Minimum Support Price, a tricky tool from the past Economic Times 30th November 2021

 

Despite GoI announcing the repeal of the three contentious farm laws, farmers' unions have decided to continue their agitation until their six remaining demands that include legally guaranteeing minimum support prices (MSP) are met. MSP is a weapon in the armoury of economists, government, politicians and farmers. It is a useful tool - depending on which side one is placed.

Twice a year, the agriculture ministry announces MSP for all kharif (autumn) and rabi (spring) crops. The reasoning here is that MSP is offered to farmers if they want to sell to the government at the time of harvest and that, in a way, it allows farmers to plan their cropping pattern.

The Commission for Agricultural Costs and Prices (CACP) calculates this price based on the cost of cultivation and adds a markup. In corporate finance terms, the MSP is an option provided to the farmer where he has a right but no obligation to sell to GoI at the time of harvest. Also, the markup is something akin to the return on capital for the farmer. So far so good.

Now, GoI announces these prices and, in the last few years, has emphasised on the return on capital (RoC). Hence, even if the MSP increases by, say, 4%, it will be said that the return over cost is 50% or 70%. This has good announcement effects as it shows that GoI 'cares'. However, when MSP is increased by, say, 10%, then the cost factor goes to the background and the absolute price is focused on. Hence, this is good advertisement.

The curious case of MSP is that while it is announced for all crops - and gets all people on both sides involved in frantic arguments on the price increase being inadequate (if low) or inflationary (if high) - for all practical purposes, MSP is effective for rice and wheat alone. Hence, while the MSP of maize can be increased, GoI is not there to buy the crop. Or, for that matter, tur or urad.

The reason is that when the MSP was formulated, it was tied to the elaborate Public Distribution System (PDS), which was distribution of subsidised food grains to the needy. So, some 5,00,000 fair price shops (FPSs), or ration shops, were created. The idea was that the Food Corporation of India (FCI), with a staff count of 20,000-odd people, would procure food grains and then store a part according to buffer stock norms and distribute the rest through ration shops.

But the procurement is an open-ended scheme, hence, there are excess stocks held in warehouses. Presently, there are stocks of 65 million tonnes held against buffer stock norms of around 31 million tonnes. So, MSPs for other crops are quite irrelevant as there are no collection systems.

 

Those from the establishment will project MSP increase from the point of view of the farmers, and will dwell on how their income will increase, and as the nation works for farmers, this is the right way ahead. Those in the opposition will argue these increases to be inadequate, and that even the RoC has not kept pace with inflation. The past few years can be used to buttress this argument. For economists, a sharp increase in MSP will be interpreted as being inflationary. Even where procurement d ..

The protesting farmers assembled at Delhi borders have voiced concern on GoI withdrawing MSP once private sale of food grains is permitted. But this cannot happen as long as we have buffer stock, PDS and FCI, not to mention CACP.

The challenge for GoI is manifold here. There is already a commitment to direct benefit transfer (DBT). This means that at some point, the PDS must be abandoned, as enough studies have shown that leakages are high. Abandoning PDS will make 5,00,000-odd ration shops redundant. Further, the giant FCI will have to be reduced to a dwarf, as maintaining a buffer stock will be its only function. As in the last 20 years, India has never really dipped into buffers stocks. They were relevant in the 1960s ..

But keeping all this in mind, dismantling MSP is hard, considering the market cannot resolve all these (political) conundrums

 

Omicron a mere speed breaker for GDP, vaccination drive will quell impact: Business Standard 30th November 2021

 GDP growth for the second quarter was going to be important from the point of view of the swiftness with which the economy would clock growth of around 9.1 per cent or higher for the full year. The rather vibrant consumer demand story that unfurled around September was the starting point of this optimism considering that the services sector was opened up with alacrity subsequently in October and November.

GVA growth at 8.5 per cent is impressive, though it comes over a negative base effect. However, when compared with growth in say Q2FY20, which was 4.6 per cent, this number would mean that we are ahead of the pre-Covid period. But GDP growth over Q2FY20 is marginal at just 0.3 per cent. This is indicative that there is some space to cover before we are back to pre-Covid levels.

The downward trajectory across the four quarters will be the norm going ahead as the base effect gets diluted. Hence this growth rate cannot be compared with 18.8 per cent growth witnessed in the first quarter. All high-frequency indicators such as tax collections, eway bills, PMIs, and trade data point to the recovery in progress. Therefore, there is reason to believe that the economy is on the right path. This data along with the financial performance of companies has been taken into account while calculating the growth numbers in sectors such as manufacturing, trade, transport, communication etc. Besides, the central government accounts which goes into calculations for the public administration/social services component have also revealed buoyancy this quarter.

Omicron is probably the only speedbreaker going ahead on account of the uncertainty of the severity of the new strain which can herald a third wave. We can still be confident that on account of the progress of the vaccination programme that the impact will be less severe and the lockdowns that could be imposed will be less deleterious to economic activity.

