Rajat Gupta's India

If justice delayed means justice denied then India is a country of an acute justice deficit. Especially in the case of financial frauds it is a land of comprehensive absenteeism of justice. The fast and quick trial and conviction of Rajat Gupta, an erstwhile Managing Director of management consultancy McKinsey & Company in insider trading has shown the robust and speedy law enforcement process of US Govt. One cannot imagine this to happen in India thanks to an abysmally procrastinating judicial system and archaic legislative setup.

The trial of  Rajat Gupta began on 21st May 2012 and less than a month on 15th Jun 2012, he was found guilty of conspiracy and three counts of insider trading. Just four years and one month elapsed between the telephonic conversation that took place between Mr Gupta and Mr Rajaratnam and his sentencing on Wednesday. Who can forget Harshad Mehta and what has happened to Ketan Parekh or for that matter Bofors case which took 25 years for its denouement. These trials don’t even deserve any comparison with that of Rajat Gupta yet latter is seeing hard-time just because he wasn’t lucky enough to get trialed in India.

Insider trading of stocks is notoriously hard to prove anywhere in world. According to the SEBI’s annual report, it took up investigations of 24 insider trading cases and completed investigations in 21 in the year 2011-12. Insider trading cases accounted for 15 per cent of the total number of cases. Yet, not a single example can be cited when any person involved in insider trading got convicted in India. SEBI has only few instances of success when Reliance Infrastructure and Reliance Natural Resources were fined for breaching securities laws. It has also fined a former independent director of Ranbaxy Laboratories, V K Kaul and the chairman of Jaiprakash Associates (JAL), Jaypee Group’s engineering and construction arm Manoj Kumar for the same but these efforts of market regulator go in vain as most of them simply appeal against their charges in the tribunals or courts and the case then either drags for years or goes against the SEBI itself. For instance, recently, the order against Gaur was set aside by the Securities Appellate tribunal (SAT) for want of evidence.

It is quite hard to crack the financial fraud being done in financial institutions and even more difficult is to defend it in the courts of law. SEBI is asking for more powers to monitor economical frauds. It is worth noting that the charges against Mr. Rajat Gupta would not have been proved in the absence of wiretaps available. It is against this background that SEBI has been asking for powers to have access to call records of suspected persons involved in fraud and also seeks the demand of special courts for special trials but it doesn’t seem to be happening anytime soon.

 Gurcharan Das writes in India Grows At Night–A Liberal Case for a Strong State that “500 out of the 3,500 central laws are obsolete and needed to be scrapped, and half of the 30,000 state laws as well.” This is why India is sickened with its poor-governance and often humored due to the weak enforcement of laws. India needs a complete legal overhaul in terms of fresh laws and swift jurisprudence. It is dire must to maintain the rule of law in the nation and to mend its image of soft estate for the crooks.

Financial Inclusion : The vital Aadhaar

 With the advancement of technology in all walks of life, it is praiseworthy that Govt. is up to providing digital identity through Aadhaar to the people of country. It climbs a further step by enabling the citizens to use this Aadhaar identity for the purpose of gaining various benefits and services provided by Govt. or private agencies. If you turn your back on the political motive, the intent behind direct cash transfer of subsidies to the beneficiaries seems to be absolutely a commendable step taken by Govt. In theory, this Aadhaar-enabled-service-delivery may put an end to the problem of bogus beneficiaries and a resultant leakage of valuable resources.  Aadhaar can become a launch pad for the final destination of direct cash transfer of subsidies to the needy, provided the challenges of implementation and financial inclusion could be dealt swiftly in mission mode.

The Unique Identification Authority of India (UIDAI) is responsible for providing a 12 digit unique bio metric identification to all Indians.  Poor and underprivileged may also avail social benefits through this identity number via banking services, which most of them are devoid of till date. But providing Aadhaar card to every beneficiary is an uphill task  in the first place. The expedite expansion of the system of Aadhaar-card distribution in far off places is a huge challenge, to begin with. First Aadhaar Number was issued in a remote tribal village of Maharashtra in September, 2009. The Unique Identification Authority have registered more than 24 crore people in the country since two years. So far, 200 million people i.e.about 16% of India’s population have been issued Aadhaar numbers. UIDAI has set the target of providing Aadhaar no. to the 60 cr people in the first phase. It means at least one of three Indians will possess a unique identification (UID) number by next year. It is easier said than done given the procrastinating administrative set up.  

