Friday, 1 May 2015

Daily News Mail - News of 01/05/2015

Jaitley rolls back proposal on public debt
  • Following a measured pushback from Reserve Bank Governor Raghuram Rajan, the Modi Government on April 30 withdrew its budget proposals aimed at the most significant regulatory shake-up in the 80-year history of the central bank — to take away from the RBI and give to a new independent agency the task of managing the Centre’s borrowings and to strip it of the authority of regulating government bonds.
  • Ahead of the vote in Lok Sabha on the Finance Bill 2015-16, which was later passed by voice vote, bringing to a close the three-stage budget process in the House, Union Finance Minister Arun Jaitley said Government would make a fresh roadmap for a new independent agency to issue, and manage public debt after consulting the Reserve Bank. He, however, did not offer any reasons for the rollback.
  • In his budget speech in February, the Finance Minister had proposed a public debt management agency, which became a source of friction between the Reserve Bank and the Centre.
  • Governor Rajan had told earlier this month: “…There have been concerns that a central bank being the public debt management authority may be lax in some of its functions…. I have always believed those concerns [are] not entirely unwarranted but perhaps overblown. For example, in my many years at watching the RBI, I haven’t seen it change monetary policy because it is worried about anything other than inflation. But let’s say...perception of these conflicts exists then may be there is some rationale to having an independent agency. But if that agency is too close to the Government also we should be careful that …the same conflict that existed in the RBI shouldn’t be transferred to an entity that now has closer links with the Government.”
  • Later in his reply during Thursday’s debate, Mr. Jaitley offered tax relief to foreign investors by exempting income from securities transactions, royalties and technical service from minimum alternative tax (MAT) in those cases where the normal tax rate is less than 18.5 per cent.

How public debt is managed in India?
Public debt is an important source of income for the government. When the revenue collected from taxes and such other sources in inadequate to meet the government's expenditure, borrowing may be resorted to. Public debt may be raised externally or internally. In India, the tools for raising public debt include government securities, treasury bills, post office savings certificates and national saving certificates.

Currently, the main objectives of public debt management in India are:
  • Meeting the Central Government’s financing needs at the lowest possible long term borrowing costs;
  • Keeping the total debt within sustainable levels;
  • Placing reliance on domestic borrowings over external debt; and
  • Developing deep and wide market for Government securities.
In order to implement this policy, while the Reserve Bank of India Act, empowers the RBI to manages the public debt incurred internally by way of securities, treasury bills and cash management bills, debt incurred externally is managed by the central government through the Finance Ministry. However, this strategy of the debt management results in fragmented jurisdiction of the management institutions, as a result of which a comprehensive picture of the government's liabilities is missing. It is against this background, that the FSLRC (Financial Sector Legislative Reforms Commission) has proposed the setting up of an independent Public Debt Management Authority to take over from the RBI the management of public debt. The establishment of the PDMA (Public Debt Management Agency) is an internationally accepted best practice as vesting of the public debt management with the central bank can conflict with the function of controlling inflation. Establishing the PDMA would help introduce much needed transparency in the handling of public debt.

What is FSLRC (Financial Sector Legislative Reforms Commission) ?
Financial Sector Legislative Reforms Commission(FSLRC) is a body set up by the Government of India, Ministry of Finance, on 24 March 2011, to review and rewrite the legal-institutional architecture of the Indian financial sector. FSLRC was constituted under the chairmanship of retired Supreme Court judge B.N Srikrishna. It came out with its recommendation in 2012 and many of these recommendations have attracted a lot of criticism. The present RBI governor Mr. Raghuram Rajan has also criticized many of the recommendations.

Among the key recommendations of the commission is the creation of two institutions,one super-regulatory authority called Unified Finacial Regulatory Agency(UFRA) and the other Financial Appellate Tribunal. The UFRA will have the combined authority of SEBI and IRDA and the regulation of financial trading which until now was under RBI. In this scenario there will only be two regulators UFRA and RBI.The commission also recommends reconstitution of the board that decides monetary policy.It recommends inclusion of politicians instead of RBI governors to this board.

