BRICS 'development bank' must aim effectively to end Bretton Woods Institutions' disparities

The move to establish BRICS bank is meant to provide patient money and risk capital to long term projects and not aimed at challenging the existing multilateral financial institutions like the IMF and the World Bank, the RBI Governor Raghuram Rajan has said in a speech at an event organised in Chicago on Friday by the Chicago Council on Global Affairs.

In verbatim, his views came as: "I don't think it was primarily meant to challenge the existing multilateral institutions but it certainly is saying look we have plenty of money ourselves, why don't we put some of this money to use in a way that benefits us rather than necessarily depending on the multilateral institutions to change which is taking much more time than anybody thought of".

This is quite surprising from him, seeing he is heading India’s Central Bank and India is going to get the first Presidency of the new bank, would be headquartered at Shanghai. Rajan’s remarks certainly have potential to start a serious debate, about the future course of old mammoth discriminatory financial institutions, which have underwent almost no practical changes (mildly he admitted this time too) towards the need of the developing countries since their inception and on wake of sea of changes in the fundamental orders in the world.

As in collective reckoning, the consensus among the BRICS countries (Brazil, Russia, India, China and South Africa) to establish a New Development Bank (NDB) and a Contingent Reserve Arrangement (CRA), finally emerged out of their dissatisfaction with the ultra conservative Bretton Woods Institutions, such as the World Bank, International Monetary Fund (IMF) and the unflinching extremes of west-centric dollar dominating global monetary system.

The US has been ruling the multilateral institutions – and the BRICS that include five super-performing economies with over 20 per cent contribution in the global economic activity, posses just 11 per cent of the votes in IMF.

Adding more jerks to the adversities, the IMF's precautionary credit lines found reluctant receivers in underrepresented countries – that made central banks of these sides desperate for dollars to obtain the credit from the Federal Reserve only. The Fed played a proactive role during the height of global economic crisis in 2008, but not necessarily the similar policy will be replicated ahead too.

The BRICS countries’ inhibition in such scenario is forthcoming but rational – and their beliefs in NDB and CRA have sufficient logical traction. The NDB aims to meet with the credit requirements of heavy infrastructural projects – although the demand for credit will not be equal from these five countries, as they are into different development stages. But for meeting additional needs of infrastructure creation, the NDB has a balanced approach in terms of activating the prospective creditors and borrowers at same platform.

So, the business proposition of NDB is free from contention. However, the Bretton Woods institutions and the flocks of economists nurtured through their legacy have reservation on it, as this new development bank will promote regional co-operation unlike the already existing Inter-American Development Bank, Asian Development Bank and African Development Bank. That apprehension is totally misplaced, as the NDB with seed capital of just $100 billion or even with an incremental outlay will be not able to challenge the might of an established and mighty, IMF or World Bank – but it would be surely a beginning for BRICS to chart a new course for them in meeting with the bundled challenges of long-term finance.

Intently, the CRA intended to lessen the BRICS dependence on the Fed and dollars, showcases something different than the NDB. It is allocated $100bn – for swap lines, accessible to all five-nation members. With no permanency of lending and borrowing structure, the idea of CRA may not work as expected. But it would be naïve to reject it too early, as the potential of closer co-operation among the BRICS can unleash conducive impacts on its functioning.

Remarkably, these arrangements by the BRICS were made to counter the persisting discriminatory policies of the giant financial lenders – as in the case of IMF, it has changed everything but not its conservative structure, aligned in favour of the western countries. There is enough merit lies in the BRICS claim that the international financial system has worked against their interest. Rajan and others must heed to this truth.

Policymakers from the BRICS have been vociferously airing their views about the partial policy stances of the rich countries’ institutions, disguised as ‘multilateral agencies’. Earlier, Raghuram Rajan, was one among them, who aptly identified rich countries for pursuing selfish policies with no thought of their negative impact on emerging economies. Will he recall it now?

And the economic bubbles, their temptation of falling and making the global financial system on toe is something never amiss the scene. The Bretton Woods institutions in their present shape will be keeping such threats alive, so the notion of getting adrift from the crisis would be rather too simplistic at this point of time.

Hence, the space is for an alternative financing arrangement – first at regional, and next on the international level. This new bank is capable of bringing that, although initially with limited impact. China has been lending in Africa and that made good effects but it also violated many basic procedures – the BRICS bank has to move cautiously on this, as carrying forward the legacy of any one country out of those five would be against its collective foundational spirit. So, the mode of operation must be carried forward with a standard set of norms, never to be tempered with any one member’s discretion.

The BRICS bank has immense potential to bank with the huge number of roads, power plants and sewerage systems, as those all need large-scale funding. With the long-term capital base of the bank and meeting with the financing demands of these projects, the purpose of its establishment would be justified.

However, the new bank is not completely free from the challenges. Among the shortcomings it has, is its relatively small size, seeing it will have to work on international level. Also as Ben Steil and Dinah Walker of the US-based Council on Foreign Relations note that, China, India and Brazil have borrowed $66bn from the World Bank alone – more than the entire subscribed capital of the BRICS bank. That indebtedness may hamper these countries to go too agile in promoting policies in favour of their new bank and finally to counter the influence of the World Bank – possibly, there may be temporary ambiguity in loyalty.

Moreover, the BRICS bank will be facing adjustment related issues with the different political systems of the five member countries – as the differences between the systems in India and China are far too wide to be adjusted so easily. The new bank will have to look on the ethical concerns, include that related to the handling of natural resources by the projects, it would be financing. Its articles, which ensure that the founders will never see their voting rights drop below 55 per cent, must be scrapped or made more democratic. As this particular clauses make the idea of BRICS bank, less democratic than claimed.

Beyond even an iota of doubt, the Bretton Woods institutions are symbolising the spent time of empire, which are on verge of ruining after a painfully long saturation phase. The rest world, including former colonies have changed in the recent decades – so, the experiments like BRICS bank outlines positively where the future is – apparently, its on the side of emerging economies. Rajan should see the turning point of history little more cautiously, wishfully like he once saw the spectre of global financial crisis as early as in 2005– and delivered memorable Jackson Hole lecture.
-Atul K Thakur
Email: summertickets@gmail.com
(Published in INCLUSION)

The Policy Muddles at Mint Street

The RBI (Reserve Bank of India) has been the master of all weather and seasons concerning India’s financial sector. It holds the pulse of the national economy with tempestuous effects. But even with all its prominence, the RBI has seldom crossed the contoured spirits which obfuscate the existing macroeconomic scenario. The scrimmages from its side are causing the fixture of topsy-turvy status in the policy domain, finally making the broad brush more frequent than the desirable spunky actions.

Until two years back, the world was witnessing the central bankers’ sullen acts; India was indeed a sort of exception so far. But things have entered in torsion once India’s impregnable finance ministry and the RBI got struck in the endless war stimulated by the egoists.

It’s clear that the finance ministry is the most important place in India after the Prime Minister’s Office. This sounds awkward, but becomes evident when seen against the recent reshuffling in ministries, when the serving home minister was called to hold the command of the economy.

This marks the moral bankruptcy, as the new finance minister will be hardly reckoning the plight of the economy which originated through the clash of interest between real and rave components. Moreover, he lacks the critical tributes like acceptance and expertise for handling a diverse economy like India’s.

This mischance will boost many inside the RBI, who earlier relied on static and soft monetary policies that at least in the last one and half years have cut India from both of its central economic ideologies based on “half-willing socialism” and “half-sighted dreams of reform.” Among the list of blunders, the RBI’s extraneous policy regarding the licensing of new banks under the private sector refers the unique misunderstanding of the whole issue.

It’s obvious that the RBI is not keen on banking licenses for corporates, not to work with any neo-egalitarian model of banking based on the “maximum happiness” of clients of different types and figures, but for securing the power to supersede the boards of existing banks and leaving the case of banking expansion in its backyard.

The insistence of the central bank on amendments to the Banking Regulation Act by the Parliament as a prerequisite for any potential flex on banking licensing is flawed and objectionable. It may be true that none of India’s NBFCs (Non Banking Financial Companies) are fit enough for the award of banking business, though the many interested public sector entities could be taken for a ride under the joint venture in private partnership.

Also, there would have been nothing wrong by downing the obstination on allowing the corporate world at large to enter the fray of banking based on competency, not by the channel of cronyism.

By the impression of numbers, India’s corporate sector is performing, but by the spirits, in no manner is it worth calling robust. For example, almost all heads of India’s private sector banks have downplayed the chances for a few more private banks, citing the already high competition and its aftereffects on their businesses.

These were all untoward statements with no technical precision or understanding of a height of possible stagnation with which India’s banks will be reckoning sooner rather than later. Banking should be a means for the profit, but not for the oligopoly; unfortunately, the reverse is the case in India today. Not surprising in the present scenario, if the SBI (State Bank of India) has lost its tag of being the most valued bank in market terms from one of its shrewd peers.

