RBI’s Monetary Policy

Shri Arun Jaitley has again emphasised on RBI to reduce interest rate so that domestic industry which is short of capital can fulfill its requirement. I hope that RBI governor Raghuram Rajan will heed this advice in the coming policy announcement. With strong emphasis on sustainable growth, the RBI in its last bi-monthly policy had left the key monetary policy rates unchanged. The apex bank announced that on the basis of assessment of key current and forthcoming macroeconomic trends, the monetary policy rates should be left unchanged.

The main thought behind such a cautious move is to continue with the current market trend, aiming at moderate inflation. One of the key issues identified by the RBI governor as a long term agenda of the current policy moves was moderate inflation as it fosters sustainable growth in the long term.

Both, the Government and the RBI are currently in discussion to put in place a monetary framework for inflation control in the longer term. Although, neither the RBI nor the government has come out with a time frame, the rough estimate is the first quarter of 2016. This is also the buffer time given to the economy to fall in tune with the government’s new monetary policy framework. An important constituent of this framework estimates to keep the CPI induced inflation around 4% (+/- 2%).

RBI’s steps can be understood in the context of the report submitted by the expert committee, earlier this year, appointed to examine the current monetary policy framework of the RBI, headed by Urjit R. Patel, Deputy Governor of the RBI. Among policy recommendations, the two principal recommendations of the committee included adopting a new CPI as the main aspect around which the discourse of monetary policy as well as the initiatives should revolve, and more importantly setting a long term target to control inflation. The idea behind adopting CPI as the “Nominal Anchor” for inflation has at least two justifications; first, that it is a tried and tested method which has been adopted by most of the economies except China and India and secondly, if the nominal anchor is CPI, the inflation rate can be better monitored as the data for CPI is released roughly every fortnight.

This monetary policy of the RBI is in consonance with the U. Patel committee report, which advised the RBI to focus only on inflation for now. Thus, the current monetary policy of the RBI seems to be directed at controlling inflation, while other growth, employment, exchange rate and price stabilisation are either left to be auto-corrected as a result of these policy initiatives, or deferred for later policy changes.

The new monetary framework that includes CPI as the nominal anchor has potential drawbacks too as more than 50% of the index is dominated by food and fuel commodities. As agricultural output can be rain dependent and oil imports depend on external factors, there is a possibility that the exchange rates are heavily influenced, in turn affecting inflation in India. But as market trends are positive, primarily on the back of increased domestic activity, the RBI seems to have done the right thing in not tampering with the exchange rates.

One of the key factors influencing the RBI’s most recent monetary policy has been a high inflation accompanied by a tight liquidity situation in the country. The RBI kept the bank rates unchanged as it expects the inflation to improve in the coming months on the back of increased domestic activity and increased liquidity. Even as targeting of inflation has become a priority for the RBI, price stability is the long-term goal that would increase domestic demand and hence liquidity. A tight liquidity in the economy could easily lead to banking crisis.

The price stability is another area of concern. The currency market has remained in a flux mainly due to rising external debt. External Debt in India increased to $ 440614m in 2014 from $ 390048m in 2013. According to RBI data, India’s external debt-to-gross domestic product (GDP) ratio has steadily risen from 18% in 2010-11 to 23% in 2013-14. The rate of debt growth has surpassed the growth of forex, resulting in fiscal strain. 

New Avatar of Planning Commission

The Prime Minister’s speech on the eve of the Independence Day outlining the need to rethink the existence of the Planning Commission could not be more timely, as the economic situation of the country, both in terms of financial need and allocation, stands much evolved. The central idea behind the mooting of the proposal seems to be a more holistic inclusion of states through a cooperative federalism that the Planning Commission was unable to herald hitherto. This approach was more than evident when the Prime Minister called the Chief Ministers’ meet earlier this month to take all the states on board. While most of the states support the idea of a reformed Planning Commission, the consensus is invariably on an increased role for states.

In the past, especially for the last decade, the Planning Commission has been used as a tool by the Central government to ‘control’ allocation. The Commission in its earlier form has been alleged to have stood for biased and excessively bureaucratic regulatory actions, especially in so far as approvals and sanctions for states were concerned. Not surprisingly, therefore, the Commission has been dubiously labelled by many as ‘control-commission.’