The encouraging signs in the second quarter were steady agriculture growth of 4.5 per cent hastened by higher growth in manufacturing (5.5 per cent), construction (7.5 per cent), trade, transport (8.2 per cent), financial services, real estate etc. (7.8 per cent) and public administration etc. (17.4 per cent). The steady growth in foreign trade has also contributed to the growth process as the allied services have received a boost. Interestingly in absolute terms GVA in construction and trade, communication, hotels etc. was lower relative to Q2-FY20.

While the non-services segments are expected to accelerate in Q3 and Q4, the omicron effect can play a role in guiding growth of services. The government is already reconsidering its decision on permitting all international flights to resume and it needs to be seen how things progress on this end. In case there is spread of the virus, there could be restrictions placed on the services sector once again which will pose challenges for future growth.

Q2 is not the time when there is new investment taken on in a big way especially in the construction and hence the gross fixed capital formation rate of 28.4 per cent must be viewed against this background. The signals received from companies in their Q2 financial calls do suggest that there are strong intentions on expanding their capacities which should materialize by the end of the year. Growth in consumption has been steady and may be expected to show buoyancy in the coming quarters as the pent-up demand story plays out.

The interesting factor here is the difference between the GDP growth numbers in nominal and real terms which is reflective of the inflationary tendencies in the market. The difference is much as 9.1 per cent which is a concern.

The T-20 investment path: Indian Express 29th November 2021

 For the last four months or so, we have all been glued to the Star Sports channel with the IPL being followed by the World Cup. Quite clearly, the 20-20 format has caught on. As a viewer, one would have also seen a lady in a track-and-field race suddenly sit down to get on to the mobile for some stock updates. The message is that we should not miss out on such opportunities and the race comes only second. In between, we saw another star smiling and telling you to make money on cryptos. Yes, this is the latest buzz in the market and there is money to be made. And then there are some cricketers, who may not have a graduate degree, but are smart enough to advise you that mutual funds are right, and you should invest carefully. Welcome to the new world of savings and investments, which mimics the changing interest or popularity of cricket formats.

Today, we do not have the patience to watch five-day matches. Those who swear by Test cricket are from the older generation. Much like the same generation which still goes in for savings in inferior bank deposits where returns are 2.75 per cent in a savings account or 5 per cent in a fixed deposit. The younger population sees the futility of these instruments as the economics does not gel. Everyone wants instant gratification, and why not, because even if you manage 5 per cent on the deposit, you could lose a third as taxes, which makes a mockery of such savings. Quite clearly, banks don’t give us anything significant as a return. The alternatives are more tempting.

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The cult of savers has changed into investors. They are looking for a good return and willing to take the risk. This is a major change we see today. Crypto exchanges assure you that they are safe. But it is the exchange that is safe, not the value of the coin, which will be driven by the market. The equity boom is on, and all the unicorns have delivered excellent results. Newspapers are full of founders of startups with beaming smiles as they enter the big league of billionaires. Today, no one is talking about investing in the Nifty companies. It is the new age start-ups that have seen the market nod in appreciation even if the ventures are loss-making. It is just like cricket. We remember who won the World Cup or the IPL or the Challengers Cup but may not recollect when India played West Indies or Bangladesh in a Test series. The stadia say it all, with audiences entering in larger numbers anywhere in the world as the format of the game becomes shorter.

There is a new wave of savings and investments in the country that is evolving quite fast. Bitcoins have given amazing returns; the Sensex at 60,000 is what we like to be a part of. We don’t want prodders like Dravid on the field but Kohli, Jadeja and Pandya are delights to watch. That’s why bank deposits are no longer on our plates. Interestingly, banks today are discouraging deposits with low rates as this is the only way they can manage their balance sheets. There are few deployment avenues and paying 5 per cent interest to savers and investing the deposits at 3.35 per cent in the reverse repo auction is a sub-optimal game.

One would have also noticed that there are no advertisements by banks on deposits. They do not want them. Instead, there are several pullouts on home loans at 6.5 per cent or auto loans at 7 per cent. One could never have dreamt of getting loans at such low rates. It sounds unbelievable but is true. You are not told to save for tomorrow but to borrow more for satiating your immediate needs.

From equities, there has been a swift shift to cryptos, which is still a grey area. The regulators/government are wondering what to do. The issue will be discussed in the winter session of Parliament. But investments have been made and there is no stopping this global wave. Making money on a currency that has no underlying asset like a metal or other currency and is traded on faith is unique; especially Bitcoin, whose originator is not known by face but by just a name. But people have ascribed a value to the currency and finally, in a market, if there are thousands who believe in the value, it gets subsumed.

If this has not been quite intoxicating (the World Cup matches also had relentless doses of surrogate advertising for liquor and tobacco, which came as innocuous water and fresheners), there is another door to a new kind of gaming where you make money by making teams and following the matches. You pay to enter this game and the spoils are partly kept, the rest are distributed to the gamers after paying taxes. The law was first silent, and then confused. But it finally accepted gaming as a skill. Logically, soon we should be able to bet on matches too, if all this is in order.

