ECONOMICS RELATED NEWS: 21ST JAN ONWARDS

Govt launches portal to better biz climate

GoI flagged off the second phase of its ambitious e-biz project, an integrated eBiz portal which would make doing business in India a lot easier.The portal allows potential entrepreneurs to do most of the formalities online — submitting forms, making payments, among others. They can also track the status of their requests through the portal.

However, the ministries crucial for clearance of projects like the ministry of environment & forests (MoEF) are  yet to become  part of the project, raising questions on how the hassles in doing businesses would be addressed.Environment is one of the key ministries giving clearances to various projects. “MoEF is important because we see delays that lead to weakening of our growth and also the cost of projects keeps on rising and exposure of financial institutions to various projects is also enormous.”

The eBiz project, first announced in 2009, looks to improve the country’s ease of doing business quotient. According to a recent World Bank ranking, India stood at 134th among 189 countries in terms of ease of doing business. “It has been a matter of concern that we were ranked very low.

 the eBiz platform enables a transformational shift in the government’s service delivery approach from being department-centric to customer-centric.The first phase of the project, which provided information on forms and procedures, was launched on January 28, 2013. The second phase, launched on Monday, has added two services from the Department of Industrial policy and Promotion – industrial licences and industrial entrepreneur’s memorandum – along with operationalising the payment gateway by the Central Bank of India.

The government has inked a 10-year contract with Infosys Ltd, where a total of 50 services (26 central + 24 state) are being implemented across five states – Andhra Pradesh, Delhi, Haryana, Maharashtra and Tamil Nadu – in the pilot phase. Five more states – Odisha, Punjab, Rajasthan, Uttar Pradesh and West Bengal – are expected to be added over the second and third years. the implementation is “slower than expected” because it is tough to expect departments to completely change their modus operandi overnight. “While there are some easy adopters, there are others who clearly do not see the benefit of it.”The portal will not only create a single-window for all registrations and permits, but will also provide investors with a checklist.

Amritsar-Kolkata industrial corridor receives green signal

The cabinet  cleared the Amritsar-Kolkata Industrial Corridor (AKIC) in a band of 150-200 km on either side of the Eastern Dedicated Freight Corridor. The project, on the lines of the Delhi-Mumbai Industrial Corridor (DMIC), will boost manufacturing units and agro-processing plants in the region.

According to the Cabinet decision, an AKIC development corporation will be set up immediately, with an equity base of Rs 100 crore. While the Centre will hold 49 per cent stake in the entity, the rest will be owned by the state governments concerned and Housing and Urban Development Corporation. The Centre will provide a project development fund of Rs 100 crore to the corporation.

AKIC would be implemented in a phased manner and would comprise a belt of at least 550,000 square km across Punjab, Haryana, Uttarakhand, Uttar Pradesh, Bihar, Jharkhand and West Bengal, an official statement said.

The first phase of the project will be in a pilot project, during which at least one integrated manufacturing cluster of 10 sq km in each of the seven states will be set up. The manufacturing clusters will be identified by the state governments. States will be free to set up more than one such cluster. At least 40 per cent of the land in each cluster will be permanently earmarked for manufacturing and agro-processing, as a substantial area in these states, except Jharkhand, is under agriculture.The manufacturing clusters envisaged under the project will be entitled to all the benefits available under the National Manufacturing Policy, 2011, with some riders.

For infrastructure development, a public-private partnership mode will be encouraged. The Centre will provide interest subsidy to states for land acquisition, grant-in-aid for project development, master planning of the manufacturing clusters, etc. It will also help state governments promote global investment in these clusters.

State governments will be responsible for ensuring availability of land for the clusters, providing the road infrastructure required, facilitating generation, transmission and distribution of electricity, putting in place a single-window clearance mechanism, etc.

For DMIC, funds will be provided by Japan International Cooperation Agency, through special terms for economic partnership (STEP) loans. The conditions for the loan say 30 per cent of the goods to be sourced from Japan can be procured from local companies in India in which Japanese companies hold equity of at least 10 per cent.The official development assistance loan under the STEP scheme is available at interest of 0.1 per cent for a repayment period of 40 years. The scheme provides for a moratorium of 10 years.

Mayaram panel mulls two categories for foreign investment

In a major overhaul of foreign investment regime, the government is considering splitting overseas inflows into two categories — Foreign Portfolio Investment (FPI) and Foreign Direct Investment (FDI) — with a minimum composite cap of 49 per cent.

The proposal, which is being considered by the Arvind Mayaram panel, envisages an aggregate automatic limit of 24 per cent of FPI, which may be raised up to the extent of FDI permitted under the automatic route, sources said.The individual investment limit under the FPI, which will comprise Qualified Foreign Investors (QFIs) and Foreign Institutional Investors (FIIs), has been proposed up to 10 per cent of the paid up capital in a listed company.

Any individual investment above 10 per cent, as per the proposal, will be treated as FDI.In case the company is not listed, the FPI investment would be deemed as FDI, sources said, adding that there will be separate guidelines for investment by non-resident Indians.As per the proposal, an investor will have the option to invest as either FPI or FDI, but not both.