What the new body aims to do differently is to create a discursive platform for an informed debate between the Centre, States as well as experts. The other reformatory leap that this new body proposes to take is to do away with the ‘incremental’ approach ingrained in the Planning Commission (primarily enunciated through its gradual ‘five year’ plans). The Planning Commission currently, therefore, seems to be only doing a catching-up job with the requirements of the states. In order to bring the allocative mechanism of financial resources to the states at par with their demand and make the states more participative, a restructuring of the Planning Commission is essential. The proposed body should intend to transcend the mere role of a body that remains embroiled in allocation of resources to one that fosters growth and development. Unlike the Planning Commission which had a top-to-bottom approach, the new body should adopt a bottom-to-top approach, mainly fuelled by the growth and participation of the states. Another significant change that the new body is likely to have over the old Commission is that it could act as a broad-based platform for larger Centre-State relations (thereby also addressing the issue of Centre-State disputes to a large extent). This will be a welcome change, especially for those states that belong to different parties than the ruling coalition at the Centre. This, in many ways, is an indispensible component of what the Modi government is trying to achieve through a reformed Planning Commission; ‘cooperative federalism.’

India “Ease of doing Business” – MSME hopes on NaMo

Amidst the politico-economic concerns arising out of the recent World Bank’s report, on the Ease of Doing Business in India, there is a renewed realisation, that strong steps are required to move ahead to achieve success under Make in India campaign. Within the short span of six months in office, Modi Government realised and simultaneously emphasised the need for expediting the process to create a more friendly business environment in India. Micro, Small and Medium Enterprises Minister Kalraj Mishra, in September this year described the present situation in India vis-à-vis ease of doing business as “laggard” and asserted the need for creating a business ambience where setting up an enterprise in India would be easy.

The latest World Bank report has placed India as low as 142 out of a total of 189 countries in the list. The exhaustive report assesses how conducive are countries based on 10 requirements ranging from starting a business to issues such as taxation and insolvencies.

The present Government has made the promotion of ease of doing business, an integral part of its agenda and is promoting it vigorously. A few important steps have already been taken. Within months of taking over by the Modi Government, the Department of Industrial Policy and Promotion (DIPP) took a slew of measures to improve business-friendly environment in the country. These include having a timeline for clearance of applications, de-licensing the manufacturing of many defence products and introduction of e-Biz project for single window clearance. Earlier, initial validity of Industrial Licence was for a period of two years with a provision of granting two extensions of two years and one year respectively, in an important step, DIPP has extended the validity of Industrial Licence to encourage entrepreneurs. Providing speedy environmental clearances, removing bottlenecks for coal block allocation to improve availability of power etc and many other such steps intend to change the unfriendly business environment, to one that facilitates and welcomes the domestic as well as international investors and entrepreneurs to set up manufacturing in India.

From June, 2013 to May, 2014 period, India hit the nadir in at least two categories; it stood 184th in the ‘Dealing with Construction Permits’ category and 186th in ‘Enforcing Contracts’. However, there is significant improvement in India’s credibility as a nation that promotes ease of doing business, since the last Government. After the new Government took over, India climbed several positions to reach a commendable 7th position when it came to ‘Protecting Minority Investors’. This is on the back of several initiatives taken by the present Government like fast-tracking decision-making, bringing down the level of current regulatory compliances and above all the efforts to reduce the cost of setting business in India.

Presently, entrepreneurs face various impediments in starting as well as promoting the enterprise, especially so in the micro, small and medium enterprises sector. The MSME sector in India stands at crossroads. Considering these facts the Finance Minister Arun Jaitley in his Budget speech had announced setting up of a Task Force for this sector. Being member of this important committee I had the privilege of interacting with many stakeholders on their concerns on various issues.

The case for MSMEs

The removal of above difficulties can catapult the MSME sector also. The largest employment provider after the agricultural sector and currently employing about 40 per cent of India’s workforce, at the forefront of sectors stands disadvantaged due to an unfriendly business environment in India. Presently, the MSME sector is also cash-strapped, mainly due to lack of equity capital in the sector, apart from other factors like the reluctance of banks to finance MSME entrepreneurs.

