Understanding GSec yield movements: Economic Times 27th November 2013

The GSec market is probably considered to be the only liquid one where secondary transactions take place. But, actually there are only a handful of securities that are traded and more importantly once the security loses tenure - a 2023 implicit 10-year bond becomes a nine-year bond in 2014 - it loses market interest. But still the 10-year GSec becomes the barometer of interest rates in the system for want of an alternative. How should this security be priced? The implicit yield in the past three months has varied from 8.18% to 9.15% - a differential of around 100 bps. The crossing of the 9% mark has caused commotion in the market, and quite understandably so, as the basic underlying factors appear not to have changed. Can any theory be fitted here?

One way is to look at the state of liquidity in the past three months. The repo auctions are more or less fixed with around Rs 40,000 crore being the daily inflows from the RBI based on the 0.5% NDTL mark. The MSF has become the effective indicator of liquidity. Here too, the amount averaged around rs 40,000 crore in August, rs 66,000 crore in September and Rs 37,000 crore in October. Yet, the rate has remained virtually unchanged at a weighted average of 8.46%, 8.5% and 8.57% respectively. Therefore, liquidity in the system cannot be an explanation.
Another way is to just look at the differential between the repo rate and the yield in different phases. When the repo rate was 7.25%, the average variation of the 10-year GSec was 125 bps above this rate. It came down to 110 bps when the repo rate was raised to 7.5% and decreased to 100 bps at 7.75%. Quite clearly, this theory cannot explain a yield above 9% as 8.75% should be the upper limit.
Bringing in some statistical tools, a regression analysis, linking changes in yields to changes in repo rate on a monthly basis for the past five years, gives a rate of around 8.65% to be the ideal rate when the repo rate is 7.75%, which is close to the crude calculation done earlier. Adding inflation (WPI inflation as CPI data is not available) as another explanatory variable brings the yield to 8.67%. But both these relations explain between 22% and 30% of the variation in the 10-year GSec rate. Intuitively, this also means that the rest is being driven by non-quantifiable factors. What could these factors be?
Sentiment is one factor that can be driving prices of government paper and hence yields. The market believes that the RBI will probably continue increasing rates since inflation appears to be still a hard nut to crack. Also, the RBI has made it clear that inflation control is the primary aim and the CPI, which is higher than the WPI inflation number, is of more consequence. Therefore, expectations of rate hikes can keep yields higher. Significantly, no fresh news on inflation came in when the yields jumped up.
Second, the Fed tapering programme has its role to play in our daily lives. Any good news, like the announcement that more jobs have been created in the USA, leads to the conclusion that the tapering will start soon, even though the unemployment rate has inched up to 7.3%. But this is interpreted as an indicator of further interest rate tightening by the RBI, which, in turn, drives up the rates. But the impact of these measures would be more or less transient for a couple of days and rates should return to equilibrium as these are typically single day sentiments.
Third, movement in exchange rates also impacts the interest rates. While a long-term coefficient of correlation between exchange rates and GSec rates is low at 22%, on a daily basis, the two do move together, especially if the exchange rate moves faster. Therefore a sudden movement of the exchange rate from 61-62/$ to above $63, automatically gets reflected in the interest rates moving up. This sounds plausible, but should again be mean reverting once the exchange rate corrects. A part of the reason for the rupee to fall in November has been the shifting of part of the OMC purchase of dollars to the market from the RBI. This, combined with the prospect of the closing of the swap window for FCNR deposits, has caused a modicum of panic in the money market too.
Fourth, the reaction of banks with these rates works both ways. When banks raise interest rates, which have been done by some of them, the tendency is for the market to follow suit, which can explain partly the increase in rates. If this is sustained, it will tend to feed back into the system and cause banks to reconsider their options.
Fifth, an explanation given often is profit booking where some entities, be it banks or FIIs are selling and thus making a profit. Excess selling leads security prices to fall and rates to rise, which can contribute to the upward movement. This explanation, however, is not borne out from the trading volumes in GSecs, which has been stable at Rs 30,000-50,000 crore in the past 8-10 weeks. In fact, in November, when the yields moved up, the total volumes traded were lower.
The conclusions that may be drawn are that yields can only partly be explained by factors such as RBI rates or inflation and around 70% of variation is caused by a variety of factors - each one stepping in and out in short phases. While it is hard to pin-point which factor is working decisively from outside, the market will have to factor all of them to cover all options.

