Can elites sleep peacefully with this?

Rahul Gandhi is pushing the country off the fiscal cliff with unprecedented populism in an equally unprecedented desperation to come to office or stay relevant at all. For him, it is a personal existential question. So, country does not really matter here.

He is stirring competitive populism everywhere. Gujarat has written off power dues now. There will be more to follow. He is pushing both Congress-ruled States and the Union government to engage in fiscal recklessness.

Just as the NDA Government’s measures have long-run positives (GST, IBC and even, arguably, demonetisation) and short-run costs, his populism will hardly have any short-term redeeming features but substantial long-run costs. It is the flip side of NDA’s structural reform efforts.

More importantly, even the fiscal populism is only of second order importance. The first order issue is their effectiveness in addressing the underlying issues and durability of such effectiveness. The absence of both  has been established repeatedly. But, the Congress Party is not one to bother itself with such evidence.

On Friday, a brief research report from the Chief Economist of the State Ban of India came to me. He offers a simple proposal that might make a big difference both for banks and for farmers:

As per the existing norms of asset classification for agriculture advances, in case of an agriculture cash credit account a farmer has to repay the entire outstanding (principal along with interest) to seek fresh loans from the banks unlike other segments of cash credit business where if the borrower has cleared interest payments and ensured submission periodic stock statements, he/she would be eligible for enhancement/ renewal eventually continuing as a performing cash credit account.

It would be in the benefit of all, if the farmer is given renewal/enhancement based on deposit of applicable interest to the bank and the submission of periodic stock statements (which may be linked to the yearly crop cycles) especially if the bank is satisfied with the farmer in terms of his/her land holding/paying capacity etc.

If we align the NPA classification norms for KCC and crop loans for agri at par with other segments, we can also save as much as Rs 37,000 crore on being classified as NPAs. It would not only help the farmers but would also help the banks in saving capital on account of provisions made towards these otherwise avoidable NPAs!



My friend Dilip Subramanian forwarded me an article written by Shamika Ravi in July 2015 which is worth re-reading now. She wrote about farmers’ suicides and said that analysis of data showed that debt was not a factor but health issues and expenditures were.

In India, fiscal profligacy has always occurred under Congress watch and it has been left to the two NDA governments to repair them. Yet, the rallying cry of elites is that the NDA government is about to slip into the fiscal abyss.

Surely, demonetisation cannot be the worst policy decision since independence in the face of such repeated criminal fiscal irresponsibility.

Opinion-leaders – collectively – must issue a strong, unequivocal, joint public statement against this journey into fiscal disaster and economic oblivion that the President of the Congress Party wants the country to embark on, collectively. Silence on the part of elites will make them partners in crime.

Lord Skidelsky on central bank independence

An important letter by Lord Skidelsky:

Chris Giles and Sam Fleming rightly note the growing conflict between central bankers and elected politicians (December 10), but fail to explain how this has come about and how it should be resolved. They note that before 2008 central bank policy limited the “volatility of inflation”, though it then “signally failed to prevent the financial crisis”. There is surely more to be said. Limiting the volatility of inflation was an important achievement, but it is far from clear that central banks had any control over the inflation rate itself.

As Mervyn King has said, they had a “nice environment for monetary policy” because of the downward pressure on world prices from the entry of millions of low-paid east Asian workers into the labour market. The failure of central banks to prevent — or even foresee — the 2008 financial crash stems directly from their acceptance of Eugene Fama’s efficient market theory, which implied that commercial banks needed only light regulation. Central banks have played a crucial but hardly stellar role in the recovery from the crash.

Most of the money pumped into the economy by quantitative easing leaked out into the financial and real estate sectors rather than stimulating the real economy. As your columnist John Kay pointed out ( July 9, 2013), “the one certain consequence of boosting asset prices is that those with assets benefit relative to those without”. Monetary policy is neither particularly effective nor politically neutral. Since governments, not central banks, are accountable for the results of policy, macroeconomic management cannot be outsourced to central banks. The two arms of policy, fiscal and monetary, need to be integrated. The experiment of independent central banks has to be brought to an end.

Lord Skidelsky FBA

London, SW1, UK

Are India’s ‘shadow banks’ a bigger risk than China’s?

