Three years of Narendra Modi government: The economy makes the current regime a clear winner: FE, 25th May

omparing economic data across two time-periods is always interesting especially when the linkage is with different governments, the UPA and the NDA. There are some caveats that need to be attached before undertaking this exercise. First, the economic numbers may not be solely attributable to the government as, often, extraneous forces determine these movements. A very good example here is the case of retail inflation in India, where almost every entity has taken credit for bringing it down, when the real reason was simply “a favourable monsoon”. Second, governments are more responsible for policy framework and administrative house-keeping that are enablers. If these two principles are kept in mind, then the state of the economy across two three-year time-periods may be compared.

The accompanying table provides data on movements in various economic variables for the last six years, with the earlier base year data being used for 2011-12 to provide an indicative number. The current regime has been clearly better in the following areas.

First, GDP growth has witnessed a continuous increase till FY16, after which there was a slowdown. The average annual growth is higher by 1.2% points. The same holds for industrial growth, where it averaged 3.4% during UPA and moved up to 4.1%, subsequently. Third, inflation, by both the measures, came down, with the CPI moving from 9.3% to 5.1% and the WPI moving from 7% to -0.3%. The clinching factor has been the crude oil price which had come down sharply by the time the NDA came to power.

Fourth, the government has been better able to meet the fiscal targets with the benefit of less pressure from fuel subsidy. While the UPA government struggled to bring down the deficit from 5.91% in FY12 to 4.48% in FY14, the NDA has gotten it down to 3.5% in FY17. Fifth, the external account is again looking much healthier, and forex reserves have increased by around $66 billion under the NDA as against around $10 billion in the UPA regime and absorbed the outflow of the FCNR(B) deposits. Sixth, the rupee has been better behaved than other currencies even as the dollar strengthened and the US Fed tightened the monetary channels. The rate of depreciation was around a third of that in the last three years of the UPA. Last, FDI, which was strong even before the NDA took over, averaging around $39 billion/annum, increased to above $50 billion iAre there any concerns? This is quite interesting because while almost all preconditions look good, there are two major challenges for the government in the next two years. The first pertains to bank NPAs which have assumed prodigious dimensions from 3.8% in FY14 to above 9% in FY17. A weak banking system denudes the growth story carved as it makes the model suspect. More importantly, the issue is not just getting this number down but also capitalising banks and making them resilient. This is not easy given that the government is not willing to over-invest from the Budget nor agreeable to wholesale privatisation to raise funds.

The second issue pertains to investment. The gross fixed capital formation rate, which was at 34.3% in FY12, has come down continuously to 26.9% in the last five years, which is disturbing. The NDA government has corrected the irregularities in natural resource allocation and cleared stalled projects. Yet, private investment has not been enthused, with the banking crisis playing out in the background.

FPI provides a mixed picture. The flows averaged around $30 billion up to FY14 and then have come down to $27 billion. But, it does open room for debate that both FPI and FDI may not be moving because of the pro-investors policy, but more due to the push factor which was dominant when interest rates were very low in the West. Further, given that FDI has tended to get concentrated in regular sectors such as services (financial), telecom, IT, etc, the opening of new sectors has not yet brought in fresh investment.

How about policies where the government has been very active? The picture is mixed here, too. Opening up of fuel prices to market forces (which was introduced in a phased manner by the UPA to begin with) has worked well so far because crude oil prices have crashed. What happens when they rise again? UDAY has been a very good scheme for ushering power reforms. But will the discoms do their bit? If they don’t, there would only be a statistical transfer of the debt from the company to the state, which actually will not alter the status quo. On the other hand, policies on DBT in LPG and auctions of natural resources have been unequivocal successes.

There are other policies that would be open for debate. GST was an old idea that was always opposed by the Opposition, and hence, there could be joint credit taken by all parties. RBI has been constantly chided by both UPA and NDA FMs for not lowering the rates out of habit. But with the Monetary Policy Committee idea being floated in the UPA regime and brought in by the NDA, with the committee consisting of independent experts and academicians, the conclusion drawn all the time is the same as what RBI has been doing.