Prospective Policy Initiatives

Currently, the MSME sector faces major hurdles in the start up of the business, lot of paper works and high degree of liability involved for the entrepreneurs. The stakeholders in the MSME sector in India have voiced the need for bringing down the liability of the entrepreneurs through the promotion of the concept of limited liability in the true sense of the term, backed by necessary policy initiatives. For luring investors in the MSME sector, an important step could comprise bringing down the current level of compliances for an entrepreneur. One of the ways in which both these steps can be implemented could be through the promotion of the concept of ‘One Person Companies’ (OPC). OPCs have the potential to transform the current status on both these issues. If the level of compliance is brought down particularly for this segment, the ease of doing business will automatically go up.

The issue of registration of the MSMEs in India, today, can probably be singled out as the most significant of aspects affecting this sector. Statistics have it that only a meagre 6 per cent of the MSME enterprises are registered. This automatically excludes the rest, a whopping 94 per cent, from the governmental policy benefits and initiatives. The first step for luring investors would be to simplify the process of registration in this sector. A common opinion among the stakeholders of this sector is that registration for MSME enterprises should be based on self-declaration, subject to verification by the authorities later, but for limited approvals only. This will not just cut out a lot of paper-work, but will considerably decrease the apprehension caused amongst the entrepreneurs relating to Inspector Raj.

Besides, the entire registration process should be made online, instead of filling only. The online process should replace the current system involving multiple-bodies in the registration. Stakeholders as well as entrepreneurs are together on the issue of only one body (probably DIC) handling the registration. An increase in registration of the MSMEs will not just bring them in the loop of Government policies undertaken to benefit this sector but will remove the current misunderstanding which often confuses the informal sector as the ‘illegal’ sector. Once in the formal network, the financing of enterprises by banks will also simultaneously get easier. Presently, most of the banks are wary of lending to enterprises in the informal sector, particularly those that function as unregistered units.

The Government will have to formulate and institute a comprehensive Exit and Rehabilitation policy also. Only when an entrepreneur would know that he/she can close down the business and come out safe with minimum liability, would he/she be willing to enter the sector in the first place. The present system lacks any mechanism for insolvencies in the sector.

Improving the ease of doing business index in the MSME sector would also require that the problem of ‘delayed payments’ be resolved. Entrepreneurs suffer huge losses as a result of delayed payments from their clients, which are often big units. Giving the MSEFC more teeth through stringent legal provisions, is a step which many stakeholders feel, will go a long way in deterring the clients to delay payments to these entrepreneurs. As most MSME entrepreneurs are not big investors, they particularly depend on speedy recovery of dues to start their next cycle of investment/production.

Another major problem of the MSME sector in India is labour policy. Many entrepreneurs, despite having the requisite capital hold themselves back because of this policy. Policies to protect labour rights such as strengthening the Industrial Disputes Act is good, but when the level of compliances for a large industrial house and a small enterprises are not differentiated, it only ends up harming labour interests. Skill development of the labour within the industry and before their exit, can be an important measured to induce labour to enter and exit freely from these industries. Yet another issue obstructing this sector is concerned with the issues of taxation. The intricacies involved in the excise and customs often goes beyond the comprehension of the entrepreneurs. To add to these, the officers involved create a fear psychosis amongst the entrepreneurs, often leading to bribery and corruption. Hence, to rid the entrepreneurs in this sector off these complexities, a liaison officer/facilitator should be appointed in each of these Government department to weed out the fear and ignorance of the small units.

Conclusion

All these would require a holistic assessment of the problems of this sector through the involvement of stakeholders and evaluation of policies undertaken by other countries like South Korea and Egypt. There are many such policy initiatives that can be taken in the MSME sector to improve the Ease of Doing Business Index in India. It is only upon such an improvement that India can see a formalisation of the contribution of this sector to the country’s GDP and realise the potential for reaching a commendable 15 per cent from the current 8 per cent. Despite the Government treating this sector as a priority sector, the progress is slow. India’s image of a potential global leader has to be matched by similar domestic policy initiatives. Credit Suisse report today places India in the bracket of countries having high level of inequality in income. Therefore, financial inclusion through large-scale employment generation and balanced regional development on the back of MSME sector should definitely be a priority policy initiative.