NACHIKET MOR CMT RECOMMENDATIONS: A CRITICAL ANALYSIS

The report of the Reserve Bank of India (RBI)-appointed Committee on Comprehensive Financial Services for Small Business and Low Income Households has been placed on the central bank’s website for comments. The report packs a lot of recommendations for furthering financial inclusion and deepening.

In the event, the report is a gold mine of information and action points. Some of these are not new but the committee’s breath-taking ‘visionary” statements can be faulted as being too theoretical.

Key question

The key question is whether some of its key recommendations can be implemented at all and that too in the timeframe suggested.

The committee’s terms of reference are comprehensive. They include

 (1) to frame a clear and detailed vision for financial inclusion and financial deepening,

 (2) to lay down a set of design principles that will guide the development of national frameworks and regulation for achieving financial inclusion and development,

(3) to review existing strategies and develop new ones that address specific barriers to progress and that which encourage participants to work swiftly for inclusion and financial deepening consistent with design principles, and

(4) to develop a comprehensive network for monitoring financial inclusion and deepening efforts on a nationwide basis.

Key recommendations

The committee has suggested providing a universal bank account to all Indians above the age of 18 years. This target is to be achieved by January 1, 2016, less than two years from now.To enable this, a vertically differentiated banking system with payments banks for deposits and payments and wholesale banks for credit outreach. These banks need to have Rs.50 crore by way of capital, which is a tenth of what is applicable for new banks that are to be licensed.

For credible monitoring, the committee has laid down certain norms even at the district level such as deposits and advances as a percentage of gross domestic product (GDP).The committee proposes an adjusted 50 per cent priority sector lending target with adjustments for sectors and regions based on difficulty in lending.It advocates fewer NBFCs and substantial regulatory convergence for them with banks on non-performing assets and the extension of securitisation laws to certain NBFCs.A state-level regulatory commission will consolidate supervision of all non-governmental organisations and money service businesses.

Justified ambition but not realistic

The committee does not lack ambition. Its proposal for universalisation of bank accounts — every adult citizen to have a bank account by January 1, 2016 with the Aadhaar as the prime driver, is certainly an outstanding example.

The committee has, in fact, laid down a distance rule — no one need walk for more than 15 minutes to reach a point of contact.Not only the accelerated timeframe but the apparent glossing over the huge costs in creating infrastructure and staff expenses is a point of contention.

Their commercial viability might not be clear at the outset. There is also a question of recruiting trained and retaining trained manpower, especially in areas which are not covered by any financial institution. Previous attempts at creating differentiated banks such as the regional rural banks and local area banks failed because their operating costs rose to the levels prevailing in commercial banks. Technology might, of course, reduce costs but it is not certain that its benefits can be assimilated so soon, as indicated.

On the face of it, the aspiration to have an electronic bank account for every Indian above 18 by January 2016 is laudable. The idea is to ride on the UIDAI’s Aadhaar number for this. An estimated 50 crore bank accounts are expected to be added in the next two years.That’s an ambitious goal considering it has not been achieved in over four decades of financial inclusion till now.The report gives the impression that bank accounts are the panacea for every problem in the economy.

A NEW ANIMAL

Some ideas proposed by the committee such as the setting up of payment banks and/or wholesale banks seem intriguing. According to the committee, these banks (to be started as subsidiaries of existing banks) will only offer a limited range of services — either payment/deposit services or lending services.

Critics say the payment/wholesale banks are really a version of ‘narrow banks’ — those that would acquire deposits and just invest them in government securities/treasuries. At one time, this was proposed as a solution for some banks with a large NPA. And one RBI deputy governor had even pilloried bankers for practising a different version of the same idea and dubbed it “lazy banking”.

Do we need a new animal for this objective?

Banking experts think the idea of payment/wholesale banks is a non-starter. They point out that regional rural banks were started with similar objectives: as a low-cost option, to be staffed by local talent that would have its ear close to the ground in rural areas. But this experiment has not succeeded and has actually forced the government to organise a long-running bailout programme by sponsor banks.

 The recommendations on priority sector lending are sensible and pragmatic. The committee proposes that banks be allowed to specialise in different segments (agriculture/ SME/ Infra and so on) based on their strengths, rather than expecting all banks to do all things.

PRAGMATIC MEASURES

It proposes to replace the current requirement of lending 40 per cent of credit to priority sectors with a 50 per cent adjusted priority sector lending (APSL) requirement. This it seeks to do by providing extra weightage for lending in remote locations or regions that have suffered from disparities or to sectors that most need banking services.

It also suggests that the target be achieved and monitored on a quarterly basis, instead of having an annual target.

This will ensure that banks remain focused throughout the year rather than scramble in March every year. Data shows that one-fourth the agricultural credit is given in March — the maximum (when there is no requirement) — while it is niggardly during the months of the rabi and kharif crop.

The committee argues that given the huge requirement of funds for small and marginal farmers alone, the case for reducing priority sector lending targets may be weak.It is true that this segment is underserved. But increasing the priority sector requirement will only result in banks being overburdened.