The demonetisation exercise of the government was probably one of the biggest attacks on black money. There is not much evidence to show that the income declaration schemes have brought in large sums, or that the way we transact has changed. In fact, digitisation could have had the unintended consequence of adding a substantial cost on society. This exercise could probably be the one in which there will continue to be discussion until such time that data is presented. Or else, it may go down as an economic misadventure which has, however, patched the moral fabric.

Other ventures of the government which bordered on campaigns, such as Startup India, Make-in-India, Swachh Bharat, etc, have been inspiring, but would need to get translated into the macro-variables. While there is no clear data on employment, the impressionistic feeling is that there has not been a significant addition to job creation in the private sector even while the government and public sector have been tightening their strings.

On the whole, if one has to choose between the current regime being a winner or loser, the die will be cast in favour of it being the former quite unequivocally. The economy seems poised to accelerate further, but the two cogs have to be addressed—investment and NPAs—to make the growth path sustainable.n the last three years.

‘Protecting society’: Can’t hedge against regulatory risk Financial Express: May 20, 2017

There are archaic laws still being implemented and new ones are being imposed under the garb of ‘protecting society’.

In any business, there are three kinds of risks—credit, market and operational. Credit risk pertains to any default on payment that is addressed through either buffering this cost in price or in collateral. Market risk cannot be measured or defined beforehand, and can be in the form of price changes, competition, trade movements, etc. All businessmen are prepared for such a risk. Operational risk can be along the value-chain, where there is a breakdown in supply-chains, theft, cyber fraud, insurgency, natural disasters, etc, where one can hedge through insurance. But one risk that has become critical in the last decade or so is the regulatory risk, where the authority in power can upset business plans.

The regulatory risk today is unique as every such action is in accordance with prevalent laws, but has the potential to strike at the edifice of business. At the individual level, the biggest shock has been demonetisation, where there was total chaos caused by an announcement made by the government. People were told that they could exchange or deposit currency till December 31, after which they could go to RBI until March 2017. But then a new law making it a crime to hold currency after January 1 put holders in a fix.

Another shock is the use of Aadhaar, where every benefit/activity has been mandatorily linked—the absence of Aadhaar precludes kids from the mid-day meal programmes as also, increasingly, individuals from holding a bank account. Therefore, individuals are not insulated from regulatory shocks. For an enterprise, it is even more pernicious as it impacts investment and employment considerations. India has improved its ‘ease of doing business’ showing, which actually is not difficult because the parameters tracked by the World Bank are based on rules in fixed locations that can be changed conveniently. For example, one can improve the score on electricity procurement by doing away with some unnecessary rules.

But running a business can be subject to several regulatory shocks, via legislative and judicial actions. These are always defended on grounds of implementation of existing laws, and the clinching argument that whatever is being done is not new. Further, legislative action derives strength from the rule of the legitimacy of the majority. Some of these risks can be enumerated here. First, the meat ban has affected many key business segments, and with a double-whammy—under the guise of ban, suspected meat traders are being subjected to violence. Curiously, the law is strict on the ones in the meat business, but is usually silent on the actions of the self-appointed conscience-keepers. Second, the liquor industry, dealing in a legitimate product, received a major blow with the highway ruling of the Supreme Court, and many liquor shops have had to down shutters.

Third, the hospitality industry has, in turn, been affected by the ban on liquor sales. The proposed move to regulate the quantum of food served in restaurants, which is justified by an emotive appeal of people starving in the country, can push the industry further back as customers would start making comparisons on value for money for various options. Fourth, the pharmaceuticals industry walks the tightrope of price-orders coming in at any point of time, and the recent control on coronary stents is a case where business plans have been seriously upset. This regulatory risk is within the country, and goes beyond the regulation in other countries on patents and other protective measures which companies are aware of and consider being an operational rather than a regulatory risk.