The government is rolling out Aadhaar Enabled Service Delivery initiatives in 51 districts across the country. Aadhaar-enabled applications will be used for making pension payments, MNREGA payments, PDS distribution and scholarship payments, among others. The Govt. is in tearing hurry to start cash transfers though a host of states have a negligible presence on Aadhaar map.  Asymmetric distribution of Aadhaar in the country is a major challenge the mechanism is facing now. A full scale nationwide implementation of Aadhaar is critical to meet the deadlines set by Govt for direct cash transfer of subsidy. Expansion of Aadhaar will now solely depend on the pro-activeness of state governments. It is a humongous task on the part of the Govt. to feasibly encompass all the states in the implementation of its ‘dream project’.

 The not-so-expanded banking system poses another risk to the full scale implementation of direct-cash-transfer mechanism. A close to 60 percent of India’s population is un-banked. Not many people in India yet hold a bank account, while  rural branches network of banks is meager and yet to be computerized fully. It will be tough business call for the banks to go for a massive investment in social banking and financial inclusion amid the pressure on margins and rising of bad debts. Banks are unwilling to bear the cost of opening up branches in remote areas without a proper business preposition. The moot challenge is how to strike a fine balance between banks' profits and social responsibility.  The direct cash transfer of subsidy can never function in the absence of all pervasive banking system.

 Subsidy payments and benefits under different schemes amount to nearly Rs.3 trillion, roughly 3.5% of the gross domestic product, according to government estimates. This can only be contained when we a have a robust identity data of the targeted populace and a widely spread banking network. Aadhaar has solved a major problem of giving an identity to the faceless beneficiary but fact remains that it is still a pilot scheme. A noteworthy reduction in subsidy shall only be possible if the Aadhaar becomes a mission via meticulous planning and quick implementation.

If inflation……!!

Inflation is all set to become the single most significant number for Indian economy in coming three months. The consumer spending, interest rate, overall economic growth and trend of investment will anchor on the inflation data of weeks to come. With the ensuing festive season, the shopping spree of Indian consumers will be guided by the level of retail prices and companies smartness to woo them despite pressure on margins.  While RBI will keep a hawk eye on inflation and take the future course about interest rates for the busy season of bank credit. Consumer spending will be an indicator of demand while interest rates will be a pointer for the status of industrial investments during the second half of the current fiscal.

India’s shopping season is all set to begin as winter festivals are setting in. Marketers are keeping fingers crossed as inflation has already spoiled the shopping party. For the first time customers are not showered with the offers which they were habitual of during this season. This is probably the first festive season when almost all of the automobile, home-appliance or electronics companies have increased the prices to factor in the increased costs of production, energy and borrowings. Food basket of consumers is already costly with the ever rising prices of wheat flour biscuits, sugar and oil.

Indians may not spend much during this festival season owing to the high inflation in the country, according to the 'Mood of the Nation Survey' conducted by global research firm IPSOS. A newspaper reports state that more than a third (78%) Indians claimed that their planned expenditure during this festival season was less than Rs 10,000. Among the respondents, about 43% individuals said that their spend during this Diwali was less than Rs 5,000. These people were mostly from middle and lower middle income families. The IPSOS survey was conducted between September 24-27, 2012 among the men and women in Delhi, Mumbai, Kolkata, Chennai, Bangalore and Lucknow.

Meek festival demand is significantly risky for the economy. Companies won’t be motivated enough to start fresh investment for the enhancement of their capacities in a timid demand scenario.  Hence if inflation is not checked, less shopping by consumers will add woes to the economic downturn.

Indian industry is crying for low interest rate on bank borrowings.  Reduction in interest rates is directly related to reduction in the level of inflation. India's annual consumer price inflation (CPI) fell in September to 9.73% from 10.03% in August, driven by a marginal fall in fuel and food prices. But it is still high on Reserve Bank of India’s parameters to reduce interest rates. In the last policy meeting RBI remained hawkish on the stance as the WPI refused to budge below 7%, the RBI’s comfort zone. Indian interest rates are the highest among the major economies .With the pass-through of diesel price likely to take effect soon, CPI inflation would head back to double digits in the next month. Inflation data will shape up the RBI's policy review, scheduled on October 30. RBI’s stance towards interest rates will set the tone for fresh investment by private companies in the economy.

