ON TV

 https://www.youtube.com/watch?v=DsbGFqscaLM

Mirror Now on 27th October 2020: Subejct Consumer revival

https://www.timesnownews.com/videos/et-now/shows/second-wave-of-covid-19-engulfs-europe-india-development-debate/79370

ETNow on 28th October 2020

ON video/TV

 https://www.youtube.com/watch?v=f3ix63mgQT0

Nirmal Bang post credit policy on 9th October 2020 

https://www.ndtv.com/video/business/news/imf-says-india-to-face-worst-contraction-on-record-revises-forecast-563334

ndtv on 13th Octgober 2020

With many more benefits than risks, new agri reforms should be hailed, not feared : Economic Times 7th October 2020

Indian agriculture has historically been alicted by outdated laws which made sense at a time when markets were closed and there was need for state intervention to ensure that farmers and consumers were protected. This led to the ourishing of intermediaries called adathiyas which led to a close nexus between the APMCs and this class. In the process, the adathiyas who bought the produce from farmers created a mutually benecial ecosystem with them by providing facilities like inputs, logistics, credit and buyback, thus making it a system which worked well. All transactions hence took place in the traditional mode of sale. The mandi system has worked well for these many years where farmers brought their produce and sold to the middlemen who in turn would keep the produce moving throughout the country. The mandi collected its fee from the buyer and the system has been eicient. It was argued that given the strong buyers lobby the farmers did not get the best price which explains the wide discrepancy between the mandi price and the retail price. Private parties which wanted to buy the produce had to go through the mandi system or seek the state permission to buy directly from the farmer which was allowed in some territories. The new farm laws seek to change the way marketing can be done. It allows the buyer and seller to meet anywhere which can be outside the mandi. There are no taxes levied and hence the mandi fee is out if sold outside. The buyer and seller can transact at a mutually agreed price. This is actually a win-win situation if it works well as there is no compulsion to sell outside the mandi and the farmer can choose the point of sale and the price. Hence if the farmer believes that the mandi price is better, he can sell in the traditional mode and need not go outside. Nobody should complain against such a system as it provides freedom to both sides. But clearly there are lobbies which don’t want this change. The mandi for instance will lose its hegemony if all transactions take place outside what is an opaque system that is ruled by the select set of buyers. They have a legitimate argument that they need money to run the facility and if the farmers sell outside, the system will collapse. The mandi has a gamut of such facilities like weighing, assaying, civic facilities, storage etc. which will be hard to maintain. Further, this gives scope for opinions to diverge politically. The stance taken is that once this happens, the mandis will close and soon the buyers, which would be the private players, will start giving a lower price and that the farmers will suer. This is a farfetched argument because if mandis provide the right price or better price, farmers will not move away from the existing system. In fact, competition will ensure the optimal solution. Therefore, to conclude thus would be erroneous. The government has simultaneously assured the farmers that the MSP system will not be withdrawn as this has been a concern with farmers. The second law on contract farming follows from the rst one. The reforms now allow such contracts which again are optional and not binding on farmers. There is a strong reason to believe that what is missing in India’s agricultural strength is the commercialization aspect. For this to happen it is necessary to have more private sector involvement which can happen if contract farming is universal. Such a situation often replicates the adathiyas system. A company walks in and oers the farmers a choice to sell the product to it with a guarantee on price. In return the farmers are oered inputs and probably credit too, so that it is an end-to-end solution. The company gains in terms of getting a standardised product from a xed source while the farmers are better o as they will enter this contract only in case the economics makes sense. These contracts would be drafted and signed and hence becomes legally binding. Can there be any objection? It is argued that the farmers will get a bad deal. To begin with the corporates will give good prices and when the mandis disappear will gradually exploit the farmers. This again is not valid as it has not happened in other sectors where corporates buy from SMEs. This is a weak argument painting India Inc as being exploitative which is not the case. Interestingly in the past corporates have had the experience of farmers reneging on contracts and not able to do anything as it is hard to sue small farmers in a court. Therefore, both these reforms are welcome, and the objections are extremely hypothetical as the government has only opened the doors for alternatives and not made anything mandatory. The third reform is more of repealing an Act which made sense at a time when there were shortages in the country. This is the Essential Commodities Act. This Act puts restrictions on the holding of agri products in the form of stock limits at both the wholesale and retail levels. The idea is good for a decit country but for India this sounds quite antiquated. The problem is that there is a subtle dierence between stocking a product and hoarding the same. As most crops are grown once a year and made available for 12 months it must be held by the intermediaries. Therefore, the issue becomes tricky and there has been a tendency for them to be penalised. By doing away with this law, the market becomes more orderly and traders can conduct their business without fear of becoming the subject of legal action. While all the reforms sound positive for the farming community, one must be measured in expectations as while the doors have been opened, it would not be the case of all farmers using this route. The existing mandi system is entrenched as has been said in the beginning; and moving to new systems is always a challenge. But with corporate India having an option, one can expect more initiatives to be taken which will gradually help in commercialisation of agriculture.

RBI's focus has been on liquidity provision in the right areas: Business Standard 9th October 2020

 The outcome of the credit policy announced was certain and hence there is no surprise element. That said, the monetary policy committee (MPC) meeting has been waited for two reasons. First, there was a deferment in the date of the policy ostensibly because the three independent members were not appointed. Second, the new set of members are refreshing though all are from the academia and their stance would be of interest. The minutes, which would be released later, would throw light on the discussions, which in turn, will let the market judge the proclivities of the new experts.

