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Archive for the ‘banking’ Category

Needed paychecks not pink slips

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Photo credit: Zee news

Ask any of the 68 government departments in New Delhi, what they are doing about private sector jobs, and each will point at the other for an answer. The truth is that governments have not been held accountable for job creation since the 1980s, when neo-liberalism took root. No one advocates going down the horribly inefficient public sector job creation route again. So, it is up to the private sector and self-employment to absorb our surging army of millennials — almost 10 million strong annually — which is equal to the entire Australian workforce.

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Humans versus machines- who’s winning?

But does the private sector have incentives to produce jobs? Looking purely at the bottom line, machines are superior to humans. They also come with financial incentives for capital investment — cheap bank finance and accelerated depreciation for tax purposes — which boost the bottom line. Technology is fast eroding the capacity gap between the unique attributes of human labour and machines. Siri (Apple), Cortana (Microsoft), Google Now and the mellifluously named Maluuba are all cheaper than hiring a real-life assistant and are on call 24×7. Bots will progressively replace humans, more so in logically-executed routine jobs. Not only are human services more expensive, but they come with enormous social and economic costs for housing, transport, education, health and security.

Can government help preserve human employment?

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So, how can the government help create new jobs and preserve existing ones? Kickstarting infrastructure projects; promoting “Make in India” and resolving the bad loans burden of banks — are all great government initiatives for new employment. But their impact is medium term. In the near-term, the government needs to preserve existing jobs. Here are four options.

Market Indian skills in 34 “Aged”, rich, countries 

indian farmers

First, extend the H1-B strategy, used to great advantage in the US, for temporarily exporting Indian workers overseas. Rich countries, with ageing populations who need the workers, but fear the cultural dilution associated with permanent immigration would be the targets. Assign targets to our ambassadors posted in these locations to negotiate with their host countries to allow temporary immigration, lightly monitored by the government and directly supported, under the Skills India initiative, to acquire local language and cultural skills. The associated fiscal costs are outweighed by the social and economic benefits from repatriated earnings alone. A stretch target could be to export a million workers over the next three years.

Discourage the “paper chase” by avoiding “gold plated” human resources.

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Second, build respect for skilled work by venerating those who have these skills. Our caste and hierarchy-ridden Brahmanical social norms devalue skills and overvalue “intellect” — both in the public and private sectors.  This unfortunate social milieu engenders “qualification creep”. Both Indian companies and the government routinely advertise for engineers even when an experienced mechanic is needed. Consider the irrational gap between the wage for a nurse versus a doctor. Good nursing vastly reduces the workload for doctors — specially in the emergency room for the care of trauma patients. But this noble, highly skilled profession is not a first choice today. Instead, there is a stigma attached to it, as being fit only for those who cannot afford the high cost and long incubation period for becoming a doctor. Why is a Bachelor of Arts degree needed to become a bank clerk — a high responsibility but a routine, people skills-oriented job? Only a select few, intending to teach at the college level or do research, should need a master’s degree. Tests and interviews for jobs should focus on personality and psychological attributes, rather than educational qualifications, which are rarely aligned with job skills anyway. Only when we consciously make the paper chase redundant will we value real-life skills accretion, where the maximum potential for human jobs exists.

Reward socially responsible business leadership which looks beyond the “bottom line”

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Third, introduce disincentives for layoffs. Yes, flexibility in workforce management is a must for employers. But companies can be incentivised to be socially responsible employers. Those who go beyond watching their “bottom line” to retaining and growing their employees should be rewarded through tax breaks, access to cheaper finance and publicly recognised as nation builders. Why not devise an index to assess social leadership qualities of company honchos before they get awards and honours, get invited to Rashtrapati Bhavan; preferential access to our ambassadors overseas or get nominated on to government committees? We need to publicly distinguish between narrow-minded private employers who only watch bottom lines, and truly transformative business leaders, if the private sector is to lead in job creation.