Well, that is what Andy Mukherjee thinks or his editorial team thinks, if one went by the header of the article that he has written.

Now that New Delhi has replaced an independent-minded technocrat at the Reserve Bank of India with a former finance-ministry bureaucrat, it’s reasonable to expect that shadow banks will be encouraged to expand again.

That is quite a loaded sentence. Airbrushes or ignores a lot of other issues with Mr. Patel.

T.T. Ram Mohan offers an alternate perspective that is well worth a read. This paragraph is worth noting:

Thirdly, the particular suggestions from the government that have led to tensions with the RBI cannot be construed as attempts to infringe the autonomy of the central bank. Take, for instance, the issue of the appropriate level of reserves for the RBI. This is a technical matter on which reasonable people can legitimately differ. It is entirely appropriate to refer the matter to an independent committee. This would not have happened had the government not pressed its point vigorously.

He ends on this note:

Will New Delhi be prepared to pull the rug from under the non-bank lenders if they push things too far? On that count, hold no hope. China’s shadow banking may be a lot bigger than India’s, but India’s is already too big to fail.

May be, he is right. But, I think he is far too dramatic here. Banks are being recapitalised and lending has picked up. So, I am not sure if India’s NBFCs are ‘too big to fail’.

Bangladesh and Maldives

With Rahul Gandhi occupying the front pages with his exemplary ‘prudence’ on farm loan waivers, this news-story did not get the attention it deserved – India’s offer of assistance to Maldives. Well done.

While I am rather pleased and impressed with the progress that Bangladesh has made and I am very happy for them, I do detect signs of hubris when the Prime Minister talks of achieving 9% GDP growth, etc. I am sceptical of such claims. It is still largely reliant on garment exports. Impressive that the per capita income has risen to USD1750. But, the economy is not diversified enough to be able to achieve and sustain a growth rate of 9% per annum. Plus, the loans to China should cause concern.

More importantly, it is good for her to realise that the current status did not arrive due to a pre-meditated plan. That is how it usually is. The end of MFA, the rise of costs in China, India’s inability to up its game on textile exports, etc., contributed. Understated confidence would do no harm at all. That said, a good story to read. Happy for them.

Macron bubble and protest vote in Spain

Recent French protests at the Fuel tax has multiple dimensions:

France is a high-tax country; but the question is whom does government provide relief – Macron reduced wealth tax earlier; fuel tax affects all; it is also a climate change issue; the vandalism that the protesters engaged in, targeted affluent communities, cafes and boutiques. Macron’s approval rating is one-fifth. 

Gideon Rachman on the Macron bubble that has burst. A rare piece of candour and correct opinion.

Much to reflect on the global angst and anger, manifested in the protests in France and protest vote in Spain.

Recently, Wall Street Journal has gloated that Thomas Piketty’s work on inequality has been discredited by recent research from the American Institute of Economic Research. May be, they are right. I have not seen their work. But, that makes the global angst and anger an even bigger puzzle. What is the motivation?
Wolfgang Muenchau on how the broken plane that led Merkel to catch an Iberian Air flight to go to Buenos Aires for the G-20 summit meeting is an apt metaphor for Europe. I agree with him. [Link]

Èconomic strategy for India’- part 2

The first part of this blog post  dealt with the proposals made by some experts recently. This post captures the proposals that I feel are worthwhile. They are based, largely, on my work (past and ongoing) with my friend and co-author Gulzar Natarajan and our several periodic conversations:

(1) International empirical evidence suggests that firms that start formal by educated individuals have a much higher chance of growing and creating employment. Enabling policy framework for this needs to be put in place – funding, incubation support and more importantly tax policies.

The uncertainty over contribution by angel investors being treated as income in the hands of the start-up companies has to be resolved. This was introduced in 2012. It is still a vexing issue. See here.

(2) Tax department has to have an overhaul in terms of philosophy.

They need to target evaders, using data and technology. But, interpreting law always in favour of ‘revenue’ has to be diluted. The Finance Minister and the PM of the day must make sure that the tax department is in alignment with overall policy goals. This is the overriding priority of any government now or six months later.

Recent examples:

Proposal to treat banks’ free services as taxable service income by imputing a value to them and to levy tax on them.