With inflation targeting being the rule, the relentless high levels of CPI inflation were to be the barrier to any further cut in interest rates. In fact, waiting for another two months has its merit while taking a call on rates, as the economy is also supposedly showing signs of a recovery. With inflation rate also poised to move downwards, albeit gently, due to a combination of high base effect as well as tempering of food prices, there would be more justification for doing the same in the next policy. The declining inflation rate would also justify the rate cut action in the December policy. The RBI expects inflation to ease in Q3 and Q4 of the current fiscal 2020-21 with food prices coming down.

The RBI was also expected to provide a numerical dimension to its macroeconomic forecasts. So far, the central bank has been open on the subject and while indicating a negative growth rate has not attached a number which has been now put at -9.5% with downside risk. The RBI is talking of a three-speed recovery across different sectors and has indicated that a positive rate can be seen in Q4.

Presently, the demand for funds is limited and traction has been seen more in the SME side where there is a guarantee in place. Otherwise, growth in credit has declined in other segments like non-SME corporates and retail. There is also a major restructuring exercise on, which has not yet been spelt out by banks. It will take some more time before the RBI will review the situation and take a call on lending. It may be expected that demand for funds would also increase towards the end of Q3, as firms are able to assess their spare capacity given the prevalent demand conditions.

The markets are unlikely to be moved much as this position has been factored in. As the Governor spoke, the 10-year G-Sec yield remained at 6 per cent, showing how much this has been buffered. The bond market will still be largely driven by developments on the fiscal front as it has been observed that the 10-years rate have been intransigent in the 6-6.05 per cent region. This is unlikely to change in the absence of any significant development on that end.

Three important messages given by the Governor are positive for the market. The first is the assurance that the government borrowing programmes will be managed to ensure no liquidity issues arise. Second, open market operations (OMOs) are to be announced for state development loans (SDLs), which will provide more liquidity to the market and help to temper the yields that have increased sharply over G-Secs. Third, having on-tap TLTROs for Rs 1 trillion would be largely beneficial for various sectors.

The focus of the policy, hence, has been on liquidity provision in the right areas – corporate and governments and ensure that volatility in interest rates will be tempered across different segment. This is definitely more meaningful in today’s environment and repo rate is probably of secondary importance.

Kamath committee suggestions are a good start for resolving a big problem: Business Standard 7th September 2020

 The expert committee on resolution of Covid-19 related stressed assets has brought out a rather cogent report, which identifies the sectors to be included as well as the parameters that would set the perimeter for inclusion. What is significant is that the approach is differentiated across sectors. It is not a case of one size fits all, which would have skewed the picture. The report has identified 26 sectors to be included and uses five indicators, which include representation for leverage, liquidity and debt servicing.

The other contours in terms of eligibility has already been notified by the Reserve Bank of India (RBI) in terms of their position before the Covid-19 pandemic struck. The Committee must be complimented for the timely delivery of this charter, and it would now be left to the banks to ensure that the other timelines are adhered to as well.

One of the basis of selection of sectors would have presumably been the outstanding debt as well as number of individual exposures beyond the threshold levels. The two sectors that have probably been affected the most by the shutdown are entertainment and media, which probably comes under the discretionary heading of others. Making the chart comprehensive covering all sectors may not have been relevant presently, given the other criteria being used for selection, but could serve as valuable signposts for future. That’s because this framework can be replicated for future non-Covid-19 action, too, as such cycles cannot be ruled out in future.

That said, the exclusion of non-bank finance companies (NBFCs) is interesting, as this is sector is heavily leveraged and could face the same problem as banks from their clients. A separate dispensation for them could have been suggested to make things clearer. It will also be interesting to see if NBFCs use the same yardsticks when looking at their asset portfolio for restructuring.

However, the indicators chosen are appropriate and will help bring the fine tuning that is required when differentiating across sectors. A further screening system could have specified the parameters by size of debt, which would have been useful for the lenders to distinguish between ticket sizes. Ideally, a larger ticket size would require more stringent parameters as the threat of non-performing assets (NPA) will be higher in volume terms. These thresholds, nevertheless, would serve good starting points for the lenders while taking a decision.

The indicators chosen are more on debt and liquidity-driven, which are the prime drivers of any restructuring exercise. Could the Committee have looked at some forward looking indicators? That would have been interesting as all these sectors have different periods of recovery. While companies in the manufacturing sector would tend to recover earlier, services will be handicapped to the extent that their opening up is contingent on the social distancing norms that have to be maintained. A hierarchy of pecking order of selecting industries is something that the lenders may further like to examine. It is here the growth prospects of various industries could be looked at. In this context another filter that could have been considered is the extent to which the other sectors have been affected by Covid-19. Pharma and retail, for example, have had fewer disruptions compared non-essential goods.

While these criterion can be considered later, the present framework is quite comprehensive and helps kick-start the entire process. The recommendations are a good start for resolving a big problem.

Loan repayment moratorium: Govt paying ‘interest on interest’ is good: Financial Express 8th October 2020

 The lockdown announcement was followed by one on repayment moratorium for borrowers for three months. This was extended subsequently, and the term was now six months. Hence, if one borrowed Rs 1,000 at say 10% per annum, the interest need not be paid for these six months (March to August). The question now is whether banks should have the right to charge interest on the unpaid interest as, technically speaking, the interest not paid—which, for six months, would be Rs 50—was another loan offered to the borrower. If it is not charged, it is a loss for the bank, and if it were charged, the idea of providing support to those in distress would be lost in these difficult times. This is a classic dilemma for all policymakers as all economic action is a zero-sum game.