Notwithstanding its actual role, the RBI is maintaining silence over the future growth of India’s financial sector, which has been safe, more for its undersized ambition than the claimed prudence. This is totally ironic watching the curtain coming down on the future of India’s more than 55 percent unbanked citizens, and overall the growth of the financial sector at large.

The path India’s banking has traveled so far hardly allows one to part the views between progressivism and ultra-materialism; here the things have to be seen in the right context. Public sector banking was more a hedging intervention, so it would be unfair considering the nationalization of banks as the complete socialistic manifestation. PSBs/RRBs (Public Sector Banks/Regional Rural Banks) played their role immensely well and would do more good under the perfect competition around every nook and corner.

Not even remotely, the arrival of a few more banks would harm their business; contrarily it would help the sagging market sentiments to get an upward touch. Instead of fearing and sharing those misleading apprehensions, the RBI should create a true healthy work culture in PSBs/RRBs, which are remarkable by their business and reach. RRBs especially deserve a much better deal in terms of human resource policies. It’s shocking to see the RBI/finance ministry’s dualism in taking them as at par with the PSBs, where the service benefits like pension are now the part of system.

This discrimination should be ended by introducing the service provisions, including pensions for the RRBs employees on the line of PSBs. With more than 17,000 branches across India’s rural heartlands and small towns, RRBs can be seen as the engine of rural growth in India -- so they need an immediate broad unification at the national level with an effective professional board, which can lead the rural banking for more inclusive businesses.

India’s jobless growth or the slow industrial momentums are the outcome of chronic pessimism from the RBI for the mass issues. It’s not more than an excuse in passing the fault on global financial uncertainty by India’s policy regime for the present mess-up at the domestic front. The last two decades of India’s growth story were based on the domestic consumption strength, rather than on any other fancied factors.

This is high time for India’s central bank to move clearly and with a well- defined goal for keeping the Indian economy robust and promising. Certainly this would be a better replacement over the current placid show off, which exudes nothing except the aura of gloom. The change in attitude of the RBI will determine the course of India’s growth story and its global economic status.

Atul K Thakur
Can be emailed at: summertickets@gmail.com
(Published in India America Today on February10,2013)

The irony of paradoxes!

Studies show that the overall effect of micro-credit is not essentially income enhancing but mostly in income smoothing, in making credited people more capable to buy goods or services that they cannot otherwise afford.
In all the ideas of financial accountability, financial inclusion is most important. Nevertheless, the policy circle represents it awkwardly and measures it by the number of new enterprises created which is flawed. The primary concern of the lending should be to target the prepared individual, who is capable to run a business and nurture entrepreneurship. In most cases, beneficiaries of the institutional credit do not use it for the sake of enterprise or for the purpose of income-generation.

Rather they spend credit given to them on conspicuous objects or for household expenses. Studies show that the overall effect of micro-credit is not essentially income enhancing but mostly in income smoothing, in making credited people more capable to buy goods or services that they cannot otherwise afford. The need is to create more micro-enterprises through the credit disbursement, but that requires the Indian financial sector to be more robust and responsible.

The wrong driving notion of ‘innovation’ is sabotaging the basic aims of banking in India. The point should be that we need something more than buzz of mobile banking and business correspondents. Giving prominence to undeserving ideas causes as much irritation as seeking ‘financial inclusion’ through the ambiguous financial products like-Participatory Notes and Sovereign Wealth Funds. The grim fact is, banking in India has failed to either catch the best spirits of socialistic planning or the goodness of open economy.

One of the big issues of financing in India is the ‘credit culture’. This is not strong and effective. In blurred vision of lending and unethical faith in not returning the credit makes the credit culture highly unsustainable. The proof of ‘Priority Sector Lending’ holds primacy among those India’s beautifully made constitution has absorbed this to ensure fair credit to the weaker sections and enterprising activities at bottom level.

Unfortunately, it was totally mistaken by the banks operating in India as guard against any extra demand of inclusive banking. Except Regional Rural Banks (RRBs), no other banks in India completely follow the constitutionally enforced PSL-the commercial banks lend as required, 1/3of the total credit on easily sourced fictitious enterprises or by buying the loans of RRBs or from some functional cooperative banks.

Even this worst comes up when RBI makes tight effort of attainment.

Though the small businesses are important, they cannot be a major source of job creation. They create jobs but many walk away from business. Growing or established businesses can create sustainable jobs. In that case, small local banks such as RRB benefit by lending to SMEs to keep them floating. If business thrives on bank credit, naturally the lending banks will be equally benefitted. Private MFIs have failed to function in desired competency, as their working model is not supported by the rationale of inclusiveness.

The static structure of large banks is a disadvantage when it comes to offering micro-credit. For SME credit in an example, an important consideration is the kind of structure which enables them for credit.

That is less transparent and recede chances of positive lending. In effect, the engines of growth/SMEs starve for funds. Here the basic argument is India’s large banks are relatively bad in giving customised loans. They ignore the marginal utility of the time and specific financial requirements, which matters earnestly to the small local customer.

This tendency mars the idea of inclusive banking, whatever the size, Indian banks could reach by having segmental business focus, but it would be not able to hide the unrelenting follies at ground. The local area banks, like RRBs are still doing well and could do better, if given them the parity as equal as the PSBs are getting from the government and regulators. The smaller banks can serve local populations much better and here requires lot of work to be done.

In popular perceptions, nationalised banks are trusted because these could be identified with the government. But the concern is their service levels, which is not good in rural areas. Another grave trend is not having the private sector banks’ concentration on agri-business or in promoting the farming. It’s very surprising as all second generation Indian private sector banks have presence in tier-III&IV towns.

The RBI has to act fast in making banks more open for compliance and also infusing the spirit through policies. The understanding should be that ‘social concern’ doesn’t make any adverse impact on core banking businesses. At this point of time, India banking cannot afford the ‘static mode’ in which Western financial institutions are addicted to function. Comparatively, Indian banks are stood with better chances to thrive on the huge domestic demands; this way the aim of ‘financial inclusion’ will be also meet.

But the RBI has to work very hard for this as Indian banks follow no voluntarism most of the time. After the long spell of policy inertia, the RBI is finally making plans to allow more licenses to new banks but that alone will not guarantee its entering of bonhomie with the finance ministry. Still they stand at distances while discussing the fate of economy. This dumps the prospect for change.

Progressing into 21st century amid volatile global financial scenario, Indian policymakers must heed on the larger questions related to the economy.

It will be nothing more than ‘complacency’, believing that Indian economy has really overcome the harsh outcomes of economic meltdown. With a directionless capital market, almost fridged insurance sector and passive banking structure, this claim will not go too ahead. Lately, the realization about mishandled policies and passed time would be more rational. Also this will help in dealing the situation, which is no longer as rosy as it was before 2008.

The double digit growth is now a distant dream and even for a timid target, struggle has to be intense!
Atul K Thakur
Email: summertickets@gmail.com
(Published in Governance now on February05,2013)

The RBI's unsavoury policy dictates!

The RBI has been the master of all weathers and seasons concerning India’s financial sector. It holds the pulse of the national economy with tempestuous effects. But even with all its prominence, the RBI has seldom crossed the contoured spirits which obfuscate the existing macroeconomic scenario. The scrimmages from its side are causing for the fixture of topsy-turvy status in the policy domain, finally making the broad-brush more frequent than the desirable spunky actions. Until two years back, world was witnessing the central bankers sullen acts; India was indeed a sort of exception so far. But things have entered in torsion once the India’s impregnable finance ministry and the RBI got struck in the endless war stimulated by the ‘egoists’.

It’s clear that, the finance ministry is the most important place in India after the Prime Minister’s Office --this sounds awkward but becomes evident when seen against the recent reshuffling in ministries, when the serving home minister was called to hold the command of economy. This marks the moral bankruptcy, as the new finance minister will be hardly reckoning the plight of the economy which originated through the clash of interest between real and rave components -- moreover, he lacks the critical tributes like acceptance and expertise for handling a diverse economy like India’s.

This mischance will boost many inside the RBI, who earlier relied on static and soft monetary policies that at least in last one-and-half-years have cut India from both of its central economic ideologies based on ‘half-willing socialism’ and ‘half-sighted dreams of reform’. Among the list of blunders, the RBI’s extraneous policy regarding the licensing of new banks under the private sector refers the unique misunderstanding of the whole issue. It’s obvious that, the RBI is not keen on banking licenses for corporates, not to work with any neo-egalitarian model of banking based on ‘maximum happiness’ of clients of different types and figures but for securing the power to superseded the boards of existing banks and leaving the case of banking expansion in its backyard.

The insistence of the central bank on amendments to the Banking Regulation Act by the Parliament as a prerequisite for any potential flex on banking licensing is flawed and objectionable. It may be true that none of India’s NBFCs are fit enough for the award of baking business, though the many interested public sector entities could be taken for a ride under the joint venture in private partnership. Also, there would have been nothing wrong by downing the obstination on allowing corporate world at large to enter the fray of banking based on competency, not by the channel of cronyism.

