It is Time for Modi to be Firm on Development Agenda

Business Economics & Services Team (BEST)


                            It is Time for Modi to be Firm on Development Agenda

Modi Administration is making the right noises both in India and abroad. But the trillion dollar question is whether it will help fructifying the results. Admittedly, the administration's effort is to make India a happening place and is going all out to launch a host of programs, policies and legislation to convey that message loud and clear. Those who are criticizing the government that there is no original thinking  in its polices should admit that Modi administration has succeeded in sending strong message to the bureaucracy that it should shun lethargy and delay tactics  and getting on to its business. At least, the signals that are coming from the corridors of power stand testimony to that. Not many officials are on junket abroad so also the ministers who in the earlier dispensations used to travel abroad and that too  in chartered aircraft. They used to take plane loads of journalists along with them in a surrogate manner, seeking the help of business associations to foot their bill and later reimbursed to them much more than the expenses incurred by them. Also, the lower bureaucracy is dot on time to the office  to mark their attendance and shun taking French leaves for fear of being caught.

These are cosmetic changes and often dubbed as the handiwork of a headstrong headmaster, who knows how to control the pupils at the tip of a cane. It will be a good augury if the bureaucracy develops a new mindset and should make 'work hard' as a habit and not when they are compelled to that. But what they are doing during the work hours are not known much. Many corporate honchos privately confide that not much has changed in the way in which the government decisions are taken. They complain that  even some of the senior ministers  are scary of taking decisions since they feel that they are often upstaged by PMO or being questioned by them even for minor decisions that are taken. Their interactions with media and the stakeholders like industry, pressure groups etc are infrequent and they often try to evade important questions posed to them. Those ministers who spoke out of turn and without being circumspect are pulled up.

The other important stumbling bloc that Modi administration is facing is the lack of cohesiveness in its articualtion. While the prime minsters office and council of ministers, barring a few, are trying their best  to put across development before all other goals, the splinter groups within the party are creating a well orchestrated campaign to downplay the development agenda. They are ferreting out all issues except the development ones and trying to taking the country back to the 18th century. Many feel that the development agenda will be de railed when there is a preponderance of social unrest, law and order problems and insecurity among various sections of the society. For instance, they feel that  the perceived or alleged stand against  Muslims and Christians can send wrong signals to the Middle East and the developed world, which can considerably affect the flow of investments and businesses from these regions, which are rich in capital. For instance, they point out that despite the forward looking polices of the government in many areas, there has not been any appreciable flow of investment, during th last months or so. On the other hand, there has been drop in investment from countries like Japan, which are  taking a wait and watch approach before committing  their funds. Also, the investment by FIIs and private equity funds can take a negative turn once the interest rate in the US  increases, which is quite possible in the coming  days.

Not that Modi Administration is not aware of these developments. But it is buying time to use the stick against these sections within its party fold. Now it is time to take the inevitable step since the next election to the assembly is in 2016, except that in Delhi, where such forces cannot upset the election calculations. Even if Delhi elections adversely affect its election prospects, it should act fast, for lack of action will be interpreted as thumps down to  development agenda, a plank on which the Modi government has been elected to the office.         

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Five Fault Lines That Decided Against Rate Cut

Business Economics & Services Team (BEST)