The government has stepped in and said that, for all loans that are of a magnitude of less than Rs 2 crore, this interest would be paid by the government. Of the total outstanding credit of ~Rs 100 lakh crore, 40-45% would be in this category. The government has also announced that this benefit would be given not just to those who took the moratorium but also those who paid on time. This is to provide a level playing field as those who paid should not be penalised; the announcement, thus, removes the debate over penalising those who paid on time.

These terms mimic the farm loans waiver schemes, with a slight difference. The new scheme covers the interest on interest, and not the principal or the interest. Hence, it is of a much smaller scale. At the limit, if the entire Rs 45 lakh crore of debt were to be covered, the total interest that would be charged at 10% would be Rs 4.5 lakh crore and another 10% on this amount will be Rs 45,000 crore for a year or Rs 22,500 crore for half a year. This will be a payout to the banks on behalf of the borrowers. If this is the deal, it can be considered to be a good stimulus provided by the government, which has been the case in several countries where the interest has been waived and paid by the authorities, especially for SMEs. Such a direct transfer is a step ahead of any guarantee given by the government on loans taken by businesses.

Is this a good move? Yes, for sure! Any support from the government which is universal is welcome as the lockdown has affected many businesses in ways that makes servicing debt quite hard. As this was caused by government action, support through such payouts is appropriate. But, the next question is why not all loans? This is pertinent because while the small players have been affected by job losses and pay cuts (retail) and closure (SMEs), big companies too are in a similar state as the environment has been the same for all. Ideally, the government should cover the entire `100 lakh crore of outstanding debt, which would mean around Rs 45,000-50,000 crore for all borrowers. This is a hard call to take, but helps not just the borrowers but also the bankers.

Ideally, all such schemes should cover only those who do not have the ability to pay. But, by doing so, there is a premium charged of those who pay on time, the classic moral hazard problem. Once it is known that the government will waive off loans (as it happens just before elections in the farming community), there will be a tendency in borrowers to stop paying their dues knowing fully well that support will come in future. This has affected the credit culture in India. Therefore, there must be an omnibus approach so that everyone benefits. Also, ideally, this should be invoked on the grounds of this being a one-off case due to the pandemic and that such extensions of moratorium or interest waiver will not become routine.

The problem becomes complex once the canvas is expanded to cover other institutions. At present, the talk is of bank loans only. What about UCBs, NBFCs, MFIs, PACSs, etc? Clearly, the government will not be able to cover all borrowers, and hence this scheme will be restricted to just the commercial banks.

A logical extension of this issue is whether there must be government support for restructuring exercises too, which involve lowering of interest rate? There will admittedly be a major restructuring exercise once banks figure out the list of clients that need such support. Around 30% of overall bank credit is concentrated in individual loans of Rs 100 crore or above. These loans would qualify for restructuring based on the predefined criteria laid down by the expert committee. With even 10% of this portfolio of around Rs 30 lakh crore qualifying for this restructuring, there could be Rs 3 lakh crore of debt which would need to be reworked for interest rate too. The cost in all these cases is borne by the bank; this has been the experience with the SME exercise done earlier or even the CDR scheme of the past. To protect banks from this setback, the present dispensation could also talk of the government paying for this cost of interest to shore up banks which are already under considerable stress.

The decision of the government to directly support borrowers this time is a step in the right direction. Normally, any support to borrowers by the government should be through the Budget, and the banks should not be asked to bridge the gap. This exercise will lay the template for future forbearance programmes. The government already has subvention programmes for farmers, where it pays 2% of the interest on behalf of farmers who pay their dues on time. It may be useful to have a similar scheme for other borrowers too so that the banking system is able to operate in a commercial manner. Often, thanks to shifting the sovereign responsibility to the public sector banks for running programmes or providing financial support to targeted groups, the PSBs have been forced to overextend their balance sheets, leading to the shrinkage of their P&L balances.

The government has quite successfully moved away from widening the subsidy bill by streamlining operations. The NREGA and Kisan Scheme of cash transfers have worked well in the rural areas in supporting farmers. A parallel can be conceived for addressing businesses that weaken under economic slowdowns. By appropriate intervention, the government will be able to ensure that the banking system remains strong and resilient, and PSBs are able to stand on their own with less capital support in the future.

The pandemic has opened the doors for some unusual measures to be taken by the government, starting with the moratorium. This is a template that can be pursued in future too in the financial sector, which is still facing an upheaval. By following such measures that unburden the PSBs, the government will be able to strengthen their balance sheets, which, in turn, can pave the way for the lowering of its stake in future.

Shape of recovery does not matter: Financial Express October 6 2020

 The same thought would prevail in FY22 as all numbers would tend to look better relative to the year before.

It has now been accepted that FY21 would be a washout from the point of view of the economy, which has been pushed back considerably due to the extended lockdown. The logical question to be posed is the possible shape of the recovery next year, and this is where the economists borrow the letters from the English alphabet and talk of a ‘U shaped’ or ‘V shaped’ or ‘W shaped’ path. The answer is that this would not really matter, and any emphasis being placed on the shape of the recovery serves little purpose.