 

The 22.7-billion-dollar question: Financial Express: 27th November 2013

The biggest success story of our efforts to strengthen the rupee and bring back hope has been the opening of the swap window by RBI on FCNR deposits in September. The latest number of such inflows is $22.7 billion and with the month yet to end, it could move up to $25 billion or even $30 billion. This has been a unique way of garnering dollars for an economy which confronted a shortfall. How has the tune played out and are there any concerns?
The concept is quite straightforward. If banks raised fresh FCNR deposits with a tenure of above 3 years, they could give the same to RBI at the existing exchange rate and be assured that when they had to pay back the deposit-holder, they would get it at the same rate with an addition of 3.5% swap rate, calculated on a half-yearly compounded basis. Intuitively, the rupee depreciation for the bank would be 3.5% as against the market swap rate of 7%. Therefore, for any transaction reckoned at say R63/$, the cost at the end would move to R70/$. While this may look like a gamble because the rupee could just appreciate by that time instead of decline, the same deal in the market would have come for around 7%. This was a reason why banks never aggressively marketed this product. This has a dual advantage in that it has helped to get dollars as well as augment deposits which have been used to finance both credit and investments. The FCNR deposit rate was fixed to LIBOR/swap rate plus 400 bps for such deposits at the upper-end. Therefore, with the FEDAI announced rate being 0.70% for 3 years and 1.4% for 5 years (as of October-end), the deposit rate could go up to 4.7% and 5.4% respectively. Add to this the swap cost of 3.5%, the cost of such funds would be between 8.2-9% with no encumbrance of CRR and SLR. At the base rate of around 10% for the best borrower, banks could still earn 1% return. Therefore, banks have been enthusiastic about this deal since it has straight away added liquidity to the system at a time when domestic deposits are not increasing due to negative real rates and inflation concerns. This has been a boost to the FCNR deposits which have hitherto not been very popular in the structure of NRI deposits in the country. Out of the $390 billion external debt as of March 2013, long-term NRI deposits were around $71 billion of which only $15 billion was FCNR. NR(E)RA deposits were around $46 billion. Quite clearly, the present deal of offering higher rates and swap has helped banks to market this product. In fact, inflows of FCNR were just $220 million in FY13, indicating that these deposits are not preferred by banks.Now, what we have done is actually allowed funds to be raised at around 8-9%, with the exchange risk being taken on by RBI in case of depreciation, and banks in case of appreciation. In fact, this is similar to the IMD or RIBS that we had earlier when there was paucity of forex in the country. The difference is that these deposits are being offered by banks and not as bonds by the government (or SBI as it was on the earlier occasions). It is therefore akin to a sovereign bond, without explicit government guarantee. There are two issues here. The first is that because we are picking up around $25 billion, it adds to our external debt which will cross $400 billion through this measure. But funds through this route sound more dignified and not desperate as a sovereign bond or loan would. The second is that at the time of redemption, there will be a provision that has to be made, as it is unlikely that RBI will roll over this swap, which means that banks will not be willing to go ahead with this scheme as the risk will be on them unless, of course, the rupee appreciates. Earlier, when we went in for RIBs or IMD, they got rolled over into FCNR deposits as the holders of these bonds were NRIs. Therefore, in a way we have postponed the problem and the assumption is that we will have surplus dollars to pay back these deposit holders. An interesting outcome is that while there is talk of all these dollars coming in, which quite clearly should be fresh money unless other accounts like the NR(E)RA, which is the dominant form, have gotten swapped for these deposits. But, where have these dollars gone? While it is true that the data points for these receipts and RBI information on forex reserves is available till November 15 at the moment, our foreign currency reserves increased from $246 billion on September 3 to $249 billion on October 4, and $256 billion on November 15. This is the time period when our trade deficit has come down sharply and FII flows, in net terms, have turned positive. If all this money was fresh, then these reserves should cross $270 billion by the end of the month taking our forex reserves closer to $300 billion mark. This will take us back to the FY11-FY12 days when these levels prevailed. The swap window has been a smart move in the short-run as it has gotten the dollars without affecting the financial flows of the government. RBI is subsidising this deal by paying up the balance 3.5% on the swap—the cost is around R5,500 crore to R6,500 crore depending on inflows of $25-30 billion. On the other hand if the rupee strengthens, banks will have to bear a cost, unless RBI decides to waive it. Should this be a policy for the future? Probably not, as we are tinkering with the markets which should ideally not become a habit. It should be the last resort, but never be the first option.

