2 L cr safety fund float around
In
the wake of the Kanpur train tragedy, questions have been raised about the
railways’ plans to enhance passenger security and the proposal for a Rs 1.2
lakh crore safety fund, which the ministry of finance has rejected. This when
the implementation of the recommendations of the High-level Safety Review
Committee headed by former Atomic Energy Commission chairman Anil Kakodkar
would require roughly Rs 1,00,000 crore. The railways has been very slow in
implementing the 2012 report that stated “the present environment on the
railways reveals a grim picture of inadequate performance largely due to poor
infrastructure and resources and lack of empowerment at the functional level”. In
the 2016 rail budget, Railways Minister Suresh Prabhu announced ‘Mission Zero
Accident’ and he wrote to the finance minister requesting him to make a
provision for a dedicated fund of Rs 1,19,183 crore, called Rashtriya Rail
Sanraksha Kosh, for carrying out safety-related projects. According to the
railways, of the 106 recommendations of the Kakodkar panel, 68 have been fully
accepted and 19 partially accepted. Twenty-two of these recommendations have
been implemented while 20 recommendations are in the final stages of
implementation, according to data tabled in Parliament. Minister of State for
Railways Rajen Gohain told Parliament last week that the safety-related work
involved track work, bridge rehabilitation, safety work at level crossings,
replacement and improvement of the signalling system, improvement and upgrade
of rolling stock, replacement of electrical assets and human resource
development.
3. Battling black money
The Hindu
After
nearly two weeks of demonetisation, it is clear that its immediate effects have
been more unpleasant than what the Government had perhaps anticipated. The
informal sector in rural and urban India (proprietary and partnership
enterprises employing less than 10 workers) accounting for 45 per cent of the
GDP and 80 per cent of total employment, has been badly hurt by the withdrawal
of 86 per cent of the value of currency in circulation. Rabi sowing and kharif
marketing and harvesting operations have been hit. At stake are the livelihoods
of over 400 million people. Not surprisingly, economists and market analysts
expect GDP growth to contract by 50 basis points or more this fiscal — owing to
a collapse in the circulation of currency in a cash-dominated economy. The
point here is not to write off the strike on black money, but to ensure that
this pain to ordinary citizens does not last long and — what’s most important —
black money recedes into insignificance. The second cannot be achieved by a
single stroke. It would require a multi-pronged approach that attacks not just
the stock of black money (in this case, cash has been the target to the
exclusion of other forms of hoarding such as property, bullion and financial
instruments) but also its flow. Black money is an integral aspect of activities
concerning elections, realty, mining and bullion and even capital markets.
Without looking at such flows — the Centre has made a start in the case of coal
mining and capital markets, by introducing auctions and amending double
taxation avoidance pacts with Mauritius and Cyprus — we may soon be back to
square one. It is crucial to note that black money flows are a product of
cumbersome procedures and high taxes, and cannot be countered by policing
alone. The Centre should not lose sight of the fact that an economy with less
regulatory clutter is cleaner and more efficient, as it seeks to rewrite the
rules in certain sectors. Realising that black money will not disappear in a
single stroke, the Centre has announced a drive against benami holdings. While
demonetisation has already brought about a welcome correction in the distorted
realty sector, a clean-up should encompass the shady secondary market. The Real
Estate (Regulation and Development) Bill focuses on one aspect — time-bound,
transparent regulations, which should reduce bribery and make it easier for
bonafide entrepreneurs to enter the fray. But overhaul of the secondary market
calls for a relook at income tax, stamp duty and registration laws across
States.
In
order to bolster popular support, it is crucial that the Centre implements
electoral reforms. The loopholes in the Representation of the Peoples Act,
which include not questioning donations under ₹20,000 and allowing exemptions to a candidate’s
expenditure limits, among other things, must be addressed. The Centre should
not be seen as getting after the ‘small fish’ alone. Only then will the
surgical strike against cash hoarders seem worth it for all.
4. Watch out for more financial disruption
TULSI JAYAKUMAR
A week after the announcement of
demonetisation (a misnomer, given that high–denomination currency notes have
not really been withdrawn and merely replaced), the jury is still out on its
effects. The Government would want the common man to believe that the pain is
limited only to the short run. In the medium to long run, with banks being
flush with funds, interest rates will be lowered. Further, it would like us
believe that there are definitive gains to be made by all in the form of a more
transparent and cleaner economy in the long run. Unfortunately, macroeconomic
implications of any policy change are not as simply explained.