By the impression of numbers, India’s corporate sector is performing but by the spirits, in no manner it’s worth of calling ‘robust’. By an example, almost all heads of India’s private sector banks have downplayed the chances for few more private banks, citing the already high competition and its aftereffects on their businesses. These were all untoward statements with no technical precision or understanding of a height of possible stagnation with which India’s banks will be reckoning sooner than the later. Banking should be means for the profit but not for the oligopoly; unfortunately, the reverse is the case in India today -- not surprising in present scenario, if the SBI has lost its tag of being the most valued bank in market terms from one of its shrewd peers.

Notwithstanding its actual role, the RBI is maintaining silence over the future growth of India’s financial sector, which has been safe more for its undersized ambition than the claimed ‘prudence’. This is totally ironic watching the curtain down on the future of India’s more than 55 percent unbanked citizens and overall the growth of financial sector at large. The path India’s banking has travelled so far hardly allows one to part the views between progressivism and ultra-materialism, here the things have to be seen in the right context. Public sector banking was more a hedging intervention, so it would be unfair considering the nationalisation of banks as the complete socialistic manifestation. PSBs/RRBs played their role immensely well and would do more good under the perfect competition around the every nook and corner.

Not even remotely, the arrival of few more banks would harm their business; contrarily it would help the sagging market sentiments to get an upward touch. Instead fearing and sharing those misleading apprehensions, the RBI should create a true healthy work culture in PSBs/RRBs, which are remarkable by their business and reach.

RRBs especially deserves much better deal in terms of human resource policies. It’s shocking to see the RBI/finance ministry’s dualism in taking them as at par with the PSBs, where the service benefits like pension is now the part of system. This discrimination should be ended by introducing the service provisions including of pensions for the RRBs employees on the line of PSBs With more than 17,000 branches across the India’s rural heartlands and the small towns, RRBs can be seen as the engine of rural growth in India -- so they need an immediate broad unification at the national level with an effective professional board, which can lead the rural banking for more inclusive businesses.

India’s jobless growth or the slow industrial momentums are the outcome of chronic passivism from the RBI for the mass issues. It’s not more than an excuse in passing the fault on global financial uncertainty by the India’s policy regime for the present mess-up at domestic front. The last two decades of India’s growth story was based on the domestic consumption strength, rather than on any other fancied factors. This should be the time of reckoning by India’s central bank, moving clearly and with a goal must be the basic catch which it has been missing for long under its mix of placid shows off and painful affects. Until India’s central bankers will rise from their very long slumbering, any hope to see the financial sector on bloom would be near about the day dreaming in a rainfed season like the present!
Atul Kumar Thakur
August31st2012,Friday
Email: summertickets@gmail.com
(Published in Governance now on August27th 2012/ http://governancenow.com/views/columns/rbis-unsavoury-policy-dictates )

Tragedies of budgetary show

As finance minister of union cabinet, Pranab Mukherjee forgot to elaborate about the much awaited 12th five year plan during his budget speech in parliament, which is aimed to strive for “more financial inclusion”. Instead, he chosen a horrific quote from foregone Shakespearian drama “Helmet” that “being cruel to be kind” in quite dramatic fashion…moreover, his exuberant declamation of Indian cinema’s centenary year with service tax holiday for a year was among the height of deviant financial planning of the economy that was waiting for a slew of measures for retrieving its desired tune!

Unfortunately that remained complete amiss and further counterpoints overshadowed the all prominent expectations were attached to this budget. For year 2012-13, GDP has projected at 7.6%, fiscal deficit-5.1% and subsidy to 1.9%, which is completely irrational from the fiscal discipline point of view and constitutional mandate of this country as it would be toughest to expect that these figures would substantially lowered the government’s borrowing in next few years. This economics from planning commission and finance ministry is very questionable, as they never have even second thought in prioritizing the beleaguered IT industry by allowing UDI, headed by Nandan Nilekani to be black pearl with incessant flow of many billion dollars every year in their favour and leaving aside the masses adrift from the dividend of state.

So there should be no surprise, have if the new definition will term “subsidy” as the biggest threat to the imaginative blooming economy which produced a Vijay Mallaya for few years with all notoriety of insane wealth! Further showing the overview of economy, finance minister has set the target of Rs 30,000 crore for disinvestment of PSUs, which is quite amateurish and shocking-even after the worst performance of stake selling of these state run companies few months back, the morale should have been never so weak. Instead rushing for sordid professional expertise, as Monetk Singh Ahulwalia often relies over before taking sides on major policy matters from the ghost house of socialism-Planning commission; a simple thought would be rather more convincing-why this unexpected undermining of one’s own assets?

Here the basic notion “good sale is always good” should be in the state of mind seeing the impressive consumerist size of Indian economy which allows a $2billion house (own by Mukesh Ambani whose literal meaning is too ambitious to live alone in its surroundings) and 56% urban slums in the same city, which for only few months and only by few, once seen as the potential global finance hub. That never happened alas! For a more pragmatic shift, the crucial policy circles must draw a line-between progressivism and reform, I am sure even the performing corporate besides the common men would chose earlier as it would allow them to be close of a sustainable model rather maligning with very ambiguous web of “reform” which is itself needed a new dossier of reform very sooner than later.

Under the regime of confused state, this year, no big announcements have made. Infact, announcements have no culture to be backed by the timeline in India, so even the tall promises of allowing few more private banks as promised by the last budget is still in the ideation of hibernation state. Another major component of financial sector-Insurance has given tough time with increased services tax and no touch of much needed regulatory changes. Mutual funds industry had long back have heard off regulatory eulogy, so it’s no longer an exciting domain like its peers Private Equity or Venture Capital Funds which are breathing existential crisis more acute than a fish out of water!

Although a sycophant scheme, Rajiv Gandhi Equity Scheme with allowing income tax deduction of 50% to new retail investors, who will invest up to RS50,000 directly in equity and whose annual income is below Rs10lakh would boost the temptations for legalized gambling rather invoking the confidence of retail investors who have lost too much in the recent past. Even in overall ambit of financial businesses, it would be very tough in the days ahead to draw back the retailers to the business as they used to be till year 2010. Only the bond market has gained, if say in monosyllabic mode-Rs 60,000 crore worth of tax free infrastructure bond from financial institutions would carve some niche here, even though for a temporary period.

Regional Rural Banks, which are doing fabulously fine, were hardly needed any new financial infusion, rather their unification and making them on all counts at par with the PSBs were sincerely expected for bridging the gap of rural financing and making an unique financial institution of strength. So, unusual touches of exotic “reform” simply abstaining financial sector to get on cheering spree. The gain indeed shifted to infrastructure and slumbering bond market, where allocations under Rural Infrastructure Development Funds (RIDF), increased to Rs20,000 crore from preceding year’s Rs18, 000 crore.

Further for addressing the warehousing shortage in the country, an amount of Rs 5,000 crore earmarked from the above allocation exclusively for creating warehousing facilities under RIDF. Under 12th five year plan, $12 billion dollar would be spend on infrastructure and this will be done on Public Private Partnership basis, so more of commercially exciting time is awaiting ahead than the real infrastructural development. Taxation remained disappointing with increase in service tax and excise duty by 2% which will have very adverse effects on the price rise…slight cut of .25%in Security Transaction Tax(STT)is hardly suffice, so is true with the token increase of initial income tax slab by Rs20,000 to 2lakh.

Adding retrospective claws in checking the tax evasion is completely erroneous, as the timely practices of existing laws are quite suffice to handle the Vodafone like situation where the loss of $2billion dollars has suffered by the exchequer. Other bizarre targets are the fuel and fertilizer subsidies which have larger binding over the agrarian classes, could create a big survival crisis among the majority of peoples involved in primary sector. Rationalisation of diesel/LPG s would not be entirely wrong but it should be come only with giving ample room for targeted subsidies to weaker sections. Albeit in broader framework, it’s interesting to know, that the government is not loosing much by oil imports with excessive revenue that coming through the existing importing duties, here too chances are alive of big correction for letting breather to an average oil consumer.

Social sectors, which constitute the pivotal roles in equitable growth, have suffered immensely by the consistent flaws in policy orientation and bad execution of ongoing flagship programmes, which is cause of grave concern. The severe human development deficits confronting India in various sectors require a major stepping up of public provisioning for inclusive development; but that would require the government to adopt progressive policies in policy framework and execution. Ironically whose chances appears very feeble as par now. On different social sectors, India has only 7%allocation of its total GDP unlike the OECD countries average that is totally stark.

