The recent NSSO survey results of the PDS and other sources of household consumption, done in with over a lakh households in 7428 villages and 5263 blocks across the country shows an increased dependence of households on the PDS. Some of the salient points in the survey are
a) Rice purchase under PDS had increased to 23.5% in rural areas ( compared to 13% in 2004-05) and to 18% in urban areas (compared to 11% in 2004-05)
b) Wheat / Aatta purchase had increased to 14.6% in rural areas ( compared to 7.3% in 2004-05) and to 9% in urban areas (compared to 3.8% in 2004-05)
c) Sugar purchase had increased to 14.7 % and 10.3% in rural and urban areas ( compared to 10.3% and 6.6% respectively in 2004-05)
And 39% of rural households and 20.5% of urban households depend on the PDS. While some of us would possibly become happy and think that the figures show an increase in the efficiency of the PDS, the results are disturbing considering that , this dependance is because,
a) Survey results show a reduction in levels of employment. The labour force fell from 496.4 M in 2005 to 487.6 M in 2011. Of the employable population, 9.8 % is unemployed, clearly indicating that growth is not leading to increased employment.
b) Food prices have grown manifold in the last few years. Rice price had increased from about 12,890 per MT in 04-05 to 32,320 per MT now ( reaching a peak of about 42,500 per MT in 2008), for a 10 year period the increase is around 222 %. Sugar prices have gone up by around 177%.
These can then only mean that they are signs of growing distress at the lower strata of the population. Possible reasons why we have not seen any major upheaval till now could be the combination of the MNREGS and the PD System. But these cannot be long term solutions. A major rethink on the structure of the economic growth model is needed, with a clear focus on making it truly inclusive - and unless that is firmly in place, any move to cut down subsidies would result in major social upheavals. The doubt is whether, given their firm western schooling, people at the helm have the willingness and capability to come out with economic models for growth that suits this country and its citizens who have become more dependent on subsidies for survival.
Saturday, February 9, 2013
Thursday, January 17, 2013
IMF's comments on the Indian Regulatory System
The IMF has recently released the India: Financial System Stability Update. While commending on the fact that the system has a tightly controlled regulatory and supervisory regime and is reasonably resilient with no likelihood of near time stress recommends certain actions, some of which merit some thought - while others are merely incremental in nature.
a) That the regime for large exposures and connected lending needs tightening in line with good international practice. The report points to the fact that the maximum level permissible at a group level including lending for infrastructure is high at 50% of bank's capital and that it needs to be reduced to 10-25% in line with international practises. While this can be a goal post over a long time period, reducing the limit steeply will reduce availability of finance to some sectors. The solution to this could be development of alternate markets for financing which will temper , if not reduce significantly , the requirement of bank finance.
b) Reducing SLR holding limits : While appreciating the fact that CRR and SLR requirements help ensure liquidity availability during crises, IMF recommends reduction in SLR holdings in Goverment Securities. The recommendation, to my mind, comes from IMF's observation of the unsavory experience with the European banks which have held large investments in Government Bonds. This recommendation fails to take into cognizance the fact in general the G Sec investment holdings in most banks is significantly higher than the mandated requirement, which in any case is being lowered in a slow manner. This also fails to take into consideration that what is held by Indian Banks is national debt ( not international debt as in the case of most European banks)and the Debt to GDP ratio of India is better than its European counterparts. Any risk of sovereign default is hence far fetched. There is also no reason to believe that reduction in SLR norms will lead to improvement in the Corporate bond market (which acceptably has to develop in the country), as what matters is the levels of government borrowings.
c) RBI nominees on PSB Boards may lead to conflict of interest: While the recommendation in theory is probably correct, the fact is that the presence of a RBI nominee helps the regulator to get information on a real time basis and thus help in supervision. It also helps act as a deterrent , preventing activities that may be inimical to the bank and the system at large. Considering the pros and cons, RBI would do well to retain this system or retain the right to use this option.
d)Insolvency framework businesses and more particularly for proprietorship firms - which are the majority businesses in the country. The amendments to the Company's Act, which provide for OPC (One Person Company) will largely address this issue.
e) International and domestic supervisory information sharing : This is being addressed by RBI considering supervisory colleges for particularly large banking organizations. RBI has already set up supervisory colleges for SBI and ICICI Bank which have significant international presence.
