EXCERPTS FROM NEWS OF 1ST - 4TH FEB

STATE OF EDUCATION IN INDIA

In terms of research productivity, India has 7.8 scientists per 1,000 population compared to 180.7 in Canada, 53.1 in South Korea and 21.2 in the US. Harvard University's endowment stands at $32 billion whereas the total extramural grants provided to Indian universities put together is about Rs 12 billion. 

There should be a three-pronged plan. One, there has to be a consensus on revising the RTE Act. The evolution of RTE should have a roadmap that lays greater emphasis on quality at the ground level with achievable goals. Second, there has to be a vision to invest in higher education with emphasis on research and development. The investment in higher education should be more than 2 per cent of GDP in five years. 

Important Bills such as The Protection and Utilisation of Public-Funded Intellectual Property Bill and The Higher Education and Research Bill are pending in Parliament. These Bills need to be cleared in order to provide better financial incentives for talented scientists. Finally, there has to be a renewed commitment to greater publicprivate partnerships in the higher and lower education systems. 

INDIA GETS A DOWNGRADE FROM FAA

 Federal Aviation Administration (FAA) has downgraded India’s safety rating. An audit held last year had found inadequacies in the oversight mechanism of India’s Directorate General of Civil Aviation’s (DGCA).

India has been lowered to Category II of safety rankings from Category I. A Category II ranking means the Indian safety regulator does not meet standards set by UN agency International Civil Aviation Organisation (ICAO).

IMPLICATIONS OF THE RATING DOWNGRADE

CATEGORY I rating means the country’s civil aviation authority complies with International Civil Aviation Organization standards CATEGORY II rating means a country either lacks laws or regulations necessary to oversee air carriers in accordance with international  standards, or that its civil aviation authority is deficient in one or more areas, such as technical expertise, trained personnel, record-keeping or inspection procedures. This is now the case with India. WITH INDIA’S INTERNATIONAL AVIATION SAFETY ASSESSMENT FALLING IN CATEGORY II,Indian air carriers cannot start new services to the United States, although they are allowed to maintain their existing services

April-Dec fiscal deficit touches 95% of Budget estimate

the Centre’s fiscal deficit reached 95.2 per cent of the Budget Estimate (BE) in only nine months of the current financial year (April-December 2013). Since Finance Minister P Chidambaram is taking the BE for fiscal deficit as a red line, he can allow over-spending vis-a-vis receipts to the extent of 4.8 per cent of what was pegged in BE in the past three months of FY14.

However, there is a silver lining as well. The fiscal deficit touched Rs 5.16 lakh crore in the first nine months against Rs 5.42 lakh crore projected in the BE, according to figures released by the Controller General of Accounts (CGA) on Friday. This means, the government will have to restrain its over-spending to the tune of Rs 26,000 crore in the last quarter of FY14 in order to meet the fiscal deficit target . Till November 2013, fiscal deficit had stood at Rs 5.09 lakh crore. So, in a month’s time, over-spending rose Rs 7,000 crore. If this has been the trend in the past three months, then fiscal deficit could easily be checked according to the BE or even lower, at least in absolute numbers.

However, the pitfall is that India's economic size might not grow 13.4 per cent in 2013-14 as assumed in the Budget. Even after a favourable push, due to the downward revision of economic growth to 4.5 per cent in 2012-13 from five per cent  earlier, growth in 2013-14 might be sub-five per cent only. The Wholesale Price Index-based inflation in the first nine  months  stood at 6.15 per cent. As such, growth in nominal terms may be sub-12 per cent. This would mean the fiscal deficit would have to be contained at lower than Rs 5.42 lakh crore to achieve 4.8 per cent of GDP target for 2013-14.  That way, the target becomes much  stiffer than earlier.