This year, total allocation on Rural Development has fallen to Rs 73, 175 crore from Rs 74,100 crore last year. Decline of total outlay on MGNREGS to Rs33,000 crore from Rs40,000 is utterly shocking though it also shows the changed polity of UPA-II which is no longer rural centric even symbolically. The marginal rise in allocations for Ajeevika (National Rural Livelihood Mission) to Rs3915 crore from 2681.3 crore, Indira Awas Yojna to Rs11075 crore from Rs10,000 crore and PMGSY to Rs18172crore from Rs17412.5crore can be only said the tip of iceberg against the real needs.

As proportion of total expenditure from the Union budget, share of agriculture has fallen from 11.21 to 9.3%. Though total outlay for the Department of Agriculture and Cooperation has been marked by an increase of 18%to Rs17,123 from Rs20,208 crore but again this tokenism is too little. Additional provisioning for Bringing Green Revolution to Eastern India (BGREI) to Rs1000 crore from Rs400crore is somehow satisfying but slashing on corp insurance to Rs1136crore from Rs3135crore shows the classic case of black comedy. Rest, target of credit flow to farmers to Rs5.75lakh crore from Rs4.75lakh crore will only encourage the targeted segments, if the compliance of Priority Sector Lendings would be made hard fast, but there is no such assurance supporting this change.

Its proven that per capita food consumption is declining in India, in this scenario declined provisioning to Rs 1,79,554 crore from Rs 2,08, 503crore is the cruelest act from a government claims to stand for marginalised classes. Public Distribution System (PDS) stood with Rs75,000crore allocation and many populist burdens like universal distribution of rice/wheat, the extra pressure of lowered petroleum subsidy to Rs43,580 crore from Rs 68,481crore will make life more difficult for rural inhabitants based on local incomes. A very much related theme, climate change found no sincere attention in entire budget document however, economic surveys have added a separate chapter on climate change but without any overt working guidelines.

The total magnitude of the gender budget has declined to 5.8% from 5.9% and allocations for the Ministry of Women and Child Development has increased to Rs18,500crore from Rs16,100crore, which is too short from anticipated enhancement. Budgetary allocation on children have grew up modestly to 4.8%from 4.6% last year-in total spending on child specific schemes have set out on Rs71,028.11crore. Allocations on ICDS and ICPS have marginally stepped up though both the amount and execution of schemes are in worrying conditions.

Health still accounts only2.31% of total GDP, many plans for new hospitals, urban health care on the line of NRHM will be in bad state grappling with no extra allocations. NRHM got 15% hike toRs20,822crore from Rs 18,115crore but overall financing public health couldn't merely be an act of tokenism, that has missed in consideration. Allocation on water and sanitation has moved up to Rs14,005.2crore from Rs11,005.2crore, rural drinking and sanitation have given priorities, which is only half good. Budgetary spending on education has increased to 4.97% from 4.65%-but allocation for SSA has gone up by just Rs21,000crore to Rs25,555 crore, which is discouraging, similar are the cases of primary, middle or even higher level of educational plans.

Allocation under Scheduled Caste sub plan has increased to Rs37,113.03crore from Rs31,434.46 crore and for Schedule Tribal sub plan, allocation has increased to Rs 21710.11 crore from Rs18,466.23crore-though most of the genuine demands related to their welfare were rejected. Though “minorities” found no mention in budget but a slight hike in allocation came to Rs3135crore from Rs 2750 crore...disabled people got no or very feeble specified assistance through this budget.

MSME Sector-
In this budget, it's well to see basic custom duty coming down to 2.5%from earlier exorbitant6% on specified parts and machinery components. To setting up a Rs5,000crore India Opportunities Venture Fund with SIDBI is a right step but the real question of financial access is related with the cooperation of banks at bottom level, where is need of greater changes. Mention of two newly created MSMEs exchanges and MSMEs being called as "building blocks" of our economy by the finance minister in his budget speech was symbolically appreciable for this hitherto marginalised segment of industry.

Though it would have better, if the procurement policy for micro&small enterprises would have broaden to private sector along with the proposed change for CPSE to make a minimum of 20%of their annual purchases from MSEs.-of this, four business deals will be earmarked for procurement from MSE owned by SC/ST enterprises.
At the moment of political and financial adverseness, there was much expectation attached with this budget, which is completely shattered now as neither market nor the mass sentiments seems uplifted even in tint after the all statistical deliverance. So, it would be right, if we will still believe more in our edge of “economies of scale” rather on statistical commentary of budget. After twenty years of liberalisation, India is lagging behind in spirit rather in fundamentals…that’s the cause of maximum worries!

(Courtesy-Centre for Budget and Governance Accountability (CBGA) - a New Delhi based research organisation for some of the data’s used in this piece)

Atul Kumar Thakur
March 23, 2012, Friday, New Delhi
Email: summertickets@gmail.com

Reckoning OECD Reports!

More than the fear of cyclical recession and failure of financial institutions, the biggest worry for the global economy in the twenty-first century is that all OECD economies, which shaped, dominated and furthered the growth of global trade in twentieth century appears to have lost their edge and steam for the first time in modern period. The three major economies zones-US, EU and Japan are expected to entwine with a long-term low growth trap with additional risk of periodic recessions. The OECD reports of 2011 simply acknowledges the impending grim prospects in its constituent economies and projecting the emerging economies, especially India, China and Brazil as new engines of growth in twenty-first century. It’s indeed an unprecedented privilege for India to respond these new international trade fundamentals which can make advance it prospects at many levels.

Report on Economic Policy Reforms: Going for Growth, underlines it more resolutely as “India continues to achieve one of the highest rates of GDP per capita growth in the world. Nevertheless, the income gap with OECD countries remains large, primarily reflecting low levels of labour productivity, calling for further reforms to support rapid and inclusive growth". Incremental reforms of administrative regulation introduced by governments at all levels have led to some improvement in the operating environment for business. However, more fundamental reforms are needed in specific sectors. Obviously recommendations have referring for more liberalisation with lesser regulatory intervention. That simply forward a “dichotomous scenario” with the kind of “reforms”, India has been carrying in last two decades. This particular report is unable to broaden the distinct choices of economic reforms, which emerging economies can pursue in the days ahead. So with concentrating on better prospects, India should rely on its own model of reform instead following the bandwagon of saturated economies!

OECD Economic Outlook {No.89, May2011} presents the overall picture of global economy with special coverage of ongoing slowdown. It wrongly articulates that the global recovery is becoming self-sustained and more broad based but then why unemployment remain high across most of the OECD countries? Rather as policy recommendations, stress should have strongly oriented towards structural reforms which could play a key role while taking into account of country-specific needs and institutional features. In emerging economies too, structural reforms could make growth more sustainable and inclusive while contributing to global rebalancing and enhancing long-term capital flows. Ofcourse inflation will be remain a cause of concern in the emerging economies which will be remain a cause of concern in the emerging economies which will need judicious monetary policies for addressal, not for blindly making action on what OECD reports suggests! It will be also wrong to follow that fiscal consolidation and prudence shall be alone confined with the advanced economies; rather it should be equally concern the nations aspiring to be significantly slotted in world trade. Apprehension of this report is now very much in action as downside risks are on the verge of interaction in US/EU, and their cumulative impacts could weaken the recovery substantially, it may also lead to stagflationary developments in some of the advanced economies. Moreover, it will be a blunder to believe that higher inflation could address debt sustainability. Even it could perilously flirt with inflationary expectations, with the outcome that interest rates would soon increase more than inflation. This knowledge paper is somehow closer to the ground realities but not without missing and confusing some of the major challenges of sustainable growth.

OECD Economic Surveys: India {June, 2011}, highlights the risk of inflation and volatile capital flows, which are indeed the most formidable challenges for India’s uninterrupted growth story. Report acknowledges well that fiscal consolidation has resumed and new frameworks may help. It’s true, prior to 2008, nice progress had been made in reducing large fiscal deficits at the central and state levels under targets set out in the Fiscal Responsibility and Budget Management Act {FRBMA, 2003}. In the mean years, government finance had sharply down yet few quintessential welfare subsidies on oil, debt writes off, enhanced salaries provisions, tax cuts etc, in the response to slowdown are tolling pressure on fiscal discipline. Here, is a need of new policy measures that can balance the chord of welfare expanses and fiscal discipline.