There is always an optical view involved when interpreting numbers. Even in FY21, ever since the unlock process began the economic indicators have been showing an improvement on a month-on-month basis, albeit in the negative zone. The PMI looks better month over month as does the IIP growth number, even though the latter is still negative. Yet economists tend to interpret such movements as a recovery. Recovery probably not, but improvement certainly. The same thought would prevail in FY22 as all numbers would tend to look better relative to the year before.

Real GDP was valued at Rs 145 lakh crore in FY20 and will be down to a level of Rs 130-132 lakh crore this year. Hence even 10% growth in FY22 will take us back to the FY20 level, which is only a consolation. The aspiration of reaching a $5-trillion (nominal) GDP will still be a long distance away. Therefore, higher industrial growth, GDP growth, infrastructure growth, etc, could be expected. But what should we really be looking at in the next year to get solace that things have changed, considering that we are still not sure that the pandemic is behind us and it could just be that restrictions prevail in several sectors even in FY22?

The first parameter to be monitored is employment. It may be recollected that even before the pandemic came in there was constant debate on whether there was growth with limited job creation. This issue has been exacerbated during the lockdown with the exodus of migrant labour amongst the working class and large-scale layoffs in the organised sector, especially services, as business activity slowed down sharply. Even today, with restrictions on the number of people that can occupy office space as well patrons in the services sector, the scale of operations has been affected, thus impacting the demand for staff. Future growth will be driven by job creation, which, in turn, will guide demand.

The picture will be blurred to an extent by the substitution of labour with technology by several companies as the lockdown has forced businesses to change their way of work.

Second, the capacity utilisation rates in industry would need to witness improvement. The latest RBI data shows that it is at just about 70%. This number has been volatile in the region of 68-72% in the last few years and should show movement towards 76%-plus to give assurance that production is picking up. This will also indicate the prospects for future investment because as long as there is surplus capacity, there is less incentive to increase investment.

Production growth numbers would otherwise not be too significant and indicate just maintenance levels.
Third, corporate profit margins must show an improvement on a continuous basis and is a necessary condition that must be satisfied. Growth in sales and profits may be an optical fact as it would be based on low negative numbers in FY21. Therefore, there must be an improvement in profit margins for sure to reflect a turnaround in the fortunes of India Inc.

Fourth, and probably one of the most important traits to be monitored, is the level of ‘risk aversion’ of banks. At present, banks are reluctant to lend as the fear of NPAs building up is palpable. With growth falling to a negative number this year, it is but natural that the quality of assets would get affected. The moratorium and one-time restructuring exercise will cast a shadow on the true position, and banks will have to regain confidence that their portfolio is in good shape before they are able to lend in the normal course.

The classification of assets as NPAs has been blurred with the change in the definition of reckoning the same. But, at some point, there would be a return to normal, which would increase this ratio for certain. A conservative guess is that it could be in the region of 15% of total advances. Until this position is known, banks would be cherry-picking their lending, which, in turn, can affect the financing of investment.

Fifth, monetary policy should be returning to the conventional mode of taking decisions on just the repo rate and CRR along with development policies. It may be recollected that RBI has gone in for a series of liquidity-enhancing measures like LTRO and TLTROs to induce liquidity into the system. This will have to be unwound at some point of time; and to begin with, fresh issuances should stop, or else it would seem to be continuation of emergency measures to support the flailing economy. This may take more time as it has been witnessed in case of the Western central banks where unwinding of QE has been difficult and has now become part of conventional monetary policy.

Last, the fiscal state needs to show stability. While the fiscal deficit ratio can be targeted at a higher rate, it should be realistic in terms of growth projections that are made when estimating the revenue flows. This will be a major challenge as expenditures are fixed and will increase at a nominal rate. But the large slippages in revenue cannot be recouped in a year and the government must be realistic in its assumptions. With a lower nominal GDP base, which can, at best, be at the FY20 level for FY22, a lot of dexterity must be displayed in managing the fiscal numbers.

Therefore, the shape of recovery in FY22 will be an optical delight most probably but may mean nothing much but a statistic. FY21 will be the year where there was economic destruction caused by the lockdown, and FY22 will be an apology for a recovery and hence will be the second year lost. Quite clearly, we may have to look for real growth in the best possible case in FY23, assuming that a vaccine is found and administered on a large scale in the country. And we may have to begin with more modest numbers of 5-6% and then scale up towards the 7-8% mark over a couple of years.

Most professionals find their voice after demitting office: Free Press Journal 23rd September 2020

I n one of his speeches, the then president of the USA, Ronald Reagan, had said that government was not the solution to our problems; government was the problem. Though sounding quite droll, the statement becomes serious if one reads the paper put out by the ex-governor of the Reserve Bank of India, Raghuram Rajan and the ex-deputy governor, RBI, Viral Acharya, on 'Indian Banks: A Time to Reform'. Most of what they have said when talking of the public sector banks (PSBs) is quite well known and not something that would strike the reader as being extraordinary. But coming from two central bankers who saw the inside working of the system, it is quite hard-hitting, as it probably tells us in a way that there is little will to change the structures.

There are four strong points made by the authors. The first is that there is too much of interference by the government and that there is no inclination to change the dynamics. Having independent management and boards in the PSBs will just not happen and the present system of having the bank board bureau appoint the personnel is no different from the earlier practice of the department of financial services being in charge, as members of the bureau are appointed by the department. There is absence of incentive for anyone to change this process, as it serves the bureaucracy as well as the government. Here, they are agnostic to which party is in power and in fact, have patted the NDA government for trying hard to change the dynamics.