The problem of savings

The falling savings rate is a product of both high inflation and low growth

The Central Statistics Office’s (CSO) detailed estimates of national income for 2012-13 reveal the extent of deterioration that has taken place in domestic savings, both quantitatively and qualitatively. Since 2007-08, India’s gross savings rate has dropped from 36.8 to just 30.1 per cent of its GDP. The current fiscal could well see this go below 30 per cent, the first time after 2003-04. The decline in the overall savings rate is, however, only one part. Of equal concern is the composition of savings. In 2007-08, 51.9 per cent of household savings were in bank deposits, insurance policies, provident/pension funds, shares, mutual fund units and other financial instruments. But five years later, financial savings constituted only 32.4 per cent of total household savings, even registering an absolute decline from ₹774,753 crore to ₹717,131 crore between 2009-10 and 2012-13.

Composition of de-financialisation

So, where are households — who account for nearly three-fourths of all savings in India — putting most of their surpluses of income over consumption? Well, in the head called savings in ‘physical assets’ that mainly comprises land and buildings. During the same three years when their annual financial savings fell, households increased their savings in physical form by almost 75 per cent. But even this does not give a complete picture of ‘de-financialisation’ of savings. For that, one should also look at what the CSO terms ‘valuables’, a category not clubbed under physical savings. Between 2007-08 and 2012-13, investment in valuables – gold and other precious metals, including jewellery — soared five-fold from ₹53,592 crore to ₹266,482 crore. If valuables are also accounted for, the movement from financial to physical savings becomes all the more obvious.

Reasons

One reason for this massive de-financialisation of savings has clearly to do with inflation, which reduces the portion of people’s income remaining after consumption to start with. When this is combined with negative real returns on bank deposits and other financial assets, even those in a position to save would choose to park their surpluses in real estate, gold and such seemingly better inflation hedges. There is certainly some basis to this argument, which has been marshalled by the Reserve Bank of India to justify its strong anti-inflationary stance and hiking of interest rates. But the fact that even physical savings (inclusive of valuables) have fallen from 18.5 to 17.4 per cent of GDP between 2011-12 and 2012-13 probably shows that negative real returns on financial assets aren’t the sole villain. Savings can also dip when growth slows down, affecting job creation and incomes. The last three years have not only witnessed high inflation rates but also a severe growth-cum-investment slowdown. Together, they have brought down the incomes from which savings can be generated. Policymakers, therefore, need to focus both on inflation and growth while addressing the problem of savings.

Investment atrophy

GDP growth cannot pick up without addressing the root problem of stalled capital formation

The scaling down of last fiscal’s GDP growth to 4.5 per cent, from the earlier 5 per cent estimate, could well be the precursor to an equally depressing set of national income data figures for 2013-14. But even the 4.5 per cent number, low though it is, fails to capture the real crisis that relates to gross capital formation (GCF): the stock of fixed assets added to an economy and contributing to its future production growth. A characteristic feature of any dynamic emerging economy is that the accumulation of such capital stock — from factories to roads and power plants — by it increases at a faster rate than GDP.

The period from 2004-05 to 2010-11 for India witnessed an average annual GCF growth of 15.2 per cent, well exceeding the GDP increase of 8.5 per cent a year. This trend has, however, reversed subsequently. The dip in GCF growth to 6.4 per cent in 2011-12 and a mere 2.4 per cent in 2012-13 has been more than the corresponding fall in GDP rates to 6.7 and 4.5 per cent. But the actual extent of drying up of investments can be gauged only from examining the components within GCF. Most significant is decline in fixed capital formation by the corporate sector in real terms, by 0.1 per cent in 2011-12 and 3.6 per cent in 2012-13. Equally revealing is that GCF in manufacturing has recorded negative growth of 17.5 and 13.2 per cent respectively. It is mainly sectors such as trade, road transport and real estate that have posted high or reasonably positive growth in capital formation. These, unlike manufacturing, don’t require much by way of machinery and capital stock.

The short point that emerges from all this is that the current slowdown is primarily about a collapse of investments. When corporates began going slow in putting up new manufacturing facilities around mid-2011, the effects of it were felt on job creation, incomes and consumption over time. We are clearly in a situation where no growth pick-up is possible without a resumption of the stalled capital accumulation process. The Centre has a crucial role in this respect and it is not limited merely to expediting statutory clearances, important though this is. What it must do is invest directly in select railway, roads and other infrastructure projects that have a high multiplier effect. The money can be found if there is a more serious attempt to rationalise subsidies and place a firm check on wasteful consumption expenditure. The savings from this are best directed towards growth-promoting investments.