Chapter-1{Sustaining growth and improving living standards}, emphasizes that expansionary macroeconomic policies cushioned the downturn and domestic demand led the recovery. It’s also true, private investment which benefitted from ongoing liberalisation and high private saving was a vital source of growth. But not to forget also the pre-crisis period was also characterised by a high degree of macroeconomic stability, reflecting benign economic conditions in advanced economies. Comparatively, India weathered the global downturn well like other emerging economies. India also suffered as liquidity constrained firms and banks in advanced economies reduced foreign asset holding to shore up their balance sheets which witnessed sharp capital outflow…that’s still an ongoing concern of international market. On the contra side, another fearsome possibility is that strong capital inflows could put upward pressure on the rupee, raising the prospect of worsening competitiveness and a further widening in the Current Account Deficit {CAD}, which is already high by historical standards. Since mid 2010, the nominal effective exchange rate has gradually depreciated but with relatively high inflation, albeit the real effective exchange rate has been relatively stable. The exchange rate policy has evolved and the capital account has continued to open up gradually, even though progress has been uneven and it remains relatively closed. Post Asian crisis in 1997, the rupee was linked closely to the dollar which influenced the further course. Though RBI has been promoting counter-cyclical macro prudential policies but it needs be more active and practical now to show the intent and commitments of finance ministry into the action. At this juncture, financial sector reforms needs a speedy push, especially licensing of the new banks in private sector. This report stressed that, the rapid economic growth has reduced the incidence of poverty, it’s to an extant agreeable but not without the serious persisting flaws in growth agenda. As a solution, welfare measures have to be reachable and accessible to the all targeted beneficiaries. Despite citing administrative and other bottlenecks, this part of report suggests that the India is continuing to catch up its goal.

Chapter2/ Fiscal Prospects and Reforms, considers India’s fiscal consolidation programme a partial success, which is true. The period of fiscal restraint lasted in 2008 for domestic compulsions and overwhelming world growth that fuelled up energy and commodity prices, the government raised public expenditure markedly. In the current policy debate, a new framework for fiscal policy is the need of hour. FRBMA has already expired years back. So, the central government’s goal to reduce Gross Fiscal Deficit to 4.1%of GDP by 2012and 3.5% the year after, urgently requires a proper policy maneuvering. In this direction, the Finance Commission {2009} report on fiscal relations between the central and state governments appears rational. It recommended that the Central government should go further and reduce its fiscal deficit to 3%of GDP by 2014. The Commission also recommended 2.4%deficit for the states, bringing a combined deficit at both levels of government to 5.4%.; down from its 2010 level of 7.2%of GDP. On taxation, OECD recommendations are completely stereotypical with having single aim to promote the greed’s of corporate world by ignoring the progressive fundamentals. Here needs a careful approach in pacifying its extreme policy recommendations.

Chapter3/ Phasing out Energy Subsidies, presents contentious and dubious viewpoints on India’s energy management. Report mandates that “India’s petroleum subsidies are economically and environmentally damaging”, which is an overt escaping of realities that is persisting over the world. It’s partially right on Coal market reform but again slips while recognising Public Distribution System {PDS}/Oil subsidies and electricity subsidies as impediments before the development of oil and energy sector. This shows the denial of distinct political characteristics of Indian economy which has its own set of working model and couldn’t solely rely in any cases on the western model of development.

Chapter4/Financial Sector Reform in India: Time for a second Wave? ,it’s intriguing reviewing the last Union Budget and reading this report, it seems that finance ministry is subscribing almost all OECD recommendations on financial reform! Reports suggests the speedy implementations for the institutions like, National Treasury Management Agency {NTMA}, Pension Fund Regulatory and Development Authority {PFRDA}, Financial Sector and Development Council {FSDC}and Financial Sector Law Reforms Commission {FSLRC}. Surprisingly, in the lieu of giving greater freedom/competency to banking operations, reports suggests some incomprehensible measures, like setting out a plan for ending Priority Sector Lending {PSL}, rapid liberalisation of interest rates on deposits, gradual reduction of the proportion of government bonds to be hold by the banks, widening of the scope of trading through Credit Default Swaps {CDS}, introduction of standard terms for Corporate Bonds, reducing of KYC requirements and transaction taxes etc. OECD should clarify, if do they have only a uniform model of financial reform that has already shattered the world’s most exotic and exciting financial market of US/EU. India either must ignore the stereotypical prophecy or simply turn down any reckless model of financial liberalisation without having touch of the commitments for its policy. Moreover, it shocks to read that the RBI should sell its electronic government bond market and the clearing house to the private sector and NABARD should be sold to the government that means RBI should cease to have its stake in NABARAD…both are unworthy suggestions and points out on the dubious intent of OECD’s reporting on India’s economic growth. Only solace is, report acknowledges well the financial health of India’s banks and found them competent enough for complying with the BASEL-III norms. But even this not without of suspicion and citing privatization in PSBs, instead of showing a different course for private banking and making them core competent with the Public Sector Banks/ Regional Rural Banks/Co-operative Banks.

Chapter5/ Building on Progress in Education, report recommends of maximum withdrawal of regulatory intervention and maximum allowance of private capital in higher education. Besides “Improving incentives for stronger performance by making funding less input based. Tie funding to accreditation and assessment outcomes and increase share of project based funding for research”. In less technical terms, reports enters with its recommendation as it handles a plain capitalist market, and not the world’s most vibrant democracy where policy can’t be altered from the maximum welfare of peoples. This section is even more disappointing as it fails to even canvass, what’s the real hindrances of the education sector that hammering its growth and the potential policy formulations?

There will be no denying the fact that, India’s growth momentum is the outcome of its judicious experiment with the mix of regulation and reform in its economy. Since the1991, India has improved its overall fundamentals in economy, also successfully crossed the very troubling recession. Despite these positive scenarios, India’s growth is less than its potential and needs better governance and regulatory control to end the frills of free and fair businesses. And ofcourse, without making its Public Sector less competent and less happening. OECD reports are reminder of the concern that India must follow its own path, based on intrinsic compulsions and welfare the peoples instead of Corporations. Only then, RBI Governor will be remain smarter and cheerful than the other Central bankers from across the world and even our Mint Street will be less greedy than the re-doubtful Wall Street…alas, where “greed is still good “and its evangelists are incorrigible with Ivy Leagues business degrees!
Atul Kumar Thakur
October 16, 2011, Friday, New Delhi
Email: summertickets@gmail.com

The Unquiet Regulation

In India, RBI has an edge to regulate key financial markets-money markets, government securities market, credit market and forex market besides the usual role of a Central banker. This enables RBI to apply regulatory purview over the interconnected channels between banks and other financial sector entities-but with such unusual regulatory load, do RBI justify its every role as top authority from financial stability perspective? It’s hard to defy the growing overload on RBI-creation of Financial Sector Legislative Reform Council {FSLRC}&Financial Sector Development Council {FSDC} during the last Union Budget have even maximized the RBI’S overtures with Finance Ministry. The mammoth task and hyped expectations forced RBI Governor, D.Subbarao to accept the denial of additional arrival of debt market under the purview of RBI; he even laid stress for divulging the existing power from governor to respective committees on key policy decisions.

Out of conservatism and indeed with many insightful policy measures, RBI has ensured over the years a stable growth of Indian financial market albeit the shade on its autonomy and new circumstances in the post reform era have diminished its earlier touch on crucial policy matters. If RBI knows that despite hard efforts, still half of Indian population is unbanked, so the goal of financial inclusion is distant reality-on the other side, Finance Ministry works on popular temptations of growth instead considering inclusive and stable development of economy. Confrontations of RBI-Finance Ministry, especially in last few years have sharpened and it’s obviously an unfortunate outcome of Finance Minsitry’s intervention in day to day working of RBI. This is a worrying trend and must be checked out before the nerves of Indian financial market will be finally derailed from the esteemed regulation of RBI.

Following the incessant soft touch on credit policy and its ineffective impact on inflation in last few quarters, RBI has increased the Repo and Reverse Repo Rate by 50basis point and deregulated the Saving Bank Deposit Interest Rate. In a recent discussion paper on Saving Bank Deposit Interest Rate {RBI, April 2011}, the reason cited that monetary policy transmission has been suboptimal as it was unchanged since 2003 when the rate was last raised from 3.5% to 4%. As expected banking stocks promising negative past credit policy of RBI, hereafter atleast in short terms, investors will have to cope with the perplex scenarios.

Inflation is much bigger issue and RBI Governor, D.Subbarao sounds very rational when he said there is no quick-fix solution for inflation control in a rapidly growing economy like ours-in a complex economic matrix, it’s truly unreasonable to expect that only monetary policy will ease the pain of inflation. Those who are in political authorities have to realize sooner that inflation is not strictly the sole by-product of demand supply mismatch from the technical parameters of Whole sale Price Index{WPI}& Consumer Price Index{CPI}. The growing cohorts nexus among Corporate, Politicians, Government officials and relentless supply of unclean funds by many routes including suspicious Sovereign Wealth Fund, Participatory notes are making this nation reach in terms of obscene numbers of billionaires and leave majority lagging behind that itself narrates the story of our wounded economy.