Impact on interest
rates
Bank repo rates, it is likely, will
be cut in the run–up to the Fifth Bi-monthly Monetary Policy Review on December
7, 2016, on account of the huge funds that have been mopped up by banks. An
indicator of the southward movement of interest rates can be seen by looking at
the money market operations and the behaviour of the daily weighted average
call money rate (WACR). The WACR is the operating target which the Reserve Bank
of India seeks to influence through its policy rate —the repo rate. With the
repo rate at 6.25 per cent, the weighted average call money rate, which was
6.21 per cent on November 8, 2016 — the day “demonetisation” was announced,
dipped to 4.44 per cent on November 14, and was 6.03 per cent on November 17,
2016. It is clear that banks need to resort less to the inter-bank call money
market funds for their daily requirements of maintaining the cash reserve
ratio.
Who benefits from such rate cuts and
will such rate cuts really have a positive impact on the economy? One, the rate
cuts hardly impact the large percentage of population (estimated at 58 per
cent), who constitute the unbanked segments. On the contrary, the decline in
liquidity on account of the restrictions in the amount of notes in circulation,
as also on the extent of withdrawals, will lead to a rise in the interest rates
in the unorganised sector and impact them negatively. Will this drive larger
numbers to be part of the formal banking system? Highly unlikely, since the
reasons for the financial non-inclusion may be more deliberate, owing to
factors such as lack of ability to provide collateral, bureaucratic hassles and
red-tapism, lack of adequate banking infrastructure as also suspicion of the
banking system at large among the poor unbanked and under-banked segments. Second,
banks cannot use these transitory deposits turned into current and savings
(CASA) accounts (these are essentially short-term deposits), for giving out
long-term loans. It has been suggested that sectors such as highways and
shipping, where the demand for investments is huge, may be the natural choice
for such surplus funds. However, given the long gestational lags in such
sectors, can banks afford to use CASA funds to finance the country’s
infrastructure needs? These may simply add to the banking system’s strain by
imposing higher mandatory capital adequacy ratio requirements.
Third, as rates of interest in India
decline, we can expect an outflow of funds from India into more lucrative
emerging markets, as also towards advanced economies which have been
experiencing a rising trend in their bond yields since the beginning of the
month. Thus, while the 10-year G-sec yield on Indian government bonds declined
by 30 basis points in the last month, yields on other emerging market bonds
have shot up by at least 30 basis points in the same time, with Brazilian
yields going up by 68 basis points. Further, yields on German bunds have risen
22 basis points, on US 10-year bonds have risen by 56 bps and on Turkey’s bills
have gone up 82.50 bps in the same period. Such a bearish bond trend exhibited
by India in the face of a global bullish bond trend, will lead to capital
outflows from India and difficulties in financing our current account deficit
(CAD).
People’s
expectations
It is important to analyse the
outcomes of the demonetisation effort from the point of view of what people
‘expect to happen’. The Rational Expectations Theory — an influential Nobel
prize winning theory by Robert Lucas, based on expectations of economic agents
— asserts that people try to forecast what will actually occur, when forming their
expectations. In doing so, there is a constant effort to adjust forecasting
rules so as to eliminate avoidable errors. Past outcomes thus feed current
expectations. In such a scenario then, outcomes do not differ systematically
(i.e., regularly or predictably) from what people expected them to be. From the
rational expectations perspective, people may be caught unawares sometime, and
make certain forecasting errors. However, such errors cannot occur persistently
in one direction.
The current ‘unsystematic’ and
unanticipated move would have caught the purveyors of black money and
counterfeit money unawares. This may led to a short-term impact on the amount
of fake money in circulation, as also some destruction of black money. However,
as people begin to factor in these developments into their expectations, the
premiums and commissions associated with corruption will only increase. As
such, the government may be better off adopting a credible policy stance — one
that is understood by people and credible in its approach. Such a stance would
have have far greater chances of success. There is no question of the reversal
of the decision to demonetise. However, the policy makers are better advised
not to throw the economy out of gear through persistent, unanticipated policy
shocks. Otherwise, the outcomes in the long run would be one akin to a more
virulent strain of bacteria resistant to all forms of antibiotics.