Global oil prices will be the key detriment for the inflation in coming months. Global commodity prices will also be cardinal for the behavior of inflation in Indian market. Although an unprecedented fall in the growth of China is a bad news for global economy but it will still help reduce the crude and commodity prices.  A renewed strength of Indian Rupee is likely to help in keeping imports cheaper and inflation under control.

The stubbornly high Inflation is one of the major factors behind the India’s latest economic hardships. It is now going to be crucial policy guide for the government’s renewed efforts to rehabilitate economy. Pick up in the demand and cheap credit is must to bring back the feel good factor among investors and industry.  This is the most opportune time for government to take inflation control as supreme ‘reform agenda’ for the good of the economy in general and aam adami in particular.

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FDI in insurance : Reassure safeguards

The Government has finally come out of a policy paralysis. The second phase of the reforms in financial sector has been launched amid political fluidity.  Insurance sector is opened up for 49 % foreign direct investment while pension sector is also up for foreign participation. Financial sector opening is a long pending reform and given the dearth of money in financial sector, undoubtedly it is a major step.  Despite the significance of these measures, context of this opening is somewhat different now. Global financial conglomerates ie banks, insurance and pension companies have lost their credibility during financial sector crisis in Europe and America. Opaque functioning of financial companies is under criticism and doubts have surfaced about safety of hard earned savings of public. Therefore one must not go berserk over swanky news-headlines but to look into the safeguards  being taken by Govt  under these reforms..

The second phase of financial sector reforms consists of two pronged strategies. First the further opening up of the foreign investment via increasing FDI limit to 49% from 26% and second, creating an enabling regulatory environment for further expansion of insurance services.  Under the first measure of reform, the Govt. has outreached the dictate of Parliamentary Standing Committee on insurance reforms. This committee had recommended that FDI limit must be capped at 26% but cabinet has decided to increase it to 49%. The pension sector is also opened for foreign investment, although private pension market is yet not developed in India.  Savings of government employees are the largest chunk of India’s pension business. Interim pension regulator is given statutory powers to kick start private competition in the business of annuity savings. Second set of measures taken by Govt. is in form of an overhaul of the regulations pertaining to insurance sector. It includes expansion of group insurance to non-employees and dose of tax breaks to the insurance savings.  

India’s private insurance industry is now ten years old and in the need of an investment of  Rs. 72000 cr. in order to expand its business. This step, if approved by parliament, will pave the way for influx fresh funds in India’s financial services industry.

If reforms are powerful and long term the fears are not less substantive either.  Financial companies have played a havoc in global markets through their irresponsible business behavior. The disastrous consequences of the banks and insurance companies investing in speculative activities are not unknown. Numerous examples can be given where they have burned the savings of common men due to their greed for making more money. These money-minting approaches of banks and insurance companies have created the real estate bubble in different parts of the world caused in a global financial meltdown. This has resulted in an exceptional tightening of regulation related to financial services. India’s fresh reforms must be analyzed in this context.

The opening up of insurance and pension has been supported and disapproved by different sections of the society. New measures are being criticized by the political standpoint only.  We need to ponder over the pros and cons of insurance sector’s opening. The fine-prints of these reforms have to be scrutinized closely to understand the possible impact. India needs an open and vibrant insurance market as majority of the population is deprived of financial security. But reform must come with impeccable safeguards to preclude the possible  greedy play of banks and insurance companies, as has occurred in developed markets. 

Cash subsidy: Identify the needy

India’s perennial challenge of wasteful government expenditure and mounting subsidies has surfaced again with worsening state of fiscal management. Rampant corruption in social schemes is also compelling government to go for a complete revamp of   welfare programs. India has just initiated a radical overhaul of welfare schemes that would see the government make cash payments direct to the needy.  The government is launching an ambitious scheme for direct electronic transfer of cash to beneficiaries that is expected to cover one quarter of households of the country. After several trials of cash transfers in different areas of India this is the first major initiative at national level. Direct cash transfer of subsidies is a welcome move as long as government system can handle the colossal task of identification of true beneficiaries and bringing them in to formal banking network.

