Since banks earned more from CRR cuts than from a 100 bps repo cut, they could have lowered rates even last year
The second biggest event in the economic calendar is the annual credit policy announced by RBI. Coming as it does after the Budget, it tells us some very important economic hopes or forecasts (one is not sure which one it is) and the monetary targets that are consistent with these numbers. There is no clear pattern on whether RBI’s GDP and inflation numbers for the year are lower or higher than what is implied in the Budget, but the language is generally similar. RBI tends to be a bit more conservative and it would be interesting to see, in case they pitch for 7.5% growth à la Union Budget 2012-13 or settle for something lower. Implied inflation in the Budget was in the 6-6.5% range, and it looks like that our new standard for inflation would be at this higher level. This means goodbye to the utopia of 4 or 5%, which we spoke of in the last 2 years.
Past annual policies have targets for money supply, credit and deposits growth and normally vary between 15-18%. In the given circumstances, there is no reason to expect RBI to target something higher given that the fundamental underlying conditions have not changed significantly. Deposits have not grown at the desired rate for two successive years, ostensibly due to higher inflation, which caused households to save less despite rising interest rates. The question is how do we raise our savings? So far, due to lower economic growth, demand for credit has been relatively tardy. But, once there is a pickup in credit, there would a mismatch between deposits and credit. Add to this the demand from the government, and there will be liquidity problems. RBI should address this issue with some expediency because the efficacy of policy will hinge on this variable.
What can be the content of the policy? There are several recommendations being made by companies, bankers, experts, etc, on what RBI should do. If one is in the private sector, the vote is for interest rate reductions (even though we personally take a hit on our savings), while the academics are more open to protecting one from inflation by using the real interest rate argument. Clearly, RBI is aware of the pros and cons of either lowering or not changing the repo rate or the CRR. Therefore, what RBI does will be more a reflection of how it perceives the state of growth and inflation; and its revealed preference will set the tone for the year.
Growth is down for sure and there is merit in lowering rates. But RBI has followed the path of combating inflation, and doing a volte face now looks unlikely unless it is sure that inflation will stay at the lower pre-determined level, of presumably 6-6.5%. The repo rate is a signal rate of RBI’s action, and hence, cannot be altered in the reverse direction if inflation moves up again. The upside risks exist on the side of oil as well as taxation effects. The monsoon is still an unknown quantity and lower interest rates at a time when we do not have spare capacity can be inflationary if too much credit is enabled.
Curiously, RBI had contended that the CRR cuts were viewed as liquidity enabling measures rather than monetary policy measures. This is not what the conventional textbook says. This being the case, CRR cuts can be persevered with to signal to the market that liquidity will be provided to take care of requirements of banks as well as the government—the borrowing programme will move easily.
The reaction of banks so far has been puzzling. Banks today maintain that a CRR cut will enable them to lower interest rates. However, when RBI has done the same last fiscal, we had around R80,000 crore provided to the system. Yet, banks did not lower rates. In fact, the CRR cut is potentially a stronger tool for lowering interest rates. This reduction would have provided banks with a minimum of R8,000 crore of extra income if lent at 10% as against nil on CRR. Compared with this amount, a repo cut of 100 bps on an annual daily average of R100,000 crore provides relief of just R1,000 crore. Therefore, banks could have actually lowered rates if they wanted to with this transaction.
As monetary policy has to be forward looking, it probably makes sense to actually wait for inflation to ease before reducing rates. A CRR cut, though not essential during the slack season, would help in assuaging liquidity. A thought that is not really novel is whether RBI should restrict the quantity of repo auctions just like how we have WMA limits. This can add a bit of dynamism in the call market too, which would become volatile as currently mapping where this repo money goes on a virtually permanent basis is still a matter of conjecture. More importantly, one should not get carried away by over-emphasising the role of interest rates in spurring growth as other elements such as consumption demand, government spending and exports are important pieces in the puzzle, of which we are holding just the investment piece in our hands.
Thursday, April 19, 2012
As China goes, so goes the world: Book Review Buisness World 16th April 2012
Is this yet another book eulogising the mighty economic power of China? Well, not really. As China Goes, So Goes The World peels another layer and reveals the flip side of the inexorable growth that led to several societal ills such as a huge market for fake products, sex trade and organ sales, among others. The author, Karl Gerth, says China is riding on consumerism of huge proportions as the Chinese have recently discovered their love for fancy cars, luxury goods, branded clothes, whisky and jewellery. The book also argues that the consumerism has its roots in its proximity to Taiwan and Korea that has caused a change in the standard of living as well brought in pop culture, something unheard of earlier.
Gerth believes that the global economy in future will be driven mainly by China, especially in the aftermath of the financial crisis in 2008. The transformation has come in the past three to four decades as the country drifted from communism to consumerism under Deng Xiaoping. One can gauge the huge market lying untapped in China when you look at its continuously growing middle class which consumes merely 33 per cent of gross domestic product. This process of consumerism gets buoyed further by institutions, which provide easy and cheap credit, and dissuade savings and encourage consumption.