Work in progress: Book Review of McKinsey's Reimagining India: Financial Express November 24 2013

Summary: The problems are well-known, and there’s not much on the practical way forward. Despite that, the 60 essays in Reimagining India make for an interesting facet of the India growth story

Mckinsey's re-imagining India comes just at a time when controversy has been stoked by Goldman Sachs’ comments on India’s polity. McKinsey brings together independent views of several reputed authors and celebrities. There is the general tendency to hammer the government, which has become a fad these days, as the concept of a ‘government’ is not an entity that responds. There is a proclivity to private enterprise, praise for the Gujarat model and hope in the middle class (also the favourite of McKinsey). The general drift at times is towards self-eulogy and critiques of the present form of governance, which is not unexpected. There is little credit given to the government for anything positive that has happened and hence it is refreshing to read Bill Gates, who puts India on top when it comes to eradicating polio using its own resources, something that wasn’t expected, given the size and population of the country.
There is also a good word from Eric Schmidt, who said that the next Google could come from India. While the senior Google official laments that Internet exposure is low in India at 150 million, he is sanguine that this will pick up to a penetration level of 60-70% in the next five years. He sees the Internet holding stage in education, banking and financial services, lifestyle, e-trading and even better governance, but is wary of censorship.Most of the views are based on experience or impressionistic views, which read well in newspapers, but may not be based on sound research. Take, for instance, Ruchir Sharma, who runs down India’s performance on the grounds of benefiting from an overflow of global funds and low base, and not due to the ‘managerial genius of New Delhi’. Yet he contradicts himself when he praises some of the BIMARU states that shine, forgetting that they, too, have benefited from the low-base effect. Or a sweeping statement that we go in for reforms only in a crisis. While the 1991 crisis was the trigger, historical experience shows that reforms are spread out across time to enable absorption. It would be facetious to say we went for reforms only in 1991 and then sat back. Similarly, he shows disdain for the government, saying it should abandon the tendency to be ‘self-satisfied and make excuses’. This borders on hubris and arrogance, something that is rarely displayed by even foreign entities. One may assume it is the author’s personal view and not of the company’s. Government bashing is also highlighted by Gurcharan Das. For people like him who espouse that India Inc did well notwithstanding the government, the question to be posed is why anyone is complaining now when the government has supposedly come to a standstill. Real entrepreneurship should reveal itself. The fact remains that nothing would have happened if the government had not provided support not just through reforms, but also sops in various fiscal and structural forms. The power of the private sector is further extolled by Mukesh Ambani, who traces the story of Reliance Industries and shifts to education, where the best quality is provided. A point missed, however, is that the education he speaks of is elitist and out of reach of the common man. On this subject, Madhav Chavan has an interesting take: social spending on education tends to look at volumes rather than quality, which does not help disadvantaged students. Srinath Reddy explains the irony in Indian healthcare, where foreigners come to India for the best and cheapest treatment, while basic health facilities are not available for the domestic masses. There are some positive stories told, though they are confined to specific pockets of this vast country. Sonia Falerio gives examples of lady sarpanches in remote villages who are trying their best. Muhtar Kent has Coke’s trysts with empowering women and villages, and how they do it by providing access to water, electricity and even property rights, which fit into their own business model of spreading their product to rural areas. Howard Shultz shares the Starbucks experience with Tatas, which is again a positive for Indian enterprise. Nandan Nilekani has faith in his UID, but laments the leakages. The problem with the entire system is one of scale and, more importantly, identification. As it is based on personal declaration, the system is flawed when used for a distribution programme because it cannot exclude beneficiaries based on facts. However, being the pioneer of this project, he does not admit the faults in the system and argues