A ruling by ‘Authority for Advance Ruling’ that back-office operations of IT companies will be deemed domestic service and not exports and subject to GST of 18%. This boggles the mind. Some of the proposals are so stunning that one wonders if they are aimed at neutralising the government’s economic agenda.

There is a need for mindset shift in the Revenue Department, while keeping funding needs for development expenditure in mind.

(3) Crop insurance for farmers is a good idea but States are dragging their feet on payment of premiums. This scheme has to be reviewed and loopholes plugged. There is not much that the government can do about rainfall, harvest and international prices. But, risk mitigation is possible. Crop insurance provides that. That needs to work. (Neelkanth Mishra has covered this).

(4) Trade Receivables Exchange is now operational. This needs to expand and the government (MoF and MCA acting in concert) has to make sure that companies mandatorily participate. The Board of Directors should be made responsible to monitor companies’ compliance with this.

(5) This government’s proposal to pay EPF contributions for employees earning salary up to 15000 Rupees per month for three years should be extended to all formal sector workers earning up to Rupees 50,000 per month.

(6) White paper – as demanded by Dr. Y.V. Reddy on Feb. 1 in a speech – by RBI on the NPA problem and its own regulatory shortcomings needs to be released. This should lead to a revisiting of the regulatory architecture for public sector (government-owned) and private sector banks so that they are level, as far as possible. Government’s non-interference in operational decisions of commercial banks must be made statutory.

(7) Revisit and revamp ‘Right to Education’ legislation and make it outcome oriented and make sure that it does not lead to shutdown of schools. Perverse outcomes should be avoided. Discrimination against educational institutions by the majority community should go. (This finds a mention in the Économic Strategy for India’).

(8) All places of worship of all religions should be freed of government control.

(9) Freeing up Higher Education – the spirit of Economic Liberalisation of 1991 must now be invoked in Higher Education with regulatory authorities put in place before doing so.

(10) Investing resources – funds and personnel – to bring our macro-economic data – at the Federal and at the level of States – up to international standards in terms of timeliness and reliability

(11) Electronic road pricing during peak hours (morning and evening) in top ten metros. Staggering of hours between educational institutions and offices. Energy consumption for transport is the biggest source of energy bill and it is also the biggest pollutant in Indian cities.

(12) Re-thinking the architecture of public transportation – integrating road, rail and water (where relevant). Introducing ‘park and ride’ options in Metros in all stations. Reduce road congestion and dependence on private transportation. Multiple benefits: esp. with respect to pollutants, easing road congestion, improved productivity and less stress.

(13) GST Council Meetings should be used as a forum to exchange ideas, share information on best practices, policies pursued in States and evolve consensus on important issues – land reforms, electricity pricing, water pricing, education reforms, for example.

(14) Personnel selection for governments and related institutions including regulatory bodies:

Merit-based appointment of key personnel in key departments and Ministries, institutions, in regulatory bodies – evolution of appropriate criteria, emphasis on merit, non-partisan, from private sector where necessary.

(15) Revisit, revise and revamp curriculum for officers selected for civil service. Dehra Dun has to be completely re-examined: international experts must be invited to re-design curriculum, provide inputs. Global issues, priorities and statecraft, negotiation strategies, interpersonal and behavioural dimensions must become part. (Some op.-eds., written jointly by Gulzar Natarajan and Duvvuri Subbarao cover these aspects).

(16) The above should be revisited and new training made mandatory when civil servants graduate from their initial jobs in villages, cities and in smaller units to State Capitals and then to Delhi. They need different skills, mental attitudes and concepts.

(17) The Cabinet should follow principles of corporate organisations and be arranged efficiently. The Modi government had the right idea of organising Super-Ministries. It did it in only or two instances. It needs to be pursued more thoroughly in all possible areas.

Some examples:

– Food and Agriculture, Irrigation, Water Resources, Chemicals and Fertilisers

– Energy, Coal, Renewable (probably, this is already there)

– Railways, Road, Water Transportation

(18) The Government and the Reserve Bank of India must revisit the inflation targeting regime. If not scrapping it, they must raise the central rate to 6% and set a range of  5% to 8% around it.

(19) Finally, the PM must take personal responsibility and the PMO monitor these and report to the nation – where feasible – on the progress on these areas.