Fifth, the automotive industry has been through tough times with state governments having the discretionary power to pass laws like the ban on the sale of diesel vehicles above certain engine size. Now, as it has never been a crime to use diesel in vehicles, the sudden ban is a shock as companies have already made investments in such technology. Sixth, in the commodity futures market, the regulator, on advice from the government, has banned futures trading in several products where traders with open positions have to close out with accompanying losses. This has been a setback for traders, exchanges and the market as well, with bans based on emotive issues like price rise. In fact, even the arbitrary imposition of stock limits whenever there is a crop-failure could send traders into a tizzy as they have to offload stocks to avoid prosecution.

Seventh, in for the capital market, the government changed the rule of treatment of tax on debt instruments retrospectively a couple of years ago, and all the holders stood to lose. Not to leave aside the equity market, the Budget this time has decided to tax capital gains where Securities Transaction Tax (STT) has not been paid. Eighth, though the concept of the General Anti-Avoidance Rule (GAAR) cannot be contested, or the infamous Vodafone case, but retrospective action is a major cost for any operator in the country. Logically, if there is money being wrongly routed through Mauritius, then such participants need to be penalised. But, by bringing in such laws, potential investors could get nervous.

Ninth, wherever there are natural resources involved, businesses run the risk in the manner in which these are allotted. The coal, 3G, iron-ore controversies are examples where a player ends up in the middle of something it has no control over. Tenth, any industry can run into problems with environment rules being brought in at any time. With a plethora of activist groups waiting to pounce on these companies, projects get into litigation for years, thus upsetting plans. Eleventh, MNCs run the risk of being pilloried for wrongdoings, as was the case with ‘Cadbury worms’ or ‘toxins in Nestle’s Maggi noodles’. The government and enforcement authorities never target the millions of street vendors who sell unhygienic food, but move with alacrity when an MNC is involved.

These examples show that almost any business is open to immense regulatory risk that cannot be hedged beforehand. The reason is often that there are archaic laws which are being implemented or new ones are being imposed under the garb of ‘protecting society’. While we do harp a lot on the ‘doing Business’ and ‘Make in India’, there is little assurance provided to the businessman once operations start. Regulatory capture is quite easy in these conditions by any interest group, which can range from business rivals to the political elite. More importantly, legislative action is justified by virtue of being the majority view, as the party/coalition with more than 272 seats has the legitimacy to voice the choice of 1.3 billion people in a democratic set-up.

Industries like sugar (diabetes), tobacco (cancer), liquor (sin), edible oils (potential coronary problems), gifting (anti-Valentine’s day campaigns), luxury housing (when there are 500 million poor, why should anyone have big houses), garments (customs and tradition), etc, all run the risk of sudden activism, pushing one out of business. Maybe, it is here that the government needs to provide assurance or guarantees to business, as addressing issues on starting a business will not help if players have to operate under a cloud of uncertainty. Otherwise, doing business will be a risky venture in India, and akin to rolling the dice.

Threat alert: Book review Financial Express 14th May 2017

Michele Wucker, in The Gray Rhino, explains why most of so-called difficult situations or chance occurrences can be explained quite easily,

One of the terms that became popular following the financial crisis starting 2007-08 was ‘black swan’. The idea, now made legendary by Nicholas Taleb, simply said that just as you don’t expect to see a black swan in your life, there are certain events that are very rare, to the point of being improbable. But once they occur in conjunction with other similar themes, the result can be catastrophic. What if there are signals staring right in your face and yet you choose not to notice them? That, in short, is a ‘gray rhino’, which is huge and hard to miss, but for various reasons, we are not able to spot it.

Michele Wucker, in The Gray Rhino, explains why most of these so-called difficult situations or chance occurrences can be explained quite easily, as there are almost always warning signals before the event occurs.

At a more basic level, we often see old houses and bridges collapse, and this is quite common in India, where such structures decay. But if you look deeper, you will agree that signals are sent out well in advance. Signals that we miss either because we don’t notice them or because we choose to ignore them, as we don’t want to face the eventuality. This holds for climate change too, where several nations have chosen to ignore the repercussions of destroying the environment for short-term prospects of higher growth.