that it will help plug leakages in the system. It is always engaging to read what foreign authors and journalists write about India. There are four interesting pieces here that are appealing. Patrick French talks of the polity and is positive about the electorate, which actually rejects non-performing governments. In fact, he is all admiration for the country’s free press and the fact that everyone feels they have a stake in the country’s governance. Let us see where he gets critical. Democracy functions, but governance does not. Once elected, one gets protection from legal proceedings and is really unaccountable. The rule of law does not apply and if you complain, there is a backlash—so true when anyone tries to oppose the government, when raids are a corollary. Often, politicians get elected to protect them from convictions. Besides the money power, French talks a lot of dynastic politics, where one has five times better chance in case one is connected. This works more than business, but the two are interlinked as funding comes from business. This is not so in countries like Britain, where Tony Blair’s offspring cannot become the Labour Party leader, unlike India, where it is hereditary. Edward Luce draws parallels with the US democratic systems. Both of them are in disarray and are national bywords for dysfunction and inertia. According to him, the UPA has a chief problem of a diarchy, where there is ‘power without responsibility’ and ‘responsibility without power’. Second, caste and religion have taken the zing out of the system and third, after 2010, the UPA has not been able to function on account of the multiple scams. The US is no better a state, as the Congress has not been able to pass critical bills since 2009. On the issue of India and China, Yasheng Huang rebuts the theory that China ‘can’ because of the absence of democracy, while India ‘can’t’ because of this freedom. He asks why China could not under Mao, while Taiwan did under similar dictatorial regimes. Similarly, Singapore has done what India cannot and South Korea, with laissez faire, also did, while North Korea couldn’t. Or for that matter, Pakistan, with an authoritarian style, has made limited progress. Victor Mallet warns of the concept of demographic dividend, which we tout as being the big one for us. He cautions that this could be a misnomer because while the private sector produces 10 million jobs a year and 12 million enter the workforce, if there are no jobs and hence no income, then it is a recipe for disaster. There are four other good, thought-provoking articles. The first is by Zia Mody, who sounds exasperated at the time taken by our legal processes and cites the examples of Ajmal Kasab, where it took four years for the case to finish, and Sanjay Dutt, whose case went on for 20 years. Interestingly, there are 31.2 million cases pending, of which 80% are in the lower courts and four million in the high courts (of these, one million lie with the Allahabad High Court). Rajiv Lall talks of the contrasts in our systems, where we manage a huge monstrosity like the Kumbh Mela involving 30 million people superbly, but are not able to manage the process of collecting garbage in the same city. This sort of sums up our mindset towards infrastructure and its development. Suhel Seth, in his uninhibited way, blasts the media for its cozy relations with both business houses and politicians due to a strong symbiotic relation. At a more intellectual level, Ashutosh Varshney talks well of our federal system, where people are still proud to be an Indian first. It has failed in the north-eastern states due to our own neglect. But there is a lot of crossing of such regional barriers, with the IPL being an outstanding case of diversity. Giving more power to the states has helped a lot. Of particular impact is the last piece by Christopher Graves of Ogilvy PR, where he works on the term ‘Incredible India’ as the brand to be used by the country, and to get over the propaganda by the states. Interestingly, he distinguishes between a branded house and a house of brands. We have started as a branded house and are moving to a house of brands. What does the book achieve? Nothing significant as the problems are well-known and only articulated by celebrities. McKinsey has its own staff writing articles on the way forward, which are also often bromides reiterated by practitioners. Besides, the consultant’s view on reshaping any economy is well-researched and appreciated. The title may sound out of place, as there is not much really on what the new India should be and a practical way forward. However, if one assumes that a writer has the right to express opinions with the usual human prejudices, then the book is interesting. But, more importantly, it is highly readable.