Cricket formats have engendered passion, and not just from the point of view of the game. But have they also fostered a change in the format of holding onto money, where savings get transformed to investment and risk appetite changes from conservative to aggressive? Will this change? Probably not, in the near future, as long as conventional deposits continue to give inferior returns.

On ET Now India Development Debate on inflation on 26th November 2021

 https://www.timesnownews.com/videos/et-now/shows/pocket-feeling-lighter-here-is-why-india-development-debate/114742

Making sense of the cash imperative: Financial Express 25th November 2021

 Demonetisation (DeMo) seems a distant memory, five years after, with Covid eclipsing all such travails. But, it is interesting to check if demonetisation was helpful in particular ways.

DeMo was announced to unearth black money and weed out counterfeit currency, apart from squashing terror-funding. One can’t be sure of the circulation of black money, but the introduction of GST has certainly brought about formalisation of the economy and, to that extent, has reduced overt black money formation. RBI data did not show any significant counterfeit currency being brought out and, hence, it stands to reason that there was not much in circulation. Arguably, terror activity has reduced at the borders, but this can be attributed more to remarkable patrolling by security forces. A later-endorsed objective was digitization; the afterthought turned out to be quite significant, as subsequent developments show. Bear in mind, it has also been argued that DeMo needn’t have been the chosen route to expedite digitisation, and providing incentives could have been the logical way to get there.

Digitisation eases transactions and makes them more transparent. Just like it is with GST, it becomes easy to trace and track large transactions, and, hence, is useful for the taxman. In Covid times, the push given to digitisation earlier proved largely beneficial as households were able to transact in a contactless manner, using forms ranging from cards to mobile options. Using currency would have been fraught considering there was the scare initially that the virus could travel through currency notes; indeed, this had brought on a virtual ban on newspapers, too. Hence, it can be said that the big push given to digitisation made life easier for all as it had become a habit by then.

But, has this led to a decline in the demand for currency? Not really, as the currency in circulation has increased to an all-time high of Rs 29.62 lakh crore (November 5, 2021). In October 2016, it was Rs 17.54 lakh crore; over Rs 2.4 lakh crore of currency has been added on an annual average over the last five years compared to an average of Rs 1.5 lakh crore in the previous quinquennium. Hence, there has been a simultaneous increase in demand for holding currency.

In fact, digital transactions have increased in volume as even low denomination transactions are being conducted through mobile banking as the handset has virtually become a bank account. Even rudimentary transactions like commuting tickets are being conducted through the digital mode. Therefore, to an extent, the volume of transactions may not be the right metric to be used when reconciling with the same demand for currency. This does beg the question why people are demanding more currency.

There are two motives for holding currency: transactions and precautionary considerations. The first motive is driven by two factors. One is that age still matters. While the youth have taken to technology easily and, hence, have moved more or less completely to digital transactions, the older age groups (likely, the above-40) still prefer the use of cash, with the propensity to use cash to transact tending to increase as age increases. There is still a modicum of suspicion on the use of cards and wallets, as remembering passwords and tracking one’s account can prove onerous. The other is that there are still several transactions of high-value like land, houses, jewellery, social functions that involve cash payments. Often, the seller of a house has paid partly in cash for land and bribes to get clearances from various quarters and, hence, insists on some cash payment. For social gatherings like marriages, there is a lot of cash which is given as gifts as formal payments would attract attention. The same holds for jewellery where the smaller dealers still sell on cash basis. This holds in both rural and urban areas.

The second motive has played a bigger role post demonetisation. As a rule, households do keep a certain sum of money at home for dealing with contingencies. The intensity of this motive increased post-Covid, when households have had to spend considerable money on healthcare wherein cash payments was a norm in most healthcare centres as the government had come down heavily on the rates charged and the caregivers insisted on cash payments for admission. In fact, even those with insurance policies were not provided cashless hospitalisation and had to pay in cash.

With the uncertainty levels increasing in these times, there is certainly an incentive to hold on to more cash.

It does look like that there is a place for cash in our country, notwithstanding the spread of digitisation. While the latter will grow at a higher rate, the supply of currency will continue in parallel. With growing uncertainty on the health front, there will be an incentive to accumulate cash to use on a rainy day.

Farm laws may be gone but we need to press ahead with reforms: Mint 25th November 2021

 

It is October-November, kharif harvest time. The farmer has just started reaping soybean or maize crop in, say, Bihar or Madhya Pradesh. Typically, he gets up at 4am and loads his produce, perhaps 1 tonne or less, in a truck or tractor and takes it to a mandi which may be 50km away. He reaches there hoping to get, say, ₹1,800 per quintal for maize or close to ₹4,000 a quintal for soybean, which are the broad Minimum Support Price (MSP) benchmarks. With all due processes followed, he puts his stock up for sale at the mandi. Buyers, usually a closed group, offer ₹1,500 and ₹3,500 respectively, which is not acceptable. The farmer decides to wait for a better deal. By 4pm, however, he realizes that prices have fallen to ₹1,400 and ₹3,200. Buyers are aware that the farmer must catch a 5 o’clock bus, the last available, and return to his village. He can’t keep his stock for the next day, he reasons, as the same story will likely play out. Besides, his family would have harvested more of the crop by then. There is hence a despair sale.