Wucker argues that there are five stages in the way in which we react to a gray rhino. The first is the state of denial, where we just say there is no issue, which quickly builds into group-think. This is the starting point because once we are in a state of denial, we will never take any preventive action. As a corollary, when the event takes place, the cure is painful and costly. The financial crisis gave all indications that there was a bubble building up, but the authorities took it as vindication of the ‘great moderation’ in the US and applauded it. The stock scam in India in the early Nineties—or the crony capitalism tentacles in east Asia building up to erupt in the late Nineties—all started off with denials.

The next stage is even more dangerous. The author calls it ‘kicking the can’, or delaying action. We don’t know what to do or how to go about it, and hence look for a way to delay. For example, when we finally accept that there is an infrastructure problem, we do nothing and postpone action. A classic case that we in India can relate to is shortage of any farm product, which can be pulses or onions. We invariably hear officials say there is no problem for a prolonged period of time and then get into a muddle and delay action by hoping things will sort out. In companies, there are rewards and punishments for preventing this. At the government level, there is little that can be done.

Third, once we decide to do something, we have to ‘size the issue’ for which alternatives have to be considered. There will be gainers and losers, and this has to be evaluated and action taken in a transparent fashion, so as to make it acceptable and workable.

The fourth stage involves panic, which is ‘decision-taking against a charging rhino’. Commonly noticed in stock market crashes, the original problem gets magnified. Panic often leads to a crash, as it becomes reinforcing and self-fulfilling.

The fifth part is ‘gray rhino in action’, a time when it’s usually too late. This is when you can only repair the damages rather than minimise the impact.

IIP numbers: Lessons learnt from the GDP experience: Financial Express May 8, 2017

Reviewing base years for various indicators—IIP, WPI, GDP, CPI—should be a continuous process and not a one-shot exercise, with the goal to have the same base year for all variables

Given the complexity of any economy, aggregating goods and services under any head is always challenging. This is so as in a dynamic world these components keep moving in and out of the production and consumption streams. Hence, while any economic measure, from GDP to a price index, is constructed based on a predefined set of goods and services, the baskets have to be revised regularly to reflect the changing reality. Thus, there is always a case for revising indices periodically and this is what has been done for the GDP to bring it forward to a base year of 2011-12. Axiomatically, it follows that other indices too should be benchmarked with a similar year to maintain comparability.

At present, the IIP and WPI use base years of 2004-05 while GDP and CPI have an advanced base year. Prima facie, comparing GDP components with their equivalents in the IIP could be incorrect as they could be referring to different baskets of goods.

Further, a base year going back 12 years could be misleading because there is always a fixed set of goods that go into the calculation of any economic variable that can be an index or the GDP, which are then tracked periodically. There could be some goods that are no longer relevant or there could be others coming in, which did not exist in 2004-05. It is for this reason that the Central Statistics Office (CSO) has been working on revising the base year for reckoning both the IIP and WPI to 2011-12.

A base year should be a normal year, where there were no disturbances and the noise factor was low and did not cause any distortion. And 2011-12 is the best possible contemporary year as subsequently the economy did go through a variety of challenges which caused volatility in economic variables. For the IIP, the change in base year is compelling and it would be interesting to see as to how the numbers look when the new base year is invoked.
Such a revision would also cover a new basket of commodities and assign differential weights to them. Hence, typewriters and floppy diskettes should be out and mobile handsets and other electronic gadgets in and so on. It is hoped that the discrepancy that exists between the GDP and IIP numbers, which has raised several questions, would narrow down.

The accompanying table provides growth rates for the IIP counterparts, which have always been an enigma for the analyst as it has been difficult to rhyme the two series. The table clearly shows that there is a major disconnection between the physical growth numbers as denoted by the IIP and value-added numbers (at constant prices) as denoted by GDP numbers. Ideally, they should move in the same range as value addition at constant prices should address the price factor and broadly reflect physical growth.