Amidst the surging scams, Government/Regulators stand like mute spectators which mark the complete shift of democratic values. There uses to be time, when for a few lakhs rupees of wrong investment, Nehru’s son-in law and MP, Feroze Gandhi started a historic debate in the Lok Sabha [1958}on the state-owned Life Insurance Corporation’s investments in the dubious companies of a tainted industrialist, Haridas Mundhra {The Mundhra affair, Indian Express, December 12, 2008, Inder Malhotra}-though the financial charge was a few lakhs but Nehru’s response was in sharply contrast to what happens these days. He spoke of the “Majesty of Parliament” and instantly ordered a judicial inquiry by one of the most remarkable judges, M.C.Chagla. The inquiries findings led to the resignation of finance minister T.T.Krishnamachari and an exceptional Civil Servant, H.M.Patel. This was the first such case of high official’s sacking Indian democratic history but alas, similar couldn’t replicated here onward and what we witnessed the consistent erosion in democratic values with terrible misuse of power.

In such gloomy parochial atmosphere, it’s hardly surprising to see the working of regulators like SEBI&IRDA which runs like sovereign horse… without any clear mandate or essential /constructive intervention from government. G.Mohan Gopal, a former board member, SEBI has recently highlighted how the SEBI board abused powers to protect Chandrashekhar Bhave {Then Chairmen, SEBI} in IPO scam {2003-06}-it’s an open secret now how the Bhave has stagnated the highly promising Indian Mutual Fund Industry through many ambiguous regulatory changes. He scrapped the load regime that made this sector unhappening in terms of employment &further very unfortunate spate with the insurance regulator, IRDA over ULIP products finally forced the mutual fund business on fringe. Apart from jeopardizing the business, he outgrew the credible impression of fund management in India. Following the too much technical line, no big hope can be conceive from the new Chairmen of SEBI, U.K.Sinha…most of his announcement are equally ambiguous and unusual like predecessor and holds no bright prospects at all. Without any reversal on entry loads, he has plan to widen the geographical spread of mutual fund business, which is completely ironical…another big fatal, he is going to make by pushing the investments by foreign pension and retirement funds on the line of global markets. Ruling out a review on the asset qualities and nature of funds with an extra regulatory shortfalls, here in India, mutual funds’s ordeal is still seems far from being over.

Presently, Indian financial market is grappling with many awkward regulatory instances-a swift appropriation is worthwhile in some area by little more supplementation of regulatory measures and at other end, relaxation to let them work more freely and in accordance to situation instead of popular demands. As the entry of third generation private sector banks and many other reforms are on hold, government must collaborate with regulators much efficiently and without thinking of deviating political compulsions to forward ahead the Indian financial sector from this transition. Integrity and performance by the three regulatory arms of Indian finance-RBI, SEBI and IRDA will decide the overall growth of Indian economy in coming years. The unquiet regulation can lead to dooms, so it’s terrible and undeserving…an efficient regulation instead can further the broader task, so government should choose later and let make the ground clear for good and impartial business. But in meantime, we have to wait to see when and how the financial regulation will be streamlined…
Atul Kumar Thakur
Tuesday, May 23, 2011, New Delhi
Mail: summertickets@gmail.com

Nail Down the Exorbitant Financing

The Economic Times dated on October 30th2010 {Saturday} rightly placed its views in editorial that banks shouldn’t be forced for lending to Micro Financial Institutions {MFIs} under the Priority Sector Lending {PSL} albeit it straightly down while narrating MFIs as an improvement over conventional money lending system with further advice to RBI regarding the repercussions of interest control on this 27,000 crore rupees Microfinancial business. In the same page, independent views of V.Raghunathan “Permit MFIs higher interest rates” artificially and even better say hypothetically tried to end the genuine acrimony persisting among the MFIs, regulators and targeted clients…views shown by him candidly deciphering the structured backup for the greedy tendencies of MFIs.
The recent broke out at top management level in George Soros backed SKS Microfinance which hitherto have known for experiencing early innovations in Indian financial market have suddenly escalate the scenarios in swift maligning pace to entire Microfinancial sector. Vikram Akula {CEO, SKS Microfinance}, who have received accolades that is lucidly many times of summing the rest alls glamorous quotient for foraying and miraculously absorbing the less privileges dire needs in overt Spartan camouflage.
Height of MFIs limelight came out with the recent success of SKS Microfinance IPO that fetched $358million but before again leaving contagious bandwagon on its wayfarers, it completely caught under the radar of regulators and political parties for proliferation of bad ethics and finance-both within the organization and beyond…?

These institutions completely rest on the overall compulsions of banks struggling to complying with the Priority Sector Lending…they have to disburse at least slightly above of theirs one-theirs of total finances to weaker sections, unemployed, Rural sectors, MFIs etc. In my earlier article, I have elaborated on this subject in detail-how except Regional Rural Banks {RRBs}, not a single Indian bank is disbursing the requisite amount in proper manner…hence, they are banking upon on easy target like MFIs.
They lend them at 11-12% without any default and found freedom from cumbersome process of envisaged compliances…it’s a sort of ethical violation of Indian Constitution’s many articles and notably one its heart “Directive Principles” that is the originating point of Priority Sector Lending or Responsible banking. Founding easy capitalization, MFIs in India summarly violates all sort of moral imperatives in theirs business conduct…many of its ex Wall Street bankers CEOs are capitulating better the commercial pastures than their competitor moneylenders in the race of exorbitant charges. At present most of MFIs are charging near about hovering34%; 22 more than the Indian banks and around less 20% lesser than moneylenders…doesn’t it practicing like patronized moneylenders even under the eagle eyes of RBI?

The kind of business MFIs is dwelling with essentially undeserving to get any more cheap and easy capitalization from Indian banks under the quota of PSL…until the Y.H.Malegan committee report come into place, RBI must seriously look into this specific angle. If a cunning investor like George Soros is taking keen interest in MFIs, it signals something substantial advantage in favour of MFIs in India…intriguing to note that how unethically social capital being transfused for the accomplishment of maddening commercial goals. That’s the main reason, why so far private equity business have not mingled with the burgeoning MFIs…theirs money have few takers in Indian Microfinance business as our banks are more than generous in lending to these unaccountable institutions!

At this point, RBI should ensure the uniform lending rates to all the financial institutions irrespective of the nature of theirs incorporation besides the softening of collateralized loans in Microfinancial segment of banks. Why Microfinancial business should not converge with our real economy? Our banking system is quite robust and mature to trace and cater the financial needs of disadvantaged section without imitating the idealistic notional model of Md. Yunus from Bangladesh whose model is shambling in India through Private MFIs.
RBI before taking any further stances over this issue must enter into an ideation fray along with NABARD with keeping the goal to align Scheduled Commercial Banks, Private Banks and Co-operative Banks with hassle-free Microfinances. Second one, to create a competitive ground for bottom level financing where MFIs or NBFC have to compete with the banks…competition is always good in capitalism unlike the socialistic system where patronism of state plays major role. So, without swapping their inherent characteristics, Indian financial system should create a level playing field for bottom level financing…now goal should be to nail down the hasslefull and exorbitant financing out of sight instead to confusing idealism with Kurta clad CEOs!
Atul Kumar Thakur
November 1st2010, Monday
New Delhi
atul_mdb@rediffmaail.com

Reckoning Basel-III Norms!

Following the recent financial meltdown, the leaders of the group of G-20economies asked the Basel Committee on Banking Supervision{BCBS} to reach the new rules needed to prevent another financial crisis in future. The aim was to mitigate the greed ridden financial crisis instead to block the real factors behind it; real notion of Basel-III norms could be sensed out with the statement of Hant Wellink, head of Basel Committee on Banking Supervision-“Partly banks will have to retain profit for years which they can not use to pay shareholders or bonuses.
For another part, this will vary from bank to bank; they will have to get it from the capital market. I think it will make a new crisis less likely. Chances are much smaller, we have made calculations on this but we can’t rule it out completely”. Last Para reflect the genuine apprehension ahead in financial market…so; life even after the Basel-III norms wouldn’t remain indifferent from regulatory considerations.

Basel-III norms, with its underlying proposition of insulating banks from adverse shocks by adequately enhancing the amount of its own capital holding compared to overall deposits and other borrowing can be regarded as an improved and standard set of rules over the existing Basel-II norms. Rule of Basel-III norms written by the Bank of International Settlement’s Committee on Banking Supervision {BCBS} with lucid mandates to define the reform agenda for the banking sector across the world. The new rule comprehensively entails how to asses risks and capital management anticipating theirs risk bearing.
On September20,2010 {Sunday}, agreement finally taken place on Basel-III at a meeting of Central bank Governors and top Supervisors from 27 countries chaired by ECB President, Jean Clande Trichet. They reached to the consensus with focusing on prevention of any further International Credit Crisis with provisioning more than triple of top quality capital as reserve for addressing any meltdown sort of occurrences.

