Hasty Cash Transfer: Appealing or appalling?

Finally the Govt. has failed to meet the deadline of Direct Cash Transfer( DCT) of subsidy in the wake of haphazard and unfinished preparation. They have now postponed it by four days.

The key purpose of DCT is to provide entitlements in cash to the poor via biometric identification under Aadhar. Any rational Govt. would have first assembled the data of beneficiaries before introducing schemes, intrinsically aiming at poor-benefit. But it is staggering that India still doesn't possess any authentic data of poverty when the entire system of social-welfare schemes rests on poverty-estimation. What is more surprising is that Govt. effort of identifying needy via Socio Economic Caste Census (SECC), which was supposed to be completed by 2006 is yet on play and Govt. is moving forward to live with the faulty list of beneficiaries. Hence many deserving needy will remain out of the ambit since beginning.

Govt. put its all energy into making people Aadhar enabled which doesn’t even estimate income data. Govt. would have done better to either associate it with specifying income data or simply expedited the process of SECC before distributing Aadhar in remote villages.

The selection of states and welfare programs also shows the poor insight of Govt. States like UP, Bihar, Orissa, and West Bengal, considered to be densely destitute, are not part of this first trial of DCT. Apart from this, Govt. has chosen mainly scholarship and pension schemes which are less or not at all tainted with leakage. Pilot projects are meant to be testified in challenging situations, if not entirely then at least on smaller scale. It is pertinent to mention that one of the testing trials in Kotkasim (Rajashthan) has comprehensively failed to deliver the desired results of DCT of Kerosene subsidy.  

Only 40% of India's 1.2 billion people have bank accounts, and only 36,000 of India's 600,000 villages even have a bank branch. There were plans to open 73,000 new "ultra small" bank branches of about 100 to 200 square feet apiece and hire one million banking employees in rural areas (according to minutes from a government committee overseeing cash transfers) but when the target seemed unattainable before deadline, there came a wild card entry i.e. Business Correspondents known as BC model. This model seems tricky. Representatives from companies, financial institutions, panchayat and even kirana shoppers etc can become a BC in far-off villages. These BCs will be deployed in villages with a micro-ATM. Villagers wanting to withdraw their entitlement will approach a BC, get his/her fingerprints verified on machine and will be paid by BC. Micro-ATM devices will be operated through wireless connectivity which is by and large intermittent and creaky. In case of any technological failure, beneficiaries might be deprived of their benefits. 

This Friday Union Agriculture Minister and Nationalist Congress Party ( NCP) Supremo Sharad Pawar cautioned the Govt. against hasty implementation of cash transfer schemes. Many Chief Ministers had also opposed the move in the recently held National Development Council (NDC) meeting. The implementation of DCT, without the consent of state governments, is certainly a tough call in the federal setup of the country. No single target pertaining to DCT has been achieved so far. The problem is that there was no visionary agenda for the same and many institutions were roped in without coordination. Govt. must understand that too many systems lead to no systematic system at all. Mr. Chidambaram, DCT is definitely a game changer (directing towards failure) and a pure magic (a black one).

Corporate for Community

Corporate philanthropy is all set to become a practice thanks to recent amendments in   Companies Act. The amended bill has included a unique proviso of mandatory Corporate Social Responsibility (CSR) in companies operation.  It is now by a statute of law that they are supposed to engage with CSR which was till then a voluntary practice. The Govt. might provide further incentives to motivate the companies to work for social betterment. With the inclusion of CSR in companies act, corporate can safely counter balance the political demand of reservation in private sector through their community development initiatives.

The Bill mandates that companies having net worth of Rs.500 crore or more, or turnover of Rs.1,000 crore or more, or a net profit of Rs.5 crore or more in a fiscal will have to spend a minimum of 2% of the average net profit of the past three fiscals on CSR. If companies are unable to meet CSR norms, they will have to give explanations and disclose reasons in their books for the same. Otherwise, they would face action, including penalty. It is left to companies’ discretion to choose the nature of their CSR programs.

Endeavors carried out by companies for the betterment of community and society are termed as Corporate Social Responsibility. It is considered that they are ethically liable to spend a part of their profit for community development. It is not a new concept for India Inc. Many renowned companies like Tata Group, Aptech, Infosys, Mahindra & Mahindra etc are already enthusiastically engaged in CSR activities. They voluntary provide services in the area of healthcare, education, employment, and environment etc under their CSR projects. This trend of engaging in CSR without a motive of profit emerged twenty years back and is highly popular at global stage as well. In 2011 companies like Statoil, Nestle, Edison, Walt Disney Company, Grupo Ferrovial etc have been listed by Fortune Magazine among top 10 companies involved in CSR.