                                              Five  Fault Lines That Decided Against Rate Cut
Despite the heavy pressure exerted on RBI Governor Rajan through multiple channels, it goes  to his credit that he stood the ground and refused to go for a rate cut. BEST has undertaken a quick survey as to what were the reasons for that bold decision, collating opinions from, economists, bankers, policy  experts, business men and common man. The results are as follows.
1. Unabated fiscal deficit.
Many thought that the RBI Governor has sounded alarm bell to the government and others about the precarious fiscal deficit, which is threatening to go beyond control. Already, the projected fiscal deficit for the current financial year has crossed 90% of the allowable limit set. The grandiose programs launched by the government such as Swatch Bharat (clean India), Jan Dhan (financial inclusion), cleaning up of rivers and importantly the report of the next pay commission will  entail huge expenditure in the coming months further straining the fiscal deficit.
2. Increase in  the non-performing assets of the public sector banks is a matter of great concern. There  can be two views on the issue. One, further blocking of the credit to the industry can turn more accounts into non-performing since many of them are held up for want of finance at reasonable rate for implementation. The other view is that many of the projects have gone haywire on account of the mismanagement and there is no guarantee that further infusion will help in achieving a U-turn in the trend. Rather, there is no checks and balance in place to prohibit diversion of funds from project funding to speculative purposes or non productive works. The controversy around sanctioning of a loan in principle to one of the controversial  corporations, heavily steeped into indebtedness, to the extent of one billion dollar from a PSU bank have invited severe criticism.
3. The price level is still overheated though the statistics doled out hid some of the realities on the ground. Food inflation is ruling very high with an unprecedented fluctuations in the prices. For instance, on a year to year basis, almost all food items have shown an upward spiral in prices. A case in point is cauliflower, the price of which used to be hovering around Rs 8to 10 a kg  in this season, is being sold out over Rs 20 in some markets on an average. Daily fluctuations  in prices is also significant. Today, the prices of cauliflower scled to Rs 30 in the Safal outlets, which is a state run retail outlet. The prices charged by the vendors will be several percentage more than this. Equally significant is the steep increase in prices of medicines including life saving ones on account of taking them out from the purview of administered price.
4. Despite heavy cuts in the oil prices, foreign exchange segment seems to be in a stand still. Further, gold import rules were relaxed to bring down the prices during the marriage season. But foreign exchange outgo on account of that is more offsetting the likely gain from the cut in oil prices. This shows that there is a huge pend up demand  for imports  particularly consumer items. Also, with lesser foreign exchange  outgo, rupee should have been stabilized against dollar. But that is not happening. Also, the lackluster performance of the export sector, despite the slow recovery of the US economy and standstill of the EU economies is a matter of concern.
5. Though a a government with a clear mandate has been elected to power, the policy framework seems to be seethed in the old mold. The government has completed already six months in office, a reasonable length of time to show some results in all fronts. But at the ground level,  many of these policy initiatives have yet to show results.
  

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Will China’s Interest Rate Cut Impact India?

Business Economics & Services Team (BEST)

                                          Will China’s Interest Rate Cut Impact India?

The good news is that the People’s Bank of China has decided to cut its bench mark one year lending rate by 40 basis point (0.4%) to 5.6% from 6 % and the one year deposit rate by 25 basis point (0.25%)to 2.75 % effective from today. This has come close on the heels of its decision to inject US$ 81 billion into the banking system to support credit growth.

Everyone is asking will this cut influence RBI decision on interest rate. Expectation of a turnaround of the Indian economy is widely expected. With the fall in the rate of growth of whole sale and retail inflation, the corporates are expecting a rate cut around first week of December 2014, when the RBI will review the monetary ecosystem. Apart from the fall in the rate of inflation, the protagonists of interest rate cut say that the economy is expected to clock a growth rate closer to 6 %, which will be an all-time high in the recent years. Coupled with the softening of oil prices and a consistent recovery of the US economy, policy watchers  predict that the RBI cannot delay the interest rate cut for long. Significantly, none other than the Finance Minister of the country has put his weight behind the increasing number of corporates, business associations and others for a rate cut. It is also important to note the cautious reaction coming out from the RBI sources that mere demand for a cut in interest rate alone will not hold good: there should be a conductive eco system that supports the rate cut.

In the meantime, the corporates have upped their demand for a sizeable rate cut. Any reduction in interest rate less than one percent, according to them, will not help in stimulating the economy. The reasons are that the cost of capital is very high as compared to that is available domestically for competing countries. This has led to a complete jolt on Greenfield projects. Even implementation of some of the projects already underway, is struck at various stages on account of higher cost of credit. This trend has to be reversed: earlier the better.

Another cause  of worry is the increasing non-performing assets (NPAs) with the public sector banks.  According to reports, NPAs of at least five PSU banks have gone worse and they have been embarking on a massive restructure to hide the increasing ratio. In certain cases, the NPAs are as high as one-fifth of their loan book. The restructuring measures include conversion of debt into equity, extending the repayment cycle of loan etc. Along with restructured loans, which  are not counted along with NPAs, in some banks the non-performing assets is high as 20.5%. On an average, across the PSU banks, this works out to over 12%, which is definitely a worrisome indicator.