CORRUPTION IN PDS

The Independent Evaluation Office (IEO) was created at the Planning Commission in August 2013 to monitor the outcome and effectiveness of various social sector initiatives taken by the UPA government. It began with an evaluation of the Public Distribution System (PDS). Ajay Chhibber, Director General of the IEO tells that his initial findings indicate almost 40 per cent of the foodgrain allocated under PDS do not reach the intended beneficiary.

some is surely corruption and some are systemic issues. So, this 40 per cent is a combination of all that; it (split between genuine leakages and pilferage, etc) can be 50-50. I have also found where the PDS has been made universal, there is less corruption, as in Tamil Nadu.

Why India's subsidies are inflationary

few legacy subsidies ourselves, we have introduced new non-merit subsidies in the past few years. Our subsidy burden, at more than six per cent of GDP in FY13, is now the highest in recorded history. Our public debt is over 66 per cent of GDP, and our commitment to development expenses has only reduced to accommodate this additional burden.

et's take government intervention in agricultural products as an example. For many years now, the government specifies Minimum Support Prices (MSPs) for 26 crops including cereals, pulses and others such as sugarcane, cotton, sunflower seeds and so on to support farmers. It is immediately apparent that something changed dramatically in the past few years. While it took about 14 years for the indices to move from 100 to 200, MSPs have more than doubled in the last seven years alone. For pulses, MSPs have more than tripled in this time.The procurement of foodgrain by the government almost doubled as well . In effect, we are now buying close to double the quantity at roughly 2.5 times the price compared to seven years ago.

All market intervention has consequences, some intended and some unintended. This particular intervention has a lagged impact on inflation, especially since the food group occupies a large part of our low-income consumption basket. increasing MSPs lead to higher rural costs and food prices. It is, however, only farmers large enough to sell a substantial portion of their produce, who benefit. The rural poor, who really deserve support, are only hurt as costs rise.

The livelihood subsidy under the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA), which guarantees income but not work, imparted a one-time inflationary shock to rural and urban wages. Moreover, the MGNREGA's inflation-indexed wages initiated a vicious cycle with higher inflation raising wages and higher wages raising inflation further. Our new food subsidy system simply allows the government to buy foodgrain at ever-increasing prices, and give it away at to two-thirds of our population at prices that don't even cover distribution costs.

As things stand, our crop mix responds to MSPs rather than demand MGNREGA distorts the labour market by creating labour demand where none exists, driving up costs for an already struggling manufacturing sector and making it uncompetitive.

As is apparent, subsidies distort markets many times the size of the subsidy itself. For example, a Rs 14 to 15 per litre subsidy on diesel distorts market dynamics for the entire litre of diesel, an impact roughly five times the size of the subsidy. With a subsidy burden of more than six per cent of GDP, the portion of GDP rendered similarly uncompetitive can only be dreaded.

As large parts of the economy become "uneconomic", the consequences acquire omnipresence. Changes in our current account balance offer a glimpse. Chart 4 plots a three-year moving average of subsidies (inverted) and the current account balance.

As one market after another is distorted and large sections of the economy rendered uncompetitive, domestic income falls short of consumption and investment demand. Looking at chart 4, one can almost visualise higher subsidies and an increasingly uncompetitive economy dragging the current account balance down as we import more goods and capital to meet our needs.

To believe this is acceptable because we seem to have insulated the poor from it is to live in denial. An uncompetitive economy doesn't benefit anybody, least of all the poor. The resulting lack of opportunity condemns them to a life of marginal subsistence provided by subsidies.

 We pay for these subsidies through borrowings because government revenues are just not enough to fund these extravagances. And with the inflationary impact of subsidies already imposing an informal tax of nearly the same magnitude as our official central taxes, our ability to raise additional taxes is virtually non-existent.

INDIA JAPAN TIES

 Shinzo Abe, pacifist Japan's nationalist PM reviewing India's annual celebration of hard and soft power.