Give incentives for digital/banked wage payments by individual employers

Around 300 million workers are employed in the agrarian and household sector as daily wagers or long-term help by individuals — farmers, rich and middle class urban households. Legislating minimum wages and benefits for this segment is lazy policymaking and can end up having a regressive impact due to weak oversight capacity. The Niti Aayog has taken the lead to plug the data gap on informal employment where most of the incremental jobs will be created. The government can step in with near-time transactional measures for light-handed regulation of such employment. As an initial step, the government should promote the payment of wages into bank accounts to generate big data on such employment. An incentive of Rs 5 credited back to the employer’s account for every Rs 1,000 paid into an employee account could help. If costs are shared between the bank and the government, a budget outlay of Rs 5,000 crores can pay for this incentive and bank annual wage payments of an estimated Rs 18 trillion, much of which is in cash today. Individual employers, with a track record of employing more than five workers and banking wages of more than Rs 10 lakhs per year, should be publicly recognised as “social growth enablers”.

Collaborative governance is key

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Last, the optics must be right. The government needs to step away from the colonial pedestal of being the “mai baap” (supreme preserver). The “lal battis” (red beacons) have gone. It is time now to puncture some sarkari egos further and spread the accolades for social and economic achievements.

Adapted from the author’s article in The Asian Age July 16, 2017 http://www.asianage.com/opinion/columnists/160517/a-to-do-list-for-govt-to-create-more-jobs.html

Funding the Republic

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The tricolour flutters happily at the Peer Makhdum Shah Dargah in Mahim, Maharashtra, hoisted by the peer’s devotees, as a symbol of the Indian Republic being alive and well. 

India is a Republic. But often it feels as though only the Union government must carry the can for doing unpleasant things – like levying tax on those who have the surplus income to add to the national kitty or getting heavy with tax evaders. Of course it is a juggalbandhi. The Union government invariably wants to grand-stand and hang on to financial muscle power so necessary to play “big brother”. State governments are only too keen to accept the federal goodies being thrown at them and thereby avoid the pain of efficiency enhancing structural reform in politics and in government. To be fair, the financial and political firepower of the Union government and individual states is asymmetric in favour of the former. This makes it difficult for a state to chart a lonely, unique, development path. The good news is we may be coming to the limits of this asymmetric sharing of development responsibilities.

The Union lacks funds for its core functions

Consider that rapid infrastructure development and public investment to strengthen competitive markets have become the stepchildren of the annual Union Budget process. This continues a trend, started by the previous government, of shoring up state government finances, at the risk of being stingy on spending in areas of its own core, constitutional mandate.

The Economic Survey 2017 notes that state fiscal deficits reduced sharply from 4.1 per cent to 2.4 per cent of the gross state domestic product (GSDP) over the last 10 years, since state governments adopted the Fiscal Responsibility Act. Enhanced Central transfers to states and reduced interest payments, courtesy debt restructuring, benefited states to the extent of 1.8 per cent of GSDP. To their credit, most states used the additional fiscal space to cover the revenue deficit and lower the fiscal deficit to below the target of three per cent of GSDP.

But how long can the Centre play the role of a responsible elder brother, darning his own clothes, whilst buying new ones for his younger siblings?

India’s poor infrastructure constrains growth. Low spending on infrastructure also limits job creation — something India needs. The Union government expenditure on infrastructure has increased from 0.6 per cent of GDP in 2015-16 to an estimated 0.9 per cent of GDP in 2017-18. But it remains inadequate. Adding the state government and corporate — public and private — expenditure on infrastructure totals less than three per cent of GDP in 2017-18 versus the five per cent of GDP we should be spending.

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Dodgy infrastructure: the bane of the Republic. photo credit: indiamike.com

Repairing the broken system for bank credit and private investment

Bank and corporate finances are the second black hole which the Centre’s Budget was unable to address. Banks have accumulated bad loans to the extent of `12 trillion, or 17 per cent of their assets. The Economic Survey 2017 exhaustively discusses the “twin balance sheet problem” — of banks that must write down at least one half of the bad loans and of large private companies that face bankruptcy, for failing to use the loans productively over the past eight years.