The report indicates that the Indian regulatory system is clearly in good shape and while being structured to suit Indian needs meets international requirements in most cases - and what will work is independent and tight regulation. 'Gaps' (if one may say so) which are there are either by design or are already being worked on. The recent crisis has exposed the weaknesses of the neo-liberal light regulatory framework that was championed by developed nations and the Bretton Wood Twins. And as they say, it is only when the tide goes down, that we know who has been swimming naked. IMF's commendation is this context is hence an interesting development.
a) That the regime for large exposures and connected lending needs tightening in line with good international practice. The report points to the fact that the maximum level permissible at a group level including lending for infrastructure is high at 50% of bank's capital and that it needs to be reduced to 10-25% in line with international practises. While this can be a goal post over a long time period, reducing the limit steeply will reduce availability of finance to some sectors. The solution to this could be development of alternate markets for financing which will temper , if not reduce significantly , the requirement of bank finance.
b) Reducing SLR holding limits : While appreciating the fact that CRR and SLR requirements help ensure liquidity availability during crises, IMF recommends reduction in SLR holdings in Goverment Securities. The recommendation, to my mind, comes from IMF's observation of the unsavory experience with the European banks which have held large investments in Government Bonds. This recommendation fails to take into cognizance the fact in general the G Sec investment holdings in most banks is significantly higher than the mandated requirement, which in any case is being lowered in a slow manner. This also fails to take into consideration that what is held by Indian Banks is national debt ( not international debt as in the case of most European banks)and the Debt to GDP ratio of India is better than its European counterparts. Any risk of sovereign default is hence far fetched. There is also no reason to believe that reduction in SLR norms will lead to improvement in the Corporate bond market (which acceptably has to develop in the country), as what matters is the levels of government borrowings.
c) RBI nominees on PSB Boards may lead to conflict of interest: While the recommendation in theory is probably correct, the fact is that the presence of a RBI nominee helps the regulator to get information on a real time basis and thus help in supervision. It also helps act as a deterrent , preventing activities that may be inimical to the bank and the system at large. Considering the pros and cons, RBI would do well to retain this system or retain the right to use this option.
d)Insolvency framework businesses and more particularly for proprietorship firms - which are the majority businesses in the country. The amendments to the Company's Act, which provide for OPC (One Person Company) will largely address this issue.
e) International and domestic supervisory information sharing : This is being addressed by RBI considering supervisory colleges for particularly large banking organizations. RBI has already set up supervisory colleges for SBI and ICICI Bank which have significant international presence.
The report indicates that the Indian regulatory system is clearly in good shape and while being structured to suit Indian needs meets international requirements in most cases - and what will work is independent and tight regulation. 'Gaps' (if one may say so) which are there are either by design or are already being worked on. The recent crisis has exposed the weaknesses of the neo-liberal light regulatory framework that was championed by developed nations and the Bretton Wood Twins. And as they say, it is only when the tide goes down, that we know who has been swimming naked. IMF's commendation is this context is hence an interesting development.
Monday, January 14, 2013
Bending back to please - Deferring the GAAR
As expected, the Government has deferred implementing the General Anti Avoidance Rules by two years - in a bid to 'allay fears of foreign investors and boost sagging FDI inflows'. The Deputy Chairman of the Planning Commission says that this 'will boost the investment climate'
The implication is that FDI inflows have been / are structured to avoid tax payments. It also implies that tax avoidance - the Mauritius route etc is viewed in a benign fashion , while the honest tax payer is penalized. This kind of economic policy making hurts.
