RBI asks Govt to speed up reforms in banking system

Need to increase efficiency through greater entry and competition

Reserve Bank of India Governor Raghuram Rajan.

“Participation is best enhanced not through subventions and subsidies but by creating supporting frameworks that improve transparency, contract enforcement, and protections for market participants against abusive practices,” he added. According to RBI Governor, technology can be very helpful in reducing the costs of supportive frameworks, and can bring hitherto excluded populations into the financial fold. “It is these ideas that guide our medium-term reform strategy.”

“Financial sector reforms need to move on many fronts,”  “for a country as big and populous as India, reforms cannot be shots in the dark, subjecting the economy to great uncertainty and risk.” “Wherever possible, we have to move steadily but firmly, ever expanding the scope of reforms while always limiting the uncertainty they create. The Chinese term this ‘Crossing the river by feeling the stones’. It is an appropriate metaphor to guide our own reforms,”

The most appropriate institutions will prevail when the competitive arena is level, so we have to remove regulatory privileges as well as impediments wherever possible, especially those that are biased towards some form of ownership or some particular institutional form.

“Participation is best enhanced not through subventions and subsidies but by creating supporting frameworks that improve transparency, contract enforcement, and protections for market participants against abusive practices,” he added. According to RBI Governor, technology can be very helpful in reducing the costs of supportive frameworks, and can bring hitherto excluded populations into the financial fold. “It is these ideas that guide our medium-term reform strategy.”

Source: The Hindu

#2015, #28, #august, #hindu

India-Seychelles pact to curb black money

Agreements to be signed on agricultural research, space cooperation.

i: Prime Minister Narendra Modi with President of the Republic of Seychelles, James Alix Michel before their meeting at Hyderabad House, in New Delhi on Wednesday.

India inked a taxation agreement with the Seychelles on Wednesday for allowing exchange of information to curb tax evasion and avoidance and is looking at strengthening maritime security ties and cooperation on blue economy with the island nation.

After holding talks with the visiting Seychelles President James Alix Michel, Prime Minister Narendra Modi described the archipelago as a key strategic partner of India, and said agreements in sectors such as agricultural research and space were being signed to deepen engagement.

As the Seychelles is considered one of the preferred offshore havens for routing of funds, the Union Cabinet recently approved the signing and ratification of the taxation pact with the island nation to unearth black money.

On maritime security, Mr. Modi said the two countries had excellent security cooperation in the Indian Ocean region, and India was a partner in providing aircraft, naval vessels and coastal radar systems for strengthening surveillance capacities. “Our cooperation in hydrography surveys is extensive and growing,” the Prime Minister said adding that India would gift one more interceptor Coast Guard boat to the Seychelles.

An air services agreement signed here is expected to enable more and easier connections between the two countries, while cooperation in space, including in the areas of managing land and marine resources, fisheries advisory, weather forecasting and disaster management, is being explored.

In March, the Prime Minister announced India would gift a second Dornier aircraft to the Seychelles. An agreement for the same was signed on Wednesday.

The bilateral agreement for cooperation on blue economy, the Prime Minister said, was a huge step forward in promoting sustainable ocean economy in the region. India, which recently reached out to Pacific Island nations to collaborate with them for combating the challenge of climate change, ahead of the U.N. Climate Summit in Paris later this year, is looking at partnering with the Seychelles on the issue.

Source: The Hindu

Hollow promise of ‘special status’

Given that economic benefits under the ‘Special Category’ status are minimal and have been diluted over the years, States would be better off seeking a special package

A number of States have staked their claim for the ‘Special Category’ status in recent years. The issue has again taken centre stage following the Union Planning Minister Rao Inderjit Singh’s reply to a pointer in the Lok Sabha on July 31, 2015 that the question of granting such status to any State does not arise. The reason given by the Minister was that the Fourteenth Finance Commission (FFC) had increased the tax devolution to States from 32 per cent to 42 per cent of the divisible pool of central taxes obviating the need for specific categorising. Given the emotive discourse around the demand, understanding the issues involved in it will facilitate a dispassionate stand on the subject both by the Union government and the States.

Under the ‘D.R. Gadgil formula’ for the distribution of central plan assistance, which became operational during the fourth Five Year Plan, the requirements of Assam, Jammu and Kashmir and Nagaland were to be met first and the balance of central assistance distributed to the remaining States based on certain criteria.

At the time of the formulation of the fifth Five Year Plan, it was decided to include Himachal Pradesh, other Northeastern States and Sikkim in the above category. For the first time, these 10 States were categorised as ‘Special Category States’ to distinguish them from others. Later on, Uttarakhand was accorded the ‘Special Category’.

Traits for categorisation

‘Special Category’ status had been granted in the past by the Union government to States having certain characteristics based on the recommendations of the National Development Council. These included i) hilly terrain; ii) low population density and/or sizeable share of tribal population; iii) strategic location along borders with neighbouring countries; iv) economic and infrastructure backwardness; and v) non-viable nature of State finances.