The recommendations up to an extent curtails the role of RBI as a regulator and reduces it to just a monetary regulator. Also the recommendation to give politician a greater say in deciding monetary policy is ill conceived. The general thrust of the government should be to include experts and professionals in key policy making positions so that they could take informed unbiased decisions. The recommendation of the commission goes against this. Also creation of an Appellate tribunal will reduce the faster implementation of policies as it can get mired into appeals.
High-level Financial Sector Legislative Reforms Commission (FSLRC) was constituted to give recommendations on the regulatory and legislative structure of Indian financial sector and the ways to reform it. Many of its recommendations have attracted a lot of criticism. The present RBI governor has also criticized many of the recommendations.
Creation of two entities one as super regulator ‘the Unified Financial Regulatory Agency (UFRA)’, two a financial appellate tribunal and a new monetary policy committee are the key recommendation of the commission.
The UFRA will be responsible to oversight the securities market, insurance, pensions, etc. i.e. it will take over the functions of SEBI, IRDA and some areas of RBI. This is being criticised by considering the vast size of the financial market which burdens the super regulator and also for time consuming.
The main function of the financial Appellate tribunal is to review the regulatory decisions. But the ill equipped and inexperienced appellate tribunal may undermine the role of regulators and paralyse the system. This system may also reduce faster implementation of policies as it may get trapped by appeals.
Creation of monetary policy committee which will be headed by government nominee is also criticized as excessive power for government in regulation matters, which should remain independent and impartial while functioning.

As the present institutions like SEBI, IRDA, RBI is time tested institutions and are functioning well in their respective areas. So now little coordination is required rather than overhaul of the system.

U.S. warns India not to rush into business with Iran
  • The United States Under Secretary of State for Political Affairs, Wendy Sherman, has said India and other countries should “not rush” into doing business with Iran as Washington is yet to work out its nuclear deal with Tehran.
  • Ms. Sherman, who is in India ahead of the strategic and commercial dialogue between the two countries later this year, was speaking at a panel discussion on bilateral and regional issues at the University of Chicago Centre here on April 29.
  • On the nuclear deal that is still being worked out, Ms. Sherman said India should “hold its horses”.
  • “…Every country that remains an importer of Iran’s oil and wants to do business and increase its trade with Iran…hold your horses. We are not quite to an agreement yet. We understand that nobody wants to be last in line; everyone wants to be first in line if the sanctions get relieved. But it will take some time even after an agreement for all the implementation to be worked out,” Ms. Sherman said.
  • She said the U.S. and Iran were on a better trajectory for getting the deal done. “We all believe that this is an opportunity we should not miss, if we can possibly get it done, but there are a lot of details that are to be worked out, it is still not a done deal,” she warned.
  • On whether sanctions against Iran will be lifted in one go, she said the U.S. has worked out in broad terms how they will be released, what will trigger the release.
  • She said the U.S. appreciates the solidarity that India has demonstrated on the enforcement of the sanction. “But sanctions are the reason why Iran has come to the negotiating table and so it is important that they stay on until we get this deal.”
Growth: the next steps to be taken
This is a nice article by C.Rangarajan, former Chairman of the Economic Advisory Council to the Prime Minister and former Governor, Reserve Bank of India.

The gloom over economic growth appears to have dissipated a bit after the new numbers on National Income were released at the end of January 2015. However, there is continued scepticism about the numbers as several analysts feel that they are not in accord with the ground realities. According to the advanced estimates for 2014-15, the growth rate is projected at 7.4 per cent. What are the prospects for 2015-16? We do not have the data for past years reworked on the new base and the new methodology, and without such a time series it becomes hard to forecast. Perhaps, 2015-16 will be a shade better than 2014-15, if all the positive factors mentioned later come together. However, it will fall short of the Budget expectations of eight per cent.

Favourable factors and uncertainty

What are the favourable factors that can contribute to a better performance of the economy in 2015-16? First and foremost, there is the advantage of low crude oil prices. This will not only reduce the oil import bill and impact favourably on the current account balance, but will also moderate the price increase in general because petroleum products are used in the production of almost every commodity and service. Second, the credit rating agency, Moody’s decision to upgrade the outlook to “positive” may facilitate the inflow of capital. Though the recovery of the advanced economies is still tepid, the external environment as far as India is concerned may be benign. On the domestic front, there are signs of a gradual improvement in the investment “sentiment”.