The NPA conundrum: Financial Express 20th November 2013

One of the highlights of the BANCON held in Mumbai was the verbal assault launched on banks' non-performing assets (NPAs) by RBI, quite clearly out of exasperation. This is a continuation of the point made forcefully by the Governor of RBI when he took over. There are actually two parts to this sordid development. The first is that NPAs have been increasing and that something has to be done by banks quite seriously. The second is the growing phenomenon of debt restructuring, which in a way can be termed an euphemism for the same, padded up to look different. In the olden days, this used to be called ever-greening when banks overlooked NPAs by giving fresh loans. Critics aver that Corporate Debt Restructuring (CDR) is similar in direction though the mechanism is different.


To begin with, let us look at the conventional definition of NPAs. Ever since the economy started slipping, companies have found it difficult to service their loans leading to NPAs' volume increasing from 2.4% in FY11 to 3.0% in FY12 and around 3.6% in FY13. In absolute numbers, they stood at around R1.9 lakh crore in March 2013. The usual reasons are high interest rates and low corporate performance due to pressure on sales and costs resulting in inability to repay loans or service interest payments. One may assume that there is less of mala fide intent and that the ‘wilful defaulters’ category is not predominant.

The restructuring story is even more interesting. The CDR website shows that the volume of restructured debt has increased continuously, touching R2.72 lakh crore as of September 2013 from R0.9 lakh crore in FY09, and was at R2.29 lakh crore by March 2013. In terms of a ratio as a percentage of total advances, CDR was higher at 4.4%, and even traditionally this ratio has been higher than the declared gross NPA ratio.

The argument given in favour of CDR is that loans have to be restructured when the project cannot take off due to extraneous conditions. We all know that several projects are held up when the government’s policy changes or the government does not put in its own share of capital to co-finance a project due to fiscal constraints. When an environment clearance cannot be procured or mining laws create an impasse, then the borrower is disadvantaged. As these are lumpy amounts, the propensity to turn bad is faster and nothing much can be done except restructure the loan as it is beyond the purview of the promoter.

The critics of CDR have two arguments here. The first is that when a loan does not perform, in the absence of malicious intent, which is normally the case, there is always a genuine problem. But when we are talking of channelling deposit money of the public into such projects, there is a certain degree of vulnerability to the financial system, especially if this number is as large as it is today. This also means that the appraiser’s judgement was not right, which affects the deposit holder. Adding the NPAs to CDRs, the total would stand at 8% for FY13, which is quite scary. The second is that in the absence of any regulatory norms on the classification of such loans, banks may just be incentivised to reconfigure a part of their NPAs as restructured assets, though admittedly there is a rigorous process involved for a CDR case. If this happens, then it would be analogous to ever-greening, which is an issue.

In fact, to get a hang on how banks' income statements are affected, let us look at FY12 which is the latest year for which RBI has provided information on the accounts of our banking system. Total assets of banks were R82,993 billion. Profits were R816.58 billion, yielding a crude return on assets of 0.98%. For the same year, the total provisions made by banks were R915 billion of which 42% were for NPAs, i.e., R381 billion. In FY12, NPAs were 3% of the total advances while the same ratio for restructured assets was 3.2%—nearly the same. Suppose all of them were actually treated as NPAs, then the same amount of provisioning would have had to be made—which in turn would lower net profits to R435 billion—with the return on assets coming down to 0.52%. Now, this is an extreme case and can be debated and debunked. But the point is that restructuring of non-performing loans is a serious issue and given the extent if their prevalence, there is a strong reason to move assets across these categories.

Therefore, RBI is fully justified in warning banks on this issue. Presently, there may be no systemic risk and it is being assumed that banks are trying their best to get the most from these assets and once the economy recovers, the repayments and interest payments will flow through. But we cannot brush aside this problem and do nothing about it. Quite clearly, the appraisal and disbursal processes have to be made more robust.

The problem is even more serious as getting legal redress is not easy and extremely time consuming. While recovery agents can knock on the doors of a retail borrower, the rules are skewed in favour of the large borrower. Therefore, the only way to eschew this problem is not to have it. The onus should be on the banks to control the increase in the number of NPAs to retain the sanctity of the system. This also leads to an interesting issue—that of the grievance of companies, especially in the SME segment, that funds are not easily available. RBI, on its part, must address the broader issue of compelling banks to get into inclusive lending, where such risks may be high and will ultimately impinge on the quality of bank assets. Evidently, at some stage, we must be practical when it comes to lending and let this sense override emotion.