5. The time’s ripe for a rate cut
S ADIKESAVAN
Like all major economic reform
initiatives, the de-legalisation of the high value notes announced by Prime
Minister Narendra Modi recently has to be followed up by quick action on other
fronts so that the gains are not frittered away and are transmitted to the
common man fast. Anecdotal evidence suggests that the people queuing up and
undergoing hardships to exchange currency across the country are generally
supportive of the objective of this bold and unprecedented move because they
believe this will be good for the nation. But it is also true that small
businesses and trading have been affected with turnover coming down sharply in
the markets.
Falling prices
Cash will continue to be king as far
as the daily transactions of crores of our countrymen are concerned, especially
in the rural and semi urban centres with payments for groceries, vegetables,
milk and wages for farm workers and labourers being done only in cash. Though
the banking system has coped remarkably well with the demands placed on it, the
prospect of a slowdown till March, 2017 remains a cause for worry. Already a
couple of major brokerages and forecasting agencies have put out reports
predicting a lower GDP growth in the second half, with some estimates putting
it lower than 7 per cent. Whatever the variations in the assessments, there is
indeed an urgent need to send out pro-growth signals and see that the
Government’s move does not affect earnings, consumption and employment. It will
have a great demonstrative effect if a quick response comes from the Monetary
Policy Committee of the RBI. The MPC is mandated to “maintain price stability,
while keeping in mind the objective of growth”. At the present juncture, growth
considerations should override concerns over inflation. Inflation as measured
by the Consumer Price Index had come down to 4.2 per cent by October-end
itself. It is a no-brainer that the November CPI is likely to be below 4 per
cent, as consumer demand has been adversely affected by the de-legalisation of
the old high value notes. Prices of fruits and vegetables have fallen
drastically. A check in Hyderabad’s largest market at Gudimalkapur indicated
that prices of potato, onion, tomato, green chilies and brinjals have crashed
(not necessarily a good outcome, especially for farmers). Food and beverages
have a weight of 45 per cent in the CPI. The Government had set the inflation
target in its August 5, 2016 Gazette notification for the period ending March
31, 2021, at 4 per cent with a tolerance of 2 per cent for the MPC. Also, in
its last meeting on October 3 and 4, the MPC had stated that its decision to
cut the repo rate from 6.5 to 6.25 is “consistent with an accommodative stance
of monetary policy in consonance with the objective of achieving consumer price
index (CPI) inflation at 5 per cent by Q4 of 2016-17”.
Cut repo
Given the certainty that inflation is
likely to trend around 4 per cent in the next two quarters and growth may be a
casualty in the near term, a repo rate cut of 0.5 per cent is a booster that is
urgently required. (Of course, as monetary policy affects growth with a lag,
fiscal stimuli may also be required for growth.) Other indicators also make the
case for an immediate cut self-evident. The 10-year G-sec rate which was at
7.68 per cent in January, 2016 is now at 6.55 per cent. State governments which
borrowed money at about 8 per cent in March, 2016 can now raise 10 year loans
at about 7 per cent. Call money, which was 7.20 per cent in January, is now at
6 per cent and the one year dollar-rupee premium has come down to 4.68 per cent
from 6.10 per cent during this period. A repo rate cut now will be just
formalising the inevitable and will be ahead of the curve. It will be seen as
one of the instantaneous results of de-legalisation and temper the hardships,
especially of the micro, small and medium enterprises, by lowering their
borrowing costs. Banks which have seen a huge deposit surge will be forced to
cut lending rates, even though not all inflows are likely to stick. This will
also lead, sooner than later, to still lower housing and car loan rates, which
will have a positive impact on housing demand and neutralise at least
partially, the realty slowdown anticipated by many. More importantly, such a
before-the-due-date cut will denote what de-legalisation means for the common
man immediately -- lower borrowing costs. And it will blunt the criticism of
the nay-sayers who miss the ground-breaking reform potential of the Prime
Minister’s November 8 announcement.