Abe's visit confirmed an Indo-Pacific convergence as both countries took aim at China's ADIZ policy, by underscoring the "importance of freedom of overflight and civil aviation safety in accordance with the recognised principles of international law", a formulation in the joint statement that sounded otherwise innocuous. The Indian government quietly dropped nuclear tipped Agni V from the parade, in deference to Japanese sensitivities, a gesture significant as India is nudging Japan towards a nuclear agreement. 

What is it that Japan and India are doing for each other? Japan is the helping hand India needs as it seeks to transform itself into a globally competitive manufacturing economy. India provides the perfect political platform for Japan as it seeks to "normalise" itself. But we are doing this in an environment where hedging - strategic and economic - is the dominant posture. 

Manmohan Singh, when he was still a talking visionary, once said, "When economics becomes big enough, it's strategic." The India-Japan economic vision for India is transformational. An industrial corridor from Delhi to Mumbai, from Bangalore to Chennai, a huge port in Chennai to Dawei in Myanmar and thence all Southeast Asia - we're looking at building a whole new supply chain which would connect manufacturing centres in southern India with markets in Asia and beyond; connect India and Sri Lanka a vital link, with a bridge between Rameswaram and Mannar including an undersea power transmission link, while Japan helps India with the development of NTPC's Sampur power plant in Trincomalee; simultaneously use Japanese funds and expertise to build infrastructure in Nagaland, Mizoram and Manipur as backward linkages from the India-Myanmar-Thailand trilateral highway which should be completed by 2016. 

Indian Banking: the New Landscape

Deploying Financial Innovations to Support Growth

A stark trend in banking leading up to the global financial crisis was rapid financial innovation and financial engineering. The pre-crisis period witnessed efforts by financial engineers to find solutions to real sector problems in the financial sector. A very key reality was lost sight of which is, financial sector exists to subserve the real sector and it should not be allowed to run ahead of the real sector.

A number of regulatory reforms have been ushered in since, which has slowed down the pace of financial innovations and the extent of financial engineering. The Dodd-Frank Act in the US and other regulatory changes in the euro zone and the UK have changed the face of banking. Through the crisis and after the crisis, Indian banking industry faced a more stable regulatory environment that allowed changes and transformation to occur with due cognisance of the international standards and codes, but India neither retracted on the financial deregulation nor did it discourage new innovations within the ambit of its regulatory system and genuine market needs. Consequently, we have seen introduction of several new financial products that include credit default swaps, new cash-settled interest rate futures, inflation indexed bonds and certificates, etc.

 Once the global financial crisis is behind us and banking reforms in its aftermath completed, the pace of financial innovations can pick-up again. But we need to ponder if our financial innovations are growth-supportive or create mere notional financial gains and losses. Financial innovations bridge the missing markets to provide complete markets, reduce agency costs, facilitate risk sharing and improve efficiency and economic growth. However, they can lead to weaker financial and credit discipline, encourage excessive risk-taking, add to market volatility and fuel asset price-led or credit-led boom-bust cycles risks. All these evils will mitigate if we, as bankers, focus on financial innovations to support economic growth. The innovations must lead to affordability. The innovation has to be what Dr. R. A. Mashelkar calls “inclusive.” Innovations must be aimed at serving the needs of the society. The benefits of innovations must reach the masses in form of cheaper prices and accessibility.

Globalisation of Regulation

An important fallout of the Financial Crisis has been internationalization of bank regulations. More and more bank regulations are emerging out of shared understanding amongst the members of the Basel Committee on Bank Supervision, Financial Stability Board, the IMF, the World Bank etc., primarily with the objective of ensuring financial stability in a highly interconnected global financial system. As a member of the BCBS and FSB, India too is committed to implementing the regulatory, supervisory and other financial sector policies which these global standard-setting bodies decide upon. In fact, the implementation of the regulations would be reviewed by peer regulators. Therefore, the Indian banks have to be ready to “expect the unexpected“ and prepare to live with more and more stringent regulations. It is high time our banks start adopting the international best practices in their operations and stopped seeking regulatory forbearance at the earliest sign of distress.