Predominant component of capital is common equity and retained earnings-new rules restrict inclusion of items such as deferred tax assets, mortgage-servicing rights and investments in financial institutions to no more than 15%of the common equity component. Here strong bank would avail an edge as now they can put excess cash to better use though with ample transition period for raising funds to compliance shouldn’t be any big issue for even smaller banks. The new norms are centered around the renewed focus of Central bankers on Macro-prudential stability. The global financial meltdown following the crisis in U.S Sub-prime market has shaped the entire propositions. Earlier guidelines, popularly known as Basel-II was focused on Macro prudential regulation, those features being carried out in Basel-III norms as well with added advanced support. That systemizes the changed motives of regulators now-they have eagle eyes on financial stability of the system in totality rather than Micro regulation of any individual bank.
Under the Basel-III norms, Key Capital Ratio has been raised to 7%of risky assets-Tier-I capital that includes common equity and perpetual preferred stock will be raised from 2 to 4.5% starting in phases from January2013 to be accomplished by January2015. Moreover, banks will have to set aside another2.5%as a contingency for future stress, taking the overall capital ratio or Capital Conservation Buffer to 7%. Banks that would fail to comply after the stipulated timeline would be unable to pay dividends, though they will not be forced to raise cash.

A further counter-cyclical buffer in average of 0%-2.5%of common equity is to be imposed depending on specific circumstances of an economy to protect the banking sector from periods of excess aggregate credit growth. In addition, a liquidity buffer, much like our Statutory Liquidity Ratio {SLR} is to be made mandatory by January2018 to check the risk based measures and higher capital norms for systemically important bank. On paper, Basel-III will triple the quantum of capital, banks will need to maintain but whether it will risk-proof the banking sector is doubtful. So, regulation would decide whether Basel-III norms is light touch set of rule or indeed an effective panacea for hassle free and ethical functioning of banking system.

Impact on Indian banks: - RBI Governor, D.Subbarao is stoutly confident that Indian banks not likely to be adversely impacted by the new capital rules. At the end of June30, 2010; the aggregate capital to risk –weighted assets ratio of the Indian banking system stood at 13.4% of which Tier-I capital constituted 9.3%. So, it wouldn’t leave any pressure on Indian banks in near future albeit there may be some negative impact arising from shifting some deductions from Tier-I and Tier-II capital to common equity.
Despite strong fundamentals, RBI should ensure even more capital than essentially stipulated limit under the Basel-III norms; besides stress must be given on long term capital inflow rather on risky short term investments. Besides, innovative credit policies, RBI should also stringently ensure the well capitalized subsidiary structure for foreign banks and financial institutions operating in India, since the stability of Indian banking system have lot to with it.

Young Committee that recommended for the establishment of Bank of International Settlements {BIS} in1930 had enough sense for volatility in International financial market and greed’s of bankers. Actual effects of even best designed rules are of no value if lacked by the competent, proactive and fearless supervision. Strengthening the global banking system should be and must be the aim of every new financial rules but it’s equally imperative to stop the adverse lobbying that makes regulation nothing more than a print order. We can easily assume this from recently enacted Dodd Frank Act {Wall Street and Consumer Protection Act} in U.S.A which loosing its effects under the stern pressure from affluent lobbyist.
Regulation couldn’t have any parallel while enforcing a law; our regulatory strength has recently tested during the world wide financial meltdown-Indian banking relatively emerged unscratched comparing the western counterparts. More attention is needed from developed world for compliance of rules envisaged under the Basel-III norms-make or break of this rule would be decided by the both Individual as well collective performances of economies. Co-operation at international level would be the real bone of contention for an ambitious rule like Basel-III…meanwhile let’s watch the movements around the financial circle!
Atul Kumar Thakur
October20, 2010, Wednesday, New Delhi
atul_mdb@rediffmail.com

Optimizing Value in Economic Governance

Dharm Narayan, an agriculture economist of repute whose concern for growing agricultural crisis amidst the rapid growth of Indian economy have already made deep impact in the realm of policy and research. Listening twelfth Dharm Narayan Memorial Lecture in his fond memory at India International Centre {September4, 2010, New Delhi} was insightful as the theme lecture delivered by Kaushik Basu {Chief Economic Advisor, Ministry of Finance, India} touched and apprised on generally considered forgotten issues.
In the era where value and social norms as an underlying of mainstream economics being frequently forestalled and reality shunned more than anything else-only wiping out of misunderstanding from the world of money can minimize the chances of impending consequences.

Kaushik’s meticulous choice between following the Greek philosopher Piero’s mode of skepticism and J.S.Mill’s very dear quotation “you have to live with waves and winds to live better” is indeed appears a fine forethought until we found ourselves in the company of credible theorists-away from vileful practices of popular politics. Though in standard economic theory too, large scale trade maximizes the conditions of monopoly and oligopoly-like political machinery, economic machinery equally rely on confederates to attain prefixed tempting goals. Interestingly, sometimes politicians and economists together spent decades to unlearn the lessons of historic blunders and shown determination to repeat all the previous mistakes.
For proving that, we don’t have to roam too much, as great depression of 1930’s could be assume as reference point and present ongoing world wide financial crisis as silly repetition of same basic flaws. In a country like ours, where90%of total work force of about 433million is employed in unorganized sector with poor pay no socio-economic security; there is an immediate need to rationalize the existing labour laws with anticipating the modern challenges of economy.

Economic theories can convince the government and also realize expected goals from it albeit to an extent only. Real driving force ultimately come through the social ideas and beliefs and that have no parallel in value term over shaping the economic policies-Indian economy sitting on the cusp of economic surge needs an equal makeover of value system based on own expertise and specific needs without blindly chasing the bandwagons and tailor made principles of western countries. Nehru rightly sensed it in his 1920’s speech-power of idea can move.
John Maynard Keynes too came with similar thoughts in 1926; at least in theoretical domain, two epoch-makers of politics and economics laid stress on better place for rational ideas than extraneous greed’s. Absence of practical support in machinery remains kingpin to handicap such positive stances…many of us may not have pastime for parable but we shall not extrude rationality from our basis thinking-unfortunately such behaviors could be the flash-point of managed chaos.

Among our many fault lines, inadequate professionalism and relentless growing corruption are haunting us like never before; our acceptance in next phase at world arena wouldn’t be succeeded with such rogue practices. We needed radical shift in overall governance that can ensure us a public life without grappling with the culture of hype and sinister loitering in an alien uneven terrain.
Despite not being a die-hard admirer of Chinese policy, for me it was amazing to see their hard efforts over the decades to improvise the governance standard in their country and configuring a balance work culture without nurturing the sycophants and Hippocrates like ours in every sector whose endorsement taken as sacrosanct for any move. Present system is quite conducive for developing arachnids, who through hidden treaties with like-minded outwitting the real spirits of business and ethics…these stereotype figure always shown as legend but finding anything substantial wouldn’t be an easy task for any fair person.

Our aspiration is under heavy strain by such odd prevailing practices; if such tendencies wouldn’t be checked with due means of governance, then rough time would wait for us. I always believe in economics as a discipline and an emphatic stakeholder in governance-desirable change in governance requires an optimization of value from economic point of view. As a surging economy, and a stable economy; we can’t dwell with unethical practices, if really have to touch our potential height in all terms. As an Indian citizen, I will be rather happy with modest yet disciplined approaches than chasing deceased sophistication…if we can address our needs through practical means, than there is no need to fade with unsure Nash equilibrium of complex Game theory.
Atul Kumar Thakur
September8, 2010, Wednesday, New Delhi
atul_mdb@rediffmail.com

What Financial Meltdown Laments!

At least since last twelve quarters, global financial system has been witnessing the most lethal repercussions of unethical practices and unsound creation of financial products designed to suit for speculation and betting by its high profile line management.
Hundreds of bank failures world-wide, statutory shifting of holdings-following it from Wall Street to the Central Business Districts of India easily implies the unfortunate changes that have taken place with the effects of financial crisis.

Despite all wrong with such failureness, it also cast some positive point as an option of learning…Indian economy, being resilient and growing must have to pick some quick changes for overall improvement in its risk averseness. Primarily, Indian banking sector which despite emerging less scratched, suffered many implicit and long-term setbacks on the counts of prospects.
Global penetration of Indian banks have essentially suffered on the account of adverseness prevailing in external markets…mood and steps have altered after the global economic crisis and unprecedented inflationary challenges followed it. In certain senses, it’s an opportunity for Indian financial system to resonate its reach and viability within the domestic market, as still majority of its terrain is under-tapped and have huge potential to grow like the recent telecom success story.

Except systemic weakening of the Public Sector Telecom Companies {BSNL&MTNL}in the name of healthy competition, there are some positive points, like “reaching to the rural segments” can be a point of reference for further banking expansion to hitherto untouched terrains.
Instead of too much idealisation, here rational and innovative business practices are more imperative-like the telecom sector, Indian banks have to think upon the innovative products that will be compatible to the huge unbanked peoples of this country. Instead of external blind imitation, enactment to the specific needs of these targeted segments would be the true prudence. Reason of my emphatic stressing on the specific re-modelling and introduction of new financial services is primarily to see it as an extension of banking from existing level to a desired height.