The second is that the PSBs are being used to meet social and political objectives. The government gets power from driving lending. The circle of power is easy to see and being in the RBI, the authors had a vantage position. The concerned parties that influence the Government get the system to appoint CEOs of PSBs, who then perform the job of lending to them. This circle of influence has been in operation and is responsible for the crony-lending that Rajan had spoken of, when he oversaw the Central Bank.

The government also has a lot to gain, as it has access to a lot of sensitive information and here the authors have quoted the case of how only one PSB oversaw the issuance of electoral bonds. It does get disturbing when they elucidate the part of the symbiotic relationship which is created where PSBs arrange the logistics for all fact-finding meetings in enjoyable locales. The power play is visible where bureaucrats at the joint-secretary level can order the chairpersons of banks.

The third point is related to the issue of government control for meeting social goals; they espouse the reimbursement to be given for carrying out these programmes. Here, the indication is probably to the Jan Dhan Accounts, which the PSBs had to bear the responsibility of executing at their cost. In the absence of such an equation, the PSBs will continue to incur costs of implementing political agendas of various governments and will never be able to compete successfully with the private banks.

Last, the authors also have something to say on the pay structures which are required to be linked to performance, to improve efficiency in the PSBs. Here, they point out, this is going to be very difficult because of the bureaucracy. Ministry officials will never let the salary of the bankers surpass theirs and this becomes a limiting factor. Hence, public sector bankers are less enthusiastic about lending - the 3 Cs – CVC, CBI and CAG prevent active decision-taking.

They don’t sign off on a positive note, as they highlight the fact that unions don’t want things to change, bankers are happy with the status quo and while deposit holders could take umbrage at times, the malfeasance of lesser degree in some private banks makes them disregard the bigger picture.

It is interesting to hear the new generation of governors and deputy governors, as well as ex- chief economic advisers talk freely after their terms. Former CEA Arvind Subramanian had called demonetisation draconian, while Urjit Patel has reiterated his stance on the IBC and the restructuring of loans in his book. It is evident that while in the system, most professionals have to be tight-lipped about the surroundings but find their voices once they demit office. While it is worrying, it is hoped that change comes in faster, so that the PSBs are better governed. The determination of the present government is laudable, but assuredly, changing such deep entrenched systems takes time. We may have to be more patient.

The farm reforms must be celebrated: Financial Express 22nd September 2020

 As a rule, individuals are not inclined to change, and hence any reform that disrupts the status quo equilibrium is treated with suspicion. This holds for the three ordinances passed in the agriculture domain that have caused a stir. Any move that questions existing entrenched systems questions the hegemony of those who wield power, and hence leads to opposition.

Let us examine the three issues that are on the discussion board. The first one relates to sale of produce outside the mandi. This ordinance defines the ‘trade area’ that is outside the mandi, and the ‘trader’ who could be the processor, the exporter or even the retailer. The new dispensation says that the farmer can sell to the ‘trader’ in these ‘trade areas’, which can be a place of production, collection or aggregation. The transaction need not go to the mandi, though the option still exists.m a farmer, the transaction need not go through the mandi and can transacted at the farmgate. Logically, this is an optimal solution because with information on prices being freely available today, the farmer can get the best price and eschew the mandi. These transactions will be free of any fee or cess that must be paid otherwise at the mandi. It is a Pareto optimal situation for the farmer and the trader where both can be better off. However, as this means skipping the mandi, which has vested interest built over the years, it is understandable that there is opposition.

At the limit, one can visualise a situation where most transactions take place outside the mandi and the market yards become less relevant, and the entire hierarchy of the mandi system, which includes commission agents, becomes unimportant. Now, intuitively, it can be argued that farmers will prefer the new ‘trade area’ to the mandi only if they see value in this option. The same holds for the trader who will purchase directly when there are cost advantages.

Quite clearly, mandis will have to reinvent their systems to stay relevant. As there is a loss of fee which is collected that can range from 1-8% depending on the state and product, the fear of viability is genuine.

The way forward is to have open markets and allow free flow of goods across borders where there is transparency. In fact, the idea of eNAM has its genesis in this thought because, at the end of the day, the price discovery system must be transparent. This idea is taken several steps forward with trade being conducted in these new defined ‘trade areas’.

It should be remembered that farmers may still prefer to go through the adathiyas route because these agents often provide a variety of ancillary services, starting with crop advice, buyback, credit and logistics support, among others. This will probably intensify once a parallel system develops.

A corollary of freeing the market dynamics is having written agreements between the farmer and the company under contract farming. This is again a mutually-beneficial system where the corporate ties up with the farmer on pre-decided terms to grow crops of specific variety with support provided on credit and possibly the inputs too with the assurance of a guaranteed buyback. This is a win-win situation for both the sides. Corporates, who are into processing or manufacturing of end-products, would always look out for standardisation in quality of inputs.

Farmers, too, can move to higher quality of crop rather than sticking to the median variety, which is the case today given the tradition that has been practised over the years. Therefore, this move by the government will be extremely beneficial for Indian agriculture and bring about a major transformation in the landscape and make farming more commercial.