Under the revised Gadgil-Mukherjee formula, which was in operation till 2014-15, 30 per cent of the normal central assistance was earmarked for ‘Special Category States’ and the remaining 70 per cent to General Category States. ‘Special Category States’ were entitled to get such assistance in the grant-loan ratio of 90:10 as compared with 30:70 ratio for other States.

In addition to their earmarked share in normal central assistance, special plan assistance for projects (90 per cent grant) and untied special central assistance (100 per cent grant) were being given only to ‘Special Category States’. Other benefits to ‘Special Category States’ include assistance for externally-aided projects in the grant-loan ratio of 90:10, whereas such assistance to other States is on back-to-back basis.

Under the Accelerated Irrigation Benefit Programme (AIBP), ‘Special Category States’ get 90 per cent of the project cost as grant as compared with 25 per cent grant for others. The matching contribution in respect of Centrally Sponsored Schemes (CSS) is usually lower for ‘Special Category States’, more particularly, for those in the Northeastern region.

Though all the ‘Special Category States’ are provided with central incentives for the promotion of industries, there is no explicit linkage between the incentives and the special status. The package of incentives is different for the States of Jammu and Kashmir, Himachal Pradesh, Uttrakhand and the States located in the Northeastern region. These packages have more to do with their backwardness than the status.

Progressive dilution

Several changes over the years, more particularly those introduced in the Union Budget 2015-16, have resulted in considerable dilution of benefits to the ‘Special Category States’. The loan component of normal plan assistance was dispensed with in 2005-06 and since then such assistance is being given only in the form of grants to all States, including those in the general category. Following this, the share of ‘Special Category States’ in total normal central assistance has been around 56 per cent from 2005-06 onwards. But the share of normal central assistance in total plan assistance, which was the predominant channel of central plan assistance to States, had come down to about 15 per cent with the proliferation of Centrally Sponsored Schemes (CSS), with resultant dilution of the benefit of untied grants to States. Following the increase in tax devolution to States from 32 to 42 per cent of divisible pool of central taxes, the Centre has dispensed with normal plan assistance, special central assistance and special plan assistance from 2015-16 onwards.

There are very few externally aided projects in the ‘Special Category States’. The Union Budget 2015-16 has drastically reduced the allocations under AIBP from Rs.8,992 crore in 2014-15 to just Rs.1,000 crore. AIBP is now included in the list of schemes to be run with higher matching contribution by States.

The ‘Special Category’ status is not so special anymore following the above changes. The only attraction that remains is the benefit of assistance for externally aided projects (90 per cent grant). But even this will be of limited benefit if any new state is accorded special category for a limited period of five years or so as disbursal of external assistance cannot be substantial in such a limited period. The benefit of lower matching contribution for ‘Special Category States’ for CSS is unlikely to be substantial with the reduction of assistance to State plans by over 40 per cent to Rs.1,96,743 crore in 2015-16.

New criteria

Following the demand for Special Status by Bihar, a committee was appointed under Dr. Raghuram Rajan in 2013. This committee suggested that States classified as ‘Special Category States’ and those seeking inclusion in that category, would find that their need for funds and special attention more than adequately met by a basic allocation to each State and the categorisation of some as ‘least developed’.

Furthermore, it is not politically feasible to consider special status to any new State as any such decision will result in demands from other States and dilute the benefits further. It is also not economically beneficial for States to seek special status as the benefits under the current dispensation are minimal. States facing special problems will be better off seeking a special package.

Source: The Hindu

#2015, #27, #august

Looming crisis

The crisis-ridden textile sector, being labour-intensive, should have been an ideal candidate for a push as part of the Prime Minister’s pet ‘Make in India’ initiative, but as the issues it is mired in remain unresolved, and with losses mounting, the situation is grim. Nearly half of India’s power looms are at a standstill: the spinning industry in the northern and southern regions has pressed in shutdowns of as much as 15 to 20 per cent of production capacity. The textile industry as a whole is reeling under high input and transaction costs. The products find it hard to compete in export markets, where India-made yarn, fabrics and garments attract duties respectively at rates of 3.5, 8.5 and 14 per cent. Yet, Pakistan, Vietnam and Cambodia enjoy zero-duty access in some categories in the U.S., EU and China. India’s trade negotiators need to seek expedited results. China is not picking up much from India this year.

Cotton was cheaper in India this year initially. But the Cotton Corporation of India for several months sold the good-quality produce procured in Andhra Pradesh, Telangana and parts of Maharashtra at prices higher than international levels, making Indian cotton uncompetitive. This added to the problems of the industry, especially the spinning segment, before an intervention by the Union Textile Ministry ensured resumption of smooth supplies. Tinkering with the cotton market through Minimum Support Price operations must be avoided. Instead, direct cash subsidy benefit to farmers could help reform the sector. China has also decided to go in for direct subsidies to cotton growers, with its textile industry free to source cotton at international prices. The Technology Upgradation Fund Scheme that was originally brought in by the Atal Bihari Vajpayee government and launched in 1999, is a ready framework available to the Centre to address the needs of the textile sector. The scheme, that is estimated to have so far resulted in investments of over Rs.3,00,000 crore in the whole textile value chain, will expire in March 2017. It should be extended. A comprehensive National Textile Policy must be announced at the earliest to create a level playing field with regard to tariff rates, raw material costs, cost of funding and transaction costs. Each power loom provides work to about 2.5 workers. Closures all across the country could endanger livelihoods on a large scale. Conversely, a healthy textile sector could potentially create millions of jobs. That should be the target.