Though a philanthropic intent involved, CSR has become more of a business strategy. Many global companies undertake ethical business actions, such as maintaining environment sustainability, providing labor etc in order to raise their reputation in market. British American Tobacco (BAT), the petroleum giant BP (well known for its high-profile advertising campaigns on environmental aspects of its operations), and McDonald's are believed to undertake CSR programs in order to avoid ethical questions based on their core operations. However this is not the case in India.

The CSR performance of India Inc has been pathetic. They could neither link CSR with business sustainability nor business strategy. A study carried out by ET intelligence group says that while most companies discuss CSR initiatives at great length only a handful have mentioned the amount spent, either in absolute terms or as a percentage of their sales or profit. Thirty eight companies of the Nifty companies mentioned CSR initiatives in their annual reports or exclusive sustainability reports, but there was no information on the amount spent.

Incorporating CSR as a statutory provision in companies bill is a commendable step. It would make corporate more sensitive and proactive towards their social responsibility. Companies must come forward to complement Govt. efforts for social development. CSR is an ideal measure for complementing government efforts of social development and a win-win preposition for both i.e. companies and society.

Affordable Sickness

How unfortunate it is that India who is called the ‘Pharmacy of the Developing World’ is not equipped-well at home to procure decent health facilities for its vast majority of population. Good number of people in this country becomes the victim of death knell simply because they are not provided with adequate medical attention. Only handful of the people has access to those top-class medical services which India likes to boast of. Poor can’t take advantage of these expensive medical amenities and end up in Govt. hospitals, mostly devoid of doctor and dose. How shameful it is that a good chunk of India can’t even afford to get sick!

In the backdrop of this sorry state of the nation, it is surely a commendable step taken by Gov. to allow reducing the prices of essential medicines. Recently Govt. has passed a long-pending bill named “National Pharmaceutical Pricing Policy (NPPP 12), concerned with the price control of 348 drugs enlisted in National List of Essential Medicine (NLEM). Once implemented, the prices of these medicines will go down by 50-70%. For the first time the cost of imported drugs, like insulin imported by Eli Lilly and Novo Nordik, has also been kept in its purview. Only new drug discoveries, new drug delivery systems (NDDS) and those which get their first patent in India will be exempted from price control for five years. Hence the new drug policy secures the sanctity of patent drugs and new inventions and at the same time protects the interests of those many people who can’t avail costly medicines.

Indian Pharma Industry is one of the fastest growing pharmaceutical markets in the world. It is world's fourth-largest in terms of volume and stands 14th in terms of value. The profitability of pharmaceutical industry will be reduced to some extent due to new drug policy but it won’t be as serious as being projected.  A preliminary working shows that prices of many leading brands will be slashed by 50 per cent to 80 per cent. This will reduce industry's profit by Rs 4,000 crore on domestic sale of Rs 67,500 crore per annum. Indian Pharma sector is growing at over 16% because of the strong growth in chronic segment in the domestic market. It is definitely a booming sector. India has the highest number of pharmaceutical manufacturers in the world: over 20,000. It must also be noted that price reduction will result into volume expansion and it can very well balance possible profit erosion due to price reduction of medicines.

Another criticism of NPPP 12 is that if profitability of pharma companies will spiral down, there would be less money to put in Research & Development. “In the past decade, the pharma sector has been spending more and more on R&D activities, while the returns have been minimal,” said D.G. Shah, secretary general of Indian Pharmaceutical Alliance (IPA) in an interview. However, It is a convenient and safest argument on the part of pharma companies sitting on high reserves.

A public health group AIDAN has filed a PIL in Supreme Court to bring down the prices of essential medicines. Hearing of the case is likely to happen in the second week of Jan 2013. By then Govt. might come up with new prices for all 348 drugs enlisted in NLEM. It is mandatory to not let pharma companies reign over this sector. Medicine is the ONLY commodity, purchasing of which is not decided by purchaser but by prescriber. One can imagine the grave scenario in the event of cartelization between producer and prescriber or for that matter among the companies themselves. Truly justified it is on the part of Govt. to intervene as 'health for all' is the fundamental duty of a welfare state.