The farm law giving farmers the right to sell outside the mandi would have protected them from this story playing out. In a way, it reinforces something already in place called the Model Agricultural Produce Marketing Committee (APMC) laws of 2003, which over 16 states have implemented to give farmers this right. They can sell their output where they like. Andhra Pradesh, Telangana, Tamil Nadu, Maharashtra, Bihar and Karnataka are some states that allow it. The horticultural produce we see being ferried about in Mumbai today on some days is a manifestation of it. However, traditions endure. For example, Bihar, which has almost fully implemented these laws and repealed its APMC monopsony, still has farmers going the mandi way.

Why should farmers oppose an all-India law on the same? After all, we have an operational eNAM (e-national agricultural mandi), offering an alternative marketplace that has not aroused protests. Clearly, it’s powerful lobbies in Punjab, Haryana and Uttar Pradesh that are up in arms, as rich farmers fear a loss of hegemony. There have been clear signs of their role in the year-long agitation against the trio of farm laws enacted in 2020, though small-operation farmers did not complain. Nor did these protests spread to other states. Why were they confined to north India?

This is where the second law comes in, the one that pushed for contract farming. This is also very much in operation already. The Tata Group, Reliance, Big Bazaar (Future) and Godrej have linkages with farmers for contract-based supplies of standardized-quality farm produce. No wonder we pay ₹50 per kg for onions at their outlets even when a shortage pushes market prices upwards of ₹80 per kg. With intermediaries cut out, farmers get reasonably high compensation. The farm lobby does not like this. So, what does it do?

The MSP issue has been raked up on a hypothetical scenario that the laws will let India Inc make inroads in the sector and initially pay farmers high sums, but the government will then slowly withdraw MSP procurement, and once that is done, evil corporate houses will pay them less, leaving them hapless as APMCs would have withered away. Sounds fantastical? Yes, but the gullible will fall for this story even though the government has assured that MSPs will remain. While support prices are announced for all significant crops, they are active for only rice and wheat, which Food Corporation of India procures in bulk for our public distribution system (and buffer stock).

Anecdotally, it has been seen that in contract farming, farmers often renege on contracts and sell elsewhere when prices are high, and companies at the other end find it hard to begin legal proceedings. Soft-drink firms have had this problem with potato and tomato farmers in the past.

The third law met less resistance, as it merely said that the Essential Commodities Act was to be withdrawn and stock holdings at the retail or wholesale ends would be applicable only under specified conditions.

The problem with India’s agriculture sector is that it employs around 60% of our workforce and contributes to just 15% of the economy. Yet, farm lobbies, which include landlords, large-holding farmers, intermediaries and APMCs, are just too powerful and hold sway over small and marginal farmers who are led to believe in doom forecasts. True, these lobby groups provide informal support to landless labourers and farmers in the form of loans, buybacks, advice, etc. This fosters close relations that allow farm leaders to stoke their anxieties without making space for them to understand the true situation.

The repeal of these laws would be very unfortunate because it may mean that we are unable to commercialize agriculture for an extended period. The fact that farming is constitutionally a state subject means that the Centre has limited power on it, unless states are taken along. The Union government may have been compelled to withdraw these laws because it needs to stay in power to effect reforms, and if three states turn antagonistic, its future agenda would be in jeopardy.

Can we ever go back to getting these laws in? The answer is ‘yes’, and for this to happen, the government needs a stronger communication strategy, one that effectively conveys their benefits to all farmers across India. This will be a long battle that requires patience and perseverance, but it can be done.

It will, of course, take time. States that are more open to these ideas and have brought in the Model APMC laws could serve as case studies to be propagated among farmers in other states. Large numbers need to be convinced that these laws are in their interest.

Getting out of the box | Book Review: ALIEN Thinking by Bouquet, Barsoux and Wade: Financial Express 21st November 2021

 The names of Billy Fisher and Teresa Hodge will not mean much to the reader when this book Alien Thinking is picked up, but will constantly be referred to as some kind of role models that the authors have presented when explaining the concept of alien thinking. In short, the authors show that there are no limits to imagination, and we can achieve a lot if we want to. For this, we need to think differently. This holds for entrepreneurs, scientists, doctors or artists, and hence even companies.

Alien Thinking by Bouquet, Barsoux and Wade is a very interesting book that is meant more for individuals, which when applied at the macro level, will translate to affirmative action in companies. As the word ALIEN suggests, it has something to do with out-of-the-box thinking. This works better if you are not directly in the business but are able to conceptualise, take your chances and deliver the final product or service. If one is already immersed in doing any specific work, it is less likely that such thinking will come naturally as we get into a routine way of thinking and need to break out of it. This is easier said than done because otherwise all companies and individuals would be successes.