The worst of all these developments, as reported in media, is the rising share of NPAs in home loans, which always bucked the trend and had a mellowing effect, unlike the corporate lending. The data in the public domain reveals that the NPAs in the housing loan segment have grown up to 1.5% in September, this year   from 1.4% estimated in March. On the top of it, for three PSU banks, the NPAs in the house loan sector is  5% of advances. Not many years ago, the trigger for the world economy to enter a recessionary phase was the sub-prime lending crisis in the US, which had a snowball effect. Against the backdrop of  standstill in the realty sector for quite some time ( there are reports  that realty  sector prices  in most of the cities and towns have come down), we have to ward off a US like situation in India, when the people will rather forego property rather than paying the increased burden of  EMI.

All said, RBI has its own system to monitor the state of the economy. Some of the reports appearing in newspaper columns may be colored or being planted by the vested interest. The decisions of the RBI should be balanced  since there are a whole lot of honest people who are depending on their hard earned money in fixed deposits and similar instruments to  make their both ends meet. Any reduction in deposit rate will reduce their income considerably. The worst thing is that their voice is seldom heard in the public domain.

  

The People´s Bank of China decided to cut its benchmark one-year lending rate by 40 bps to 5.6 percent on November 21st. It is the first rate cut in more than two years as the economy slows.

The one-year lending rate was cut by 40 bps to 5.6 percent and the one-year deposit rate by 25 bps to 2.75 percent, effective November 22nd. Policymakers also decided to increase ceiling for deposit rates to 1.2 times the benchmark rate from the previous 1.1 times.

China’s central bank is said to be injecting CNY 500 billion (USD 81 billion) into the banking system, aiming to support credit and growth. Published on 2014-09-17

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Rate Cut, Black Money and Kisan Vikas Patra

Business Economics & Services Team (BEST)



                                   Rate Cut, Black Money and Kisan Vikas Patra

Is RBI governor Rajan becoming more important than the Finance Minister? Going by the financial paper reports in India, one may get that feel. Everyone-from corporate honchos to economists-known and unknown-are clamoring for an early interest rate cut. Even the finance minister has joined the bandwagon of expanding number of people arguing for a rate cut. There is nothing wrong in the finance minster putting pressure on the RBI governor.  That has been the practice in India since monetary policy falls in the exclusive realm of the RBI, where RBI's diktat is the last word. Many finance ministers, including the immediate past one, tried to transgress into the exclusive territory of the RBI. Some have succeeded and others have failed, sometimes miserably, depending on astuteness of teh RBI governor. 
While the decision of the RBI governor will come out only by the first week of December, the nation is waiting in bated breadth the decision, if one has to believe the newspapers. I have a suggestion in this regard. The present prime minister is known for seeking the views of the people on a continuous basis. He had invitd the views of the citizens on the future of the planning commission and he had enabled even the lowly government servant send their sincere views and suggestions on making the governance apparatus more effective. Why not he seeks the opinion of the people  on the interest rate also?

I will not be surprised if a sizable number of people opine against a rate cut. it is not the price alone. Whatever statistics the government wants the public to believe, only the rate of increase of the prices have come down and not the  absolute prices, except for some seasonal vegetables. Most ideally, the government should have come out prices ruled last year for each commodity. That will nail the lies, which can be covered through statistical gimmicks.   
The oft repeated argument put forward by the protagonists of rate cut is that with lower interest rate, the citizens who availed home loans need to pay only lower EMIs. But does  the fiance minister know that such roll back of interest charged by the banks is done when the loanee moves an application to  the bank for switch over to the lower rate? For that, the loanee has to pay a one time fee. The banks keep on charging this fee every time the switch over takes place. For a person whose loan is close to Rs 20 lakh, the fee for rate conversion  will be upwards of Rs 5000. Sometimes, the switch over takes place several times during the pendency of the loan and aggregates to quite a tidy sum. Not that RBI or finance minister knows about it, but they turn a nelson's eye to such nefarious activities of the reputed banks.
Now about the black money. The G20 has endorsed the global efforts to eliminate the black money. Every participating country  has vouched to step up the drive towards the elimination of black money. India was an ardent supporter of the resolution. But what is happening on the ground is different. It is estimated that in India there is a parallel economy as big as the formal economy, if not bigger. That money is not necessarily stashed away abroad. It is floating in our economy in different forms and hues. Construction and building are the best avenues for pumping the black money. There are also agents who indulge in money laundering. Elections are fought on black money. Every one knows about it. There are allegations that  successive governments and political parties are using this conduit to the hilt during the election time. Despite the plain talks and threats, the judiciary   could do precious little for unearthing such money. The present case of  large number of accounts abroad  and cricket betting are pointers how very little had done on this count.
The other day, a well known lawyer  in one of the news channel opined that the black money holders abroad should be given amnesty and their nontaxable income should be chargeable to the highest rate applicable in the country. Then why a person, who had felled a jack fruit tree from a government compound for personal use in household should be punished with one year imprisonment and that too it had taken place some 40 years back.
The latest from the fiance minister is the launch of Kisan Vikas Patra, a certificate that the public can buy with tax exemption up to a prescribed level. The reason for the fanfare launch of the scheme is to give options to the investors who are crowding the space with investment in gold. That has necessitated a large quantum of gold imports, which will take away the buffer given to external resources on account of the easing of the oil prices.Does the government know that gold is a non merit good and  can impose steep tax on it to moderate its use.