The Male muddle : Politics vs corporate

How unfortunate it is to see that political establishments are hitting hard at the business of corporate-giants. You get a contract sponsored by sovereign Govt. of the country and later the apex court concerned simply terminates it regardless of the huge loss the private enterprises involved go through with.

It seems that not only in India but globally internal politics of respective nation is encroaching upon the territory of its global economic relations which are supposed to be dealt with independently. Economic relations must never get tainted by the petty interests of politics, opposite of which just happened in Maldives.

The earlier Govt in Maldives in the president-ship of Naseed enters into a concession agreement with GMR-MAHB to develop the Male International Airport. After a coup d’état, the new Govt. formed in the stewardship of Waheed annuls the same contract calling it illegal and this $500 million airport-deal simply goes into vain. The similar incident has happened in India as well when 2G-spectrum allocations had been negated by Supreme Court jeopardizing the interests of corporate including foreign companies such as Telenor , Sistema, Etislat etc.

In June 2010, the Maldives government, the Maldives Airports Company Limited (MACL) and GMR-MAHB Consortium signed a tripartite concession agreement to develop and run the Ibrahim Nasir International Airport at Malé, the capital of the island nation. According to this agreement GMR group levied Airport Development Charge on departing passengers, the revenues earned through this process went to the Maldives Govt. Later this practice was found illegal by a local court. Seeing that, the then president Nasheed allowed the GMR to deduct the amount of ADC from the overall revenues it used to share with the Govt. Bone of contention appeared when the changed Govt. of Waheed found out that it owed GMR about $3.5 million.

 In the guise of xenophobia he contended to expropriate the tender from GMR and won the case in Singapore Court.  It is notable that GMR-MAHB consortium has made the largest-ever FDI investment in Maldives and Male airport is a top growing airport in the region. Given these facts and that IFC, a financial body of World Bank was involved in the bidding process through which GMR had won the tender; it is wondrous how the new Govt. in Maldives called it an unfair agreement. The whole incident clearly manifests the anti-Indian sentiment spread in the neighboring island.

On one hand, GMR-Maldives spat is technically a win-win situation for the Maldives and on the other; it brings complex repercussions for India. Strategically Maldives is an important neighbor archipelago for the country. Given the geographical position of Maldives and its recent brew with India, China with all its might would try to make a footing in this region to counter balance India. Hence it is a challenge for Indian Govt. to keep Maldives in good humor while achieving justice for its company. Highly likely it is that GMR will appeal in International Trade Court against the Singapore court verdict which would further stress diplomatic  machinery’s new mission to handle Male. The test is not actually for GMR but for Indian Govt. as to how it would help this b’lore based enterprise to incur its losses at the same time keeping the strategic relationship with the island intact.

The Twin Deficit Trap

Indian economy is in the grip of classic quagmire named twin deficit. Fiscal deficit is already looming large thanks to the acute imbalance of revenue and expenditure. While current account deficit has risen to a precarious level indicating a fragile state of affair at the forex management front. A decadal low growth is making things worse. As stubborn inflation and political fluidity is here to stay, India has become a riskier place for global investors than its emerging market peers.        

A current account deficit occurs when a country’s total import of goods, services and transfers is higher than the total exports of goods, services and transfers. India’s current account deficit (CAD) has peaked to the level of 4.5% of the GDP which denotes that India is importing more and exporting less. This is the highest level of CAD in last 20 years and it is more than 1991, the year when India faced a balance of payments crisis. The skyrocketing CAD is a result of India’s huge foreign trade deficit.  The slowdown in the global economy has taken its toll from India’s exports while imports are rising unabated. Energy import (Crude oil and coal) are the fastest growing imports in last few quarters.

India is also not able to create a favorable investor environment and deters foreign investors to invest in the economy. This is another big drag of forex inflow apart from the skewed export proceeds. This current account deficit puts burden on domestic currency. Rupee has witnessed a fresh onslaught of speculators recently after CAD figure came out to public domain. A current account deficit of about 2% of GDP is sustainable in India which needs foreign funds to propel its growth. But a CAD of 4.5 pc is just a crisis and it is likely to hit rupee further in coming months.