While ALIEN does mean something from outside and not part of our system, the authors use this acronym to denote the five characteristics that go into alien thinking. These are attention, levitation, imagination, experimentation and navigation. These words are quite self-explanatory. Let us put these thoughts together. We need to be attentive and see the problem as an outsider and then decide on action. Looking at things afresh is important and can also be done by us in our routine work if we really want to. While deciding on the solution we should be prepared to go forward and backward, to understand the situation and see what works. This is levitation and here they give the example of Bertrand Piccard who had to swing his thoughts in all directions to create a hot-air balloon which could fly around the globe without using any fuel and came up with the idea of solar impulse which was a solar-powered craft capable of perpetual flight.

Third, one needs to be imaginative, which does not come very easily because it depends on the situation, and the response will be varied. Next, we need to be willing to experiment with new ways of doing things and last we have to navigate the system to ensure you do what you have to. This is dealing with the external environment and adjusting to the forces that can make or break the solution.

Let us look at Billy Fisher who is a doctor sent by WHO to Guinea to attend to Ebola patients who were just dying by the day with little hope of survival. Patients did not want to go the hospital because they knew that death was beckoning them. The hospital had no air conditioning, limited equipment and doctors who were clothed in protective garments could talk only on phone, which did not work. The conventional course of medication did not help. Dr Fisher keeps observing what happens to patients as they move towards death and then drew a pattern. Most of them had severe diarrhea, which led to dehydration combined with high temperatures and finally death. Put in a simplistic way, he thought differently and put the patients on saline with antibiotic and the mortality rate came down sharply and patients revived. It was quick thinking and experimentation which worked. There was no time to consult with the authorities and he had to do the best that he could, and hence imagination and experimentation had to be invoked.

Teresa Hodge was jailed for an offence and when she was released, she decided to do something for prisoners who came out of prison but did not know what to do. Not really a techie, she embarked on creating a model which she presented to bankers on evaluation of such people who now sought loans. The R3 Score, which is a risk assessment tool, was engineered by her and is used widely today.

The point being driven by the authors is that we need to be innovative in thinking and have the courage to go ahead with our thoughts to the implementation stage. This is the only way in which changes can be brought in. It holds for individuals and also for enterprise. The example of Narayana Peesapaty is given where he gives up his job as a researcher and blends his thoughts concerning India’s problem of water for farming. People grow more rice which uses more water which is given cheap due to government policy and hence lowers the water table level. A solution is to encourage new crops. This includes growing more millets, which use less water. He has his eureka moment on a plane when he is eating his meal in disposable plates, where the idea of using edible cutlery strikes him and he is able to develop edible spoons, etc, made of millets.

A mechanic, Jorge Odon visualises and finally brings in an alternative to forceps used by obstetricians to extract babies with zero risk and harm. He invented a device that was similar to a cork remover that could free a baby stuck in the mother’s birth canal. These examples are quite amazing and show that people can achieve a lot when they stop to think.

The basic message of the authors is that this is something all of us can do if we are willing to put in effort to start thinking differently. We do have the capability of alien thinking, but have to search for it and use it to becoming creative.

Madan Sabnavis is an independent economist

ALIEN Thinking: How to bring your breakthrough ideas to life
Cyril Bouquet, Jean-Louis Barsoux, Michael Wade
Penguin Random House
Pp 292, Rs 699

Economic times podcast: 18th November 2021

 https://economictimes.indiatimes.com/news/morning-brief-podcast/morning-brief-inflation-the-india-story-why-inflation-is-rising-and-whether-we-should-worry-about-it/podcast/87770252.cms

All that is dubious about crypto currencies: 19th November 2021

 https://www.thehindubusinessline.com/opinion/all-that-is-dubious-about-crypto-currencies/article37564644.ece

Fitch's rating disappointing but investors see future in India, its reforms: Business Standard 17th November 2021

 The business of rating is very subjective, especially when it comes to sovereigns. Fitch has retained the rating of India at BBB- but given a negative outlook compared to the other two agencies that think it is stable. Hence, Fitch’s view comes as a disappointment for sure.

India is probably going to be one of the best-performing economies in the world this year. This has been done without the government going in for excessive fiscal spending as the western nations have done. This factor has been appreciated by S&P and Moody’s. The way in which we have rebounded has been remarkable, with the government following a rather unique route since the pandemic began of ushering in some tough reforms in the last 18 months. It has been ably supported by the Reserve Bank of India (RBI).

Fitch’s main grievance appears to be on the side of public debt, which admittedly is high compared to the median of comparable countries. Ideally, credit rating agencies (CRA) need to give more weight to the underlying as well as the efforts being put to get things back on rail. The Union Budget has laid down the fiscal path for the centre and this is also being pursued by the states under the revised FRBM guidelines. The focus has been on galvanising investment as seen by the higher capex. There have been limited giveaways on the tax front and the government has taken the bold step on not compromising mulch on taxes on fuel. To top it all, the asset monetisation plan lays down the roadmap for revenue to be garnered and the sale of Air India bears testimony to the urgency on disinvestment. Hence, we do have reason to be disappointed in the view taken by the CRA.