This discrepancy holds across all three sectors and is stark for manufacturing and mining. If physical production is not increasing sharply but value addition is, then either the two entities have different components or that there is migration to higher value-addition commodities. Often, it is argued that if there are more Audiand BMW cars on the roads, the physical numbers may not be increasing sharply, but the value addition would he higher. Alternatively, there is higher monetary value for salaries (which is not the case) or profit (which has not been stark of late) as the GVA is based on numbers from the profit and loss accounts of companies where value added is, broadly speaking, the sum of gross profits and salaries and wages.

Hence, the new series to be released by the CSO would be interesting as it is hoped that these discrepancies between the GDP and IIP numbers would narrow down. Typically, a new series should clean up the existing series by dispensing with or lowering the weight of products that are not too relevant and including new ones.
The other challenge for any update in indices pertains to flow of data. Data is normally procured from industry associations or based on direct reports filed by companies. Systems have to be built in to ensure that there are fewer cases of data not being provided by the entities. At times, indices do not change for several months, and when they do, denote extreme growth numbers.

The problem is acute especially where the unorganised sector comprising SMEs is dominant in terms of contribution to overall output but has unstructured reporting patterns. It is also expected that the CSO would be using the fresh series of data, which would come in once the GST is introduced, to work backwards on the production numbers as a large part of the unorganised sector would be expected to get included in the mainstream.

A takeaway from the new GDP numbers that were released last time was that, to maintain credibility, it is absolutely essential for the CSO to provide a back-series. This became important because the GDP growth numbers looked healthier than the impressionistic view one had on the economy, and while there was theoretically no flaw in the approach of the CSO, the numbers were hard to digest. In 2013-14, when the economy went through very hard times, the growth was 6.7%, which appeared to be a major anomaly. Hence, it may be hoped that the CSO would address this issue especially if the new IIP number is significantly different from the current series which indicates a virtual zero number in growth for the first 11 months.

The move to a new base year and index is progressive and it can be expected that the same will be done for the WPI too. Also, there will soon be a compulsion to revise the base year once again, as 2011-12 is already lagged by five years, and while a new normal year is yet to be identified, in our context where there are several changes taking place in the way in which goods will be traded (National Agriculture Market), tracking of transactions (demonetisation plus GST) and trade flows, the frequency of change in such benchmarks will have to be more regular to be relevant. Hence, reviewing these base years for various indicators should be a continuous process and not a one-shot exercise, with the future goal being to have the same base year for all variables.

Sandra Navidi’s book titled Superhubs: The elite club: Financial Express 7th May 2017

A thought that will strike anyone about the corporate world is that it’s almost always the same set of business architects that feature everywhere, every time. This is even more glaring when it’s the financial sector. If this is an observation made by the perspicuous reader, then one will be completely in sync with Sandra Navidi’s book titled Superhubs. The term ‘superhub’ does, at first thought, strike one as being equivalent to a superhero, which, on closer reading, is actually true. But the word ‘superhub’ connotes the close and strong networks built by financial mandarins who rule the world.

Navidi has been closely associated with the financial world and has worked with economist Nouriel Roubini. Navidi has closely followed financial heroes over the years, especially during the crisis period of 2007-08 onwards, and has traced patterns and habits that make these superhubs work.

Her theory is that these people form a very tightly-knit closed user group, which influences the way policy is formulated, decisions taken and which creates strong symbiotic relationships across companies to make the system self-serving and perpetuating. Let us see how these hubs are built.

She gives a very accurate picture of the World Economic Forum and Davos—which almost everyone accepts is a futile exercise—where nothing much is achieved, with business leaders and government officials uttering bromides that serve little purpose. Yet everyone wants to be seen there. Navidi believes that these exclusive conferences in otherwise non-descript places, which host a lot of wealth-makers, are hard to enter and the purpose to be seen there is to network with the who’s who. This involves a huge cost—a helicopter ride could take you back by $10,000 if one does not have the patience to do the last stretch of travel from Zurich by road.