Indian federal budget is perennially in the grip of populist profligacy. The frightening days of high fiscal deficit has returned now.  The Centre's fiscal deficit stood at Rs 3.68 lakh crore in the first seven months of this fiscal, constituting 68.32% of revised target of fiscal deficit for the entire 2012-13. Finance Minister P Chidambaram had earlier revised fiscal deficit target to 5.3% of GDP from the Budget Estimate of 5.1%. Collating GDP figures released today and fiscal deficit figures released last month, fiscal deficit constituted 7.36% of GDP in the first half of 2012-13. Ever major indicator related to fiscal deficit is giving a dismal picture as expenditure on rise and revenue growth has been tapered due to general economic slowdown. Exorbitant subsidies and reckless spending in failed schemes such as MNEREGS is one of the key reasons of fiscal quandary. Government is forced to borrow more from the market to finance its expenditure. Heavy Govt borrowings are crowding out private loans and adding fuel the inflation. The vicious cycle of high fisc def, high govt borrowing, increased money supply, inflation and high interest rates is setting in now.  

Though a minimal amount of fiscal and current account is not bad for the economy but given the present economic environment, it is going to be a deadly deterrent to the prospect of growth.  GDP growth has dipped down to 5.3% in Q2 from 5.5% of the previous quarter. With a below 6pc growth rate twin deficits have become a deadly duo for overall economic management in the nation. A quick correction to the situation seems impossible as India’s unstable political environment is making it further difficult. Indian economy is now venturing in to minefield of uncertainties.  Things will improve only after the political scene becomes clear i.e. after post Loka Sabha elections in 2014.  

Big banks : Bigger caution

Bank consolidation has again come to the fore with recent initiatives of finance ministry for new banking licenses and renewed discussion on India’s diminutive banking. India is the country of spate of small banks and a handful number of big-banks. Amalgamation of these small and big public sector banks is imperative otherwise it would badly lag behind in global banking system. However, large-size banks aren't immune to risk. Massive bank failures in USA and Euro zone are a loud word of caution for big banking operations.

It is a coincidence that USA and Europe are now trying to bring global banks under tight regulation while India is looking for a Desi model of global banking. Finance minister P.Chidambaram has expressed the need for India to have world-size banks to meet the requirements of India’s growing economy. USA and EU markets are a frightening tale of big banks. Risk inclined, greedy and casual approach of big banks had led  to the  toxic securities and real estate investments. This has resulted into the collapse of Lehman brothers and quite a few big banks across the USA and EU.  EU and USA regulators are trying to ring-fence the banks and pushing them for a separation of core banking (deposit and lending) and investment operations.

Merger of small banks with big banks is necessary for the country if it is to create its international footing. The present scenario of Indian banking is not conducive to vie globally. According to ASSOCHAM chief, only two Indian banks, State Bank of India at the 64th position and ICICI Bank Ltd at 81st, figure among the global top 100 by tier I capital and in terms of assets, India’s largest bank SBI is world’s 70^th largest bank and India’s largest private sector lender ICICI Bank Ltd. stands at 148^th position. None of the other Indian banks features among the top 200 banks in the world-in terms of size of assets. Many Indian banks, especially public sector banks, cooperative banks and regional rural banks are unprepared for the implementation of Basel norms due to capital inadequacy. These norms demand capital allocation for operational risks in addition to credit and market risk. With this view, small banks must go ahead with consolidation in order to achieve capital adequacy.

Apart from this, India is not well penetrated with banking. A good chunk of areas are still under-banked, even non-banked. Merger of two banks with the prospect of targeting far off places would flourish the banking system in India internally. Indian Govt. is going to launch the system of giving subsidies through cash transfer which can only be possible if banking reaches to the grassroots of India . Large size banks  can feasibly take their business to remote areas devoid of banking.  

Chidambaram did advocate banking consolidation but did not come up with the process as to how and under which rules and laws it should be done. Merging two banks is not an easy step. Most of the Indian banks are at the different stages of technology implementation.  Technology platforms, system platforms, network architecture, database vendors etc are usually different in different banks, which must be made compatible before merging the two. Heterogeneous culture of the two banks must also be critically considered. Staff of both the banks must be taken into confidence so that they can accommodate well in changing work-place environment. Regulatory norms must also be paid due attention.

India is in the dire need of large-banks in order to go with the international banking standard but it must not forget what had happened in USA and EU. When A developed country like USA could not yet recuperate from the economic crisis its banks had led it into how a developing country like India would handle the situation if at all its banks falter. Therefore proper procedures of merger and acquisition and the safeguards in the event of mishap must be well-crafted and documented beforehand if banking consolidation is to be done. Large-banks are not a panacea. It has its own side effects. Indian banks must always be vigilant towards the fact that Lehman Brothers was too big to fail but actually it did.   

