Super regulator : Greater contention

Just because Govt. doesn’t enjoy autonomy in financial matters, it intends to dominate the sector through Financial Code Bill 2013

India is toying with  an idea of super regulator for burgeoning financial sector amid spate of incongruous standpoints of financial regulations. The new Financial Code Bill proposes to create a unified financial regulator merging rest of other regulators  barring RBI, though  very purpose of bringing it to the fore remains unclear. The report of Financial Sector Legislative Reforms Commission headed by Justice B N Srikrishna, has already generated a hectic debate as it waters down RBI’s powers and wets financial regulation in one super notch bureaucracy.  There are valid apprehensions that sole regulator may suffocate financial sector with confusions and turf wars amidst complex nature of financial products and services. Having multiple regulators for varied financial services is a global practice, willing to do away with it is like returning to square one.

Under the proposed regulatory architecture, there will only be two regulators i.e. RBI and a Unified Financial Agency which will merge the existing capital markets, insurance, pension fund and forward markets regulators (Securities and Exchange Board of India, or Sebi; Insurance Regulatory and Development Authority, or Irda; Pension Fund Regulatory and Development Authority, or PFRDA; and the Forward Markets Commission). There has to be different regulatory bodies for capital markets, commodity markets, insurance and banks. Govt. must make it very clear what purpose a super regulator would serve when having at least three apex monitoring authorities in financial sector is a common practice. While IRDA and PFRDA can be merged into one but merging all four is not only irrelevant but unwise.

A closer study of the Financial Bill suggests that it implicitly focuses on pruning RBI’s powers perhaps because RBI hardly designs its policies the way Govt. wishes it to. According to new Financial Code there will be an empowered Monetary Policy Committee which will be though headed by Chief of central bank but five of its seven members will be outsiders. The finance ministry will also send a representative, but without a vote. That means the majority of members will come from outside the RBI and they will be appointed by the government. MPC is a welcome move but the current structure seemingly aims at diluting RBI Governor’s control over monetary policy who can override MPC only in exceptional circumstances.

Non Banking Financial Institutions and Housing Finance Companies have also been kept outside RBI’s ambit which is certainly insignificant as the functions of NBFCs and HFCs are no different from banking institutions, therefore, having different regulator for former and latter is utterly illogical.  RBI will also no longer be Govt’s debt manager and a new body i.e. Public Debt Management Agency will take over this job of raising loans for the government. Even on capital controls, FSLRC has proposed that all issues related to inflows be handled by the government, while RBI should deal with outflows. It also recommends empowering the existing Financial Stability and Development Council, which would be headed by Finance Ministry and not RBI.

The only positive proposal seems to be coming out of this bill is that it specifically addresses issues related to consumer protection. There will be a common Financial Redressal Agency which will handle all type of consumer complaints from bank deposits to exotic derivative products. It will thus spare consumers to go through the varied complex system of grievance registration and redressal for diverse financial services.

FSLRC recommendations have come in the wake of a spate of disagreements between the central bank and the finance ministry over the past decade. Just because Govt. doesn’t enjoy autonomy in financial matters, it intends to dominate the sector through this legislation. Financial policies must be governed by an institution independent of Govt. control as it is now. To encroach upon RBI’s authority will only increase further governance problem. Govt. would do well to first contemplate likely repercussions what such a contentious step can bring before moving towards its implementation.

Food Gambit

Reeling under huge fiscal deficit, it is unclear how the Govt. would fund such an expensive scheme also how it would acquire enough foodgrains to mete out to such a whopping population.

Despite series of  scams and comprehensive malfunctioning in right to education and right to work, Govt. seems undeterred and hell bent for implementing National Food Security Bill before the advent of general elections. The bill has been passed by cabinet and is likely to be kept before Parliament during the second half of the budget session.  This Bill aims at giving food security to 75% of rural and 50% of urban population. Reeling under huge fiscal deficit, it is unclear how the Govt. would fund such an expensive scheme also how it would acquire enough foodgrains to mete out to such a whopping population.

The Bill will provide guaranteed 5 kilograms of rice, wheat or coarse cereals to all the identified beneficiaries at a flat rate of Rs 3 per kg for rice, Rs 2 for wheat and Rs 1 for coarse cereals. There would not be any Above or Below Poverty Line demarcation but entitlements for beneficiaries under the Antodaya Anna Yojana (AAY) under which 35 kilograms of grains is provided per family will be retained in the Bill. Overall 67% of India’s 1.2 billion people are being covered in this scheme.

Why India is heavily undernourished despite a long history of food subsidies is because the quality and type of food being delivered don’t appeal to the poor in the first place. It is pathetic that no innovation is palpable in the mindset of Govt. to improvise the same. What is being delivered on the name of cheap food is low quality wheat, rice, millet etc. These grains aren’t enough for nourishment and quality of food like pulses, ghee, salt, green vegetables etc are too expensive to afford for destitute.