The opposition to both these measures can be largely political, which is understandable. But otherwise to argue that farmers are naïve and will be given a bad deal by ‘traders’, meaning large corporates, is disingenuous. Indian farmers are quite sophisticated and do use all the information that is available when taking decisions. The current structures are traditional for sure, which have worked under prevailing conditions.

But any new structure for sale or cultivation would be weighed appropriately before a decision is taken. Hence, the fear that the corporates will take over the entire community and make them subservient is not well-founded.

In fact, such measures will force the existing structures to change and ensure that farmers get a better deal. It is well known that farmers selling perishables like vegetables or fruits are forced to sell their products at lower prices in mandis as they cannot take their goods back to their village if a sale does not take place.

This forces distress sale as commission agents buy at a lower price and deliver at a higher price at the retail end. This has been one reason why there is considerable disparity in wholesale and retail prices for almost all commodities—all of which cannot be explained by logistics costs.

The third reform has been the repeal of the Essential Commodities Act. This is progressive, as the Act which sought to penalise traders who held on to stocks beyond what was permitted did create problems for wholesalers and retailers. It must be realised that most crops are produced once a year and stored and made available throughout the year. The issue is that farmers must sell their crop immediately as they do not have the holding power.

Intermediaries or traders who come into the picture store the crop and bear the costs of storage, interest on loans, possible deterioration in quality, transport, among others. There is, hence, intrinsic value that is being provided by these parties.

The Essential Commodities Act makes it a crime to go beyond the stock limits for all the defined commodities and is invoked whenever there is a shortage in supply of a product. Traders holding the stocks are now classified as hoarders and face penal action. The government has put in the safeguard of this Act being invoked only if retail prices rise by certain levels compared with the past period. This makes sense because if hoarding is seen to increasing prices, this Act can be brought in to check inflation as it has a bearing on overall CPI inflation and hence interest rate policy.

All these three reforms will be very positive for the agrarian economy, and with the assurance being given that the MSP will not be withdrawn, there is comfort being provided. But, logically, in course of time, if the system works well for farmers who are able to get better prices, the government can think of scaling down the procurement system and the MSP as the open-ended procurement scheme has distorted farm markets. Adathiyas will have to compete with corporates to retain their business and the overall system will only improve. Electronic trading will get a boost on the side-lines and the idea of free agricultural markets will see fructification over the next couple of years.

Book review: The shackles of liberalism: Financial Express 20th September 2020

 The doctrines of liberalism and free markets are espoused as the panacea for problems facing any country. Author Pankaj Mishra thinks differently in his new book, Bland Fanatics. In his opinion, these principles have been used as a cover-up for something more diabolic like promoting ‘empire’, condoning racism, and encouraging a cozy relationship with capitalists.

Known to be a powerful, lucid and intelligent writer, basing his work on extensive research, Mishra uses his remarkable sense of history as an anchor for drawing up his arguments.

Written over a decade, the 14 essays in the book cover an array of subjects and people ranging from Salman Rushdie and Niall Ferguson to the more renowned Economist magazine. He combines history and contemporary times in right measure to deliver rather hard-hitting messages.

Let us peruse some of them. His argument is that liberalism being preached is one-sided and practised such that it exacerbates inequality, which is justified by the principles of free economics. USA, which is the bulwark of openness, has never been shy from the time of Woodrow Wilson to originate the doctrine of superiority, and the interference across the globe for access to mineral wealth is nothing short of imperialism through the back door. If we juxtapose the unequal terms in the WTO, one will agree with Mishra. Racism, prevalent even today in the USA, is a part of this culture of superiority and what we have witnessed of late vindicates the view.

One of his more poignant essays is where he attacks The Economist whose motto is to stand up for liberalism and freedom. He gives several instances where the journal has not lived up to this doctrine and this has been the case since 1843 when it was established. He calls The Economist as being a part of ‘British glamour elitism’. The staff is predominantly white and only recently had a woman editor. Most are recruited from Oxford and Cambridge and they genuinely believe that absence of diversity is a benefit as it produces assertive and coherent points of view!

Mishra’s tirade against both the USA and UK are interesting. Their continuous espousal of free markets, which includes privatisation and deregulation, was responsible for the collapse of Russia in 1989, which in turn led to the growth of leaders like Putin. Interestingly, he also brings out the very cozy relationships between the presidents and prime ministers of these countries with industrialists, which probably is a case everywhere. Therefore, the policies in these so-called free enterprise economies are always skewed towards capitalists, with there being a symbiotic relationship. The theory of the revolving door originated in these nations. We in India may also identify these relationships both at the government and industry levels. The IMF and World Bank are also organisations always headed by the elite and vindicate the view of Mishra of how the world order is controlled by the West.

He has a lot to say about Islamophobia prevalent across the globe and which is a creation of the West that has been exaggerated to the point of sounding real. The same has been extended by thought leaders like Niall Ferguson who talk of the colonisation of Europe by Muslims (Eurabia). This has created a deep distrust against a community, which is erroneous and has led to discrimination. He is probably right here because the kind of umbrage shown by these nations post 9/11 has not matched even when there have been meaningless deaths in the Arab world, especially Iraq, Iran and Syria. While not getting into details, he also takes a dig at the atrocities caused in Kashmir on grounds of countering terrorism.