Notwithstanding the view taken by these rating agencies, the relentless flow of foreign direct investment (FDI) is a vindication of reforms and how investors see India and its future. The government has ushered in reforms that have the potential to change the landscape in the medium term. The balance of payments has been positive as seen in the continuous growth of forex reserves with exports riding the wave of global trade.

Should we worry about the rating? From a practical standpoint this may not make a difference when companies borrow from overseas markets. But from the point of view of reputation, an economy like ours can expect a minimum rating of A given that all debt is in rupees and there is no external risk posed. Foreign investors are longing to come to India and take a share of the Gsec market. This is a problem emerging markets do face all the time and the discussion will be on.

Looking at how we are positioned for the future it can be said that both monetary and fiscal policies are working fine and the RBI has assured the market that liquidity will continue to be available for growth even though inflation is a worry. Structures are being created for addressing non-performing assets and financing infrastructure though a bad bank and new DFI. This should clearly be providing comfort to the rating agencies.

The government for sure will be continuing with the policy of talking to the rating agencies on reconsidering their approach to judging India and hence will be work in progress. It can be hoped that as the fiscal picture improves for sure in the coming years, an upgrade should be very much on the cards.

The value of values | Book Review — Value(s): Building a Better World for All by Mark Carney: Financial Express 14th November 2021

 To begin with, it can be said that a book which asks us to reappraise the market system is very timely against the backdrop of several financial crises, Covid and the more palpable fear of climate change and its repercussions. There is a big difference between ‘value’ which all of us in the corporate sector talk of, and ‘values’, which goes back to the basics of ethical living. And this is what Mark Carney talks about in his book, Value(s). Capitalism works on the basis of value, which is the price of any product or service and translates finally to profit. Values, on the other hand, refer to basic principles that looks at society at large. It is more in the area of ethics where we should value our surrounding and follow practices which help all—or at least are not detrimental to others. The future, according to Carney, would be ‘value’ getting aligned to ‘values’ and not the other way round, which is the case today. This is a very interesting book that actually tilts towards the Rawlsian principles and does not fully support unfettered market capitalism. And here, according to Carney, we all have a role to play, which includes governments and corporate leaders. This is a very interesting book that actually tilts towards the Rawlsian principles and does not fully support unfettered market capitalism. And here, according to Carney, we all have a role to play, which includes governments and corporate leaders. 11/14/21, 7:24 PM The value of values | Book Review — Value(s): Building a Better World for All by Mark Carney - The Financial Express https://www.financialexpress.com/lifestyle/the-value-of-values-book-review-values-building-a-better-world-for-all-by-mark-carney/2368529/ 3/15 COVID-19 in India LIVE Updates: India sees drop in fresh Covid cases, death toll; 112.0 cr vaccine doses administered so far Climate action: Nations compromise on coal to strike UN climate agreement Escaping reality: Can't run away from the lure of 'escape rooms' SS The Leaf Gurgaon Homeskeek Realtors Carney is better known for being the first outsider to be appointed as governor of Bank of England, but has a very interesting career graph having worked with an investment bank. Therefore, there is a 360-degree view on the way in which economies work, and as the head of two central banks, he has also seen how states function. Today he is more into propagating impact investing where precedence is given to ‘values’ over ‘value’. The book is a combination of basic economics and economic history with a lot of ethics thrown in. At times it could sound like preaching, but that probably is required as we have seen systems collapse due to absence of morals in business. The present way of thinking is that in a market system everything goes, as long as ‘value’ is created. This is why we have had several crises, especially in the financial world as players game the system. It is interesting that people make several compromises in the name of creating ‘shareholder value’ that they neglect the welfare of their employees, society and environment. Some of the repercussions have already been seen. In the author’s view, Covid has been a turning point because somewhere everyone realised the importance of life and almost all governments turned their attention to saving lives, which also meant spending more on healthcare and related issues, which is how things should be. Health over economy is quite rightly the priority. But we need to ask ourselves in India: Do we always do this as there have been several calamities every year, and we do let them pass without any empathy. Something we should think about seriously. There is some hope here that the basic rules of social contract that were turned upside down by the market have started reverting and hopefully will continue. Carney, in this rather exhaustive book, keeps reiterating three things about the market, which are falsehoods that have been given as excuses for failure. These phrases are ‘this time is different’, ‘markets are always right’, and that ‘markets are moral’, which can never be used as justifications for systemic crises. We should steer clear from these delusions and change the way we operate. 