 Bloating subsidies and inefficient expenditure has become a lasting bane for India’s fiscal health. Indian Government has always been generous in providing fuel, food, power and fertilizer on cheaper rates than the actual costs. Subsidies are meant to address poverty in India. There is no uplift of poor and below poverty line people as most of the government benefits never reach to the needy populace. The current emergence is how to plug the leakage of subsidies and target the subsidies for poor. The government has pegged its outgo on food, fuel and fertilizer subsidies in the 2012-13 fiscal at over Rs 1.79 lakh crore, nearly 14 per cent lower than the revised estimates for the current fiscal. According to the Budget proposals, the government's subsidy bill on food, petroleum and fertilisers is estimated at Rs 1,79,554 crore for the 2012-13 fiscal as against Rs 2,08,503 crore in the revised estimates for this fiscal.

 The debate to cut subsidies has become more prominent after the recent  report of Dr Vijay Kelkar Committee on fiscal consolidation. Report  says the economy is on the edge of a "fiscal precipice" and if the government does not cut subsidies on fuels, food and fertlisers, the budget deficit could go out of control in current fiscal year. The report notes that whereas Budget 2012-13 sought to limit subsidies to 2 percent of GDP, that number will likely be overshot. Report cautions in an unequivocal terms that  “A do-nothing approach would mean the risk  of a much larger adjustment of incomes and spending forced by the markets, both domestic  and international, with a spiraling fiscal deficit and its consequences for much slower growth,  rising unemployment, and higher inflation.”

 The plan to start  direct cash transfer of subsidies has come in this premise.  Against the backdrop of corruption and pilferage in various schemes, the government has been thinking about direct cash transfers to genuine beneficiaries to plug leakages as it is expected to bring down the subsidy burden.
 The beneficiaries will include poor people. Of them, the Unique Identity (UID) Mission (Aadhar)  has already enlisted 200 million people and the number is expected to go up to 600 million in the next six month. The program will initially cover scholarships, pensions and unemployment allowances and later MNREGA and Public Distribution Schemes. A Cash Transfer System can be used for transferring cash benefits such as MNREGA wages, scholarships, pensions, income support of other types and health benefits.  The program is inspired by such successful schemes existing in countries like Brazil and Mexico and cities like New York and Washington.

  The whole idea of cash transfers must be seen into the context of few bottlenecks. Indian economic and social planning is marred with critical data gaps. The unavailability of a credible income data is the oldest inhibiting factor in the implementation of welfare schemes. India still lacks an authentic data of people living below poverty line as host of official poverty estimates are just in the chorus of mutual contradiction. The governor of the Reserve Bank of India has recently complained about the quality of data made available. The credibility deficit about Indian socio-economic data has been created because of the glaring errors but also because of the unnecessary politicization of the data. So much so that today nobody trusts our employment estimates, industrial production estimates, inflation estimates and certainly not the ones on poverty. We must have a credible income data  at the earliest to identify beneficiaries for getting cash transfers. The next big challenge is that a large part of Indian population is just out of formal banking network. As proposed move aims to transfer individual benefits from the government directly into the bank accounts of beneficiaries, lack of financial inclusion will be a major roadblock. Indian banking sector is required to gear up to reach out with the poor.  

  The success of this plan will largely depend on the government’s efficiency in dealing with the fundamental issues like the basis of targeting, definition of poverty line and identification of intended beneficiaries. Devising a methodology to transfer the cash subsidy to the poor is going to be a tough task. Central government will also need a proactive support of state governments in taking up fundamental reforms required in refurbishment of welfare system. Direct transfer of subsidies to poor is a far-reaching move. The new system is expected to reduce the cost and subsidy bill through better targeting providing the government could identify the needy in a transparent manner.

FDI in retail : Enter consumer !

Excuse me!!!  Aren’t we being too touchy about FDI in retail? Is this a country of farmers only? Is the interest of only kiranawalas paramount? What about India’s largest socio-economic class? What about us? We, the ubiquitous consumers.  It is high time now to bring the largest stakeholder in the discourse.

  Farmer’s interests are important. Role of small traders is not less significant. But we are a country of 1.25 billion people. Consumers, especially middle class consumers are the largest mass directly influenced by the happening in retail arena. Producers are also consumers in a practical manner. We can’t deny the fact that the recent growth of Indian market is a gift of nation’s emerging consumer culture. Constant and strong growth in individual consumption expenditure over last few years has upped growth of Indian market. Private consumption expenditure is rising at an annual rate of 8-9 percent since last seven years as per the Economic survey of 2012.