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The finance minister has been explicit that the government should not bail out the private companies who made bad decisions. This is well-intentioned but difficult to implement.

There are 13 public sector banks that account for 40 per cent of these bad loans. Merging them with efficient banks can mask the problem for some more time. But such mergers can spread rather than contain the contagion. Selling or closing a failed public bank or enterprise requires courage and conviction. Our inclination is to retain the “crown jewels” no matter how tarnished they get. Air India has got a capital infusion of Rs 1,800 crores in 2017-18 on top of the Rs 5,765 crores over the last two years.

Fifty private companies account for 71 per cent of the bad loans. The public mood is for the government to go for their jugular. This will make it politically difficult for the government to fund write-downs of debt. But vigilantism against corporates can rock the growth story, which we can ill afford.

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A fast track quasi-judicial process must distinguish between “wilful” and unintended default, caused by systemic shock. Different rehabilitation regimes should be determined for the two categories of defaulters. Wilful defaulters should be pilloried. The downside is that picking and choosing defaulters, itself can perpetuate what this government abhors — crony capitalism.The finance minister has allocated Rs 10,000 crores in 2017-18 for recapitalising banks. This is a placeholder. All eyes are trained on the additional resources unearthed by demonetisation. The RBI is yet to disclose the value of Rs 500 and Rs 1,000 notes which remain undeposited. This may be around Rs 1 trillion. Transferring the resultant excess sovereign assets, from the RBI to banks, can buy some breathing room.

Second, the incremental tax collection from demonetised “black money” deposited in banks, can fund infrastructure development or recapitalise banks, as it dribbles in over the next two years. This windfall was to be distributed to the poor as cash support. But recapitalising publicly-owned banks, albeit with more vigorous oversight and more transparent and intrusive stress tests, has a higher priority. More credit for corporates translates into more investments, more jobs and higher economic growth. These are the fundamentals that must accompany fiscal stability.

More “give” rather than just “take”, needed from States

We are in the middle of an incipient financial emergency, which can be triggered by a shock. The RBI cautions against thinking that inflation has been tamed. Other than food and oil, where prices remain low, inflation hovers just below the red flag of five per cent. This limits the headroom available to overshoot the fiscal deficit red flag of three per cent of GDP.

The Centre needs considerable fiscal slack to fund infrastructure development and recapitalise the banks. State governments can help by enhancing their own tax resources. Imposing income tax on agricultural income and vigorously collecting property tax are low hanging fruit available to them. These measures can add around one per cent of GSDP to their resources. This will enable the Union government to scale back the long list of Central sector schemes for human development and social protection and use the funds instead for its core mandate — developing infrastructure, markets and a competitive private sector.

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The Goods and Services Tax Council meets: State’s follow the take rather than give strategy. 

States may well ask why they should bother, since they were never partners in the illicit gains from mega crony capitalism. But this would be short-sighted. Faltering economic growth adversely affects all boats. An increase of six per cent in economic growth boosts state government tax revenue by one percentage of GDSP with more jobs in tow. But above all, cooperative federalism must have some give — along with the take. This is the time for states to give to the Republic, as equal partners in national development.

Adapted from the author’s article in the Asian Age, February 14, 2017 http://www.asianage.com/opinion/oped/140217/to-raise-resources-give-and-take-needed.html

How to junk cash and when

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Going cashless is a good idea. For the government, the biggest gain is an easy audit trail to assess individuals and businesses to tax and to ferret out illegal transactions like the financing of crime, terror, smuggling and drugs. For individuals, plastic (payment cards) and e-money provides far greater security, despite the risk from cybercrime. Businesses also gain. Studies of consumer behaviour show that paying by card or e-money encourages you to spend more than you would otherwise.