The author traces consumerism in China from the car culture — which has now made it a major exporter of automobiles. This has not been an unmixed blessing as it has brought China closer to countries like Sudan, which it is cosying up to in order to access oil.
Gerth explains the new face of consumerist China as one where the new freedom decides what, when and where to buy goods — a decision taken earlier by the state which has driven the retail revolution. But he points out that they still have to learn to make standardised and identical goods as the same brand looks and tastes different in different locations. This has led to the growth of one of biggest markets for ‘fakes’ that has proliferated at the cost of quality and has led to substandard products such as baby food that affects babies. This is what is referred to as the Shanzhai culture, earlier used for bandits who fled and hid in mountains.
The same culture has also led to the growth of extreme markets (as the author calls them), which do flourishing business such as wet nurses, maternity clinics to determine the sex of babies (given that there is a preference for boys), sex trade, organ sales and trade in endangered species. Therefore, while China has created lots of jobs and shown growth, the repercussions in terms of quality, faking and scant respect for the future of the environment have been sore spots that spoil the party. Yet, you can never ignore China which will continue to guide global economic growth.
As China Goes, So Goes The World: How Chinese consumers are transforming everything
By Karl Gerth
Pan Macmillan
Gerth believes that the global economy in future will be driven mainly by China, especially in the aftermath of the financial crisis in 2008. The transformation has come in the past three to four decades as the country drifted from communism to consumerism under Deng Xiaoping. One can gauge the huge market lying untapped in China when you look at its continuously growing middle class which consumes merely 33 per cent of gross domestic product. This process of consumerism gets buoyed further by institutions, which provide easy and cheap credit, and dissuade savings and encourage consumption.
The author traces consumerism in China from the car culture — which has now made it a major exporter of automobiles. This has not been an unmixed blessing as it has brought China closer to countries like Sudan, which it is cosying up to in order to access oil.
Gerth explains the new face of consumerist China as one where the new freedom decides what, when and where to buy goods — a decision taken earlier by the state which has driven the retail revolution. But he points out that they still have to learn to make standardised and identical goods as the same brand looks and tastes different in different locations. This has led to the growth of one of biggest markets for ‘fakes’ that has proliferated at the cost of quality and has led to substandard products such as baby food that affects babies. This is what is referred to as the Shanzhai culture, earlier used for bandits who fled and hid in mountains.
The same culture has also led to the growth of extreme markets (as the author calls them), which do flourishing business such as wet nurses, maternity clinics to determine the sex of babies (given that there is a preference for boys), sex trade, organ sales and trade in endangered species. Therefore, while China has created lots of jobs and shown growth, the repercussions in terms of quality, faking and scant respect for the future of the environment have been sore spots that spoil the party. Yet, you can never ignore China which will continue to guide global economic growth.
As China Goes, So Goes The World: How Chinese consumers are transforming everything
By Karl Gerth
Pan Macmillan
External Commercial Borrowings can be a blessing, but concerns remain: Economic Times 4th April 2012
With a big question mark hanging over the future of interest rates, expectations surrounding the timing and the extent of interest rate cuts are being scaled down - especially with inflation remaining an enigma.A thought which comes to mind is whether or not ECBs ( external commercial borrowings) make sense, since the government will be borrowing an additional Rs 60,000 cr this year from the market which will impact liquidity.
The ECB route appears to be the way out. In FY12, the total approvals through the automatic and approval routes were $30 billion. But, is this the best solution? Today, the global markets are flushed with liquidity, thanks to quantitative easing by the US Federal Reserve and the ECB.
The financial systems have money to deploy and given that there is little growth taking place, there will be an urge to look at the emerging markets where prospects are brighter. Therefore, supply of funds should not be a concern for entities raising funds overseas.
The rupee volatility, however, has raised concerns over the cost-effectiveness of these funds relative to domestic borrowings. To begin with, not all companies are in a position to borrow from the euro markets.
Second, even if they can, the major constraint will be the country-rating, where India ranks just at the periphery which means all cannot get the finest rates. The RBI's ECB guidelines, however, fix the rate at which borrowings can take place to up to 500 basis points (bps) above 6 months of LIBOR. At the present rates, this would be around 75 bps plus 500 bps, amounting to 5.75%.
Next, the forex risk is sharp. While the rupee has held strong during the earlier years, since August 2011, there has been a tendency for the rupee to depreciate driven by two sets of factors: widening current account deficit and weak capital account coupled with a strengthening rupee vis-a-vis the euro as the Greek crisis once again unfolded.
Will this situation change?
Quite unlikely, as the trade deficit will widen due to the relative slowdown in exports and increase in imports due to rising oil prices (oil constitutes between 30-35% of total imports). The current account deficit will be under pressure in the 3.5% range of GDP as invisible receipts, especially remittances and software may not be able to compensate for the same in a global environment which ranges from a recession in the euro region to a recovery, albeit, not a smart one in the USA. Capital flows can be whimsical as FIIs have shown, which in turn could mean an eventual depreciation of the rupee.
The present forward rates for one year on the dollar range are between 6.5-7%. If this is added to the cost of borrowing, the effective covered cost of borrowing would be in the range of 12-13%. Companies may choose not to hedge, but then that would be taking a chance, especially when the time horizon could be anywhere between one and five years.