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Now, how can one identify these superhubs? They have some distinctive features and commonalities in the way they operate. Access to these hubs is critical because it provides an opportunity to get closer to wealth, people and privileged information. Getting a smile from George Soros is a big thing to start a business relationship. All these superhumans are ambitious and driven by both power and insecurity. Jamie Dimon is known to be irreverent to the point of being rude and had to reluctantly apologise to Mark Carney, former governor of Central Bank of Canada, for being brash. Hence, one can identify these superhumans by this trait. The author believes that these stars need to build ‘emotional intelligence’ in their styles of working. Bill Gross of PIMCO had a poor relationship with traders, colleagues and other constituents, and was always contrasted with the soft-spoken Mohamed-el-Erian, who was more respected for his investment acumen.

Now, once these cocoons or matrices are built, they progress towards the old boys’ club status and become self-perpetuating, where it’s hard for outsiders to intrude. This can happen through college links, as well as connections with government power centres. This is what the author calls ‘homophily’, or the love of being alike. Once these groups are established, the networks are expanded with equals and are an example of what the author calls ‘employing relational capital’.

These superhubs understand the importance of networking and earmark time and money for it. Curiously, one way of being in such networks is being in the right places, which can be Davos or a big party hosted by another superhub.

As may be expected, there are costs involved in leading to such a powerful state and the most important one is family. An interesting observation is that despite these imbalances, marriages among such people last, as the alimony bill can get monstrous! Further, they are always under media glare and, hence, must keep this in mind, as any improper behaviour can be hyped up. But this is all part of the game.

An interesting observation, which is the focus of a chapter in the book, is that there are not too many women in this community. The reason adduced is that it’s usually believed that women can’t take too much stress, though the author argues that when the International Monetary Fund had its crisis with Dominique Kahn, it was a woman, Christine Lagarde, who was brought in. The author agrees, however, that the glass ceiling exists in the financial sector. A factor working against women is that, normally, all these superhubs have mentors and men are hesitant to mentor a woman lest it be interpreted as an affair. Further, women have not created their own networks to perpetrate such superhubs.

There is a chapter on ‘revolving superhubs’, wherein these superheroes are always ‘in and out of the loop’. They switch jobs and roles, and are always there somewhere. Larry Summers could probably be described as being insufferable, but he is a brilliant person who has always been with powerful people. Unless they do something egregious, like Kahn, they remain in circulation. Here, Navidi gives examples of several investment bankers who have been associated with the government in various roles like Ben Bernanke, Hank Paulson, Timothy Geithner, etc. This really helps and it has been observed empirically that when there is any deviance from adherence to regulation, the penalties slapped on such banks are less severe than they would have been in case such a connection was not there. This is the result of effective lobbying. Personal linkages skew the system in the favour of superhubs and while conflict of interest is tricky, solid relationships help in times of crisis.

Finally, the author shows how these strong linkages can also lead to supercrashes, as was the case with Long-Term Capital Management when John Meriwether took the system down, which actually questioned the strength of capitalism. These superhubs can, hence, be destabilising and can distort the equilibrium quite badly through contagions.

Superhubs, as a concept, can be contextualised in any system and while Navidi has confined her narrative to essentially the American context, we can identify these superhubs anywhere and connect the dots to trace the patterns. While the ‘men’s only’ hub does not hold in the Indian financial sector, the nexus between the government and corporates manifests in the form of employment post-retirement or indirect lobbyists in the form of advisers, consultants or members of a board where such relationships can be leveraged. The reader can identify for herself what is being spoken about here.

Bad loans crisis: Final frontier of resolving NPAs? Financial Express May 6, 2017

RBI should consider some punitive action against banks for creation of NPAs. though difficult, This has to be brought in to serve as a deterrent

Resolving the NPA problem is analogous to a truck loaded with explosives, being driven by a group of bankers where there is no consensus on how the toxic material can be offloaded as there is a fear of the same blowing up on their faces. Each navigator has her/his own view and the suggestions made are not mutually acceptable. The result is that the quantum of these explosives has multiplied over time and the constant suggestions/options provided by the policeman from outside have not quite been followed as the group still cannot agree on the best route to the dumping ground.