6. Rural India is full of opportunities’
JINOY JOSE P
Vijay
Mahajan holds the John P Harbin Centennial Chair in Business at the McCombs
School of Business, University of Texas at Austin. He is the author of 12 books
including Africa Rising, The 86% Solution, and The Arab World Unbound. Businessline recently had a chat with him about his
new book — Rise of Rural
Consumers in Developing Countries: Harvesting 3 Billion Aspirations (Sage India) — and more. Excerpts:
You’re
saying rural incomes are rising across the globe. But some economists have been
warning us about disappearing rural incomes. What’s the reality?
My
market visits to several countries have showed me that a growing class of
emerging rural consumers who are globally connected have seen their incomes
rise and have the same aspirations as anyone anywhere. This is what I reported
in the book. Several factors are adding to this emerging middle class. Some
examples include government interventions, remittances (both from within the
country and outside the country), NGOs and social organisations.
Social
organisations?
Yes,
many such organisations are offering better tools to farmers to, say, manage
farming. Entities such as IDE India, Gates Foundation, Tata Trusts are good
examples. These organisations also provide farmers and the rural population
with sustainable living by teaching them to use natural resources (PRADAN in
India with Tasar silk is an example), or train them in various crafts to
produce commercial products ( example, Aarong BRAC in Bangladesh). There are
also private sector initiatives such as Olam, which works with small-scale
farmers to improve supply chain for their crops. All these initiatives help.
You
say larger opportunities reside in the up-and-coming rural populations of Asia
and Africa. But these are also regions with volatile and unstable regimes. Why
would companies take the risk?
Companies
do take risks that they can manage. Operations of P&G, Unilever and
Coca-Cola in West Asia are examples. At the end, there is the size of the
market: there are more than three billion rural consumers in Africa and Asia.
That’s almost half of the total population. One-third or one billion of them
live in South Asia (India, Pakistan and Bangladesh). Unilever South Asia based
in Mumbai have been catering to the needs of these consumers for decades. These
companies, what I call, have a rural DNA.
Granted,
but there are reports of mass exodus from villages to urban centres.
Rural
migration is happening in every developing country I visited. But many of these
migrants are still connected with their villages. They send money back home to
improve the livelihood of their families and leave cities during the harvest
time and attend marriages and religious celebrations in their villages
(example: Chinese urban migration during the Chinese new year and Indonesia’s
migration called ‘mudik’ or ‘going home’ at the end of Ramadan). The fact
remains that in terms of urbanisation, India is where the US was in the 1880s
and China is where the US was in the 1920s. So rural population in developing
countries is not going south anytime soon.
You
observe that religion plays a vital part in political economy. This is
interesting especially in the context of countries such as India.
Religious
and other cultural/social festivals (such as Chinese and Vietnamese New Year) form
the fabric of several developing countries. I just came back from India after
celebrating Diwali and Bhai Dhuj in Jammu. I saw that some entrepreneurs have
made special sweets for these occasions. Ad budget is the highest in India
during Diwali, as I have explained in the book. Similarly, in the US, Christmas
season plays a big role in economy. So is in the Philippines.
But
India lags some of India’s Asian neighbours in enhancing the rural economy.
There
is no secret that the Chinese have a done an incredible job in improving their
rural economy and making substantial progress on extreme poverty. Same trend is
visible in Vietnam. As a matter of fact, this is happening in almost all the
countries I visited including India. To sustain high growth rates, you need an
inclusive growth strategy that includes both urban and rural consumers. This is
the key message of my book.
How
is the advent of new trends such as social media, messaging platforms, online
commerce influencing rural consumers?
I
have devoted an entire chapter on this question in the book. Technologies such
as internet, mobile phones and satellite TV are the game changers. You can see
this in almost all the countries I visited. They impact the way people do
banking, receive information and entertainment, and education and healthcare.
Developing countries are leapfrogging and in some instances are ahead of the
developed countries, challenging the notion of digital divide.
Has
entrepreneurship become a very urban activity of late? Not many entrepreneurs
are coming up from rural areas.