Currently, the base rate of banks is between 10-10.75%. Therefore, the decision to choose the mode of finance depends on the stature of the company. Those that can obtain finance at the base rate may actually be comfortable here while those beyond the periphery may still be better off with ECBs after taking in the hedging cost by buying forward dollars simultaneously.
However, for those which can get funds at less than 500 bps above LIBOR, (there will probably be a handful of them), ECBs will still work better than domestic borrowing. Or, for that matter, companies which need to import can save on forex conversion charges through this route.
An issue for the country, however, is that while ECBs can be a blessing for some companies, it raises the issue of sustainability of external debt at the macro-level. External debt of the country was $326 billion in September 2011 and exceeded the ballpark number for our forex reserves by over $30 billion.
With ECBs becoming attractive, they now account for 30% of the total debt; they could rise as long as our interest rate differential with those in the euro market is wide. The back-up in terms of reserves would increase primarily from hot money FII flows in the future, which may not be the perfect match. This, coupled with the forex risk, in the absence of hedging would be the two concerns going ahead.
The ECB route appears to be the way out. In FY12, the total approvals through the automatic and approval routes were $30 billion. But, is this the best solution? Today, the global markets are flushed with liquidity, thanks to quantitative easing by the US Federal Reserve and the ECB.
The financial systems have money to deploy and given that there is little growth taking place, there will be an urge to look at the emerging markets where prospects are brighter. Therefore, supply of funds should not be a concern for entities raising funds overseas.
The rupee volatility, however, has raised concerns over the cost-effectiveness of these funds relative to domestic borrowings. To begin with, not all companies are in a position to borrow from the euro markets.
Second, even if they can, the major constraint will be the country-rating, where India ranks just at the periphery which means all cannot get the finest rates. The RBI's ECB guidelines, however, fix the rate at which borrowings can take place to up to 500 basis points (bps) above 6 months of LIBOR. At the present rates, this would be around 75 bps plus 500 bps, amounting to 5.75%.
Next, the forex risk is sharp. While the rupee has held strong during the earlier years, since August 2011, there has been a tendency for the rupee to depreciate driven by two sets of factors: widening current account deficit and weak capital account coupled with a strengthening rupee vis-a-vis the euro as the Greek crisis once again unfolded.
Will this situation change?
Quite unlikely, as the trade deficit will widen due to the relative slowdown in exports and increase in imports due to rising oil prices (oil constitutes between 30-35% of total imports). The current account deficit will be under pressure in the 3.5% range of GDP as invisible receipts, especially remittances and software may not be able to compensate for the same in a global environment which ranges from a recession in the euro region to a recovery, albeit, not a smart one in the USA. Capital flows can be whimsical as FIIs have shown, which in turn could mean an eventual depreciation of the rupee.
The present forward rates for one year on the dollar range are between 6.5-7%. If this is added to the cost of borrowing, the effective covered cost of borrowing would be in the range of 12-13%. Companies may choose not to hedge, but then that would be taking a chance, especially when the time horizon could be anywhere between one and five years.
Currently, the base rate of banks is between 10-10.75%. Therefore, the decision to choose the mode of finance depends on the stature of the company. Those that can obtain finance at the base rate may actually be comfortable here while those beyond the periphery may still be better off with ECBs after taking in the hedging cost by buying forward dollars simultaneously.
However, for those which can get funds at less than 500 bps above LIBOR, (there will probably be a handful of them), ECBs will still work better than domestic borrowing. Or, for that matter, companies which need to import can save on forex conversion charges through this route.
An issue for the country, however, is that while ECBs can be a blessing for some companies, it raises the issue of sustainability of external debt at the macro-level. External debt of the country was $326 billion in September 2011 and exceeded the ballpark number for our forex reserves by over $30 billion.
With ECBs becoming attractive, they now account for 30% of the total debt; they could rise as long as our interest rate differential with those in the euro market is wide. The back-up in terms of reserves would increase primarily from hot money FII flows in the future, which may not be the perfect match. This, coupled with the forex risk, in the absence of hedging would be the two concerns going ahead.
BRICS development bank & local currencies: Financial Express 9th April, 2012
The concept of a BRICS development bank, prima facie, looks a jolly good idea. The top five emerging economies which account for around 40% of the world’s population and contribute to over 20% of world GDP and a quarter of world trade are putting together a bank which helps not just these nations but others too. Financing is proposed to be through local currencies which will add to the flow of trade and free borrowers/ traders from the vicissitudes of the euro-dollar movements, thus lowering transaction costs. This helps the nations at the time of crises besides supporting growth in normal times by providing finance for infrastructure and other projects.
One can intuitively see value as these nations start trading more among themselves, even if they are not doing so today. India’s exposure to this group is around 10% and 15% for exports and imports respectively. If hypothetically all trade is carried out in local currencies between these nations, then we would be net gainers. The bank would, however, be dealing with local currency loans for lending for projects and trade.