For a while, model of Gramin bank of Bangladesh or present way of private Micro financial operation can’t be even appropriate for slight inferences. Idealistic and lately unrealistic notions would be hardly suitable for Indian markets…the sizable presence of Regional Rural Banks {RRBs}along with some commercial banks are accomplishing much better then any prospective option from above sighted examples.
They of course banks with the poors albeit in comparison of Indian banks, their lending rates seems unfeasible and exorbitant, so instead of making peoples poor and bank upon them, it would be better to empower them and enable them for inclusion in mainstream banking. Neither we can play on superficial western structured financial products nor on other exotic alternatives-plights of rural financing can be addressed only through the adoption of no-frills practices by the banks and other financial intermediaries.

Indeed sharpening of effects within the financial eco-system would depend upon the synergy emerging out of co-ordination among the various change agents and almighty regulators. In essence, RBI has been playing a formidable role on the regulation front but wisdom can be counted most often only through the defensive spectacles.
Progressivism is the need of hour which RBI should be and must be reckon as the catalyst of policy formulation in next all course of action. Defying of the grave reality, that around sixty percent of Indian population is still out of any sort of banking or institutional financial services would be extremely distorting and manipulative in substance.

Providing adequate universal services through smooth access mechanism will be the most revolutionising occurrence in practices-the entire exercises like, CSR and others have to be better comply with the idea of responsible banking that have broader meaning and significance in practical banking procedures. Frequent convulsions in the world of finance necessitates now to fix and chase our own targets…our characteristics are unique, so we should have our first hand propositions and ways of formulation to proceed better. Maximum financial inclusion would be the wisest exercise from domestic front.
Atul Kumar Thakur
July7th 2010, Wednesday, New Delhi
atul_mdb@rediffmail.com

Bank Licensing: Task Ahead for RBI

Finance Minister’s pronouncement for further banking license during the last budget speech marked a significant change in Indian banking sector-since last sixteen years, RBI has tried best to optimize the scale of reform in banking sector, by giving nod to UTI {now Axis Bank}for full fledged banking was the way forward in the direction of core competency.
Later entry of some more banks in 2004,enhanced the efficiency in Indian banking scenario-now the condition has changed significantly over the years as technological up-gradation have played very crucial role in meantime. Infusion of over Rs17, 000 crore on technologies since 1999 and relatively unscratched overcoming of Indian banking from global financial meltdown have paving the way for next level of transition under sound regulatory norms of RBI; so, time is opportune for banking in India to transform itself at the level of global standard.
Amidst the growing speculation, officials of RBI have in mind some basic inquisitions, like how many licenses should be issued? What should be the minimum capital requirement? Whether NBFCs should be allowed to convert into banks? Whether Industrial houses should be considered for granting banking license? Obviously for a year ahead, these concerns would cap the regulators like cloud though above all the same meticulousness and regulatory oversight will be the catalyst.
At initial level, RBI is going to post a draft guideline for both the general and expert comments by the end of July; afterwards the notice would be issued for application-in next and final stage, High Power Committee would review the applications and come out with their decisions-entire process will take at least a year.

Indeed, in all manners, RBI has to play pivotal role with its regulatory oversight-it must have to take into account the credibility of the promoter, that means no bank license for loan defaulters; RBI and Finance Ministry, both agreed on strict scrutiny of Books& Accounts ahead of issuing new licenses.
The second most imperative condition is business plan of prospective contenders, they must be asked for a long term plans of business with essential proposition to improve operations of banking Industry in India.
Anticipating the significance of a banking license in this country, contenders must have to demonstrate their vision in terms of enhancement and strengthening of banking business before and after their inclusion in banking sphere-only greed for profit sounds very unethical which hardly create incentive for the regulatory officials who have to play much larger task in terms of streamlining the financial inclusion and financial architecture of the country.

Moreover financial deepening should be and must be the priority task of India’s Central Bank {RBI}, as it forwardly entwined with the growth prospects of economy at this juncture, there wouldn’t be any denial for entry of sufficient new banks for improving the business outlook which despite making progress still lagging behind of actual turn around.
As per the RBI data, retail advances have grown from 10%to 20% of total advances, growth of return on assets from 0.4%to 1%, reduction in Non Performing Assets{NPA} from 6%to less then1%, fall in cost-income ratio from 67%to 44%-on the other side, from total 95 banks, we have 53,000 branch, only 40% people having bank accounts, 25.1 million no-frill accounts have opened in last two years-but they all hardly justified the actual potential of Indian banking which possess worth of 95%of India’s total GDP.

In 1994-95, RBI had issued 10 licenses for new banks, next time in 2003-04, numbers fallen down to merely two-with more applicants this time, RBI has flexible options to make sensible choices, absolutely number wouldn’t cross the double digit this time but its also unlikely that it would juggled beneath the five-six new licenses.
Level of capital requirements needs to be optimized as per the existing needs and better implication for banking business as it’s a crucial determinant of financial inclusion and growth. Some other issues, like granting fresh licenses rather conversion of NBFCs and retaining of RBI’s stand for not issuing the banking licenses to the industrial houses must remain intact as they don’t gives the broad view.

RBI can also contemplate to issue group licensing with limited voting rights of 10% as they would provide a diversified opportunity with group control-under present regulatory norms, especially on the wake of global recession, this could be another rational choice-there’s lot of room available for banking in India, as still around 70 million population is out of its purview, so it makes sense to tap these unexplored opportunity through introducing sufficient numbers of new banks as next course of action.
Atul Kumar Thakur
June 3, 2010, Thursday, New Delhi
atul-mdb@rediffmail.com

The World of Derivatives

Derivatives are specialized contracts which marks an agreement or an option to buy or sell its underlying's up to pre-choreographed time in the future at a prearranged price,which is know as the exercise price. The word “derivatives” originated from mathematics and signify the variables, these variables are derived from another variable-they have no value of their own and they derive their value from the value of some other asset, that’s commonly known as underlying.
Not in modern sense,though the history of derivatives is surprisingly longer and could be traced back since the age of Mahabharata,albeit advent of modern day’s derivatives contracts can be attributed to the need for farmers to protect themselves from any decline in the price of their corps due to delayed monsoon or over production.

The first “futures” contracts can be traced to the “Yadoya” rice market in Osaka {Japan} around 1650-those were the explicitly standardized contracts which resembled very close to today’s futures contracts. The Chicago Board of Trade {CBOT}, the largest derivative exchange in the world was established in 1848 where forward contracts on various commodities were standardized around 1865-aftetwards, futures {contracts}have remained more or less in the same form, as we know them in modern understanding.
In Indian case too-derivatives have a long standing presence; the commodity derivative market has been operationalizing in India since the nineteenth century with organized trading in cotton through the establishment of Cotton Trade Association in 1875, since than contracts on various other commodities have been introduced as well.

Indian market is in growing phase with seven-eight years of operation in exchange traded financial derivatives, those were introduced in India in June 2000 at the two major stock exchanges-NSE and BSE.Further National Commodity &Derivatives Exchange Limited {NCDEX} started its operation in December 2003, to provide a platform for commodities trading-with slew of measures, the derivatives market in India has grown exponentially over the years, especially at NSE.
Stock futures are the highest traded contracts on NSE accounting for around 55% of the total turnover in derivatives trade at NSE, as on April13, 2005. Broadly derivatives can be categorized in three orders-I. Simple derivatives {plane Vanilla products}, II.Complex derivatives {exotic products} and III.Very complex products designed and suitable to particular client only.

Indian banks remains mostly untouched with the last two products as RBI doesn’t permit too much open positions on foreign exchange; many Indian banks did the deals and in turn entered into back to back understanding with the foreign banks-it was so because Indian banks didn’t have those exotic products, they bought it from foreign banks and sold them to corporates.Thanks to our regulators, who never believed in “greed is good” principle like the protagonist of 1987 released Hollywood blockbuster {Wall Street} or its real executioner{bankers} at Wall Street…we also can’t ignore the wise saying of grand old man of investment, Mr. Warren Buffet, who in aggrieved state pronounced on the wake of deep recession in 2008, derivatives as “Financial Weapons of Mass Destruction”.
Indeed he wasn’t wrong as longer as he saw its bad outcome by the acts of its maligners {greedy bankers from Wall Street} otherwise, a financial product even derivative can’t stand so destructively on their own foot-these potential outside push is the real threat behind the entire web of derivative trading.

A single derivative product known Credit Default Swaps {CDS} has alone fuelled the matter for more than six dozens bank failure, alone in U.S.A since the break out of recession in 2007-wrong doings are still far from being over as another giant from Wall Street {Goldman Sachs}is badly tapped in its wave of unethical handling.Derivatives as a financial product is very useful until its bounded with an ethical conscience and incentive for mass enrapture otherwise its repercussions can be easily ransack the entire order…proper regulatory execution and shared vision of institutions involved in this field can lead to a sustainable way-out.
Atul Kumar Thakur
April24th 2010, Saturday, New Delhi
atul_mdb@rediffmail.com