NFSB is based on creaky Public Distribution System that has been blamed time and again for failing to deliver the goods because of massive pilferage. The PDS is carried out nationwide with the help of over 5,00,000 ration shops. It will also prescribe guidelines to states for the identification of beneficiaries.  Infact,  a study done by the Planning Commission in 2005 showed that 58% of the subsidized food grains issued from the central pool do not reach the Below Poverty Line (BPL) families because of identification errors, non-transparent operation and unethical practices in the implementation of PDS. Given this NFSB will be disastrous more than any other scheme as exorbitant fund and food grains are at stake.

The government needs around 61 million tonnes of grains a year to implement the Act, which is nearly one-fourth of the country’s total food grain output. A couple of national-level farmers’ organizations have opposed the National Food Security Bill, saying it would “lead to nationalization of agriculture by making the government the biggest buyer, hoarder and seller of food grains”.

Agriculture market must be unregulated and farmers must be sufficiently incentivized to raise their food production. Globally this is a general practice but UPA’s flagship NFSB focuses on just opposite of that. As the subsidy burden is going to be quite high, Govt. will keep the minimum support price lower discouraging the small and marginal farmers to grow food grain. Thus, NFSB is likely to disastrously distort the already dilapidating food market in India.

The lack of vision visible in NFSB establishes the fact that it addresses nothing more than political motives of Congress. Going against the recommendations of Kelkar Committee to contain the food subsidy, Govt. intends to launch an even more expensive subsidy doll-out program which will raise the food subsidy burden to 1.1 lakh crore from the current 90,000 crore.  Failure to target right beneficiaries and faulty delivery mechanism can never make NFSB workable. A revolutionary, an innovative approach to architect the food subsidy program is the need of time otherwise Right to food security in its current form would mean nothing to who it aims at. 

Murky Banking

 Paying heed to what Operation Red Spider reveals is of paramount importance otherwise growing nexus between fraud banks and black money hoarders can be gross.

Money laundering through banks !!  The  bizarre  and ignominious face of banking has finally  surfaced in India as well. A recent expose has validated the fact that Indian pvt. banks are not insulated from the vices of global private banking. Stories of LIBOR fixing scandal in Britain, bank finance to terror  in Iran and HSBC drug cartel now has an Indian edition as top notch Indian banks ICICI, HDFC and Axis bank involved in money-laundering. Govt is planning to bring in new players in banking industry, while finance Ministry and banking regulator Reserve Bank of India seems to be in complete dark about the maladies of Indian banking. This Cobrapost (web magazine) sting expose also dares the effectiveness of  Know Your Customers norms. It seems that KYC norms make genuine   customers to run from pillars to post but the same gets violated for the good of those deterring whom is the prima facie motto of KYC. 

A latest research from National Institute of Public Finance and Policy (NIPFP), a Govt. think tank, estimates that India’s current black money economy can be 30% of its Gross Domestic Product (GDP) nearly Rs 28 lakh crore. It is no rocket science to guess how this much of unaccountable cash sloshes about in the economy without getting caught. Definitely RBI and Finance Ministry are intimated with the fact that it is banks that facilitate such fraudulent activities but former has taken it for granted that latter will keep faltering and black money will keep laundering. There used to be “The Banking Cash Transaction Tax (BCTT) which would levy a tax of 0.1 percent on individuals who withdrew or deposited more than Rs 50,000 in a single day in cash. Even encashment of fixed deposits paid in cash were subject to this tax but Finance Minister P. Chidambaram withdrew BCTT for no obvious reason befor 2009 general election. Thus, instead of creating a tougher regulatory regime he seemingly preferred to make the system more feasible for misuse.

The most startling fact coming out of CobraPost revelation is that the whole process of turning black money into white is done via Standard financial practices like opening bank accounts, putting money in insurance products, allotting bank lockers and also via inventing exclusive investment plans for moneyed customers. It seems that banking officials are working as wealth managers for their revered rich clienteles and, for the purpose, don’t even hesitate to tamper with the accounts of innocent account holders. The ease and comfort with which the banking officials of those three banks seemed to be dealing with the customer in the sting videos makes it obvious that those higher up in the hierarchy would have been surely in the knowhow of such acts and if they weren’t, its even pathetic because if the higher authorities in the same institution are oblivious of what lower rung officials do, one must not expect much from RBI and Finance ministry.