There
is a clearly an awareness that we need to focus on rural innovations. Companies
understand this. At Unilever, Unilever South Asia is a hub for rural
innovations. Working with the IC2 Institute at the University of Texas at
Austin and other partners, FICCI in India is catalysing rural innovations and
entrepreneurs. But much more needs to be done. Among the developing countries
India has the largest rural population. Among the developed world, the US has
the largest rural population (9th highest in the world). I have suggested
several initiatives that can help here. For example, formation of a global
entity called Rural 10 like BRICS. This entity of the ten countries with the
largest rural populations should focus on the needs of more than 2.2 billion
consumers, almost two thirds of the total rural population of the world. They
have common problems such as issues in healthcare, education and
infrastructure.
Can
you name a few trends that are going to shape Rural India in the immediate
future…
Through
mobile phones, internet and satellite TV, rural consumers are very well
connected and aware. They are aware of what is available for them and their
children. Their aspirations are not any different from urban consumers. Rural
migrants are also a big source of information and choices for products and
services. Urban markets are saturated and competitive.
Rural
markets offer an opportunity for expansion and sustainable growth. Companies
are developing an inclusive strategy to include both urban and rural consumers.
7. Growth between 7 and 8% likely, says Panagariya
NITI
Aayog vice-chairman Arvind Panagariya has said that the Indian economy will
grow between 7 per cent and 8 per cent for 2016-17. However, he said that he
isn’t certain about hitting the 8 per cent GDP growth milestone over a full
financial year by 2018-19. “We are at about seven and a half per cent [now].
So, you know, I have been saying [growth this year would be] between 7 and 8
per cent. I still expect it to remain there. It should remain there,” Mr.
Panagariya told The Hindu , while refusing to comment on the
impact of demonetisation on the economy in the short or medium term.
8. Getting real on climate
The Hindu
The
UN conference on climate change held in Marrakech, with an emphasis on raising
the commitment of all countries to reduce greenhouse gas (GHG) emissions, is
particularly significant as it provided an opportunity to communicate concerns
about the future climate policy of the U.S. It would be untenable for the U.S.,
with a quarter of all cumulative fossil fuel emissions, to renege on its
promise to assist vulnerable and developing nations with climate funding,
technology transfer and capacity-building under Donald Trump’s presidency. As
the Marrakech Action Proclamation issued at the close of the conference
emphasises, the world needs all countries to work together to close the gap
between their intended reduction of carbon emissions and what needs to be done
to keep the rise of the global average temperature well below 2°C in this
century. The Paris Agreement on climate change was forged on the consensus that
man-made climate change does have a scientific basis, that the developed
countries are responsible for accumulated emissions, and that future action
should focus on shifting all nations to a clean energy path. Not much progress
was made at Marrakech on raising the $100 billion a year that is intended to
help the poorer nations. Political commitment and resource mobilisation will be
crucial to meet targets for mitigation of emissions and adaptation. India is in
a particularly difficult situation as it has the twin challenges of growing its
economy to meet the development aspirations of a large population, and cutting
emissions. National GHG levels are small per capita, but when added up they put
India in the third place, going by data from the Carbon Dioxide Information
Analysis Center in the U.S. As a signatory to the Paris Agreement, which has
provisions to monitor emissions and raise targets based on a review, pressure
on India to effect big cuts is bound to increase. The UN Framework Convention
on Climate Change will hear from the Intergovernmental Panel on Climate Change
in 2018 on what impact an additional warming of 1.5°C could have on the planet
and what can be done to ensure it is pegged at this level. The pledges made so
far are well short of this target, and even if they are all implemented, a
minimum rise of 2.9°C is forecast by the UN Environment Programme. India has no
historical responsibility for accumulated GHGs, but smaller, more vulnerable
countries such as island states and Bangladesh are demanding action to cut
emissions. A strategy that involves all State governments will strengthen the case
for international funding, and spur domestic action.
9. Hitting the refresh button
One of the most distinguishing
features of India’s emergence as a preferred investment destination in recent
years has been the strength of its policy and institutional frameworks.
Decisions such as e-auctioning of natural resources, a rule-based framework for
Indian monetary policy, insolvency and bankruptcy code, the goods and services
tax, amongst others, have all aimed at enhancing the credibility of policy and
institutional frameworks.
On similar lines, gradual changes in
the conduct of fiscal policy, although less spoken about, have been a crucial
contributor towards improving India’s growth and investment potential.
Restraint on unproductive spending amid plugging of subsidy leakage through
comprehensive implementation of the DBT (direct benefits transfer) platform,
higher devolution of revenue to States and local self-governments, greater
autonomy to States for spending on developmental plans have indeed improved the
quality and credibility of fiscal policy of late.