Will this work? There is a sense of déjà vu because when the euro was created it had similar and probably more far-reaching goals. Here the local currency acceptance would only affect their inter-group transactions. First, the political systems vary across the group from democratic republics to statist rules. Second, while these are the five largest emerging markets, economic conditions vary. Third, the economic discipline which has to go along with like-minded countries must be examined. This will be the necessary preconditions for Russia to accept the rupee or Brazilian real or China the ruble or rand.
The accompanying tables give two sets of comparable indicators for these nations – the basic economic indicators and more fundamental variables for seeking common ground.
Three of the 5 nations are at a different level of growth rate, being moderate. Further, unemployment levels are much higher for South Africa and India, which compels governments to play a more active role in social programmes. Inflation appears to be fairly high in 4 of the 5 nations, with India topping at 8.1%. Differential inflation will provide an advantage to the country with high inflation as it can use other currencies to procure cheaper goods. Hence, India can borrow in renminbi and buy goods from China, and the rupees that they get will then have to be used to buy goods at a higher price from India. Therefore, the conversion rates need to be determined in a meaningful manner. Interest rates are again high in 3 of the group countries and low in China and Brazil, which will make it attractive for the others to borrow from these markets and currencies.
The common meeting ground should ideally be closer for these nations if they were to borrow in local currencies, as policy stance domestically will be driven by these considerations. Fiscal deficits are high for India and South Africa, while China and Russia have current account surpluses. The rupee is the weakest currency vis-à-vis the dollar, followed by the ruble. The real is the strongest currency here. But, ultimately we need to have a converter for currency, which means that all of them have to be flexible to be credible. Today, all currencies are pegged to the dollar, with central banks taking a conscious decision on their currencies. It is here that China has gotten into a controversy with advanced nations believing that the renminbi is undervalued. Lastly, forex reserves are high for all except South Africa.
China is evidently the strongest nation and would be most forthcoming to lend renminbi, which has to be used to import more from China, which in turn will help its own economy. In fact, it may have the clout to ensure that its own currency becomes the favored currency for trade. Here interest rates have to be tuned to the local currency interest rates and the fact that the renminbi is controlled can pose some issues for the others. Brazil also appears to be attractive given lower interest rates though it would on its own part be looking for funding for its growth from the other nations.
Hence, we need to iron out all these issues before creating a development bank that facilitates lending in local currencies. While it is true that the dollar world has created uncertainty, the US still remains the dominant trade partner individually for the BRIC nations. Getting preliminary economic conditions right and maintaining similar prudent economic policies will be a challenge. The exchange rate conversion will hold the clue to which currency ultimately gets to dominate the transactions and payments architecture.
One can intuitively see value as these nations start trading more among themselves, even if they are not doing so today. India’s exposure to this group is around 10% and 15% for exports and imports respectively. If hypothetically all trade is carried out in local currencies between these nations, then we would be net gainers. The bank would, however, be dealing with local currency loans for lending for projects and trade.
Will this work? There is a sense of déjà vu because when the euro was created it had similar and probably more far-reaching goals. Here the local currency acceptance would only affect their inter-group transactions. First, the political systems vary across the group from democratic republics to statist rules. Second, while these are the five largest emerging markets, economic conditions vary. Third, the economic discipline which has to go along with like-minded countries must be examined. This will be the necessary preconditions for Russia to accept the rupee or Brazilian real or China the ruble or rand.
The accompanying tables give two sets of comparable indicators for these nations – the basic economic indicators and more fundamental variables for seeking common ground.
Three of the 5 nations are at a different level of growth rate, being moderate. Further, unemployment levels are much higher for South Africa and India, which compels governments to play a more active role in social programmes. Inflation appears to be fairly high in 4 of the 5 nations, with India topping at 8.1%. Differential inflation will provide an advantage to the country with high inflation as it can use other currencies to procure cheaper goods. Hence, India can borrow in renminbi and buy goods from China, and the rupees that they get will then have to be used to buy goods at a higher price from India. Therefore, the conversion rates need to be determined in a meaningful manner. Interest rates are again high in 3 of the group countries and low in China and Brazil, which will make it attractive for the others to borrow from these markets and currencies.
The common meeting ground should ideally be closer for these nations if they were to borrow in local currencies, as policy stance domestically will be driven by these considerations. Fiscal deficits are high for India and South Africa, while China and Russia have current account surpluses. The rupee is the weakest currency vis-à-vis the dollar, followed by the ruble. The real is the strongest currency here. But, ultimately we need to have a converter for currency, which means that all of them have to be flexible to be credible. Today, all currencies are pegged to the dollar, with central banks taking a conscious decision on their currencies. It is here that China has gotten into a controversy with advanced nations believing that the renminbi is undervalued. Lastly, forex reserves are high for all except South Africa.
China is evidently the strongest nation and would be most forthcoming to lend renminbi, which has to be used to import more from China, which in turn will help its own economy. In fact, it may have the clout to ensure that its own currency becomes the favored currency for trade. Here interest rates have to be tuned to the local currency interest rates and the fact that the renminbi is controlled can pose some issues for the others. Brazil also appears to be attractive given lower interest rates though it would on its own part be looking for funding for its growth from the other nations.