 the KYC animal

KYC goes much more beyond a simple proof of identify and proof of address for the banks. KYC is a critical component of a bank’s risk management framework. A customer-centric business needs to know its customer, the nature of his business and the inflows/ outflows into the accounts, if it is to provide customised business products and solutions. This, I call as KYC-B. The banks further need to understand the risks associated with customer’s business to manage risks arising from potential delinquency, fraud and consequent losses as also legal and reputational risks arising from exposure to customers having links to Multi level Marketing (MLM) business/terrorist activities/ hawala transactions, etc. , which is another manifestation of KYC and may be termed as KYC BR. The Know Your Customer (KYC), Know Your Customers’ Business (KYC-B) and Know Your Customers’ Business Risks (KYC-BR) should be ingrained in the DNA of the bank’s business. It should be understood that it is not just procedural compliance, but that good KYC and KYC-BR compliance are important for the bank’s business.

 Banks as the financing agent of the economic and developmental activities have an important role in promoting overall sustainable development. It is in this respect that the concept of green banking has emerged and is recognized as an important strategy to address sustainable development concerns and creating awareness among people about environmental responsibility. Promoting Green banking has to be the way forward for banks across the globe. Green Banking entails banks to encourage environment friendly investments and give lending priority to those industries which have already turned green or are trying to go green and, thereby, help to restore the natural environment.

 As a part of the Corporate Social Responsibility, the companies are required to integrate social and environmental concerns in their business operations and in their interactions with their stakeholders on a voluntary basis. The banks /financial institutions would also need to keep themselves abreast of the latest developments in this area and help build a sustainable environment through good banking practices. This is important for ensuring that the banks remain socially relevant.

First Preliminary Report on Status of Women in India 

The High Level Committee identified Violence Against Women, Declining Sex Ratio and Economic Disempowerment of Women as three key burning issues which require immediate attention of the nation, and action by the government.

The flagged recommendations for immediate action are as follows:

1.      That the constitutional promise of a right-based approach needs to be promoted for positive outcomes to enhance the status of women.

2.      That there is an urgent need to formulate National Policy and Action Plan for Ending Violence Against Women impacting the life cycle of female population at every stage of her life.

3.      Institutional mechanisms should be strengthened and well resourced. The Minister for Women and Child Development should be of cabinet rank, thus reflecting the Government’s concern with women’s issues.

4.      Currently large amount of resources continue to be directed towards child development under the Ministry of Women and Child Development. Increased resources would enable prioritization of gender concerns as well.

5.      Further, the MWCD should engage with, participate in and draw from international debates. It is also not out of place to point out that the Concluding Observations of the CEDAW Committee should be revisited and acted upon by Government of India as part of our international commitments to uphold women’s rights.

6.      The parliamentary Committee on Empowerment of Women must examine the gender implications of all proposed legislations. There is also a need for the Committee to meet more often, and its meetings should be open to civil society groups as observers.

7.      The role of the National Commission for Women must go beyond reactive interventions to fulfill the proactive mandate of studying, recommending and influencing policies, laws, programmes and budgets to ensure full benefits to the stake holders.

8.      The National Commission for Women, as an apex body is responsible for and answerable to 50% of the Indian population. In keeping with this, the selection and composition of the members must be made through an institutionalized and transparent process. A selection committee comprising of experts must be given the task of searching, identifying and selecting the members who must be professionals of proven expertise.  Appointments must be made keeping professional capability in mind and not political affiliations.

9.      Gender Responsive Budgeting coupled with gender audits should be taken more seriously to reflect purposive gender planning.

10.  Legislation for 50 per cent reservation for women in all decision-making bodies should be enacted.

12.  Assessment of the status of women in India should be a regular feature. It took 25 years for the first Status Report and now 40 years to constitute the present High Level Committee.  There should be a regular mechanism for continuous examination and assessment of status of women and reporting back publically to the nation and women of India on a bi-annual basis.