Banking is a complex system and with the inception of electronic banking it has become even more complex regulating which is a hard challenge now. Vigilance hasn’t grown the way banking system has developed. Prevalent regulatory and monitory measures such as, Foreign Exchange Management Act or Prevention of Money-laundering Act, are victim of inadequate and incapable implementation. It is high time that Reserve Bank of India graduates itself as far as bank monitoring is concerned. It cannot do away with its responsibility just by imposing KYC norms on banks. It must fabricate a robust mechanism to keep a constant vigil on banking institutions making latter answerable to former.

Tons and tons of literature are there to validate that banking fraud has become a global phenomenon. Considering this, Governments worldwide are gearing themselves to implement stringent regulations and punitive measures to curb banking frauds. For instance, huge penalty has been put on banks indulged in LIBOR fixing scandal, HSBC was also adequately fined for laundering money to Mexican drug dealers and the issue of Iranian banks financing terrorism was also dealt with impeccably.

The callous attitude with which RBI and Finance Ministry is dealing with this bank scandal is pathetic. Paying heed to what Operation Red Spider reveals is of paramount importance otherwise growing nexus between fraud banks and black money hoarders can be gross. Banks are the most crucial economic institutions. An arbitrarily banking is disastrous. It’s high time that Govt. clears this banking mess by taking swift and strict actions against ICICI, HDFC and Axis bank. Firing lower-rung officials isn’t enough; senior management must be made accountable to this wrongdoing. Apart from this, a robust mechanism having modern regulatory laws must be incepted as soon as possible so that the future possibility of any such happening can be deterred in the bud.

Land Slide

the callousness and ineptitude with which India deals with its limited resources is not just astonishing but appalling.

Land, being a limited resource is one of the most important economic key resources for any country. It is surprising that India is still devoid of modern land laws and much awaited land reform bill namely Land Acquisition, Rehabilitation and Resettlement Bill (LARR) has been languishing from one committee to another for more than three years. Once again the discussion on the same remained inconclusive in all party meet which is to be held again on 20^th March 13.

Land laws in India are highly complicated and archaic. It still follows century old Land Acquisition Act of 1894 (amended in 1962 and 1984) which empowers the investment hungry Govt. to forcibly acquire any area of land it deems fit in the name of ‘emergency’ and ‘public purpose’ and in the process uprooting many people from their place and depriving them of their only livelihood, that too without much compensation and in some cases no compensation at all. Thus denuding them of their primary civil right i.e. right to live and earn livelihood.

Fine difference there is between lands grab and land development. There are quite a few examples of powerful personage grabbing thousands of acres of land illegally under the nose of Govt. yet it prefers to turn a blind eye. Successive Governments in India has an abysmal track record of implementing land reforms. Land ceiling laws and laws against land grab have been openly violated. Earlier in the tenure of BJP, various massive benami land transactions were effected by Ramalinga Raju of Satyama and recently Robert Vadra, son-in-law of Sonia Gandhi violated land rules and acquired lands in Rajashthan and Haryana and resold it at a premium. Yamuna Express Way project of JP Infratech approved by Mayawati also shows the disregard of Govt. towards the interests of land holders. Governments, mouthing virtuous slogans of ‘development,’ have actually justified massive land grab to feed corporate greed. It seems that it is playing the role of property dealer for industrialists and it is only poor land owners and farmers who lose in this game.

Another lacuna leading to faulty land laws is that Acquisition and requisition of property falls in the concurrent list, which means that both the centre and the state government can make laws on the matter. There are a number of local and specific laws which provide for acquisition of land under them though the main law that deals with acquisition remains Land Acquisition Act, 1894. Upcoming land reforms must take into account that uniform land laws across the states are of immense importance otherwise competitive policies of various states to attract investment will bear negative consequences for inclusive growth of Indian states.

The new bill does propose for various measures significant for land owners, livelihood earners and also for land purchaser. Much debated issues such as definition of ‘public purpose’, compensation to both the land and livelihood losers, loss of housing, tribal displacement plan, compensation more than on market prices etc are being well addressed in LARR. However whether or not these provisions will be implemented in spirit is the real question to ponder over. As of now the future of the bill itself appears uncertain which did receive momentum in Jun 2011 when Rahul Gnadhi visited Bhatta Parsol but only to be hanging again in parliament due to never ending battle between central and state Govt. It is notable that the original LARR was designed by National Advisory Council headed by Sonia Gandhi. Despite being an issue flagged by Rahul and Sonia Gandhi, it is hanging in balance since long. One must doubt if they are actually concerned with implementing the bill.