Banking on India: Financial Express 9th November 2013

What could be the response of foreign banks to the new set of RBI guidelines which gives them greater scope for expansion if they convert their Indian operations into subsidiaries? This follows up on the guidelines released by RBI earlier and seeks to provide some momentum to India's expanding banking sector in the manner that was followed for private banks. While offering sops like greater number of branches, the guidelines include several caveats to buffer the system against any risk that could emerge from the opening up of the sector as well as eschew domination by foreign banks.
It is necessary to evaluate and grasp the importance of these banks for our financial set-up. Foreign banks were considered models to be emulated when we went in for liberalisation in the nineties which led to the creation of new private banks—Indian private banks, in a way, were much like the one abroad, bringing in all the goodies offered to the masses. This was in the form of more products and technology which helped to unleash competition. As on March 31, 2013, there were 43 foreign banks with 334 branches in a total of 92,114 in the sector. Their share in the net worth of the banking sector was 15.3% while it was 2.3% for employment. Quite clearly, these are technology-driven banks with deep pockets that rely less on headcount. However, they are better pay masters with the staff cost being 18.2% of the total expenditure as against the 13.0% average for the entire sector. In terms of business, they accounted for 3.9% of deposits, 4.5% of credit and 8.7% of investment, which is not bad given their number. In terms of operations, they do better than the rest of the sector primarily because their perimeter of operations is limited. Their cost of funds is lower at 4.05% as against 6.12% for the sector, while the return above the cost of funds is higher at 5.50% (4.21% for the sector). The return on assets was higher at 1.94% (1.03%) and their net NPAs were lower at 1.01% (1.68%). Quite clearly, in case these became benchmarks that are emulated, the sector would be healthier provided this is scalable. What could be the level of interest of these banks in becoming subsidiaries? Looking at this list of 43 banks, there are only 6 which are significant players. Out of them 2 have over 50 branches, 2 around 40, and the remaining 2, between 10-20 branches. These 6 banks accounted for 81% of deposits of foreign banks and 75% of credit. Quite clearly, there will be limited interest for the remaining 37 banks in this new deal unless they fall in the mandatory category which was set up after August 2010. Also if these six banks were to become wholly-owned subsidiaries (WoS), they need not bring in more capital to begin with as their new worth is already above R500 crore (only one bank has equity of less than R500 crore).The basic issue is whether these banks are really seeing a viable business model in expanding into non-metros/large urban centres. There are arguments on both sides. While the present set-up has worked in terms of maintaining the market shares over the years, the model will not help scale up the business in any big way unless there is movement to the relatively lesser banked areas. On the other hand, becoming a WoS and getting national-level status will provide access in terms of geography but the contingent obligations of priority-sector lending and opening of branches in unbanked Tier-5 and -6 cities would be a consideration that will come in the way. Here, RBI is insisting on brick and mortar branches rather than access through the internet. At the operational level, these banks have not had any experience in this segment on account of the branch expansion restrictions. Hence, getting into rural banking will mean setting up a new establishment in terms of hiring laterally to get the right people to create business. Even today, on the account of perceived entry-barriers into these branches, the masses are not on their network in urban centres. Now, getting into the rural areas would necessarily mean a change in approach which will also increase the costs as all such inclusive banking means keeping accounts that hold low-level deposits. Therefore, it will really be an individual call for a foreign bank to take on how much it would like to compromise depending on how important India would be in its global plans.However, it does look like that if foreign banks prefer the WoS route and enter in big numbers, the gains for the country would be more than that would probably be for the banks themselves as they have to give themselves several years before breaking-even in these territories. RBI has put up a fence around possible foreign domination of the sector by fixing the point of no-further-entry for foreign banks at the point when their net-worth reaches 20% of total. It is already around 15% today.Two interesting clauses are in respect of ownership issues. They could get listed within the FDI limits or even look at M&A activity. The first step would help in pushing up valuation as these banks are certainly more profitable as a group which will command value on the bourses. The other step would be a way out in adhering to the norms laid down by RBI with respect to number of branches and priority-sector lending. RBI will have to spell out its policy on this aspect more clearly because the decision of a foreign bank to become a WoS would make more sense if there could be an acquisition as part of the deal. The new policy on foreign banks is hence progressive considering our own tryst with deeper financial liberalisation, though the individual banks will have to take a call on whether they would really like to get their fingers wet. It would depend on the time horizon that they are working with, and plain vanilla entry, prima facie, does not really look appealing. It is unlikely that more than a couple of the large banks would find the terms attractive as the latter stand at the moment. Add listing prospects or M & A options, spelled out clearly by RBI, and the possibilities multiply and look much better.