Justice J S Verma's observation on the SC judgement in the Vodafone case clearly stresses this point . He says "The effect of benefiting a corporate is to cast a higher tax burden on the common man and when you uphold an illegal tax avoidance, then you cast a higher tax burden on the honest tax payer". True.
While the markets gave a thumbs up with the Sensex gaining 240 points, what is still not clear is how postponement of GAAR will boost sagging FDI inflows. It is not that there is a long queue of investors dying to invest in India and wanting only this change to be done. And notwithstanding what the western schooled economists say, it is plain common sense that FDI is no panacea for economic evils in this country and so, the question is whether the Government needs to bend back to please.
The implication is that FDI inflows have been / are structured to avoid tax payments. It also implies that tax avoidance - the Mauritius route etc is viewed in a benign fashion , while the honest tax payer is penalized. This kind of economic policy making hurts.
Justice J S Verma's observation on the SC judgement in the Vodafone case clearly stresses this point . He says "The effect of benefiting a corporate is to cast a higher tax burden on the common man and when you uphold an illegal tax avoidance, then you cast a higher tax burden on the honest tax payer". True.
While the markets gave a thumbs up with the Sensex gaining 240 points, what is still not clear is how postponement of GAAR will boost sagging FDI inflows. It is not that there is a long queue of investors dying to invest in India and wanting only this change to be done. And notwithstanding what the western schooled economists say, it is plain common sense that FDI is no panacea for economic evils in this country and so, the question is whether the Government needs to bend back to please.
What Price - Price WaterHouse ?
About a decade back, Global Trust Bank used to be audited by Lovelock and Lewes (L&L). The audit firm declared the bank a going concern and raised no objection to the (gross under) reporting of NPAs by the bank. Following the aborted attempt to merge with the then UTI Bank ( now Axis Bank), media was awash with the terrible state of GTB's asset book. On RBI's diktat, GTB changed its auditors .... it took PWC as its auditors. Some how, everybody missed the fact that L&L and PWC were just two arms of the same group. L&L was PWC's sister concern...they call it 'network firm'. And what happened to GTB is something we know.
About half a decade back, Satyam Computers used to be audited by PWC...( well... Ramesh Rajan from PWC says it was Lovelock and Lewes and that the fee deposited by Satyam Computers to PWC was transferred to L&L !) ...the creative internal accounting these firms follow is immaterial. What happened in Satyam Computers is something we know.
And now, PWC is back in the news. The IT Dept says, the firm advised Nokia on what it considers a Rs 2500 Cr tax evasion. They have 'missed' claiming TDS on their payments to their parent company.
It is PWC again and again. In the first two cases the shareholders lost heavily and in the third - the Government has (atleast till now). PWC is still a 'respected international audit firm'.
The problems are basic and pertain to conflict of interest.
a) The audit firm also doubles up as a tax consultant ( Well, some of them don't do it directly - they have 'network' firms to do it for them ).
b) The audit firm is supposed to give an opinion on the accounts of a company - basically the results of performance of the managers and promoters to the shareholders - but are paid by the managers.
And till we resolve these issues, there will be managers in firms who will be willing to pay a price and price waterhouses which will sell themselves...
About half a decade back, Satyam Computers used to be audited by PWC...( well... Ramesh Rajan from PWC says it was Lovelock and Lewes and that the fee deposited by Satyam Computers to PWC was transferred to L&L !) ...the creative internal accounting these firms follow is immaterial. What happened in Satyam Computers is something we know.
And now, PWC is back in the news. The IT Dept says, the firm advised Nokia on what it considers a Rs 2500 Cr tax evasion. They have 'missed' claiming TDS on their payments to their parent company.
It is PWC again and again. In the first two cases the shareholders lost heavily and in the third - the Government has (atleast till now). PWC is still a 'respected international audit firm'.
The problems are basic and pertain to conflict of interest.
a) The audit firm also doubles up as a tax consultant ( Well, some of them don't do it directly - they have 'network' firms to do it for them ).
b) The audit firm is supposed to give an opinion on the accounts of a company - basically the results of performance of the managers and promoters to the shareholders - but are paid by the managers.