Accounting for a
changed order
While these measures are encouraging,
going forward it will become increasingly critical to codify fiscal rules so as
to make it insulated from populist manoeuvres. In this context, the framework
regarding fiscal responsibility and discipline as outlined by the previous
version of the Fiscal Responsibility and Budget Management (FRBM) Act needs to
get urgently revived and fine-tuned taking into account the ongoing changes in
the global and domestic economic and financial order. While there is little
doubt that in a developing economy such as India the government needs to
spearhead a prominent role in funding growth, an institutional mechanism that
imposes rule-based parameters on government’s spending and deficit
significantly enhances its credibility. The FRBM Act was first introduced in
India in December 2000 to rein in burgeoning government deficits both at the
Centre and in the States. Enacted in 2003, the FRBM Act institutionalised
fiscal discipline, by seeking to eliminate revenue deficit and to bring down
fiscal deficit to a manageable 3 per cent of GDP by FY08 from 5.7 per cent of
GDP in FY03. However, during the international financial crisis of 2008, as
government spending became critical to revive growth amid sharp decline in
private investments, the deadline for attainment of the target was pushed
forward and later suspended. However, in the 2016 Budget speech, in a bid to
reinforce the commitment to fiscal consolidation, the Hon’ble Finance Minister
instituted a committee to review the contours of the FRBM Act in the light of
current domestic and global dynamics. With the committee expected to submit its
report by the end of the current month, I believe the following issues need to
be reflected upon. First, what’s the ‘Point’ in ‘Range’? Amid government’s
increased role in reviving growth, debate has emanated on whether it would be
appropriate to impart flexibility to the government by adopting a range-based
target as opposed to a point-based target for fiscal deficit. In my opinion, a
point target that infuses fiscal discipline, limits the room for government
manoeuvres and provides an unambiguous signal to the bond markets is superior
to a range target. A focused policy communication, complementing the objectives
of monetary policy, is likely to result in a ratings upgrade for the Indian
sovereign, which will eventually percolate down to lower cost of borrowing for
the private sector, which is important for new capital and investment
formation. Second, determining the ‘appropriate fiscal deficit target’. Macro
underpinning of sustainable fiscal deficit comes from the supply of funds in
the economy. The fiscal space for the government is expected to be created
after meeting the demand for excess funds from the corporate sector in order to
ensure there is adequate crowding-in of private investments. Given that the
total supply of funds through household financial savings and sustainable
capital flows are estimated at 10-12 per cent of GDP and demand for excess
funds from the corporate sector is estimated at 4-6 per cent of GDP, a
consolidated fiscal space of around 6 per cent of GDP exists for States and the
Centre put together. This implies a 3 per cent headline fiscal deficit target
for the Centre and States each. Third, rules that serve as a guiding principle.
A binding spending rule along with a medium-term debt range that takes into
account the specific institutional setting in each country would help to
enhance the policy credibility and facilitate effective monitoring that would
ensure stability, fairness and efficiency. Moreover, effective rule-based
policy would help the governments adopt a countercyclical approach and limit
the scope for creative accounting. Regarding a debt sustainability rule, a
ceiling on government debt at 60 per cent of GDP can get adopted over the next
three years (67.2 per cent of GDP currently) with indicators of sustainable
debt serving as guiding principles, in line with the Maastricht Treaty
guidelines. And expenditure rules that focus on enhancing the quality of
spending and improve accountability are preferred in many countries. In case of
India, a preference for capital spending (in both agriculture and
manufacturing) should receive budgetary enunciation. Fourth, an independent
constitutional body as a watchdog. The revised FRBM framework can consider
setting up an independent reviewer, a Fiscal Council, to oversee the adoption
of rule-based fiscal policy and also recommend future course of public policy
advocacy. A well-designed fiscal council with strict operational independence
will boost fiscal accountability and transparency and will further add to the sovereign’s
credence and rating potential.
Twin-deficit
vulnerability
In conclusion, the adoption of
version 2.0 of the FRBM framework will enhance the efficacy of India’s fiscal
policy and significantly reduce the twin-deficit vulnerability. At a juncture where
most developed economies are struggling with their government’s balance sheet
to support the economy, a rule-based system with room for independent advisory
and oversight can transform India’s fiscal architecture and create enablers for
germination of green field investment appetite.