So, what should we be doing? He says we should go back to the underpinnings of markets that famous economists Adam Smith and Friedrich Hayek espoused. They spoke of certain beliefs that are part of inherited social capital, which provides the framework for free markets. The common values and beliefs that we need to pursue now based on our stories of financial crises are dynamism, resilience, sustainability, fairness responsibility, solidarity and humility. These basic principles are self-explanatory. For business leaders, his message is that they should continuously engage, explain and emote to all the stakeholders, which include clients, colleagues and community. In short, we cannot take things for granted and need to create a strong ethical foundation of trust. Markets cannot be left to solve our problems as they are social constructs that are determined by the rules of the state and the values of society. The latter determine the principles on which markets are created. It should not be the other way round, where markets guide the state and society. And this is probably a question that we should be pondering over in India, especially when we analyse several anomalies in public policy over the last couple of decades. We need to have strong independent institutions to enable this equilibrium. And as he now is involved in impact investing, Carney quite rightly emphasises that we need to rebalance the components of stakeholder value and progressively calibrate sustainable and financial values. Strategic investors should put their money where both are maximised. 

On ET Now's Leaders of Tomorrow

 https://www.timesnownews.com/videos/et-now/shows/leaders-of-tomorrow-season-9-diwali-panel-part/113671

Who would have thought bankers had hazardous jobs?: Mint 11th November 2021

 

“I am now a member of the staff of this bank. Its interests are my interests. Psmith, the individual, ceases to exist, and there springs into being Psmith, the cog in the wheel of the New Asiatic Bank; Psmith, the link in the bank’s chain; Psmith, the Worker. I shall not spare myself."

This is a rather droll extract from PSmith in the City by P.G. Wodehouse, who gave his readers a flavour of what banks and bankers are like. The charm has definitely gone and been replaced with trepidation. Behind the doors of banks, the letters of the English Alphabet denote different words. While ‘A’ can be assets and ‘B’, banks, the letter ‘C’ leads to stumbles, as the acronyms of CBI, CIC, CVC and CID come up. Yes, the new world of banking in India remains humbled and bankers continue to have a hard time.

The recent case involving an ex-chairman of a public sector bank (PSB) lays bare the trauma of being a banker. The bank lends money to a hotel in 2007. The loan turns into a non-performing asset (NPA) in 2010. In 2013, the bank’s chairman retires in normal course. In 2014, the NPA is sold to an asset reconstruction company (ARC). It so happens that after retirement, the chairman becomes a director on the board of this ARC. And in 2021 there is a non-bailable warrant issued against the ex-chairman (that is, eight years after he retired), following a case filed by the defaulter at a local court. The banker is arrested, and granted bail, but faces the quadruple trauma of losses of reputation, liberty, health and money, as such cases can go on and on. This is a warning bell for bankers. They are not safe even after retirement.

This particular case highlights the risks borne by a banker who is on the lending side or heading the organization. We have seen several bankers in the dock following the high-profile default cases of Nirav Modi and Vijay Mallya. Here, the supposed wrongdoing was in disbursing credit. The focus was more on the bankers than the defaulters. But no one knows what happened to the bankers who faced a quadruple trauma. The present case is even more bizarre in this theatre of the absurd because the defaulter has been heard on a case involving an asset sale by a bank to another company, but the person singled out is a retired banker who was not even on the scene when the sale took place.

It has been seen that defaulters on loans always have their sympathizers; even the Reserve Bank of India had to withdraw its June 2018 circular which mandated NPAs to be taken for resolution under the Insolvency and Bankruptcy Code (IBC). Unfortunately, too many businessmen think they have the right to borrow and not repay as they’re doing the nation a service. Never mind that when they do well, their profits go to shareholders and not the government. The typical argument given is that the economy has done badly and so their business got affected.

It is clear that such cases will be a reality, going ahead, and there is a need to protect bankers.

Banks are run on commercial lines. Today, this is also true of PSBs. The idea of privatization hinges on these banks turning profitable and thus into good purchases for prospective buyers. At the same time, PSBs have to carry out various social-agenda programmes of governments to ensure alignment with larger goals. They also need to grow their books and make profits. But when the chips are down and the quality of assets deteriorates, or trouble arises, as in the case of an NPA sold to an ARC on terms the defaulter found unacceptable, then bankers are left to fend for themselves.

What is the way out? The government has a big role to play, with a new ‘bad bank’ being set up to take on the bad loans of banks. Against the backdrop of the former banker’s woes, will any bank willingly sell its NPAs if deal values can be disputed in court and bankers are at personal risk? The government needs to create a new rule book to incentivize bankers, or else they may find procrastination the best solution, especially since heads of banks have fixed tenures and would rather not take decisions that can haunt them years later.

First, just the way the government runs insurance programmes for health, life and farmers, we need a new ‘Prime Minister’s Banker Bima’ scheme, under which banks must pay premiums to insure their personnel against job hazards. The category of personnel covered could be decided by them. If a case arises, the insurer will bear the cost.