And till we resolve these issues, there will be managers in firms who will be willing to pay a price and price waterhouses which will sell themselves...
Tuesday, January 8, 2013
Forcing policy changes by threat
Fitch Ratings , the international rating agency has reiterated its negative outlook for India and has warned of a downgrade. The agency complains that structural reform process is sluggish. This is the era of policy making by threat. The agency is concerned over
a)India's economic and fiscal outlook
b)Sharp slowdown in growth
c)persistent inflationary pressures
d)weaker public finances.
Probably these are concerns, but should the government choose to cut back spending to ensure that the fiscal deficit is contained, it will impact the already fragile recovery , and should the central bank increase rates to cut out inflation, it will affect growth. Less taxes may help growth, but will increase the deficit. Cut rates to spur growth and you have the threat of inflation picking up again. Look anywhich way, the Goverment cannot really do much. And this is after the spate of 'actions' taken by the Government.The fact is that we will need to live with this situation till global growth rates pick up. What the agencies would desire is a cut in subsidies (which is only huge in absolute amounts - in relative terms it is not really as big a problem as it is potrayed to be), lowering of taxes and a cut in rates. They forget that this country has a population of 1.2 billion and all that we have been taking in terms of growth has not been very inclusive. NSSO data clearly shows that the growth has not resulted in increased employment - it is a jobless growth.These policy prescriptions by Fitch or S&P will only aggrevate the problem. Running a country is not like running a company. And that is where the problem is.
Ratings are statements of opinions and the track record of thees agencies in rating corporate bonds is decent. What is questionable is their ability to rate other issues (their track record in rating mortgage backed securities is disastrous) and sovereigns. Sovereign debt rating is almost entirely unsolicited and the ratings and policy prescriptions of the three big agencies Fitch Ratings, S&P and Moodys has played a major role in accentuating the EU crisis, forcing governments to consider placing curbs on the timings of release of such un-solicited ratings and curbing ownerships. There is nothing to prove that these agencies have been successful in predicting crises.
What happens is that rating changes affects the ownership pattern of sovereign bonds - as most institutions. Because most institutions have allocations for bond holdings based on the ratings of the bonds, when a downgrade happens, it results in a huge sell off.... well that is what is supposed to happen in theory. But when US had its AAA ratings stripped, its bonds rallied ! Bloomberg reports that 'Predicting the consequences of a rating change by S&P or Moody’s may be little better than flipping a coin, with yields moving in the opposite direction than suggested 47 percent of the time, according to data compiled by Bloomberg in June on 314 upgrades, downgrades and outlook changes going back to 1974'....
So should the Government worry ? Reforms are required. But we should make haste slowly. Policy should not be made under threat.
a)India's economic and fiscal outlook
b)Sharp slowdown in growth
c)persistent inflationary pressures
d)weaker public finances.
Probably these are concerns, but should the government choose to cut back spending to ensure that the fiscal deficit is contained, it will impact the already fragile recovery , and should the central bank increase rates to cut out inflation, it will affect growth. Less taxes may help growth, but will increase the deficit. Cut rates to spur growth and you have the threat of inflation picking up again. Look anywhich way, the Goverment cannot really do much. And this is after the spate of 'actions' taken by the Government.The fact is that we will need to live with this situation till global growth rates pick up. What the agencies would desire is a cut in subsidies (which is only huge in absolute amounts - in relative terms it is not really as big a problem as it is potrayed to be), lowering of taxes and a cut in rates. They forget that this country has a population of 1.2 billion and all that we have been taking in terms of growth has not been very inclusive. NSSO data clearly shows that the growth has not resulted in increased employment - it is a jobless growth.These policy prescriptions by Fitch or S&P will only aggrevate the problem. Running a country is not like running a company. And that is where the problem is.