So it is no surprise that Prime Minister Narendra Modi, a man in a rush, is pushing the country to abandon cash. But how far are we from the point where a cashless economy can kick in? A US study in California noted in 2012, that even in the case of those who state a preference for paying by card, there is a 49 percent probablity that they will settle payments less than $20 by cash. The probability drops to 8 percent  for payments above $20. In India the inverse is true. At least, 95 per cent of personal consumption related transactions in numbers (not volume) are in cash.

Access to bank accounts is key for going cashless 

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A 2015 World Bank survey established that increasing the number of banked adults in the economy is the most relevant intervention till one reaches the level of around 800 accounts per 1,000 adults. India stands at a ratio of 480 accounts per 1,000 adults. This is pretty far from the point after which increase in the number of bank accounts cease to matter. Nevertheless, the extension of banking services in India is impressive given the scale of poverty, illiteracy, gender discrimination and the sparse spread of bank branches, particularly in rural areas — just around 40,000 for six lakh villages and a population of 800 million or on average 1 bank branch per 20,000 people..

“Barefoot” banks

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The high level of poverty in rural areas; low savings and consumption levels make rural branches uneconomic. So innovative mechanisms should be developed to provide “barefoot” banking to the poor. This is virtually impossible via our clunky and inefficient public sector banking system. The Reserve Bank of India revolutionised the licensing of payment banks earlier this year by bringing in a “year-around”, entrepreneur-driven approach of welcoming proposals for opening payment banks -which provide less than the full range of banking services- without inviting proposals for bank licensing through formal rounds, as previously. We need to pursue this approach and establish at least a “payment only” bank branch for every cluster of 5,000 adults. But inevitably this will take time.

e-money is a low cost, “quick win”, to digitise payments

A faster way of displacing cash payments is to scale up the use of e-money. Across economies which do not have universal financial access, over the period 2010 to 2015, the number of e-money accounts have grown at the rate of an astonishing 63 per cent per annum — more than triple the rate at which bank accounts have increased over. Mobile money accounts comprise 55 per cent of such e-money accounts. But, in India, e-money continues to languish at merely 10 per cent of transactions.

Getting merchants digitally ready for Point of Sale applications.    

A more serious missing link for ramping up cashless transactions is the relative scarcity of point of sale (POS) acceptability of cashless transactions. Easy access to POS ready merchants and vendors is key for building the credibility of plastic money as an alternative to cash.

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Photo courtesy: thehindu.com

This is a chicken and egg situation. Merchants do not see the value of accepting e-money payments unless enoigh people want to use them. Also, mechants lose interest on the deferred payments into their accounts. On top of this card providers charge merchants upto 3 percent of the transaction value for the service. All this pushes up the prices of customer purchase price of products. Customers in turn, try and dodge the servive tax and additional charges which comes with buying digitally. No wonder then that a mere 1.5 million commercial entities accept cashless transactions in India. Compare this with the 44.7 million registered micro, small and medium enterprises (comprising industrial and service related businesses) with an investment ranging from Rs 1 to 50 million, estimated in India by the 2006 SMSE survey. Bringing all these service providers into the POS net expands the market by an order of magnitude. Why not start by first “Carpet bombing” commercial entities in the 50 largest cities in India, with assistance and persuasion to say no to cash? Lets start by making cities cashless first and let the smaller towns and rural areas follow in an orderly manner.

Make cash transactions more expensive than digital ones

One cannot develop an entire ecosystem for junking cash by fiat alone. The incentive structure, which today privileges cash settlement because of its lower transaction cost, must be reviewed and reversed. The government started the RuPay debit card in 2014 with the hope that it would compete with the international biggies in the business — MasterCard and Visa – and make them look more seriously at the potential fortune which lies at the bottom of the pyramid — the small transactions end of the market.