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Tangled telecom

India’s most celebrated success story, telecom revolution, turning into a tragic tale of ambiguity and disputes. The failed auction of 2G spectrum is yet another illustration of the fact that India’s fastest growing sector is a clear victim of policy deficit, corruption, short-term policies and disconnect with market realities.

The just concluded rather aborted 2G spectrum auction is a result of chain of inconsistent government decisions. The reason for the failure of 2G auction lies in the fact that reserve price determined by it was quite high, in the wake of which hardly any telecom operator turned up to bid and only 9,407 crore could be earned against the anticipation of Govt. of 40,000 crore. Exceptionally higher scale of erudition was not needed to comprehend the market realities of the day. TRAI and Government have already been cautioned by the experts that  a high reserve price may  be a dampener in the given situation. It was entirely nonsensical to put up the reserve price so high when profit-making potential of telcos is already going down. They could have bought the spectrum on the same price back in 2008 but then it was allowed to have been sold nearly for free. Now when many telecom circles are in the stage of saturation, how the Govt. can expect the telecom operators to invest such huge amount of money on buying spectrum. It is worth to mention that elevated bids for acquiring 3G spectrum had resulted in bleeding the reserves and squeezing bottom lines of all major telecom companies.   

Indian telecom sector is losing its sheen in the eyes of investor on one hand while tariffs are rising for subscribers on the other. The most serious fact is that growth of new mobile connections has tanked in recent month because of a policy disputes and uncertainties.  For instance, in the reign of Raja, 2G spectrum was allocated on first-cum-first-served basis. As no viable rules were there he could readily distribute the spectrum voluntarily exploiting the Govt. property considering it as his own. The episode resulted into one of the biggest scam in the country and Supreme Court had to cancel all the licenses awarded by him in 2008. Bearing it in mind, next time the Govt. resorted to the system of auction for the sale of 3G spectrum in 2010. The same method it repeated recently in the allocation of 2G spectrum as well, the denouement of which is not unknown to anyone.  

The Govt. now intends to re-auction unsold spectrum in the month of March and still hopes to reach the budgeted target of 40,000 crore. Again a faulty decision! There is no rocket science into understanding that the reserve price will be brought down in the next auction. What wrong did the companies, which purchased the spectrum in the current auction do that they are liable to pay more for the same spectrum the other companies might be getting in lower prices in re-auctioning? If it happens those companies will definitely move the court of law and the growth of telecom sector will again be stuck due to another controversy.

India’s tele density hovers around 60%, hence there is still enough potential  of growth of voice telephony via 2G while offering a high speed mobile data service to the urban middle class though the 3G platforms. It is too difficult to understand why Govt. fails to take prudent decisions and behave so nonsensically. Too painful it is to see the demise of the growth of most thriving business in India which still possesses enormous potential to prosper further. 

USA: Political cliff to fiscal abyss

A creaking siren on an unprecedented fiscal crisis has rung in the United States of America just the next day of the re-election of Barak Obama for four more years to US presidency. Three days after his victory speech, President Barak Obama rendered his first public comments giving birth to the pending debate over looming fiscal cliff. The debate is divided as usual. Obama reiterated his stance to not budge on Republicans’ demand of keeping taxes alike for all and sacrificing social expenditure. He is still of the view that people making more than $250,000 a year must pay more taxes which he says is acceptable to the vast populace of America as is validated by him achieving four more years. This is likely to start a new phase of political wrangling over sensitive fiscal issues, that will keep the whole financial world on cliff of uncertainty for weeks to come.

The beginning of the New Year sees the deadly combination of automatic tax increases and spending cuts that economists predict could push the US back into recession. In order to prevent its occurrence, Republicans want to cut spending and avoid raising taxes, while Democrats are looking for a combination of moderate cut in spending cuts and while steep increase in taxes.