Doing business index a wake-up call: Financial Express 4th November 2013

The World Bank ‘Doing Business’ ranking is controversial because all those countries rated in the lower order do not like it and feel that the methodology is suspect. However, based on a relatively objective criterion, the World Bank ranks countries on how easy it is to start and close a business and traverses through a set of 10 parameters. The latest report for 2014 is quite timely given the uncertainty on the economic front and, in a way, is a revelation as we get to know where we stand.
There have been several discussions on the myriad issues relating to delays in getting papers moving and consequently, delays in getting projects started on account of an impasse at the decision-making level. Quite clearly, a domestic investor knows that there are issues here when it comes to clearances. There is also flip-flop on policy when it comes to FDI as that means going through Parliament. Even if these concerns are kept aside, how do we fair in the ordinary course of business life?India’s rank comes down by three notches from 131 to 134 in a set of 189 countries. This is significant for two reasons. The first is that we are moving down the echelon which will affect our own long-term attractiveness for investors. The second is that we are placed even lower than countries like Bangladesh, Kenya, Honduras and Egypt. Also, while we do like to compare ourselves with the others in the BRICS group all the time, India is placed uncomfortably low in the list. South Africa leads at 41, followed by Russia at 92, China, 96 and Brazil at 116. This relative scale is certainly not something to be proud of and the fact that there is a downward movement indicates that we need to address these issues, else we would be the outlier in the BRICS group. The picture is also quite disappointing if one considers the individual ranks across the 10 parameters. We do very well on two counts, which have helped to keep our ranking where they are. The first is access to credit, where we are placed at 28, and the other, in terms of protecting the investors, we are placed at 34. Quite clearly, the financial sector is our strength, and the credit should go to Reserve Bank of India (RBI) and Securities and Exchange Board of India (Sebi) for keeping us ahead of the other nations. In fact, the orderly development has ensured that we have not felt any primary effects of any global economic crisis. The other 8 variables tell a disappointing story. Our rank is 186 when it comes to enforcing contracts, 182 for getting construction permits, 179 for starting business, 158 for paying taxes. We do better than our overall rank in case of trading across borders (132), insolvency laws (121), getting electricity connection (111) and protecting property (92). It is well known that banks struggle to get their debtors to pay up and the laws are skewed in their favour. Also, the red tape and the antiquated procedures make getting clearances difficult. Therefore, these numbers do not really surprise. An interesting statistic pointed out by the World Bank is that last year, 114 countries brought in 238 changes in their regulations to enable convenience for business. These reforms were across all these 10 variables so that there would be fewer hassles for those doing business. Unfortunately, India does not feature here, meaning that there has been virtually no conscious effort made to address any of these issues, which has in turn led to a slide in the rank as other countries moved ahead. In fact, 29 countries have brought in 3 or more reforms to improve their systems.The World Bank, in this report, also calculates the potential for every country and then shows how far the country was away from this ideal situation across the time period of 2005-2013. Here, India has moved ahead in case of ‘starting business’ (still less than 70% of potential), ‘credit access’ (above 80%), ‘payment of taxes’ (just above 50%), ‘trading across borders’ (a little above 60%). At the cumulative level, the nation has come to around 55% of the potential, which is not saying much.This is where the irony lies. We have seen a lot of foreign interest in the economy notwithstanding the tardy nature of our administration as well as the controversies surrounding the allocation of public wealth. Investors do see a lot of potential in the country given the size of the population, growing incomes and severe lacunae in various sectors which makes investing an attractive option. The developed countries are already operating at a plateau level of capacity utilisation where incremental growth can only be marginal. This is where size matters and China and India are the two potential markets for such investors followed probably by Brazil. At the domestic level, business normally takes in these factors as a part of their costs and plan accordingly. Intuitively, it can be realised that if we are able to address these ten issues, we can make India an even better business destination and lower the cost of doing business, which will help entrepreneurship develop. Today, we are all talking of focusing on inclusive growth where the SME segment is often spoken about. These units encounter these challenges along the way making it difficult for them to break even. In fact, if one looks at these ten elements of what can be called the superstructure required to do business, 6 of the 8 issues can be addressed relatively easily. These are: ‘starting business’ (single window clearance, which admittedly we have been talking for long but not doing much), ‘construction permits’ (should be automated and driven by rules), ‘getting electricity connection’ (need to streamline procedures), ‘protection to property’ (have clear property laws and amend all dated regulation), and ‘payment of taxes’ (online payments with less human intervention and collection of tax source to avoid post-payment ambiguity). The issues on insolvency and enforcement of contracts, which are related to one another, have to be taken up at a higher level since it requires our judicial processes to be revamped. Seeking redress today is time-consuming as banks grapple for a solution with their NPAs.Rather than being critical of the World Bank Report, we need to treat this as a wakeup call to reform our procedures and rules for doing business as the economy is quite literally, to use the cliché, at a crossroad. Foreign investors should feel reassured when they bring in their dollars, and Indian enterprise should not be looking outside the frontiers in desperation which has already begun and needs to be reversed. It would then be a win-win situation for everyone.