Hence, we need to iron out all these issues before creating a development bank that facilitates lending in local currencies. While it is true that the dollar world has created uncertainty, the US still remains the dominant trade partner individually for the BRIC nations. Getting preliminary economic conditions right and maintaining similar prudent economic policies will be a challenge. The exchange rate conversion will hold the clue to which currency ultimately gets to dominate the transactions and payments architecture.
Sunday, April 1, 2012
ABCDE of corporate social responsibility: Economic Times 31st March 2012
Antilla and Singur are two sides of the same capitalist coin that has been minted in the last two decades in India. Antilla is a manifestation of the achievements of free markets and capitalism when private enterprise works to create shareholder value. Singur is a grim reminder that India is still a poor country and that the trickle-down effects are nebulous enough to create a backlash. This has come in the way of three reforms in the country: land, environment and labour.
Free markets are all about the survival of the fittest but when growth is uneven, it creates wrinkles in our social fabric. There are established interest groups that have emerged to slow down its proliferation. While social activists may actually care, it also allows for leverage by political manifestos, besides germinating pseudo militant groups that subsequently become terrorist outfits.
While India has definitely made the headlines in producing a lot of wealthy people, the fact that between 20-40% of the population is poor and even worse over 40% of children are malnourished, should make us stop and think. Should there be a responsibility on industry to give something in return? While strictly speaking, the answer is no, given the tremors witnessed at times, we may have to change perceptions that growth has to be a 'joint' and not 'trickle-down' process.
Today, corporate social responsibility ( CSR) is a feeble attempt most of the time which aims to embellish annual reports, though admittedly some of the corporates have done a lot for their local communities. Given that the redistribution channels through government expenditure is afflicted with leakages there has to be a direct effort made by the private sector to create trust. This way, when there are expansion plans, there will be support from the local constituency.
A five-point approach is called for where companies actually bring about participative development.
The acronym, ABCDE approach can be used here. First, the company should Adopt a geography which really means that it should target a fixed perimeter and work towards developing this area. Having scattered programmes seldom works.
Second, the funds deployed should be used for Building structures that entails creating social requirements for the adopted geography so that the community is aware of what the company is doing. Building schools, health centers, community halls, setting up of bank branches are examples of the physical and financial infrastructure that has to be created.
Third, the focus should be on Creating competencies. Government programmes normally are constrained by funds and we have bizarre situations where schools exist but have no teachers or chairs or toilets. It is better to have a smaller set up where education is of national level so that the children actually grow to compete well in future.
The present education system is biased where education in an Indian language automatically puts the student at a permanent disadvantage.
In fact, the strength of demographic dividend is overstated in India because the large young population of the country does not have the necessary skill sets to enter the corporate world.
Fourth, Distribute the gains of profits in the form of tangible benefits such as subsidised health facilities, education, basic infrastructure, etc. The top 25 companies earned net profit of Rs 200,000 crore in FY11. Intuitively, one can see that if a certain fixed proportion of profit is ploughed back, it will go a long way in helping the community.
Currently, it is assumed that this sector pays the government taxes that should be providing these services. But things do not work that way which comes in the way of further reforms.
Lastly, Engage the local community in one's own work. Here, the idea is that the community is trained and deployed in their own activity that works well in terms of providing employment, imparting skills and earning trust.
There is evidently a need to bridge trust between the rural folks and corporate India to ensure smooth operations. Private delivery of services is a far more efficient vehicle, given that corporates who work for profit value their money more than governments that ideologically are not suited to run a business. A small step through allocating 1% share of the profit can go a long way in assuaging the poor and involving them.
To quote WH Auden:
About suffering they were never wrong, The Old Masters: how well they understood, Its human position; how it takes place While someone else is eating or opening a window or just walking dully along... We need to address this issue with a fresh mindset.
Free markets are all about the survival of the fittest but when growth is uneven, it creates wrinkles in our social fabric. There are established interest groups that have emerged to slow down its proliferation. While social activists may actually care, it also allows for leverage by political manifestos, besides germinating pseudo militant groups that subsequently become terrorist outfits.
While India has definitely made the headlines in producing a lot of wealthy people, the fact that between 20-40% of the population is poor and even worse over 40% of children are malnourished, should make us stop and think. Should there be a responsibility on industry to give something in return? While strictly speaking, the answer is no, given the tremors witnessed at times, we may have to change perceptions that growth has to be a 'joint' and not 'trickle-down' process.
Today, corporate social responsibility ( CSR) is a feeble attempt most of the time which aims to embellish annual reports, though admittedly some of the corporates have done a lot for their local communities. Given that the redistribution channels through government expenditure is afflicted with leakages there has to be a direct effort made by the private sector to create trust. This way, when there are expansion plans, there will be support from the local constituency.
A five-point approach is called for where companies actually bring about participative development.
The acronym, ABCDE approach can be used here. First, the company should Adopt a geography which really means that it should target a fixed perimeter and work towards developing this area. Having scattered programmes seldom works.
Second, the funds deployed should be used for Building structures that entails creating social requirements for the adopted geography so that the community is aware of what the company is doing. Building schools, health centers, community halls, setting up of bank branches are examples of the physical and financial infrastructure that has to be created.