Anomaly in levels of excise and customs duty- Blog four

The MSME sector contributes nearly 8 percent to the country’s GDP, 45 percent of the manufacturing output and 40 percent of the exports. However, statistical data of the past few years indicates that the share of MSMEs in GDP, manufacturing output and exports has been slowly declining. This is primarily because of shrinking demand both externally and internally for MSME products.

The revitalisation of the MSME sector would require that the government incentivises manufacturing in this sector through a slew of measures. Addressing the anomaly in the levels of excise and customs duty on MSME products would go a long way in refurbishing a declining growth in the MSME sector.One of the key steps to incentivise production in the MSME sector would be to bring the excise duty on MSME products and customs duty for foreign cheap products which have edged out MSME products in market on equitable terms.

The sector faces immense competition from cheap imports, especially from China. Consequently, there is a need to offset the challenges faced by the MSME sector by reinvigorating and reviving shrinking demand and fighting competition.

In 2013, the Inter-Ministerial Committee for Accelerating Manufacturing in Micro, Small & Medium Enterprises Sector submitted a set of recommendations in which it listed 'Incentivising through Taxation' as a policy option for the government.The Inter-Ministerial Committee suggested a ‘deferment scheme’, whereby it suggested that the Ministry of Finance may consider allowing a rapidly growing unit to retain a portion of tax payable such as excise, income tax, etc. for 3 to 5 years, if the unit is growing year on year above national average. Allowing MSME firms to pay less in excise or income tax would incentivise the next cycle of investments to be made by these firms.

Excise exemption is another area that can be explored to exhort entrepreneurs in the MSME sector to embrace technology and innovation as a result of increased savings. At present excise exemption is withdrawn when the annual turnover exceeds Rs.1.15 crore and a Chartered Accountant  is required to be engaged when the annual turnover exceeds Rs.1 crore. This is too narrow a financial leeway. Raising the excise exemption bar, would incentivise both savings among entrepreneurs and hence production. If manufacturing in the MSME sector has to be accelerated, vulnerable sub-sectors like the handicrafts sector should either enjoy exemption of excise duty or face only nominal taxation. Lastly, a balanced growth of the MSME sector is necessary for an even growth in rural employment. This would in turn require geographically-specific targeting of areas with cluster development. Areas that are not well connected to the rest of the country and areas lagging behind in industrialization should be targeted as potential areas to be benefited out of excise duty and other tax exemptions.

The other option, raising of customs duty for goods that are imported at cheap price, needs to be exercised with immediacy. The custom duty on prices from China looses relevance when the concept of imput cost is not very transparent in that country. Many rightly suggest that cheap Chinese goods have made deep inroads in the Indian markets and are edging out the relevance of MSME products. One of the major issues to be considered for the review is to counter the imports of electronic system and design management sector. To this effect, the  Ministry has urged Department of Electronics and Information technology to take measures for blocking the entry of technically inferior products into the country. Before India becomes China’s backyard for dumping its cheap products and more importantly, before MSMEs in India decline further, customs duty on cheaply imported goods should be reviewed. The criticism of this step would be that India would be promotingprotectionism. As much as that criticism might be valid, protecting jobs at home and more importantly protecting the cultural ethos though MSME promotion should be a national interest priority.

Delay in payments to MSME- Blog three

One of the most important structural rectifications required in the MSME sector in India is to address the problem of delayed payments.Whether in manufacturing or the Services sector, the small scale units face the problem of delayed payments (recoveries of due) from their clients. As most of these clients are big units, the subsidiary MSME units (often sub-contracted to these bigger units) have to wait until payment is released. This in-turn exacerbates the financial dependency of the entrepreneur and his/her capability to start the next cycle of production as 90% of the MSME enterprises are operating from self generate funds. As the sector is capital intensive, MSME units are rendered sick in the case of non-payment of dues or prolonged disputes. Although the institution of micro & small enterprises facilitation Council (MSEFC) and the recently announced Credit Guarantee Fund have provided some hope for speedy resolution of disputes between the supplier and the client and covering financial risks respectively, the ground situation has not improved much. As many workers in the sector are illiterate or schools dropouts with no kind of formal training or skill sets, approaching an arbiter is the last option, as they risk losing an established clientele. A limited knowledge of financial and judicial institutions also obligates the entrepreneurs to wait for their payment rather than approach banks or the MSEFC.