However, even if the reader finds reason in Mishra’s writings, some things rankle. As these essays have been written at different points of time, the dynamics being spoken of have changed during this period. The essays are in general counterarguments to authors/institutions/leaders and hence could be difficult to assimilate for readers unfamiliar with them. For example, talking of leaders of the past may have less to do with what happens today even though it is true that history is often repeated. This is the problem with countering history through these pages, as the diatribe spoken of in the historical context may no longer hold today. Some issues of discrimination against Muslim women for their headwear are pertinent, though the views held by Bagehot or Wilson may not be too relevant. This is a problem when essays are written over time with history being an explanation. The author evidently thinks that this is not so.

Bland Fanatics is definitely an excellent book and intellectually stimulating for those with an inclination for history and holding a contrarian view on democracies and free markets. The idea drilled in along the way of discrimination against race, colour, religion and countries are real and hard hitting. He is clearly for more state action as every collapse of free markets does require government intervention, which is not fair, though inevitable. There will be many supporters of this view, especially after the financial crisis in the USA where losses had to be socialised to protect the capitalists. Even when it comes to dealing with the pandemic, the USA has failed because there has been limited state intervention, unlike in Europe and Asia, where governments were more proactive. Another proof that liberalism and 

Reviving growth: India’s not well placed in the global context: Financial Express 17th September 2020

 When the Q1 GDP numbers came out, there was a rather unnecessary controversy that showed a data series where the US economy declined by more than India’s 23.9%. The IMF data subsequently clarified this anomaly. More importantly, as almost six months have passed since the lockdown was imposed, it may be time to introspect the concept of closing the economy in the context of the pandemic. The fall in GDP in Q1 may just about be the proverbial tip of the iceberg.

When the lockdown was announced in March, it seemed to be the right thing to do as everyone was doing it. India could take pride in the approach, which was stringent to the extent of being quite draconian on the weaker sections both in terms of putting millions out of work as well as subjecting them to physical hardships in the process of migration. Yet it did not play out according to script.

It was justified on the ground of the larger picture, which had to be seen. The initial response of the government was positive handholding despite the conflicting stance taken at the state level. But after a point, the fiscal numbers hurt, and the support was more through the financial system that could help those who were operative but not units that had closed. And just when it looked that the state could no longer support the people, the ‘unlock’ process began in stages. Today, we are in the ‘unlock 4’ stage and there will be a fifth version coming for sure next month. Ironically, India is the only country that has not seen the flattening of the curve and has the highest per day cases of infection. Yet the drive is to open the system in stages, and it is anybody’s guess on the future of the infection spread.

After the initial expectation that the total lockdown would stop the spread of the virus, the realisation was that we must live with these conditions and adapt. In the process, the economic system has been maimed to a large extent, especially when seen in the global context.

The recent GDP numbers released brought home the point that India was affected more than any other country. A good yardstick for comparison is the data put out by the Economist magazine where there is standardisation in the data presented. GDP growth for the first quarter of FY21 or the second quarter of the calendar year was the second lowest in a set of 42 countries, with only Peru doing worse at minus 30.2%. The others that came close to India were Spain at minus 22.1%, the UK at minus 21.7%, and Mexico at minus 18.7%. Interestingly, the degrees of lockdown for these countries were dissimilar, with none of them being as stringent as India.

Even when looked at in terms of growth on quarter-on-quarter basis, the picture is the same, with Indian growth declining by 69.4% and Peru’s by 72.4%. This concept, it may be recollected, became controversial with the IMF coming in to clarify as the growth rate in the US was at minus 31.7%, which was on this yardstick and not year-on-year.

This decline in growth should be seen against the perspective that when the lockdown was introduced and the IMF came out with its forecasts on growth on April 6, India along with China was one among those growing by positive rates this year. Therefore, this is a comedown from what was projected earlier.

The scenario becomes grim when the inflation picture is juxtaposed as the CPI index shows 6.9% for July and 6.7% for August, which is one of the highest numbers, with only Pakistan and Argentina exceeding it. The first reaction from an economic standpoint is whether these are signs of stagflation that typified the global economy at the times of the oil shock in the 1970s. The answer is that these numbers do resemble the same as growth is more likely to continue to be in the negative terrain in the next quarter for sure, and the course of inflation will be driven largely by the kharif harvest as food inflation has been a problem for us today. While 6.9% is not scary, it looks uncomfortable nevertheless, when placed with such sharp decline in growth. A part of the inflation is due to the government also raising the taxes on fuel products and given that most of it is on the supply side, it does smell of stagflation.

The third indicator where the picture gets messier is unemployment, where the 8.4% number is on the higher side, which is consistent with the sharp decline in GDP. Here, too, the unemployment data does not capture the unorganised segment, which was affected more by the lockdown. Unemployment, however, has been higher in countries such as the US, Spain, Greece, Argentina, Brazil, the Philippines, Turkey, Columbia, Egypt and South Africa. But for most of these countries, this rate has been high even in pre-Covid-19 times. The exceptions were the US, the Philippines and Chile.

The fourth set of data pertains to the fiscal deficit. There are projections made by The Economist based on the developments that have taken place so far on the likely fiscal deficit level for the year. Here, for India, the forecast is 7.9%, which is fairly conservative compared with that of others (see graphic).

This is one area that can be improved upon by India. In such a situation where growth is low and unemployment naturally high, the economy falls in a low equilibrium trap. The only way to get out is through Keynesian push, especially in these rather difficult times where the private sector is still struggling to see growth in demand. In fact, the private sector has been hit by both supply disruptions as well as low demand conditions, which can be overcome only through some affirmative action from the government. Admittedly, the government has so far walked the path of prudence, and with GDP growth slipping has encountered a major shortfall in revenue, which gets manifested in higher deficit.