Third, the focus should be on Creating competencies. Government programmes normally are constrained by funds and we have bizarre situations where schools exist but have no teachers or chairs or toilets. It is better to have a smaller set up where education is of national level so that the children actually grow to compete well in future.
The present education system is biased where education in an Indian language automatically puts the student at a permanent disadvantage.
In fact, the strength of demographic dividend is overstated in India because the large young population of the country does not have the necessary skill sets to enter the corporate world.
Fourth, Distribute the gains of profits in the form of tangible benefits such as subsidised health facilities, education, basic infrastructure, etc. The top 25 companies earned net profit of Rs 200,000 crore in FY11. Intuitively, one can see that if a certain fixed proportion of profit is ploughed back, it will go a long way in helping the community.
Currently, it is assumed that this sector pays the government taxes that should be providing these services. But things do not work that way which comes in the way of further reforms.
Lastly, Engage the local community in one's own work. Here, the idea is that the community is trained and deployed in their own activity that works well in terms of providing employment, imparting skills and earning trust.
There is evidently a need to bridge trust between the rural folks and corporate India to ensure smooth operations. Private delivery of services is a far more efficient vehicle, given that corporates who work for profit value their money more than governments that ideologically are not suited to run a business. A small step through allocating 1% share of the profit can go a long way in assuaging the poor and involving them.
To quote WH Auden:
About suffering they were never wrong, The Old Masters: how well they understood, Its human position; how it takes place While someone else is eating or opening a window or just walking dully along... We need to address this issue with a fresh mindset.
Moving past calories to define poverty: Financial Express 30th March 2012
The concept of a poverty line and the resultant headcount of the number of poor has created a furor because it comes at a time when inflation rate is high and the norm for classification has been lowered by around R4/day. Given that the World Bank has shown declining trends in China, Latin America and Africa, it is tempting to depict similar pictures in India, considering that we have long taken pride in being the second-fastest growing economy in the world, where the fortune is building at the bottom of the pyramid. But, when we see starvation deaths, debt-related suicides and high levels of malnourishment, it is hard to accept this shining story even though these are exceptions rather than a general observation. There is now debate on whether we can use a daily criteria, and one is always concerned about what goes into this number, considering that the price both a loaf of bread and one kilogramme of potatoes is R28. Is this then a fair assessment of the poverty norm?
We need to be clear about what the purpose of talking about the poverty line is. If it is to score political brownie points, or to vindicate the economic policies that have been pursued, then there could be some academic backing when the calorie criterion is used. While the calorie concept does give out an odd number, it can theoretically be defended depending on how we define poverty. This is both an advantage and disadvantage of any economic concept once the assumptions are defined, as there will always be a strong justification for the result. However, if it is to be used for invoking certain social development programmes, then we seriously need to reconsider the definition as the present version could be redefined as a ‘starvation’ line rather than a ‘poverty line’.
Globally, the World Bank uses the norm of $1.25/day (on a PPP basis), which is around R62.50 and another version of $2, which is R100 at the present exchange rate. Quite clearly, the basis is different and looks at the concept of human degradation in various ways. However, if the same is adjusted for PPP, then the number comes closer to what the Planning Commission is talking about as our own GDP would be around a third of the PPP number. When we combine this controversy with some other data on human conditions, such as malnutrition or the Human Development Index (HDI), we get a different picture.
The solution is to get out of this calculation of poverty on the basis of the present calorie criteria and look at gradations of the quality of life. Calories can keep one medically alive but may not allow you to go beyond basic existence. When the concept was introduced by the Planning Commission, it may have had relevance, but given that the country has progressed, especially since the nineties, and there has been a sea change in the quality of life of the upper echelons, it is but natural that when we think of any inclusion, the aim must be to inculcate a broader concept of sustenance.
Instead of calling it a poverty criterion, we should move to defining people who are below a certain income level just like how NCAER classifies households under different income criteria. Again, households are preferable to individuals and a longer time-frame, like a month or year appears pragmatic.
These income levels should be defined in different ways. There should be basic food criteria where the average consumption basket for a family of four should be used to compute what is required to remain out of hunger. This is more akin to what is being used today and is theoretical in nature because merely assigning a value to a calorie-related quantity of food is looking at procurement rather than delivery. The second level should include certain other necessities, such as fuel, clothing and shelter. This would be required to ensure that the first criterion can actually be consumed by the household. This cannot be done for individuals. The third level would go ahead and include the cost of other services such as education, health and social services such as water, sanitation, etc. Here, too, there would be a downward bias given that the cost of public services is far less than that of the private sector, with also a lower quality.
These two concepts can then be mapped with the targeting of any social programme. The food criteria can be used for mapping the public distribution system when working on the implementation of the Food Security Bill. The second can be mapped to an employment scheme such as MGNREGA, where incomes have to be enhanced to enable people to have a more respectable living. The last can be linked to communities when deciding on allocations in the Union and state budgets.
While it is true that the Planning Commission concept of poverty tends to look absurd, the premise used is the one to be changed, rather than the method of arrival of the number. Ideally, if these three criterions are used and the comparable numbers provided along with the World Bank number, they would be easier to digest.