Ratings are statements of opinions and the track record of thees agencies in rating corporate bonds is decent. What is questionable is their ability to rate other issues (their track record in rating mortgage backed securities is disastrous) and sovereigns. Sovereign debt rating is almost entirely unsolicited and the ratings and policy prescriptions of the three big agencies Fitch Ratings, S&P and Moodys has played a major role in accentuating the EU crisis, forcing governments to consider placing curbs on the timings of release of such un-solicited ratings and curbing ownerships. There is nothing to prove that these agencies have been successful in predicting crises.
What happens is that rating changes affects the ownership pattern of sovereign bonds - as most institutions. Because most institutions have allocations for bond holdings based on the ratings of the bonds, when a downgrade happens, it results in a huge sell off.... well that is what is supposed to happen in theory. But when US had its AAA ratings stripped, its bonds rallied ! Bloomberg reports that 'Predicting the consequences of a rating change by S&P or Moody’s may be little better than flipping a coin, with yields moving in the opposite direction than suggested 47 percent of the time, according to data compiled by Bloomberg in June on 314 upgrades, downgrades and outlook changes going back to 1974'....
So should the Government worry ? Reforms are required. But we should make haste slowly. Policy should not be made under threat.
Wednesday, August 15, 2012
Why is that we accumulate more money than needed
Periyar EVR's observes that humans have a major weakness ..they are so insecure that they accumulate wealth for tomorrow. I know that some animals also have the habit of storing food ...but this tendency of humans to accumulate much more wealth than is required for a couple of generations is something that is strange ...for even if one were to spend as much as possible on oneself and one's kith and kin - there is an extent beyond which it is not possible. One look around , and one sees a lot of people accumulating more - lots more that that....their hunger for wealth seems insatiable, and appearing to border on obsession.
There is a saying in Tamil which translates thus 'There are only rare instances of a family flourishing for more than 3 generations or of families being impoverished for more that 3 generations' ...while I am not sure about the latter part , I am reasonable convinced that the first part is by and large true ( 3 may be 5 but generally not beyond that )
And that brings back the question - why accumulate so much ? If money is what money does - then accumulation does not appear to be rational. If it is a store of value - how does one realize and recognize value when there is no transaction in the forseeable future ? ...the only explanation that appears sensible is that it is a sign of insecurity.
Some decades back, this society valued its scholars and intellectuals ..it also valued people for their valour and philanthophy ...these days it values the 'wealthy'...probably some where it has collectively decided that if you are intellectual , you must also be able to use your intellect and become wealthy or conversely, if you are wealthy , it must be because you were smart, sensible (and intellectual ?)... I dont know, but if accumulation of excess wealth is a sign of insecurity - then the society is valuing the more insecure of the human kind and that certainly does not make sense ...
There is a saying in Tamil which translates thus 'There are only rare instances of a family flourishing for more than 3 generations or of families being impoverished for more that 3 generations' ...while I am not sure about the latter part , I am reasonable convinced that the first part is by and large true ( 3 may be 5 but generally not beyond that )
And that brings back the question - why accumulate so much ? If money is what money does - then accumulation does not appear to be rational. If it is a store of value - how does one realize and recognize value when there is no transaction in the forseeable future ? ...the only explanation that appears sensible is that it is a sign of insecurity.
Some decades back, this society valued its scholars and intellectuals ..it also valued people for their valour and philanthophy ...these days it values the 'wealthy'...probably some where it has collectively decided that if you are intellectual , you must also be able to use your intellect and become wealthy or conversely, if you are wealthy , it must be because you were smart, sensible (and intellectual ?)... I dont know, but if accumulation of excess wealth is a sign of insecurity - then the society is valuing the more insecure of the human kind and that certainly does not make sense ...