India has 26 million credit cards and 712 million debit cards. But their use is low at just 12 times per debit card every year at an ATM and barely two transactions per year per debit card at a POS. The corresponding numbers are less than 1 transaction for a credit card at an ATM and 38 at a POS. In comparison in high income economies cards or e-money options are used to conduct around 280 transactions a year per person. We are a long way off from the frontier of cashless transactions. The good news is that we are better off than low and middle-income countries, which averaged just 22 cashless transactions per year per person.

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Plastic money becomes expensive to use if the individual transactions are small. Typically, micro-transactions of less than $5 (Rs 340) are not viable through plastic money and would need to be cross-subsidised. This is where e-money becomes the most appropriate vehicle to mop up the micro-transactions market which could account for as much as two-thirds of the total transactions. After all, cigarettes are still sold as singles in India; a paan (betel) costs just Rs 20 and a street meal is Rs 100.

Build the eco-system for expanding payments beyond traditional banks

If the government is serious about junking cash it must engage with commercial entities which have a large , diversified customer base to leverage for diversifying into the payments space. Phone carriers, progressive electricity utilities and the Railways are some options. They can quickly scale up the use of digital money by their customers in collaboration with e-pay platforms and provide some assurance to merchants against the risk of not realising the payments from the e-pay platform. Developing a “reward” based strategy to move 50 per cent of commercial transactions above Rs 500 to digital settlement by 2020 is a reasonable target.

There are some limitations which need to be overcome or gone around- the poor quality of electricity supply, dodgy net connectivity and the additional cost that needs to be borne to digitise small-value transactions via POS arrangements. Regional hackathons to find solutions to specific barriers can pay rich dividends. They can create an ecosystem of innovative thinkers focused on solving the problem. The future is digital. Engage millennials to figure out how to fast forward us there, out of turn.

Adapted from the authors article in the Asian Age November 28, 2016 http://www.asianage.com/opinion/columnists/281116/in-rush-to-go-digital-dont-junk-cash-yet.html

 

Rexit technical brilliance, enter political economy expertise

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Rajan the thinking central banker: photo credit: bloomberg.com

Raghuram Rajan, India’s central banking czar, will be history by September 2016. He enjoys unprecedented popularity and near cult status as Governor of the Reserve Bank of India. Some of this has to do with his youthful looks and fresh demeanor — unusual in a profession peopled by dour old men. But much of his appeal is related to the confidence and skill he brings to the job, which he plunged into in weeks, rather than the months, which are the usual learning curve.

Even business — usually taciturn about rooting for bureaucrats, has also publicly supported his conservative strategy to keep the rupee stable; build foreign reserves; check inflation and ensure reasonable positive real interest rates, to protect the large mass of middle-class savers. International capital flows, which are as much about fundamentals as about the Iqbal — the credibility and charisma — of the central bank, responded well to his strategy for stability with fundamental reform.

Job specific technical brilliance and international standing matters

Rajan is the first RBI governor to came to the job with considerable experience in international finance (in the IMF) and even more significantly, a long spell in American academia, in the same area. To the billionaires who make the markets move, Rajan is a familiar face, with a track record of original thinking and practical foresight. He is best known for disagreeing with mainstream economists and foretelling the 2008 financial meltdown.

Rajan’s exquisite symphony- the “Dardnama” (book of pain)

In India, his legacy is the exquisite symphony, he wrote, of caution mixed with big-bang reforms. On interest rates, he was consistently cautious. His mantra was that flooding the economy with cheap money is not a quick-fix for growth. Instead, it can spark off high inflation, as in Brazil.

To the common man, this resonates well with the millennium’s continuing conundrum of jobless, inequitable, high growth. There are no quick fixes for these flaws in today’s post-industrial, service-oriented growth model. Rajan had no choice except to focus on keeping inflation low; preserving the real incomes of the disadvantaged who don’t have the luxury of inflation-indexed incomes and pushing banks and industry hard to become competitive.

His historic big reform was break with the past and publicly finger banks that had lent inefficiently, destroyed capital and most likely enhanced corruption — given the magnitude of bad loans accumulated by them since 2011.