But a fiscal stimulus can be considered as being expedient under these conditions as there is no other way out. Growth is something outside our control today, which also means that employment will be a challenge for the rest of the year. This problem is not endemic to India, and holds true everywhere. The signal that can be taken from global experiences is that a fiscal push at this time is the best bet and would not be interpreted negatively by multilateral agencies. Leaving it to the private sector would be time-consuming and the interim period before recovery even more arduous.

Time to re-frame fiscal prudence norms: Business Line 13th September 2020

 

Rigid fiscal deficit targets normally lead to the govt cutting back on discretionary spending, which is not good for the economy

An interesting discussion that has been going on of late is on whether there should be flexible norms for fiscal targets. This has assumed a practical aspect today considering that there is a pandemic and all fiscal targets are going to be breached. The MPC (Monetary Policy Committee), for instance, targets 4 per cent inflation with a tolerance limit of +/- 2 per cent. Can we think of such an approach?

The discussion is timely because of the controversy ignited by the recent GST episode. The challenge for India is that there is a federal structure with seemingly unequal financial powers. The Centre can run deficits and debt and not adhere to the FRBM (Fiscal Responsibility and Budget Management) targets, while States perforce have the fiscal deficit ratio as a binding norm with limited flexibility.

Also, there are several transfers from the Centre to the States with any shortfall causing disruptions. Further, grants from the Centre for certain centrally-sponsored schemes run the risk of the States having to put in their money in case there are shortfalls from the Centre as schemes once started are hard to cut back on.

To begin with, is there a rationale for the fiscal deficit ratio to be 3 per cent of GDP? There is no reason why it should be 3 per cent and not 4 per cent or 2 per cent. The number appears to be borrowed from Western experiences, especially during the formation of the Euro zone. For a developing economy like ours, where governments must perforce be more focussed on delivering welfare programmes, a higher number can be justified.

The problem with the fiscal deficit number is that it is a ratio where a higher denominator of GDP will justify a higher deficit. The GDP in nominal terms can explode in case of high inflation and justify a higher fiscal deficit in nominal terms even with a constant ratio. Hence, ironically, governments can run higher deficits by allowing for higher inflation which results when there is too much expansion.

No flexibility

It is true that fiscal deficit does put pressure on the financial system. In fact, too much borrowing becomes a blessing for banks which prefer to invest rather than lend. Therefore, there needs to be limits set. But having a fixed norm also means that the government normally ends up cutting back on discretionary expenditure to meet this target which is not good for the economy.

This has happened in the past and will recur especially at the State level when there is no flexibility. Alternatively, States often target a much lower fiscal deficit number of 2 per cent or so and create buffers and, in the process, restrain themselves from spending on capex.

The idea of a band has its problems. It cannot have something on the lower end like an inflation target as some States are by their volition pursuing this policy. The stretching of the band must be only in the upward direction. Again, there is a problem of by how much should this be permitted, and no number can be sacrosanct.

In fact, curiously, even the MPC target has become debatable because the number of 4 per cent looks unreasonable for an economy like ours which is subject to supply shocks. Further, the action of the MPC has not been consistent when inflation crosses 6 per cent, which should lead to an increase in repo rate but is not the case.

A way out is to fix the quantum of borrowing as a multiple of capex which is discretionary expenditure. For FY21, for instance, a capex size of ₹4.1 lakh crore for the Centre can have a multiple of two as fiscal deficit. This will ensure that at least a minimum amount of gross borrowing goes for capex. An alternative would be to look at borrowings as a proportion of total size of the Budget.

For FY21, a size of ₹30.4 lakh crore can have a proportion of 25 per cent being the fiscal deficit. This way the deficits are dovetailed to the content of the Budget which leaves scope for higher investment. This can address the issue of States too, which have better last-mile-connectivity but are often unable to meet the capex targets due to fiscal responsibility constraints.

Debt-GDP ratio

The issue of debt-to-GDP ratio also requires debate. The Finance Commission is talking of a ratio of 60 per cent, with the Centre and States meeting targets of 40 per cent and 20 per cent, respectively. The problem for States is that such ratios tend to come in the way of reforms which may have to be undertaken to correct systems.

For example, the UDAY scheme requires that a part of the debt of DISCOMs would be taken on by States. Adding such a liability would be dead-wood debt for the States, making them reluctant to go in for such schemes.

The more contemporary clash of ideology between the Centre and States has been on GST compensation (which hopefully will be amicably resolved). States have been given the option of borrowing from the RBI or market, which would not be agreeable as their debt ratios get impacted. They would find it disagreeable to borrow as the funds should be coming from the Centre, which the latter is not able to mobilise. Therefore, this can lead to a turf war where neither arm of the administration would like to take on debt on their books.

Re-framing guidelines on fiscal prudence is quite timely. Mimicking the West is not advisable and linking deficit to GDP runs the risk of slippage when the economy is weak — the denominator falls, collections slide and borrowings automatically increase.

The deficit should be linked with the size of the Budget or its components. The debt-to-GDP ratio should be clearly defined so that the Centre and States do not get into the ideological duel of not borrowing to protect these numbers. Budgeting is not an accounting but growth-inducing exercise.