   Organized retail has already become a ten year old experience in India and consumers have developed their own perspective about retailing. A host of researches and surveys are there to support the fact that organized retail has qualitatively improved shopping paradigms in India. A recent survey of renowned consulting agency has found that the growth of modern trade ushered in several benefits for consumers, some of which include better prices, increased product choice and an improved quality of life. Consumers are experimenting with products, brands and categories, and are trading up in their purchases, wanting to use products of good quality. Modern trade retailers, on their part, will also help consumers understand how to use products.

    Greater supply of products, increased competition, new product launches, etc., increase the flow of products into the market. As a result, prices tend to fall and become more competitive. Locally sourced products and commodities also help keep prices cheaper. Basic food of the urban poor is cheaper in supermarkets of Delhi than in traditional retail shops: rice and wheat are 15% cheaper and vegetables are 33% cheaper, just because of scale of retail operations and better supply chain management. Indian consumers have got a proactive support from organized retail during the recent bout of high inflation. This support came in the form of innovative packaging and bundling/discount offers.   

India’s organized retail experience has remained by and large satisfying for the largest socio-economic class ie consumers. Is it really true that organized retail have put danger to the survival of small retailers? Or farmers have suffered coz of retail opening? It is time to look for the ground realties and debate practically. Let the consumer enter in the debate, the bona fide stakeholder of India’s growth story. 

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Savings – Bigad gai aadat !!

Thrift conscious Indians are fast becoming spendthrift and vague saver. Robust savings, an internationally acclaimed Indian phenomenon is taking a disturbing trend of slide owing to the uncertain and suspicious economic ambience around. It is just not that Gross domestic savings as the ratio of GDP is declining but composition of Indian savings has also become somewhat alarming. Financial savings instruments are losing their sheen   while non-liquid assets like gold, land or home are catching up quickly. This trend is not at all favorable for the growth of Indian economy as it reduces the stock of savings available for development expenditure.

Indian savings are registering a consistent decline since last few years.  As per the Economic Survey of 2011-12 the gross domestic savings have declined from 33.8 per cent of GDP in 2009-10 to 32.8 per cent in 2010-11. This decline is accounted for by a reduction in household savings in financial assets.  It is clearly evident that households have been putting less money in financial savings. Two more recent reports on the macro economy have drawn attention to this development, which has deep implications for the economy. The Economic Outlook, of the Economic Advisory Council of the Prime Minister (PMEAC), headed by C. Rangarajan, and the Reserve Bank of India’s  Annual Report (2011-12).  According to the Economic Outlook, gross financial savings which were at 15.4 per cent of gross domestic product (GDP) in 2007-08, fell to 13.6 per cent in 2010-11, and could have possibly fallen to below 12 per cent in the next year (2011-12). The RBI’s estimate is even less upbeat: household financial savings fell to 7.8 per cent (of GDP) in 2011-12, the lowest since 1989-90. During the preceding three years, it averaged 11 per cent.

Indian’s lure for gold not a new phenomenon but recent development is a bit more serious. Indian households have withdrawn from financial savings to put more money into gold. Indian investors are now more aware about the investment potential of gold. Even ordinary investors buy gold, hoping it would protect them from inflation. Gold investment is ranging from physical gold to exchange traded gold funds. Spurt in gold import is clearly a confirmation of the investment led gold buying. Real estate is the next asset class catching up to investor fancy. With rising income levels and bank credit support, real estate has become a high profile destination of Indian household savings. Gold and property savings are not available for economy as both are non-liquid assets. The non-transparent market of these assets also results in a huge tax loss to the govt

Rising inflation pinches from all the directions. Not only does it reduces the consumption on account of low income but also increases the expenditure. Consequently very less amount remains for savings. Inflation is one of the major factors behind a mass disenchantment from financial savings. Inflation is robbing return on savings while interest rate on bank deposits no way a cushion for common investor. Recent spate of reduction on saving banks interest rate has resulted in an all-time low growth in bank deposits. Present tax policies on insurance and MFs are also a dampener to the investment spirit.

Household savings are major source of investment for the nation. Reduction in common man’s thrift is a loss to economy as it forces govt to borrow to meet investment needs. That results in higher deficits.  It is very important to bring Indian savers back to the financial savings as the tendency to invest in non-liquid asset will surely fabricate grave repercussions in near future.