RBI panel wants retail inflation as new policy benchmark

The Urjit Patel committee on monetary policy framework has proposed setting up of a monetary policy committee (MPC) that will be headed by the Reserve Bank of India (RBI) governor and accountable for achieving inflation target set by it.

The report of the Patel committee, set up by RBI in September last year, has recommended that retail inflation, measured by the Consumer Price Index (CPI), replace wholesale inflation as the price anchor. The responsibility of the central bank, the panel has suggested, should be to bring the retail inflation rate down at four per cent, with a variation of 200 bps on either side, in three years. “The nominal anchor should be defined in terms of headline CPI (-based) inflation, which closely reflects the cost of living and influences inflation expectations relative to other available metrics.If the MPC fails to achieve its target for three quarters in a row, it has to issue a public statement, mentioning reasons for failure and remedial measures, with signatures of all the five members.

If this practice was followed, the central bank would have valid reasons not to pay attention to any advisory from the government on its monetary policy stance. In recent times, finance ministers have repeatedly pressured the central bank to cut interest rates, even if the situation does not warrant such an action. The lines between the government and RBI were set to be re-drawn if the recommendations of the committee were accepted.

EASING POLICY FRAMEWORK

Highlights of Patel panel report Nominal anchor: A shift to headline retail inflation Road map: Cut inflation from 10% to 8% in one year; and to 6% in two years Target: Retail inflation rate of 4% (+/- 200 bps) Rule-based framework: To make conduct of monetary policy more predictable and transparent Fiscal consolidation: Firm govt commitment  to cut fiscal deficit to 3% of GDP by FY17 Composition of monetary policy committee (MPC): RBI governor, a deputy governor, an executive director and two external members Tenure of MPC: Three years (to meet once every two months) Accountability: MPC to be responsible for meeting inflation target; to issue public statement with members’ signatures if it fails to achieve the target for 3 quarters Phased refinement of operating framework: LAF, repo rate to continue as single policy rate in Phase-I; 14-day term repo will emerge as policy rate in Phase-II

Indicating a shift from a discretionary policy to a rule-based one, the panel has advocated adoption of a policy rate that is easily communicated and understood; it will be positive when inflation is above the nominal anchor.

Since bringing down inflation from the current level is essential to move to this proposed framework, the panel has also laid out a road map for this. It has suggested that the current level of retail inflation — at 10 per cent — be brought down to eight per cent within 12 months and then to six per cent over the next 24 months, before the recommended target of four per cent is formally accepted.

Since food and fuel account for more than 57% of the CPI on which the direct influence of monetary policy is limited, the commitment to the nominal anchor would need to be demonstrated by timely monetary policy response to risks from second round effects and inflation expectations in response to shocks to food and fuel. However, it will be a challenging task and will depend a lot on coordination with fiscal authorities.

The committee has also recommended that the government should ensure it brings down its fiscal deficit below three per cent of gross domestic product (GDP) by 2016-17 and does away with administered prices, wages and interest rates.

In what could be construed as paying more if the government’s market borrowing is high, the panel has said that RBI’s open-market operations should be only for liquidity management and not for managing yields — a practice widely followed now, though not formally admitted to.

The panel has proposed a two-phased transition to the new operating framework. In the first phase, the weighted average call rate will remain the operating target and repo will continue as the single policy rate. It has emphasised the need for a spectrum of term repos of varying maturities, with 14-day as the anchor rate. In the second phase, the 14-day term repo will emerge as the policy rate.

To support the operating framework, the committee has recommended some new instruments in the monetary policy toolkit, such as a standing deposit facility. It has also called for market stabilisation and cash management bills to be phased out, since the government debt and cash management is being taken over by the government’s debt management office. The report has also elaborated on the impediments for transmission of the monetary policy. It has said, “the government should eschew suasion and directives to banks on interest rates that run counter to monetary policy actions.”

Among other impediments, the panel has proposed reduction in statutory liquidity ratio of banks, more frequent intra-year resets for small savings schemes and revisiting the issue of interest-rate subvention to the farm sector. The panel has also said all fixed-income financial products be treated on a par with bank deposits for the purpose of taxation and TDS (tax deducted at source).

Detailing the MPC framework, the Patel panel has said the RBI governor will be the chairman, while the deputy governor in charge of monetary policy will be the vice-chairman and the executive director will be a member. Besides, there will be two external members who will work full time and have access to information/analyses generated within RBI. They cannot hold any office of profit or undertake any activity seen as amounting to conflict of interest with the working of the MPC. The term of office of the MPC will ordinarily be three years, without a prospect of renewal.

Each MPC member will have one vote and the outcome of any issue will be determined by a majority in voting — which will have to be exercised, without abstaining. Minutes of the proceedings of the MPC will be released with a lag of two weeks from the date of the meeting.

The MPC will ordinarily meet once every two months and RBI will also place a bi-annual inflation report in the public domain. The MPC chairman will have a casting vote during exigencies. The committee will be asked to put out the bi-annual inflation report in the public domain on the basis of macroeconomic and monetary policy reviews.

The committee has also deliberated on the issue of volatile capital flows and suggested building up an adequate level of foreign exchange reserves. The adequacy should also to be determined by intervention requirement based on past experience.