10. Sharia banking: RBI
proposes ‘Islamic window’ in banks
The Hindu
The
Reserve Bank of India (RBI) has proposed opening of “Islamic window” in
conventional banks for “gradual” introduction of Sharia-compliant or interest-free
banking in the country.
Both
the Centre and RBI are exploring the possibility of introduction of Islamic
banking for long to ensure financial inclusion of those sections of the society
that remain excluded due to religious reasons. “In our considered opinion,
given the complexities of Islamic finance and various regulatory and
supervisory challenges involved in the matter and also due to the fact that
Indian banks have no experience in this field, Islamic banking may be
introduced in India in a gradual manner. “Initially, a few simple products
which are similar to conventional banking products may be considered for
introduction through Islamic window of the conventional banks after necessary
notification by the government. “Introduction of full-fledged Islamic banking
with profit-loss sharing complex products may be considered at a later stage on
the basis of experience gained in course of time,” the RBI has told Finance
Ministry in a letter, a copy of which was received in response to an RTI query
filed by PTI.
Islamic
or Sharia banking is a finance system based on the principles of not charging
interest, which is prohibited under Islam. “It is also our understanding that
interest-free banking for financial inclusion will require a proper process of
the product being certified as Sharia compliant will be required both on the
asset and liability side and the funds received under the interest-free banking
could not be mingled with other funds and therefore, this banking will have to
be conducted under a separate window,” it said. The central bank’s proposal is
based on examination of legal, technical and regulatory issues regarding
feasibility of introducing Islamic banking in India on the basis of
recommendation of the Inter Departmental Group (IDG). RBI has also prepared a
technical analysis report which has been sent to the Finance Ministry. “In case
it is decided to introduce Islamic banking product in India as suggested, RBI
would require to undertake further work to put in place the operational and
regulatory framework to facilitate introduction of such products by banks in
India,” the letter said. The work areas include operationalisation of Sharia
boards and committees, feasibility of extending deposit insurance to Islamic
banking deposits, identifying the financial risk and suggesting appropriate
accounting framework for these products, the central bank had said in the
letter written in December last year. The RBI had in February this year also
sent a copy of the IDG to the Finance Ministry. It said the RBI also needs to
work on formulating suitability and appropriate criteria for Islamic products
in addition to what would be determined under Sharia. In its annual report for
2015-16, the central bank had said that some sections of Indian society have
remained financially excluded for religious reasons that preclude them from
using banking products with an element of interest. “Towards mainstreaming
these excluded sections, it is proposed to explore the modalities of
introducing interest- free banking products in the country in consultation with
the government,” it had said. The plan for Sharia bank was opposed by certain
political and non-political groups. In late 2008, a committee on Financial
Sector Reforms, headed by former RBI Governor Raghuram Rajan, had opined the
need for a closer look at the issue of interest-free banking in the country. The
committee had said, “Certain faiths prohibit the use of financial instruments
that pay interest. The non- availability of interest-free banking products
results in some Indians, including those in the economically disadvantaged
strata of society, not being able to access banking products and services due
to reasons of faith.”
“This
non-availability also denies the country access to substantial sources of
savings from other countries in the region,” the panel had said.
11. Mounting NPAs nix
dividends in 16 of 22 public sector banks
The Hindu
Saddled
with mounting bad loans, as many as 16 public sector banks, including PNB, BoB
and Canara Bank, skipped paying dividends in 2015-16, leading to a 67 per cent
decline in government receipts to Rs.1,444.6 crore, a bulk of which came from
State Bank of India.