Still, there are several unfavourable or uncertain factors, chief among them being the uncertainty about the monsoon. We have not yet seen the full impact of the unseasonal rains of the last few months. The damage to crops has been extensive in several States and the natural consequence will be some pick up in food prices. Initial reports indicate that rainfall this time will be below normal. The impact on production will depend not only on the quantum of rainfall but also on its distribution over time and across States. Even though agriculture contributes only about 15 per cent to the GDP, any shortfall in agricultural production has serious implications. It fuels inflation and human distress is high as more than 50 per cent of the population depends on agriculture. Second, the several initiatives promised in the Budget will have the desired impact only if they are implemented speedily and effectively. For example, take the increased allocation of funds for railways and roads. Are these ministries adequately prepared to utilise these funds? Some of the initiatives such as the National Investment and Infrastructure Fund and Mudra Bank will take time to be set up and for their impact to be felt.

Role of public investment

The Economic Survey has persuasively argued for larger public investment at a time when private investment is yet to pick up. The same point was made by the Report of the Economic Advisory Council to the Prime Minister in September 2013, that said: “The focused attention that is being given to achieving the production and capacity creation targets in coal, power, road and railways should generate higher growth. In effect, the public sector would act as the driver of growth and crowd in private sector activities”. It is to be noted that capital expenditures of the Central government in the Budget are not significant. Capital expenditures are also not synonymous with investment. While capital expenditures in 2015-16 show an increase over the revised estimates of 2014-15, as a proportion of GDP, they remain the same as in the Budget estimate of 2014-15, i.e. at 1.7 per cent of GDP. In fact, the bulk of the investment has to come from public sector institutions such as Coal India and the Indian Railways. What is needed is for the government to come out with a statement regarding the quantum of investment that will be made by the various public sector institutions. This should be monitored every quarter and the actual investments made should be made public. Apart from making the government accountable, this will inspire confidence in investors.

The new initiatives

For raising the growth rate, the government relies on many of the initiatives announced in the Budget. Several of them need clarification and refinement. For example, how will the National Investment in Infrastructure Fund operate? Will it take the form of a trust or a non-banking financial company (NBFC)? The word “trust” was used in the Budget speech. The sooner the details are spelled out, the better it will be. Take another idea, of the Mudra Bank. To call the institution a “bank” will be incorrect if it is only to be a refinancing institution. Which are the last mile finance institutions which will be refinanced by this institution? Apparently, this institution will have to rely totally on Budget allocation. The idea of a refinancing institution is good but, once again, the details need to be spelled out. In fact, in this context, perhaps the best way to promote investment in the large-, medium- and small-scale sector is to go back to the days when we had development banks which provided long-term finance to large, medium and small industries. At the national level, the IDBI (Industrial Development Bank of India of that time) played a major role. At the State level, State finance corporations operated to provide long-term finance to medium and small enterprises. The development banks became universal banks and in that process we have lost out on long-term finance. Even the new initiative of allowing commercial banks to raise infrastructure bonds may not be adequate. Very soon, they will reach the limits of exposure with respect to industries and groups. And, it is also difficult to have firewalls separating short term from long-term credit. While the new ideas promoted in the Budget are welcome, it is time to think in terms of creating long-term finance institutions to provide equity and long-term loans to large and medium industries.

‘Stalled’ projects and consensus

The easiest way to achieve higher growth in the short run is to ensure that the projects that are under way are completed in time so that output will flow out of them. India’s investment rate as a proportion of GDP has come down from the peak it had reached in 2007-08. Nevertheless, it is still around 32 per cent. In normal circumstances, this should have given us a growth of 7.5 to 8 per cent. But the actual growth rate was below it. The decline in output growth is sharper than the decline in investment rate. This may be because of the delay in the completion of projects or a lack of complementary investments. In some cases, it can also be due to non-availability of critical inputs such as coal and power. The Economic Survey has examined in detail the causes behind “stalled” projects. The reasons include not only delay in clearances and permits but also decline in demand and lack of finance. The analysis also shows that clearing the top 100 projects by value will address 83 per cent of the problem of stalled projects. Focussed attention on removing the bottlenecks will give one an immediate pay off.

Strong economic growth is imperative as growth is the answer to many of our socio-economic problems. Prospects for a rise in growth rate in the immediate future appear to be bright. This depends critically on implementing, in a time-bound manner, the various initiatives announced in the Budget. Public investment is directly in the hands of the government. A continuous progress report regarding the performance in this area will go a long way in building up confidence. What is needed is a timetable of action. It is important that non-economic factors are not allowed to derail the process of economic growth. Contentious issues must be avoided and consensus building on key economic issues is very much the need of the hour.

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