Americans have long been pampered with low tax rates. Apart from this, colossal public spending on education, health care, infrastructure and technology has led to the current crisis of higher fiscal deficit in the US economy. America has to resort to tax increases and spending cuts at the sunset of this year to fix this deficit crisis. US Congressional Budget Office (CBO) estimates that this combination of lower spending and higher taxes is expected to conglomerate about $600 billion from the economy but at the same time would cut gross domestic product (GDP) by four percentage points in 2013, sending the economy into a recession (i.e., negative growth). It also predicts that unemployment would rise by almost a full percentage point reaching to 9.1 percent range, with a loss of about two million jobs. Due to the expected negative impact of fiscal cliff, the American lawmakers are in a tizzy whether or not raise the taxes and reduce spending.

Obama is ready to compromise to some extent but vehemently refuses to agree on  Republicans’ demand of annulling tax hikes for affluent. Exit polls of voters released Tuesday showed that 47% of Americans supported Obama's proposal to raise tax rates on income above $250,000 for couples. In addition, 13% said everyone should pay more in taxes, while 35% were against any tax increases. On the other hand Republicans who are in majority in the House of representatives, the lower  house, avert to go along with the President on the ground that it would cripple the growth of small businesses those are still struggling hard to overcome the repercussions of earlier recession. Republican House Speaker John Boehner said he remains unwilling to raise tax rates on upper-income earners. But he left open the possibility of balancing spending cuts with new revenue that could be achieved by revising the tax code to lower rates but also eliminate some tax breaks. Hence it is a tough call for Obama to reach an agreement in the Congress.

 Obama and speaker Boehner in their respective speech seemed to put the burden of averting fiscal cliff on each other while the whole world expected prudent answers from them. The vicious altercation between democrats and republicans over the issue of debt-ceiling in 2011 is well known. It led to an unprecedented downgrade of the US credit rating BY S&P. Hence, if the deadlock between both the parties still persists and no legislation passes before the year-end the US economy will be badly affected resulting into an economic disaster worldwide. Is the world going to view another round of brinkmanship in US politics ? … Clock is ticking for America. 

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Business of bottlenecks

Despite economic openness of two decades, India still remains one of the  most  difficult places to do business in the world.The new IFC and World Bank Report, ranked India 132nd among 185 countries in terms of ease of doing business. The report is an upsetting critique of the state of affairs in the Indian legislative and bureaucratic system. In spite of 22 years of economic reforms, India is still grappling with archaic and cumbersome laws and procedures. It appears that not by default but by design the system deters the local and foreign investors to do business in the country.

 India is the lowest ranked among BRIC nations. Brazil (130th), Russia (112nd), China (91th) and 'Taiwan, China" (16th) and is also below neighboring Pakistan (107th) and Nepal (108th). As per the IFC and World Bank report, in the past eight years, India did implement a total of 17 institutional or regulatory reforms making it easier for local entrepreneurs to do business here  than any other economy in South Asia since 2005. It has focused mostly on simplifying and reducing the cost of regulatory processes in key areas such as starting a business, paying taxes, and trading across borders but it did not improve at all rather slipped on six parameters among ten on which the countries were ranked.

 India’s oppressive bureaucracy and immeasurable red tape is a nightmare for small business.   The report -Doing Business 2013: Smarter Regulations for Small and Medium-Size Enterprises by International Finance Corporation and World Bank which is the 10^th edition of their Doing Business series- states that It also takes one of the longest time (1420 days) required to enforce a business contract in Indian system. Also areas such as starting business, getting electricity, protecting investors and resolving insolvency have seen a further  degradation   as compared to last year. 

Outdated laws are the crux of the problem. Old procedures and lack of computerization in several departments makes it even worse.  India is in dire need of judicial reforms as well. The time taken to fight a dispute in Indian courts is roughly three times more than that in OECD countries. Dual bureaucracy (center & state) is a double whammy which makes the policy-implementation way harder. Recently Finance Minister P. Chidambaram pointed out that almost 700 projects with investments of Rs 7,500 crore are stuck due to delays caused by the absence of regulatory approvals. A deep rooted corruption which is highly pervasive across the system forces businesses to become corrupt to survive. In its 2008 study, Transparency International reports about 40% of Indians had first-hand experience of paying bribes or using a contact to get a job done in public offices.

On the name of reforms India is opening its doors again for foreign investment but it’d do no good as long as it doesn't pay heed to the core i.e.  the efficiency of government systems. India is a growing market therefore investment may come, But the fact remains that fresh investment will increase the corruption potential thanks to the everlasting bottlenecks. Ease of doing business is the fundamental reform that must be taken at the earliest to make India’s growth story clean, not tainted with graft and corruption. 

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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