Only
six state-owned banks declared dividends, though at a lower rate for the fiscal
ended March 2016. Under the existing guidelines, profit-making banks have to
pay a minimum dividend of 20 per cent of their equity or 20 per cent of their
post-tax profit, whichever is higher. The government, which is the majority
shareholder in all the public sector banks, witnessed a 67 per cent decline in
dividend receipts from PSU banks at Rs.1,444.6 crore. According to Finance
Ministry data, the highest dividend was paid by SBI to the government at
Rs.1,214.6 crore during 2015-16, 22 per cent lower than in the previous fiscal.As
regards Union Bank of India, the dividend payout was one-third of the previous
fiscal at Rs.85 crore. For Oriental Bank of Commerce, it was one-fifth compared
to the previous financial year at Rs.12.4 crore despite an increase in
government holdings due to capital infusion. Banks which skipped dividend
payments included Allahabad Bank, Bank of Baroda, Bank of India, Canara Bank,
Central Bank of India, Corporation Bank, Punjab National Bank, Dena Bank and
Syndicate Bank.Balance sheet of most of the banks have been under stress due to
the clean-up exercise targeted at non-performing assets. Due to heavy
provisioning for bad loans, many banks posted losses in the last quarter of the
previous fiscal. Gross NPAs of the PSU banks had surged from 5.43 per cent (Rs
2.67 lakh crore) in 2014-15 to 9.32 per cent (Rs 4.76 lakh crore) in 2015-16 of
the total advances. Banks have been given time till March 2017 to clean up
their balance sheet.
12. Stalemate over GST
jurisdiction continues
The momentum for the implementation of the goods
and services tax (GST) slowed on Sunday after the centre and the states failed
to reach a political consensus over sharing of administrative powers in the new
indirect tax regime. In a meeting with Union finance minister Arun Jaitley,
state finance ministers also raised the issue of the impact of demonetisation
on states’ revenue, growth and the common man. Sharing administrative powers
for control over both goods and service taxpayers has remained a contentious
issue. While states want exclusive control over small traders (those with an
annual revenue of less than Rs1.5 crore), the centre is unwilling to cede
complete control over such traders as it would leave a very small pool of
taxpayers with the centre. In the past few months, various formulations have
been discussed and discarded by the GST Council. This forced the finance
minister to look for a political consensus, albeit unsuccessfully, on Sunday. “The
meeting has remained incomplete. Discussions will continue on 25 November,”
Jaitley said after the meeting. One option that’s being considered is to divide
the tax base horizontally, wherein taxpayers below a threshold of Rs1.5 crore
are administered by the states and those above this threshold are divided
between the centre and the states. But this is not favoured by the centre. The
other option is to divide the entire tax base vertically, wherein the taxpayers
are divided between the centre and the states in a fixed proportion. Kerala
finance minister Thomas Isaac said the meeting ended in a stalemate and a
consensus was unlikely till the centre maintained a rigid stance. “The centre
wants a fair share (of taxpayers to administer) but states consider it an
unfair share. Kerala is unwilling to compromise. We have virtually given up our
taxation rights. This is simply a question of administration. We do not want
small traders with a revenue threshold of less than Rs1.5 crore to be under the
centre’s control. Uttar Pradesh, West Bengal and Tamil Nadu also have similar
views,” he said. “Some states prefer a vertical split from top to bottom where
two-third of the traders are controlled by the states and the remaining by the
centre. Centre would also like to have a vertical split of all dealers. They
are taking a rigid stance, but I hope good sense will prevail at the centre,”
he added. The estimated number of total active indirect taxpayers (including
those paying value-added tax (VAT), service tax and excise) is around 10
million, of which around 400,000 are common to the centre and the states. This
leaves around 9.6 million taxpayers, of which around 6.6 million are VAT
assessees, 2.6 million are active service tax assessees and some 400,000
assessees are registered under excise. But a majority of the 9.6 million tax
assessees are below the annual revenue threshold of Rs1.5 crore. Only around
1.4 million assessees have an annual revenue of more than Rs1.5 crore. If this
is divided equally between the centre and states, this will leave only around
700,000 for the centre to control. “They are not fighting for sharing of work
but for sharing of powers of coercion,” said a person familiar with the
development. The GST Council will now meet on 25 November to finalize the draft
GST laws—the central GST (CGST) law, the integrated GST (IGST) law and the
state GST (SGST) laws. Officials from the centre and the states will meet a day
earlier to finalize the laws. The government hopes to table the CGST and the
IGST laws in the winter session of Parliament to ensure a 1 April 2017 GST
roll-out. On the issue of demonetisation, many states have informally said they
have seen a significant decline in revenues. “If 86% of your money disappears,
there is a problem for people. There is a collateral impact on investment
sentiments,” said Isaac.
Post a Comment