For more details: jthac1234@gmail.com,jthac1234@yahoo.com          

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Capital Account Convertibility of Indian Rupee

 Business Economics & Services Team




                          Capital Account Convertibility of Indian Rupee

The other day, I heard somebody, who poses to be one in the knowledge of what the government is going to do telling that soon the government will announce a road map for moving towards capital account convertibility of the Indian rupee. I felt that term he used road map was in appropriate since the government, long back had taken some steps that could lead to capital account convertibility. To list them in sequence is not a problem. Long back in 1991, the government had announced the partial convertibility of rupee under the trade account enabling the exporters to park 50 per cent of their proceeds in foreign banks under intimation to RBI. Later, the government allowed floating of GDR, ADR and also   private placements  of foreign funds in the Indian companies etc, which was an incremental advancement towards capital account convertibility. 
Inflow of funds from Foreign Institutional Investors (FIIs) and PE route investments were another set of reform, which were aimed at revitalizing the Indian stock market. It is important to note that these investors can bring in and repatriate investment in dollar terms as and when they like. In a way, they enjoy convertibility of  rupee under capital account, which is denied to other segments of investors.

In between, there was another stage when the people where allowed to source dollar or any other convertible currency from the market for the purposes of education, tourism purposes and treatment etc. Earlier, such requests were to be managed by the RBI and one can get the foreign exchange only after RBI approved it. There were also ceilings imposed for release of foreign exchange.  . Removal of such restrictions can be termed as rupee becoming convertible under the current account.

Liberalizing lobby in India campaigned for capital account convertibility some 10 or 12 years back . They would have succeeded in their efforts but for what that had happened in Mexico and South eastern countries, which were  showcased  as models of economic reforms by the multilateral organizations like  IMF, World Bank etc. Riding back on the euphoria created by the foreign media, these countries had resorted to convertibility of their currency under capital account. Then onwards, the mayhem started. These economies were collapsed one after the other like a pack of cards. Many had written obituaries for these economies. That also helped the Indian administration to be more vigilant and to postpone the capital account convertibility.

It is important to examine what happened in the these countries. When the local currency became weaker, the citizens converted their assets into dollar denominated savings and investments. Local currency and assets had become valueless. Also, there were huge speculative syndromes, when people frely converted their assets from one currency to the other to take advantage of the speculation.   These countries also faced a massive current account deficit and had to be in ventilation for quite sometime. Thanks to some timely interventions from the multilateral organizations and more importantly due to their meticulous planning and tightening of belt,  economies had limped back to normalcy now. One advantage with them was that unlike India, theirs were smaller economies and the impleemtation of the plans were easier and faster.

Now coming back to the rumor. Harping on convertibility of  rupee  on capital account will  prove to be the most disastrous that the government can take at this stage. Our current account deficit is very high and at times can go out of bounds. One reason, the economic pundits, who support convertibility advocate is that India has sufficient foreign exchange reserves at any given point of time and even if there is massive flight of capital in the aftermath of  the convertibility, India will be able to hold the bull by the horn. This was also the reason adduced by the Mexico and South eastern countries at that of point  of time. We know what had happened to them 
For more details: jthac1234@yahoo.com,jthac1234@gmail.com        

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Labor Reforms in India - What They Portend?

There is a lot of talk about labor reforms in India.  Many reports have come that it will be unveiled soon. But still it is not clear what will be those reforms. There are conjunctures and predilections. But on one knows exactly what these reforms are. Will the government openly discuss these reforms with the stakeholders and  political parties? Today, there is a news in Times of India that the President has approved the amendments to the labor laws  passed by the Rajas than Government. The report quoting the government officials, says that the move will open up  for deeper  changes in the archaic labor laws.