On the leeward side: state of economy

Several emerging markets (EMs) are in crisis mode again. Argentina and Venezuela have been forced to devalue their currencies, the Turkish lira has depreciated against the US dollar, and so has the South African rand.

The rupee, on the other hand, is holding up relatively well so far.  This was due to rising expectations of the United States Federal Reserve tapering its monthly purchase of bonds (“the taper”). India was one of the “Fragile Five” (Brazil, Indonesia, India, Turkey and South Africa): economies whose currencies were expected to weaken significantly when the taper eventually started.

This was attributed not just to their high current account deficits and dependence on foreign capital, but also because all of these economies are facing political uncertainty: all five are headed for elections this year. For India, most market commentators were talking of a recurrence of the currency crisis of 1991.

The taper started in December and, indeed, in the last three months, four of the Fragile Five currencies are down 10 to 15 per cent against the US dollar. However, the fifth, the Indian rupee, is down a mere 3 per cent, and total market capitalisation of the Indian markets is almost 30 per cent higher than the lows seen in August last year. The sense of crisis prevalent in markets like Argentina, Turkey and Brazil is therefore absent in India.

What has made India stand out thus far among emerging markets, and can the rupee and the economy withstand the current turmoil in the global economy? Of several possible reasons, there are only two that matter in my view: the first, a sharp decline in the current account deficit, and the second, the remarkable $34 billion that flowed in through the measures taken by the RBI towards attracting NRI deposits and banking capital. Both demonstrate the core strengths of India, despite all the negative publicity around unhappy corporations, noisy democracy and governments which act only with their backs against the wall.

India’s trade deficit has shrunk dramatically over last year, and by far the most among all emerging markets. From a monthly run rate of close to $17 billion in the run-up to the crisis period last year, it has been averaging about 10 billion a month. Of this $7 billion fall in the monthly rate, only about $3 billion is due to the decline in gold imports, and the rest due to other factors. While a large part of the decline in gold imports is indeed due to the quantitative restrictions placed by regulators (considered “non-fundamental” by many), a meaningful part of the decline in gold imports is also due to lower gold prices. They are down from an average of $1660 an ounce in the last financial year to about $1250 an ounce currently, a 25 per cent decline.

The larger part of the decline in the trade deficit is instead coming from a rise in exports and a fall in (non-gold) imports, as the weak currency and rising domestic surpluses have allowed Indian manufacturers and farmers to gain competitiveness . Weakness in the domestic economy is also doing its bit for the decline in imports, as demand for items like capital goods and steel scrap has come down sharply, and that for crude oil is not growing.

But any amount of fundamental improvement cannot prevent speculative moves on the currency. Near-term movements in pricing are almost always driven by sentiment. This is where the three-year deposits that flowed into India from NRIs till November come in: they reduced the “liquidity risk” for the currency. The difference between “solvency risk” and “liquidity risk” needs some explanation. While the economy’s dollar liabilities have risen sharply in the last decade, as a percentage of domestic output they are still low. This means solvency risk is low.

However, the liquidity risk was high: a large part of the debt is short-term in nature, implying that if all these lenders were to ask for their dollars back at the same time, India would be in a spot of bother. Liquidity risk can sometimes drive solvency risk, as at the time of greatest need, even longer duration dollar debt becomes unavailable.

The deposit scheme encouraged and supported by the RBI brought in $34 billion, close to a full year’s current account deficit (as per the current run rate), and thus helped reduce the liquidity risk for the economy, strengthening the currency’s position against speculative attacks.

The coming weeks are likely to be turbulent, with some uncertainty from the crisis-like situations in many emerging markets, a narrowly averted default in China of a wealth management product and a temporary slowdown in global output growth. India is likely to be buffeted by the turbulence elsewhere. After all, India’s global linkages have increased significantly in the last two decades, from the perspective of trade as well as capital flows. Redemption pressure on broader EM funds, for example, could cause capital outflows from India, pressuring domestic markets, even if only temporarily. Or, commodity producers in India could be hurt by falling prices as global growth gets affected by the uncertainty. Sentiment about India may also be affected by changing forecasts of the electoral prospects of various parties in the upcoming general elections.