We need to be clear about what the purpose of talking about the poverty line is. If it is to score political brownie points, or to vindicate the economic policies that have been pursued, then there could be some academic backing when the calorie criterion is used. While the calorie concept does give out an odd number, it can theoretically be defended depending on how we define poverty. This is both an advantage and disadvantage of any economic concept once the assumptions are defined, as there will always be a strong justification for the result. However, if it is to be used for invoking certain social development programmes, then we seriously need to reconsider the definition as the present version could be redefined as a ‘starvation’ line rather than a ‘poverty line’.
Globally, the World Bank uses the norm of $1.25/day (on a PPP basis), which is around R62.50 and another version of $2, which is R100 at the present exchange rate. Quite clearly, the basis is different and looks at the concept of human degradation in various ways. However, if the same is adjusted for PPP, then the number comes closer to what the Planning Commission is talking about as our own GDP would be around a third of the PPP number. When we combine this controversy with some other data on human conditions, such as malnutrition or the Human Development Index (HDI), we get a different picture.
The solution is to get out of this calculation of poverty on the basis of the present calorie criteria and look at gradations of the quality of life. Calories can keep one medically alive but may not allow you to go beyond basic existence. When the concept was introduced by the Planning Commission, it may have had relevance, but given that the country has progressed, especially since the nineties, and there has been a sea change in the quality of life of the upper echelons, it is but natural that when we think of any inclusion, the aim must be to inculcate a broader concept of sustenance.
Instead of calling it a poverty criterion, we should move to defining people who are below a certain income level just like how NCAER classifies households under different income criteria. Again, households are preferable to individuals and a longer time-frame, like a month or year appears pragmatic.
These income levels should be defined in different ways. There should be basic food criteria where the average consumption basket for a family of four should be used to compute what is required to remain out of hunger. This is more akin to what is being used today and is theoretical in nature because merely assigning a value to a calorie-related quantity of food is looking at procurement rather than delivery. The second level should include certain other necessities, such as fuel, clothing and shelter. This would be required to ensure that the first criterion can actually be consumed by the household. This cannot be done for individuals. The third level would go ahead and include the cost of other services such as education, health and social services such as water, sanitation, etc. Here, too, there would be a downward bias given that the cost of public services is far less than that of the private sector, with also a lower quality.
These two concepts can then be mapped with the targeting of any social programme. The food criteria can be used for mapping the public distribution system when working on the implementation of the Food Security Bill. The second can be mapped to an employment scheme such as MGNREGA, where incomes have to be enhanced to enable people to have a more respectable living. The last can be linked to communities when deciding on allocations in the Union and state budgets.
While it is true that the Planning Commission concept of poverty tends to look absurd, the premise used is the one to be changed, rather than the method of arrival of the number. Ideally, if these three criterions are used and the comparable numbers provided along with the World Bank number, they would be easier to digest.
Towards Financial Inclusion: Book Review: Business World 2nd April 2012
The book is a regulator’s officialese with a lot of points and subpoints — much like a detailed textbook, hence, a good compendium for the serious researcher but the layman...
Towards Financial Inclusion In India,
By K.G. Karmakar, G.D. Banerjee and N.P. Mohapatra
Sage Publications;
Globally, the subject that has produced a plethora of books is the financial crisis, where authors have a lot to tell, often being wise after the event. Back home, the buzz is ‘inclusion’. The subject has pervaded seminars, policy documents and financial literature to the extent that almost all areas of this subject have been covered in breathtaking detail. It is even more compelling for those in the financial field to write on this subject where there is firsthand experience to narrate, which can be refreshing.
Towards Financial Inclusion, authored by K.G. Karmakar, G.D. Banerjee and N.P. Mohapatra, is another addition to the literature on the subject. For the authors, being part of the National Bank for Agriculture and Rural Development (Nabard) helps. The organisation has top-of-the-mind recall on any subject to do with rural India and financial inclusion.
The authors look at both the demand and supply sides in some great detail to analyse all dimensions of the concept. They feel that the nation should achieve cent per cent coverage by 2012. In fact, they go further and explain how inclusion will also further strengthen our anti-poverty schemes and improve their implementation, especially if every family has a bank account that can be used for transferring cash credits to them.
The authors discuss an important issue. They say the formal system actually needs to recognise the vast business potential here as there is an unmet gap in this field. Therefore, we need to have appropriate products devised for it, which can then be used not just to provide services but also become part of a cogent business model. Financial inclusion should not just be looked as a moral or regulatory commitment.
The demand side story includes the need for encouraging savings in formal systems, provision of remittance facilities, addressing requirements of farmers, tribes and so on. Further, the authors extend the concept to other financial products such as micro remittance savings, credit and insurance. All this has to be reached out for the “last least and lost” to come closer to success. All banks have internally set targets on branches to be set up, unbanked villages to be covered, business correspondents to be appointed, kiosks to be set up and so on. No-frills accounts have been opened and cards such as kisan credit cards and regular cards distributed to make inclusion more pervasive.