A concentrated effort is required, especially towards restructuring the credit policies to address the delay in payments issue for MSME is recommended.

           Program today by Sri Ramanuja Mission Trust, Chennai
Rishi Parampara, Venue: Hindi Bhawan, No.11, Vishnu Digambar Marg, 5 to 9 PM

I am guest speaker please join on Rishi Parampara
Points of my Speech

1. Who is अधिकारी 
    Very important identification is required

2. Who can impart Knowledge 
• A Seer who is visionary 
• तत्व दर्शी and not तत्व वादि

3. Process of Knowledge 
• तत विदधि प्रणिपातेन, परिप्रश्णेन् सेव या।
  उप् देक्ष्यन्ते ते ज्ञानम्, ज्ञानिनस् तत्वदर्शिनः।।
• Prostrate before the seer
• Do सेवा and ask questions to remove doubts
• They will show you or make you experience
   Knowledge and not alone tell you.
• Those who have assimilated and experienced and seen
   knowledge. 

4. Where to impart knowledge
• Strong desire for knowledge in the seeker
• अर्जुन विषाद् योगो नाम्
• Krishna and Arjun were childhood friends,
  Were staying/playing together but
  Geeta was taught at the centre of a battle field
• Arjun was disillusioned and was seeking advice.

5. What knowledge to impart 
• The Veda fountainhead of all knowledge
• Not only spiritual, but for physical well being and materialistic
  progress including warfare, science etc.

• अपौरुषेय- No single author
• A compendium of knowledge and research from lineage of rishis.
• युक्ति युक्तम् वचस् ग्राह्यम्, बालाद् अपि शुकाद् अपि।
  युक्ति हीनम् वचस् त्याज्यम्, वृद्धाद् अपि शुकाद् अपि।।
• Accept logic from a child and even a parrot, reject illogical speech
  even from an elderly or from saint like शुकदेव जी.

Procurement policy for MSME - Blog two

In the Report submitted by the Prime Minister’s Task Force on MSME in 2010, one of the key recommendations was to put in place a Public Procurement Policy for MSMEs at the earliest. Approved by the Cabinet in 2011 the procurement policy for MSME was instituted in 2012, followed by a serious governmental effort to overhaul the policy in 2013. The contribution of the MSME sector to the country’s GDP stands at 8% but is reckoned to have a potential to reach 15%.Employing close to 40% of India's workforce and contributing 45% to India's manufacturing output, SMEs play a critical role in the economy.

However, structural deficiencies in MSMEs in India and the nature of their participation (mainly as an informal sector) significantly undermine their potential to contribute further to the economy.The goal of an annual procurement of minimum 20% from Micro & Small Enterprises including 4% from MSMEs owned by SC/ST entrepreneurs is yet to be realised, even as a complete integration of the rural, backward and unemployed populace waits. And this is also limited to Public Sector Enterprises, there is a strong case for taking it to private sector and State PSU’s. Due to a high degree of variance in the spread of MSME units across the states of India and because of differing production/consumption patterns, a state-level revision of the procurement policy is required.

Series of Blogs on the case for MSMEs - Blog One

The Modi government has made the promotion of ease of doing business an integral part of its agenda and is promoting it vigorously. A few important steps have already been taken. Within months of taking over by the Modi government, the Department of Industrial Policy and Promotion (DIPP) took a slew of measures to improve business-friendly environment in the country.

The above concerns can catapult the MSME sector, the largest employment provider after the agricultural sector and currently employing about 40% of India’s workforce, at the forefront of sectors standing disadvantaged due to an unfriendly business environment in India. Presently, entrepreneurs face various impediments in starting as well as promoting the enterprise, especially so in the micro, small and medium enterprises sector. The MSME sector in India stands at crossroads. Considering these facts the Finance Minister Shri Arun Jaitely in his budget speech had announced setting up of a Task Force for the MSME sector. Being member of this important committee I had the privilage of interacting with many stackholders on their concerns on various issues. In a series of Blogs and articles I will try to bring out those issues for public debate.

We have seen reports of various committees and Task Forces which have highlighted the problems and bottlenecks being faced by MSME sector. Those Committees have also given various suggestions for large scale reforms and remedial actions to be taken by the Government and other related agencies to address the issues. But the fact of the matter is that either action has not been taken by the desired intensity or the steps being taken are not sufficient enough. It is high time that we reassess the situation and rearrange ourselves to target the problems of the MSME sector with strong will and conviction.