First of  all, let us face the fact that labor is a state subject  and one state passing it will not lead to its adoption in other states. Every state will have to move a similar legislation and get it approved by the state assembly.  Clearly, there is no consensus among the states to move towards such a legislation. Even if they go for it, there will be stiff resistance. And in some states like Kerala, West Bengal, etc it will be near impossible to have such a legislation. Even the BJP affiliated BMS, a trade union outfit has not made  its  mind clear in this regard nor the all powerful RSS, who have a sizable number of followers among the working class

In Indian situation, there are two types of labor laws operating. One for the IT companies, which almost all states having IT industry, have complied with. There is no restriction on night shifts for ladies, working hours, and almost all of them follow a policy of hire and fire. There is no union and therefore no resistance. In certain companies, there are advance warning systems to the under performers. In certain other companies, lay off and retrenchment of the efficient employees are resorted to as a policy of downsizing the labor force linked to general performance of the company. In some other companies, mostly, the multinational ones there are instances when the companies are closed down. And yet, there are no protests or resistance. It is because the people who are working in these companies are different from the people in factories or work sheds. When a worker in a knowledge company is fired or laid off, he or she gets another placement almost immediately or can hope to get a suitable position sooner or later. That is not  the case with the factory workers, whose skill sets are limited and scope for undoing whatever they had learned is very limited. He or she is going to join the backlog of millions of unemployed people  in  case of  unemployment.They will not have any safey net unlike in the developed countries.

I had extensive discussions with many owners of factories regarding the labor reforms. Significantly,   most of them are not looking for a hire and fire policy. They want less number of paper works and compliance. Presently,  I am told that  a company has to maintain close to 25 records about the employees. Some of them are trivial and unproductive exercises but non compliance attracts penal action.They want such silly restrictions and unnecessary paper works to go.

Admittedly, the number of strikes, go slows and things of that ilk have come down substantially. The employers' organizations are not talking about the man days lost on account of the strikes and go slows. They   want to have the rights to  rationalize the labor as and when they  require. It is a fact that the government could get rid of  millions of workers who were working with National Textile Corporation  without giving them any compensation or minimal packages, despite having the same rigid and archaic laws.

There are many private sector units which had pulled down their shutters without giving any notice to the workers. Their salaries are struck for a long time. Despite the promises, no government had come forward to help them.

Then why the talk about the great labor reforms? Let not the government be over enthusiastic about it since it will have a huge backlash. 

Business Economics & Services Team

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Will the Hunt for Black Money Fall Flat?

Reports are emanating from different quarters about the seriousness of the government to curb the black money. We hear about close monitoring of the tax havens. Consultations with countries like Cyprus, Switzerland, Mauritius  etc are in progress. The latest is the proposed team from external affairs ministry  to visit Cyprus, which is reckoned as one of the top tax havens and a destination used for round tripping money through the foreign institutional investors. There are indications that the government may drop some of the provisions that abet round tripping. That will attract the provision of withholding tax once the abetting provisions are removed.

We have been hearing about these serious talks and contemplative steps for a long time. The previous NDA government  also talked about it. There were evidences of high trafficking of round tripping of money through Mauritius route. But precious little was done to curb them. The systems that enable the flow are opaque. Added to this, there are vested interests who lobby for the continuance of it. Whatever  steps  were taken  in curbing the source of black money had happened only after 26/11 when the US went all on a hog to find out the source of terror  money. The recent breakthroughs in unearthing  black money and corruption in high places had happened only with the tip off from other countries or thanks to revelations of the wiki leaks.   

Let us take the present case of list of deposit holders in foreign banks, which was handed over to the apex court in ndia in a sealed envelope. Now reports are coming from the SIT that the money in these accounts are pittance. The public do not know whether they are planted stories or not. Also, there are  numerous stories and lists in social media floating around, each different from the other. New names are added both from the ruling party and opposition, who have allegedly stashed away billions of money. Public is at a loss to reckon which is the fact and which is the fiction.

Now no one is talking about the black money, which was the hottest subject and headline story in rint and electronic media. Anchors who used to shout at the panelists who give a different view points were conspicuously silent. Have they got instructions from the top or being silenced by their benefactors by one way or the other?

Many  in the knowledge of things vouch that not much can be done by the government in this regard. Then why not do the possible thing. Give amnesty to the black money holders and charge from them  30 percent of their booty, which is the highest tax slab applicable to a person.

Business Economics & Services Team

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