He shone a bright light on the dodgy bank loans overburden- shockingly high at more than 12% of bank assets and 4% of GDP, rather than keeping them hidden under furtive, refinance Ponzi schemes. He was likened by “incremental reformers” to a bull in a china shop — pulling down both fraudsters and unlucky entrepreneurs with equal ferocity.

Admittedly, big-bang reforms shake up the cozy status quo and inflicts pain. But if followed through with decisive surgery, as Rajan recommended, it could have created sustainable wealth, in the medium term, rather than slowly bleed the financial system till it collapses, as happened in the developed world in 2008.

“Big bang” reforms too disruptive for India’s political economy

Will there ever be another Rajan as RBI governor? More importantly do we need another Rajan, given our political economy?

India is a conflicted society — at once eulogizing “savants” like Rajan, and yet shrinking away from the ripples they create in the village pond. It takes a lifetime of work in India to play the system harmoniously. Rajan came before India was ready for him. So while we may not be able to digest a Rajan today, there is unlikely to be a shortage of “suitable” talent. But the real pity is — why have we tried to “fix” a system that is not broken. Why not let the good work continue?

Tough global headwinds for the new Governor

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Grapic credit: janeaustenslondon.com

The irony is that by letting Rajan go in September this year, the government will actually be cementing his “rock star” legacy. The second half of 2016 is blighted by uncertainty and will be hell for the new governor. First, is the near-term question mark over Brexit on June 23. If the “Leavers” win, Europe is surely in for turbulent times. But this may not actually happen, as the British are far too practical to be brash and emotional.

Second, even without a Brexit, the economic outlook is gloomy. Protectionism is growing and geopolitical instability is getting worse. These are fertile grounds for a flight of capital to safety and away from emerging markets like India. A tightening by the US Federal Reserve in the second half of this year may convert the capital flight into an outward-bound tsunami, severely denting our foreign exchange reserves and importing instability.

Oily silver linings and political compulsions

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India’s largest state-Uttar Pradesh, votes in 2016: photo credit: teluguflavours.com

The only good news is that oil prices are likely to remain low. The low lead time for the mothballed 500-odd oil fracking rigs in the United States to return to work ensures that any uptick in price beyond $50 will deliver a supply response. Saudi Arabia, with nominal production costs, a deficit budget and a deficit current account and a proposed public listing for its oil company, is unlikely to rein in production or oil revenue. But low oil prices also depress incomes in oil-producing countries, which is bad for Indian exports and disastrous for inward remittances — that are largely dependent on the Gulf countries remaining lucrative employment sinks for Indian expatriates.

Low growth potential in the coming years, combined with the domestic compulsions of the largest state election in Uttar Pradesh in 2017 and three smaller states and a national election in 2019, are likely to strain the fiscal discipline, which the finance minister has assiduously built up since 2014. Rajan was lucky. But had yet to be “Indianised”. He would have got there. But time ran out.

Job description for applicants

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India financial leadership job vacant- only the best need apply: photo credit: blogs.wsj.com

Needed an RBI Governor with the political acumen to align with the government’s compulsions. Must be able to quickly improve the well-being of voters. Must also have the economic guile to minimize the resultant damage caused by politics to the economy. Must have his finger on the pulse of Bharat; the experience of having walked this tightrope earlier and the good fortune of being lucky. Must be able to strike practical deals — with big defaulters to ensure that capital starts getting rolled over; with banks so that interest rate cuts are passed on to borrowers; with the government so that Rajan’s “dosanomics” inspired efficiency enhancing incentives are carried forward: cut red tape and discretion in licensing of financial intermediaries; keep interest rates positive in real terms; exercise forensic oversight over banking discipline. Must be reconciled to the macro-economic ball being carried mostly by the government. Must have the access and ability to discreetly warn the government against scoring self-goals.

Adapted from the authors article in The Asian Age, June 19, 2016 : http://www.asianage.com/columnists/does-rbi-needs-political-governor-511

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