Out of various impediments in the progress of this sector, we have identified some important ones and shall invite comments to analyse them threadbare to arrive at some concrete but achievable solutions.

Needed, a Saarc financial market platform

The South Asian Association for Regional Cooperation was set up in 1985 with the belief that cooperative action among the member countries would usher in an era of shared prosperity.

Thirty years down the road, it is now widely accepted that Saarc has failed to achieve the objectives for which it was set up as a result of which the organisation does not carry much heft at the international level. This, however, is expected to change with the current government’s focus on its immediate neighbourhood, most importantly Saarc. It is believed that India will lead the charge to change the organisation’s hitherto insipid performance.

Economic integration between member countries is a prerequisite for a strong and vibrant Saarc. Not much headway has been made in intra-regional trade despite the South Asian Free Trade Agreement (Safta) and South Asian Preferential Trade Agreement (Sapta). Intra-regional trade hovers at around 4-6 per cent. It is in this context that the ‘Integrated Financial Market Platform for Saarc Countries’ is important.

This needs initiatives on several fronts, the first and foremost being the creation of an integrated financial market platform. This initiative has to be taken up at the government level. As the name suggests, the Integrated Financial Market Platform would be an exchange where companies of the member countries would list their shares. The platform would provide companies an option to reach out to a much larger number of potential investors and provide them with a more diversified stock owning option.

Facilitating flow

India has the most sophisticated financial market in the Saarc region with world class regulation and effective compliance. The markets of other member countries are plagued by a multitude of problems, lack of liquidity being one of them. An integrated platform would enable investors to invest in their own domestic companies with less risk as the shares would be more liquid and the listed companies better regulated.

This set-up would have its own independent trading, clearing and settlement platforms, professional management and risk management practices. It would facilitate easier intra-regional flow of capital.

India manages to attract significant foreign portfolio investments, but the accruing to India from the proposed platform would not be any less compared to other member countries. Therefore the initiative has to be looked at through a politico-strategic prism too. The platform would necessitate a settlement mechanism which might lead to the emergence of the Indian rupee as a preferred mode of transaction in the Saarc region.

Other Saarc countries not only have a small financial market, they are poorly regulated as well. Harmonisation of regulatory standards and uniformity in enforcement of rules and regulations would benefit these countries greatly. The purpose of the platform would be to make the capital market of member countries more efficient and serve their development needs more effectively.

Combined clearing, settlement and risk management corporations can be promoted, with equity participation by member countries. Here the role of the regulator and self-regulatory organisation (SRO) of the respective countries is very important, including the central banks. They can also form part of the equity ownership of these corporations.

A federation of market intermediaries association, that is, the South Asian Securities Association (SASA) needs to be created. SASA would be a federation of brokers’ associations in the member countries. It would formalise and institutionalise a process of interaction among members to share best practices and try to achieve harmonisation of rules and regulations pertaining to their sector. The sector regulators would meanwhile enter into an agreement with one another to recognise a market participant registered in any member country to be eligible to participate in any other member country and in this integrated trading platform.

Special economic zone

To give further fillip to the concept, a special economic zone can be set up in India, developed on the lines of Global Financial Hub, housing offices and all intermediaries such as brokers, banks, exchanges, regulators, corporations and technological infrastructure for connectivity, technology, software and hardware vendors, and so on.

This will lead to several beneficial outcomes, including harmonisation of regulatory standards, rules and regulations, a freer flow of capital and investment among member countries and doing away with compulsory registration/licensing of financial market participant in order to operate in a member country.

It will also lead to an increase in financial intermediation, increase in the saving ratio, development of niche financial markets, lower cost of borrowing for companies and governments, and will provide investors with wider investment options both in terms of number of products and risk-return profile. Other benefits include increased financial literacy, specialised financial product development and sharing of knowledge and expertise.

Challenges include overcoming the fear of capital flight from smaller countries to better regulated and better managed financial markets, and opposition to an integrated platform from vested interest profiteering from the current fragmented and inefficient market. Managing currency settlements will also need to be suitably worked out.