On the supply side, the authors work on models for lowering the costs for banks and their clients. The business correspondent model is what they recommend for better outreach. Organising the farmers to take on combined liability is an option and they share Nabard’s own experiences with their farmer clubs besides highlighting the Sewa model, which got in over 100 collectives. But the authors espouse the use of financial literacy as being very important in this endeavour. There is, definitely, a case of knowledge asymmetry when it comes to awareness of financial services. The case of the post offices working with banks in Uttarakhand is quite laudable. Here, India Post collects money from the people and passes it on to the banks.
On solutions, the authors do look at the micro-enterprise model and support the role of microfinance institutions to provide credit to the poor. They favour using the Unique Identification Number to hasten the process of inclusion as it addresses issues of banks. Above all, there is need for regular social audit to ensure that pro-poor schemes are well implemented and there is better accountability. They do support the banking correspondent model, counselling for inclusion, bigger role for NGOs and support to village bodies, mobile-van banking, rural credit bureaus and so on. Obviously, the technology options in this context will be enablers. The authors emphasise on the use of technology in financial inclusion. This could be the single-most important factor that can reduce the cost of inclusive banking.
The book is interesting, though difficult to read at times. It has numerous examples in each and every idea, thanks to Nabard’s rich and vast experiences in this field. Also, rather than being recommendatory, it is filled with real examples for the reader to identify with.
That said, the book is written in more of a regulator’s officialese with a lot of points and subpoints — much like a detailed textbook. It is, hence, a good compendium of everything on the subject for the serious researcher though it could test the patience of the layman. Having said that, this subject is not really for the layman and more for the student and practitioner, for whom it is a wholesome treatise.
Towards Financial Inclusion In India,
By K.G. Karmakar, G.D. Banerjee and N.P. Mohapatra
Sage Publications;
Globally, the subject that has produced a plethora of books is the financial crisis, where authors have a lot to tell, often being wise after the event. Back home, the buzz is ‘inclusion’. The subject has pervaded seminars, policy documents and financial literature to the extent that almost all areas of this subject have been covered in breathtaking detail. It is even more compelling for those in the financial field to write on this subject where there is firsthand experience to narrate, which can be refreshing.
Towards Financial Inclusion, authored by K.G. Karmakar, G.D. Banerjee and N.P. Mohapatra, is another addition to the literature on the subject. For the authors, being part of the National Bank for Agriculture and Rural Development (Nabard) helps. The organisation has top-of-the-mind recall on any subject to do with rural India and financial inclusion.
The authors look at both the demand and supply sides in some great detail to analyse all dimensions of the concept. They feel that the nation should achieve cent per cent coverage by 2012. In fact, they go further and explain how inclusion will also further strengthen our anti-poverty schemes and improve their implementation, especially if every family has a bank account that can be used for transferring cash credits to them.
The authors discuss an important issue. They say the formal system actually needs to recognise the vast business potential here as there is an unmet gap in this field. Therefore, we need to have appropriate products devised for it, which can then be used not just to provide services but also become part of a cogent business model. Financial inclusion should not just be looked as a moral or regulatory commitment.
The demand side story includes the need for encouraging savings in formal systems, provision of remittance facilities, addressing requirements of farmers, tribes and so on. Further, the authors extend the concept to other financial products such as micro remittance savings, credit and insurance. All this has to be reached out for the “last least and lost” to come closer to success. All banks have internally set targets on branches to be set up, unbanked villages to be covered, business correspondents to be appointed, kiosks to be set up and so on. No-frills accounts have been opened and cards such as kisan credit cards and regular cards distributed to make inclusion more pervasive.
On the supply side, the authors work on models for lowering the costs for banks and their clients. The business correspondent model is what they recommend for better outreach. Organising the farmers to take on combined liability is an option and they share Nabard’s own experiences with their farmer clubs besides highlighting the Sewa model, which got in over 100 collectives. But the authors espouse the use of financial literacy as being very important in this endeavour. There is, definitely, a case of knowledge asymmetry when it comes to awareness of financial services. The case of the post offices working with banks in Uttarakhand is quite laudable. Here, India Post collects money from the people and passes it on to the banks.
On solutions, the authors do look at the micro-enterprise model and support the role of microfinance institutions to provide credit to the poor. They favour using the Unique Identification Number to hasten the process of inclusion as it addresses issues of banks. Above all, there is need for regular social audit to ensure that pro-poor schemes are well implemented and there is better accountability. They do support the banking correspondent model, counselling for inclusion, bigger role for NGOs and support to village bodies, mobile-van banking, rural credit bureaus and so on. Obviously, the technology options in this context will be enablers. The authors emphasise on the use of technology in financial inclusion. This could be the single-most important factor that can reduce the cost of inclusive banking.
The book is interesting, though difficult to read at times. It has numerous examples in each and every idea, thanks to Nabard’s rich and vast experiences in this field. Also, rather than being recommendatory, it is filled with real examples for the reader to identify with.
That said, the book is written in more of a regulator’s officialese with a lot of points and subpoints — much like a detailed textbook. It is, hence, a good compendium of everything on the subject for the serious researcher though it could test the patience of the layman. Having said that, this subject is not really for the layman and more for the student and practitioner, for whom it is a wholesome treatise.
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