Sunday, February 6, 2011
Reinventing Capitalism - Michael Porter's idea of making a virtue of a necessity
A critique on 'How to reinvent capitalism - and unleash a wave of innovation and growth' by Michael E Porter and Mark R Kramer, in HBR
This article appeared on the HBR, Jan-Feb 2011. The article is an interesting read - Interesting because, it shows that there are people out there sitting tall and tight who can dish out such stuff and not just get away with it , but probably also get accolades for it ..... Please read the article and read on...
a) Looks like Porter is now acknowledging that his model needs a revisit - adding the sixth and most important force - society / the local environment - something that a lot of people I have met have spoken about ( He still however does not admit it in this article)
b) From whatever little I have seen of this corporate world, I think this idea of shared value will be spoken for some more time for sometime now - with nothing tangible ever happening - before the next new idea to talk gets written about.
c) The cause and effect issues in the examples he suggests are not convincing. For instance, if Intel and IBM are devising wayw to help utilities harness digital intelligence in order to economize on power usage - it , to my mind is not out of any shared value concept - it is simply because power costs are going up and it makes simple economic sense to address this. This is a segment in the market that is being addressed. If Intel and IBM dont do it - somebody else will.
If Nestle worked with farmers directly, to increase productivity of coffee beans - it is out a necessity to get good quality and assured supply of beans ( that is what the sugar mills in India have been doing for decades) ...it is not out of some higher and enlightened idea of shared value of capitalism. Not sure why there is an attempt to make a virtue of a necessity.
Some of the examples are simply ludicrous and others unbelievable. Marks and Spencers has overhauled its supply chain, and this is supposed to save the retailer GBP 175 million annually by 2016. Fine. But to take credit for reducing carbon emissions by doing this is .....to my mind , a rather interesting way to look at things !
It talks of a service in India by Thomson Reuters , which provides a monthly service for farmers who earn an average of USD 2000 per year at a fee of USD 5 per quarter, which provides them weather and crop pricing information and agricultural advise. This service reaches 2 million farmers and early results apparently suggest that it has increased the income of more than 60% of them - some cases even tripling incomes !!! Wow....
d) Net net - a valiant attempt at tweeking Capitalism. This 'ism' needs to be relooked and (re) built - tweeking, tinkering and repainting will not help it run for long .....
This article appeared on the HBR, Jan-Feb 2011. The article is an interesting read - Interesting because, it shows that there are people out there sitting tall and tight who can dish out such stuff and not just get away with it , but probably also get accolades for it ..... Please read the article and read on...
a) Looks like Porter is now acknowledging that his model needs a revisit - adding the sixth and most important force - society / the local environment - something that a lot of people I have met have spoken about ( He still however does not admit it in this article)
b) From whatever little I have seen of this corporate world, I think this idea of shared value will be spoken for some more time for sometime now - with nothing tangible ever happening - before the next new idea to talk gets written about.
c) The cause and effect issues in the examples he suggests are not convincing. For instance, if Intel and IBM are devising wayw to help utilities harness digital intelligence in order to economize on power usage - it , to my mind is not out of any shared value concept - it is simply because power costs are going up and it makes simple economic sense to address this. This is a segment in the market that is being addressed. If Intel and IBM dont do it - somebody else will.
If Nestle worked with farmers directly, to increase productivity of coffee beans - it is out a necessity to get good quality and assured supply of beans ( that is what the sugar mills in India have been doing for decades) ...it is not out of some higher and enlightened idea of shared value of capitalism. Not sure why there is an attempt to make a virtue of a necessity.
Some of the examples are simply ludicrous and others unbelievable. Marks and Spencers has overhauled its supply chain, and this is supposed to save the retailer GBP 175 million annually by 2016. Fine. But to take credit for reducing carbon emissions by doing this is .....to my mind , a rather interesting way to look at things !
It talks of a service in India by Thomson Reuters , which provides a monthly service for farmers who earn an average of USD 2000 per year at a fee of USD 5 per quarter, which provides them weather and crop pricing information and agricultural advise. This service reaches 2 million farmers and early results apparently suggest that it has increased the income of more than 60% of them - some cases even tripling incomes !!! Wow....
d) Net net - a valiant attempt at tweeking Capitalism. This 'ism' needs to be relooked and (re) built - tweeking, tinkering and repainting will not help it run for long .....
Subscribe to:
Posts (Atom)