Source: The Hindu

#2015, #august

Nobel laureate Muhammad Yunus to help Maharashtra in reviving MSMEs

On a special invitation extended by the State government, the Grameen Bank founder will hold a discussion with top Ministers and bureaucrats on September 6.

Social entrepreneur and Nobel Peace Prize winner Muhammad Yunus of Bangladesh will guide Maharashtra on microfinance and how to revive dying Micro, Small and Medium Enterprises (MSMEs) in the State.

On a special invitation extended by the State government, Mr. Yunus — the founder of Grameen Bank — will hold a discussion with top ministers and bureaucrats on September 6.

Apart from sharing his experience , he is also expected to discuss the government’s thrust on a road-map for future development of the MSME sector in the State.

At present, the State is suffering from the closure of high number of small scale industries. Out of the total number of 2.54 lakh, around 30,549 units are closed for various reasons, ranging from lack of finance to unavailability of skilled labour.

“We have been annually allotting money for this sector in every budget. Despite that, the small scale industry is facing a number of problems. It’s an effort to learn from him and know how he succeeded,” said Finance Minister Sudhir Munguntiwar.

While Mudra Bank will be ensuring capital flow for this industry, the State is also exploring ways to ensure finance to small scale industries through Self Help Groups (SHG). “Mr. Yunus will be the ultimate authority to guide us on this front,” said Mr. Munguntiwar.

Source: The Hindu

#2015, #august

China cuts interest rates

Nevertheless stocks plunged further on Tuesday, marking the biggest four-day rout since 1996

China has cut interest rates for a fifth time in nine months in a fresh effort to boost growth in the real economy following the stock market rout, which extended into Tuesday.

The central bank said on Tuesday that the benchmark rate for a one-year loan will be cut by 0.25 percentage point to 4.6 per cent. The one-year rate for deposits will fall by a similar margin to 1.75 per cent.

The People’s Bank of China (PBoC) or the central bank also stepped up liquidity for lending by reducing the minimum reserves that banks are required to hold by 0.5 percentage point.

The rate cut is meant to drive down financing costs so as to benefit small- and medium-sized enterprises and support the development of the real economy, the PBOC said. The move was widely anticipated after economic indicators showed weaknesses in manufacturing and exports by larger margins than expected.

Besides the five rate cuts since late November, the PBOC had earlier removed its 75-percent loan-to-deposit ratio requirement to free more liquidity for lending.

Earlier on Tuesday, the central bank injected 150 billion Yuan or $23.43 billion, into the inter-bank market during open market operations, the state run China Central Television (CCTV) reported.

Nevertheless, stocks plunged further on Tuesday, marking the biggest four-day rout since 1996 amid concerns that the government is withholding intervention with market support measures.

The benchmark Shanghai Composite Index on Tuesday fell 7.6 per cent to close at 2,964.97 — dropping below the 3,000 level for the first time in eight months. The more than 1,000 stocks that were badly hit included energy giants China National Petroleum Corp and Sinopec Group. Stocks for banks, including CITIC Bank, Bank of Communications, Everbright Bank, Ningbo Bank and Nanjing Bank plunged by more than 9.5 per cent.

On Monday, the Shanghai index had suffered its biggest one-day plunge since 2007, triggering the biggest global wave of sell-offs since the 2008 financial crisis. But Tuesday’s drop did not impact rest Asian markets notably South Korea, Taiwan and Australia, which staged a recovery.

Source: The Hindu

#2015, #august

India urges rich world to help in curbing climate change

Environment minister Prakash Javadekar said on Monday that the rich world could not wish away its responsibility for man-made global warming. Javadekar urged developed nations to do more to help India deal with the impact of climate change.

India is one of the last major economies still to submit its plans to tackle global warming ahead of a United Nations summit in December where more than 190 countries will seek a deal to halt a damaging rise in temperatures.

Despite its low per-capita emissions, India is already the world’s third-largest carbon emitter. Its huge population of 1.2 billion, a fast-growing economy and rising use of coal make its role crucial if the UN summit is to succeed.

Javadekar said India was in the final stages of preparing its submissions to the UN, and that he was confident  a global deal could be reached at the summit in Paris.

But, he added, the rich world had so far failed to make sufficient money and cutting-edge technology available to help poorer countries that were not to blame for global warming.

“Historical responsibility is a fact. It cannot be wished away. We are just 2.4% of the world’s historical emissions,” he told reporters in New Delhi.

Unlike other large emitters like the United States and China, India has said it will not commit to a “peak year” for its own emissions, arguing that doing so would hamper its drive to beat poverty through economic growth.

Source: HIndustan Times

#2015, #august