Land is a burning issue in all over the India. It is the most sensitive resource to tackle politically and economically. Being the 7^th largest country in the world having 8.76 cr acre of land, there is certainly no dearth of land in India yet the country seems land scarce just because of defective land policies giving leeway to corruption. Even Supreme Court has observed the need to scrap ‘fraud’ Land Acquisition Act of 1894 devised by some ‘sick people’. Countries worldwide try their best to make the most of their natural resources preserving it at the same time with all their might by keeping robust and rigorous natural resources laws. However, the callousness with which India deals with its limited resources is not just astonishing but appalling. 2G spectrum scam, coal scam, Maharashtra water scam etc bear the testimony of how better Indian Govt.is poised with addressing laws concerning its scarce possessions. It is high time that it realizes the havoc what bad management of limited resources can bring. After all you can import anything but natural resources!!  

Baffling Budget

At the end of the day,people at large were relieved that at least current budget didn't make their life any worse if not better.

 “Much ado about nothing”. This is what Union Budget 2013 was all about. Budget trouble might have passed for PC but it has gone to an extreme level for the people of the country. Budget completely disregarded what an aam aadami expected from it. No matter what happens with fiscal deficit or GDP, rising cost of living, something which common men are most concerned with, certainly not going to recede.  FM in no ways makes it any easy for the people putting up with plummeting inflation against their steady income. Following are the issues which needed an immediate consideration on the part of him. Some of them did receive his attention yet core problems related to those were completely left unaddressed.

Real Estate:

With the intent of providing affordable housing, FM proposed a 2.5 lakh deduction on the total taxable income on home loans less than 25 lakh. As if he doesn’t know that finding a home on that price in itself is a herculean task in Indian cities. Apart from this, first time home buyers can now get up to rs. 5.5 lakh of income exempted from tax. Again the point is will they even get a low cost home given the present scenario of skyrocketing property prices.

Indian realty sector is faced with multi faceted regulatory challenge. On one hand the sector is tainted with the circulation of black money on the other genuine buyers are bereft with affordable housing. Nexus between people sitting on wads of cash and avaricious dealers has made it a nightmare for a middle class house hunter to even dream of a dream house.

FM would have done well had he announced for a Real Estate National Regulator, as earlier stated, who could maintain transparency and provide real picture of demand and supply in the realty market. FM must be aware of the fact that it is affordable abode not some scant relief on home-loan interest payments what a middle income earner expects for. 

Savings against inflation:

Acknowledging the people’s lure for gold and decreasing rate of savings in financial instruments, FM has proposed for tax free bonds in Infrastructure sector and also increased the gross income level to 12 lakh from earlier 10 lakh for investing in Rajiv Gandhi Equity Savings Scheme (RGESS). However, it is dubious whether these meager steps towards fighting gold lure will be of any avail.

FM has also proposed the idea of launching Inflation Indexed Bonds with the consultation of RBI in order to lessen the gold demand. IIBs are those bonds overall return on which is adjusted with increasing inflation. Given that India has several inflation measuring indices, ranging from Wholesale to retail Inflation, it is still not clear which one would be used for pegging return on IIB. Whatever be the index parameter IIBs can never yield the same benefit as gold does. It would have been better had he proposed to instead launch gold index bonds, returns on which could be adjusted with floating gold prices. IIBs including other proposed savings alternatives will certainly fail to catch people’s attention against their penchant for gold.

Urbanization:

India is fast urbanizing. Its urban population would grow from 340 million in 2008 to 590 million by 2030 (according to a 2010 Mc Kinsey & Company report.) It is unfortunate that an efficient FM like Chidambaram failed to provide a farsighted vision to make Indian cities accommodate this huge influx of population. Apart from doubling the fund allocation to Jawaharlal Nehru National Urban Renewal Mission (JNNURM) -- the UPA government's flagship urban modernization program, there were no critical steps towards making India urbanized in planned manner, a much-needed effort on the part of Govt. in the present time.

Tax reforms:

Keeping in mind the next year general election, FM left the personal income tax slabs unchanged and apart from this he has given 2000 rs tax credit to people earning between 2-5 lakh. However, he levied 10% surcharge on people earning more than 1 cr who are just 42800 in number. It is beyond understanding how the surcharge on this meager number of riches will generate enough revenue to swell Govt. exchequer.

It is time that major tax reforms are incorporated in India. Current range of taxation was last revised more than a decade ago in 1997 when people earning close to fifteen lakh used to be considered among top slot of income holders. Now annual income of a good chunk of Indian population has gone up to 40-50 lacs. It is irrational that people earning 15 lakh and someone who earns just double of that is taxed at the same rate. FM should have dared to make changes in the marginal tax rates for much needed tax reforms.

Conclusion:

All in all Union Budget 2013-14 was a huge disappointment. It was a formality, an attempt on the part of FM to play the game safe with one eye on voter and other on foreign investors and rating agencies. This budget had nothing to offer for which FM had to wait for this auspicious annual economic event. At the end of the day, despite huge expectations, people at large were relieved that at least it didn’t make their life any worse if not better.