The present ordinance on NPA resolution is quite different from the earlier endeavours as, finally, there is an entity which has been empowered to take such a decision, which makes it easier for the navigators of the truck to do as they are told. As it is a top-down approach, where there are legal structures, the navigators have no choice. Also, the final authority, i.e., the policeman has the final word, and his rules have to be obeyed. This, in essence, is the major takeaway from the new ordinance on NPA resolution that was met with considerable cheer, as prima facie there are no holes in the fabric.

The onus is now on RBI to take this decision, and the banks would really have nothing to do, but refer the NPA to the NCLT and the due process of the Insolvency and Bankruptcy Code would be followed. The decision is pragmatic as RBI is both independent as well as the regulator of the banks and has a rightful place in this drama. In fact, it has the legitimate right to be the director of the script. Besides, at the end of the day, the NPA concern falls in the domain of RBI as it has a destabilising effect on the banking system.

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Should the bankers heave a sigh of relief? To an extent, yes, because a major concern has been that they could get engulfed in a witch-hunting process if a decision taken today turns out to be unacceptable five years down the line. This fear is allayed with RBI taking the decision. Further, as normally a consortium of lending banks could have a differing view on the resolution process. Those against such a resolution due to commercial considerations could be at a disadvantage, but could seek solace as a troubled asset has been resolved, finally releasing capital for future business.

How about RBI? With RBI coming into the picture, the members of the so-called deciding or oversight committee will be critical. Will they be outside experts or RBI officials? This is important because taking such decisions will require some degree of expertise in the way banks work and loans are disbursed. While central banks are definitely aware of the macros, the experts deciding on such resolution need to be conversant with the micros. This is so because the bank will have to cherry-pick the bad assets that need to go to the ICU, and such decisions will require in-depth knowledge of the loan, company, and industry in which it operates. Often, such NPAs result due to commercial reasons and may turnaround when the economic cycle turns over. Hence, RBI committee has to be fully cognisant. A thought here could be to get in experts with central banking experience, who have also worked in the commercial banking as they would be best-placed to take a decision.

The efficacy of this move can only be seen over time. The reasons are manifold. First, the quantum of NPAs that we are looking at—around 12% of outstanding advances—is really large. Are we looking at lowering this ratio of 10% or 5% or 2%? This medium-term goal has to be defined with definite timelines.

Second, the time consumed in making such decisions is critical because if it is done in a piecemeal fashion, the measure may not be too effective as one can never be sure of how the banking system evolves over time. Clearly, timelines need to be fixed as the IPC processes could take up to nine months to move forward.

Third, the back-end infrastructure is necessary to be in place and this means two things. One, RBI should have enough manpower to handle this issue and the right persons need to be chosen, either from within the organisation or outside. The precise numbers would be known once the loans are identified in an order of priority—this can be through a rating process devised by ratings agencies. Two, the legal system should be well equipped to take on this challenge. If we are targeting only the top 50 defaulters then the job may be easier. But it is necessary to have this pecking order in place.

However, an issue that will continue to be discussed in various forums would pertain to the future of such resolution. The ordinance talks of empowering RBI to resolve the issue do not cover the ground of how to prevent such assets from being created. When easy solutions exist, a moral hazard develops where banks become laxer with their credit standards. RBI, hence, will have to make it clear as to whether its approach is going to be an on-going one or time-bound. Simultaneously, RBI should consider some punitive action on banks for the creation of NPAs which, though difficult, has to be brought in to serve as a deterrent.

The government’s approach towards resolving the issue of NPAs has been remarkable and the various schemes brought out are part of the fine-tuning mechanism where lessons of the failure of existing schemes have been improvised. The present dispensation appears to have reached the so-called last mile and definitely looks superior to the other attempts. The execution would have to be planned meticulously to move towards a successful conclusion.