Second, any case against a banker should be taken up by a specialized set of lawyers on the rolls of the Indian Banks’ Association, so that a retired banker faced with allegations doesn’t have to run around in search of a lawyer. If the person is in service, the bank would make the legal arrangements, but post-retirement cases need support too.

Third, all such cases should be routed through the ministry of finance, where a special division should be created to ensure order. Presently, the predominant view held is that a government cannot intervene once a case is sub-judice. Therefore, there must be a pre-emptive mechanism in place to acquire prior knowledge of such a problem before it arrives at the doorstep.

A safety net is required if banking reforms are to succeed. There has been a lot of enthusiasm in setting up the new bad bank, which may be a non-starter if the present case is not resolved soon. Also, progress on India’s Insolvency and Bankruptcy Code could suffer further setbacks if bankers’ fears are not calmed. The current NPA case emboldens defaulters, and, as aggrieved parties, banks will likely get more defensive.

Cheques & balances| Book Review — The Custodian of Trust: A Banker’s Memoir by Rajnish Kumar: Financial Express 7th November 2021

 Normally one is interested in the early life of a celebrity in the field of say showbiz or sports, which is what prompts people to write about them. When it comes to a banker, there would be very few interested, especially if the author is from a public sector bank. The autobiography of Rajnish Kumar, former chairman of SBI, is a deviation from this perception.

A section on Kumar’s life takes us through his early days and his experiences in various branches of SBI in the interiors of the country. SBI trains everyone on the job by taking the person through different responsibilities in various divisions so that by the time a person heads the bank, one is fully acquainted with all aspects of banking. This cannot be said about most private sector bank heads, who get elevated to the status of CEO without really getting to know the intricacies of a bank job. In fact, interestingly, PSBs rarely falter on processes and procedures because everyone goes through the grind of dealing with cheques, lockers, loans, and, more importantly, people. This is why they tend to be more empathetic when it comes to people management.

Rajnish Kumar, however, is quite hard hitting in his book and calls a spade a spade. He does not spare the RBI, though he is diplomatic when he says that the regulator must have had reasons to give several private parties a banking licence given that some of them went down. He clearly does not see any logic in giving more licences to private parties that do not have long-term commitment. He also does not mince words when he names private banks that stand out compared to the other average ones.

Similarly, he also questions whether the central bank has the bandwidth and experience to monitor the entire financial system, covering commercial banks, NBFCs, cooperative banks and so on. This is why once we move out of the commercial banking ambit, it becomes progressively harder to monitor these institutions.

He makes readers think hard on deposit insurance. Yes, we are all happy that deposits up to `5 lakh are now covered by insurance. But then, so far, the deposit insurance has hardly been invoked whenever there is a crisis as the RBI never lets banks down. If this has been the case, then is there logic to load this cost on banks?

Kumar makes the book really engaging by taking on various issues and dissecting them threadbare. We can sense what bankers went through during the demonetisation time, with several circulars being issued by the RBI. He also highlights how no one thought of the size of the notes in the ATMs, which caused quite an amount of discomfort.

With recollections of some lighter incidents in his career, including dressing up to meet the President in London or dealing with the so-called mafia in the interiors of the country, one would find the narrative interesting.

Without really brushing aside the blame on NPAs, he forcefully tells the reader that all the great infrastructure we see and revel in, which includes airports, is there today because the PSBs have contributed significantly to their funding. True, things went out of hand, but the problem was more in the way in which these projects were taken up. Hence it was not just a case of phone banking, which people like to say. Even the FIs did not do well on this score because of the fundamental challenges in infra finance. Roads have problems of land acquisition, power with availability of coal, steel with iron ore mining and so on. And with all the environment issues coming up frequently, projects were bound to run into problems. He explains why PPP failed in power and roads but succeeded in airports, because the contracts were well structured. Thus, he does not agree with the concept of dirty dozen that was coined by the media when talking of the IBC.

The author also takes us through the details of the Jet Airways fiasco as also the entire NBFC crisis. The Yes Bank imbroglio is explained in some detail. Therefore, for any person in the credit business, this is good knowledge to know the take of the most powerful banker in the industry. The point he drives home constantly in his book is that bankers are not always to blame, and neither are all corporates, as it has been made out to be. This message is powerful and strikes a balance as it asks us to be more discerning when passing judgments on issues of NPAs.

Quite significantly, what stands out is a chapter on people development in SBI. This is something that people rarely talk of. In fact, most corporate biographies or autobiographies are full of the protagonist. But here we have the former chairperson of the biggest bank, which is also in the public sector, talk a lot on the tradition of people management.

This is a differentiating factor from the private sector where it almost always is about a small group of people who seem to drive organisations. In case of SBI, clearly it is the people, as explained by the author.

The book has been called the Custodian of Trust. Is it egotistic? The answer is no, because through the narrative the custodian is the institution called SBI, which has never been personalised. Needless to say, the bank will grow in strength with time.

Madan Sabnavis is an independent economist

The Custodian of Trust: A Banker’s Memoir
Rajnish Kumar
Penguin Random House
Pp 261, Rs 699