We should tax agriculture. But how? Business LIne 3rd May 2017

While the idea is reasonable, the issue is so political that it will automatically ring in negative points for the implementer The subject of taxation on farm income has once again taken centre stage not just because there have been some distinguished opinions voiced on this subject but also that this has been recognised as one area where money is channelled to avoid paying taxes. As the focus of the Government is on black money, looking at agriculture for enhanced tax collection appears a logical corollary. The solution is evidently not simple for were it so, it would have been implemented by now. The major challenge is really political as any such tax would be interpreted as affecting the lives of 600-odd million people and can be perceived to be a disaster during elections. Logically one can argue that if we can sift the rich from the poor this can be done. But agriculture has a complex structure. Pretty strong The arguments for taxing agriculture are compelling. It is just like any other economic activity: if individuals and companies can be taxed, so should farmers, provided they go beyond the exemption limit. All other reasons put forward for not taxing farmers are more emotion-based given that the majority would be classified as socially and economically deprived. But then, this can hold for other sections too which are being taxed, especially at the lower-income level. This said there are practical issues which have been hard to surmount so far. To begin with it must be realised that even if agriculture has to be taxed, it would be by the State as our federal structure would not permit the Centre to do so. The major problem is identifying the individuals given that many of them own small pieces of land or are landless labourers. The numbers involved are really large, some 600 million people. The latest data on tax collections shows that of the 42 million-odd people in the organised sector around 17 million are salaried and pay taxes. In the unorganised sector which has 56 million workers, another 18 million pay taxes. Hence, the strike rate for a population of 100 million workers is just 35 per cent. In the case of agriculture with 120 million potential assessees, it will be hard to identify them. Tax what? The other issue is what can be taxed? Should it be value of output or the net income earned by farmers? While the value of output sold can be gauged and tracked to the extent that it enters the market, this is not net income as there are expenses incurred in growing crops which include seeds, fertilisers, water, and so on. Also for those owning equipment a depreciation value has to be imputed. This means farmers have to be treated on a par with companies or selfemployed professionals and not income tax assessees. How can one draw up such a profit and loss account?
Further, there is a lot of produce that does not enter the market and the marketable surplus can range from anywhere between 65 to 100 per cent depending on whether it is a food crop or a commercial product such as cotton and jute. Hence, a large part of the value will be hard to fathom on this score. Also there is a lot of under-reporting given the state of logistics in the country. There is hence an anomalous situation where there could be a considerable amount of money that is channelled here to escape tax by diverting funds to agriculture on paper or showing property owned as farmland which may be used for a penthouse. This is what needs to be plugged. To begin with this is what should be targeted by the department to weed out such leakages. This is akin to the amount siphoned out by the value-chain when it comes to food subsidy where ration shop owners sell grains in the open market and make fraudulent entries for this in their books. A way out is to tax the product which is presently also being done in some States through a mandi tax or something else. This tax will be finally passed on to the consumer who will then have to pay a higher price for the product. Such a move will ensure that the tax does not come in the way of the farmer’s income. Strictly speaking this would be an indirect tax on commodities, like an excise or sales tax, which will get subsumed under GST. The income of the farmer will still be outside the ambit of income tax. Out of the box One may have to do something out of the box here. Theoretically, in the case of large farmers thresholds for exemption can be decided for specific crops. These can be worked out on the basis of an assumed cost of production which goes into a unit of the produce which can be extrapolated to the relevant level of income which merits a tax. Using biometric impressions all sale transactions in the mandi can be recorded and aggregated leading to subsequent taxation beyond the limit. This will not be easy because of the possibility of proxy impressions; however, mandatory registration of farmers at mandis will help. However, once the National Agricultural Market attains a reasonable density, then tracking such persons with large transactions becomes easier, and tax can be imposed at source. Taxing farm income is the practice in developed countries; it is easier given the organised nature of farming. In developing countries, however, the information systems are not satisfactory and even crop estimates are based more on satellite imaging combined with arrivals which do not give the full picture. Further, the sellers in mandis are often not the farmers as the crop moves through a labyrinth of intermediaries before entering the market. This makes identification of the farmer difficult as the intermediary would be the ‘face’, who could be paying tax even today. This issue is definitely politically sensitive with several vested interests involved. The Government has been bold enough to operate the National Agricultural Market which breaks the traditional stronghold. The next step would be to start reforms in the direction of taxes so as to bring about greater accountability in the system while plugging the lacuna