The global economy has been slowing down. India’s economic growth has been range-bound in the recent years. It has been hovering around seven to eight per cent. This growth has not proved effective in creating sufficient numbers of jobs as per reports by CMIE and others. There is need to accelerate growth further. Macroeconomic stability is a precondition for sustained high economic growth. Key macroeconomic indicators don’t show very healthy signs. There are indications of challenges on several fronts including, spike in crude oil prices, fiscal slippages and high unemployment, among others.
Although, for over the past 30-years, governments of different political persuasions have been generally reform-oriented, the political narrative, including promises made in their manifestos by the two key political parties, indicate that the next government is likely to increase public spending. Some form of income supplement scheme aimed at addressing income inequality is likely, although the exact contours of it are far from clear. Such a move will have fiscal implications. Under these circumstances it would be very challenging for the new government that comes to power at the end of May, to bring and maintain macroeconomic stability.
Fiscal Math and Social Democracy
There is a huge gap between people’s aspirations and resources available for development. There is a direction of majorly enhanced social spending as a commitment across party lines, be it universal basic income or minimum income guarantee etc. With India debt/GDP ratio being over 68 per cent without off-balance sheet borrowings, the fiscal math and its implications need to be well understood and articulated. The assumption that these schemes would replace the existing subsidies may not hold good, as there are so many areas where the country is already legally and constitutionally committed, e.g., MGNREGA, Right to Food etc. It is more likely that all this new social spending will be on top of the existing social spending. Therefore, a roadmap for garnering resources for this needs to be identified and implemented. Some possible areas could be:
- Removing all tax breaks to industries such as software exports and power.
- Introduction of state duty for inheritances upwards of R50 crore.
- Government has repeatedly emphasised substantial savings using Aadhaar. These can perhaps be pooled and put into a special fund, which is used for enhancing social spending.
- Tax base needs to widen significantly.
Job Generative Growth
For this, MSME sector as well the unorganised sector may hold the key. The initial success of Pradhan Mantri Mudra Yojana (PMMY) in job generation seems to be tapering off. Therefore, there is a need to review and assess the scheme and apply correctives.
Under PMMY, a cash-credit facility be made available to micro and small enterprises in the same denominations as the current Shishu, Kishore and Tarun. The difference being that this will be a pure cash-credit limit not linked with any collateral and would be entirely covered under CGTSME scheme.
The eligibility criteria is suggested to be carefully calibrated for each of the loan types, i.e., Shishu, Kishore and Tarun. For example:
- Type of legal entity: company, proprietorship or LLP.
- Age of business, minimum being 1-year for Shishu; 5-years for Kishore; and, 10-years for Tarun.
- The business should have a similar number of years of banking history of good standing.
- Average turnover and average profit before tax (PBT) based on the same number of years.
Currently, MUDRA scheme is linked to asset purchase. However, not enough scrutiny is done for the assets purchased. This is leading to NPAs, which is an emerging concern. MUDRA loans should also be given in the form of cash-credit. Beneficiary should have the freedom to use it as per the need. Under the current regime, term-loan is being utilised as cash-credit putting unnecessary interest burden as well as creation of dubious assets only for the purpose of borrowing. Unique new loans should be reported separately.
There is a need for sharing of MUDRA loan data amongst banks. Our ground level study shows that same people borrow from different banks or borrow repeatedly from the same bank. While in itself there is nothing wrong with the practice but it does tend to give a skewed view of the performance.
As on date, even after providing collateral, be it property or fixed deposits etc, only a small percentage of the value of collateral is provided to MSMEs as cash-credit limit. A concept of margin collateral should be introduced. E.g., the cash-credit limit could be 2x or higher than the collateral value. A carefully calibrated criteria for eligibility can be, e.g., based on a minimum 7-years of average turnover, average profit, banking history of good standing etc.
Often, there are externalities or environmental factors that create a choke on cash flows or profitability of MSMEs. E.g., vendors of IL&FS or a sudden spike in oil prices etc. It is at these times that availability of cash-credit limit becomes critical to help the business tide over. Unfortunately, it is exactly in such situations that either the cash-credit is choked or stopped all-together. It is therefore, very important to base cash-credit decisions on empirical performance of 7-10 years, rather than the immediate situation at hand. A carefully calibrated criteria for eligibility can be, for example, the percentage of business impacted by the externalities.
Some banks charge for non-utilisation of a cash-credit limit. This should not be applicable for micro and small enterprises.
SIDBI perhaps is the single biggest point of failure for MSMEs. Over the years, a lazy habit of parking all the funds with SIDBI has been developed. Most of these funds are not performing or even disbursed. The policy on this needs to be reviewed and ground created for a more professional intervention from the private sector.
The need for enhanced credit and funds to the MSME sector cannot be emphasised enough. While banks have to consciously pursue this, markets too need to play a role. It is unfortunate that a country of our size has less than 450 SME companies listed on the stock exchanges. We have been working in this area for several years in identifying, mentoring and preparing SMEs to access markets. While this in itself is a huge challenge, we find that even a bigger challenge is finding investors.
Most MSMEs, in a particular sector, tend to do similar things but do them reasonably well. The opportunities for windfall etc due to innovations, efficiencies etc are rather limited. What is possible, however, is that these organisations can scale and create more jobs. This sector then becomes the lowest priority for investors. It is here that the banking system can play a major catalytic priority sector development role by directing the treasuries to make 5 per cent from their investments in SME stocks. This will impact the sector positively over a period of time making SME investments desirable and impactful.
Skill development programmes have largely failed to deliver the desired results. MSMEs should be encouraged to hire apprentices under a two-year programme. During the first year, their apprenticeship is supported by the government and paid under skill development programme. During the second year, these apprentices are absorbed by the organisation and put on salary.
The recent policy decision on co-origination of loans is a welcome step. There are however, certain implementation areas that need to be examined closely. These are as follows:
- Whether the sources of data used for credit profiling are legally permissible for such purposes?
- For the lack of a data privacy law in India, Global Data Protection Provisions (GDPR) should be taken cognisance of.
- Looking at the marketing campaigns and websites of the FinTechs, there seems to be a thin dividing line between priority sector lending and consumption credit.
- Credit may be aggressively pushed to people who are neither in the market for seeking credit nor may be able to afford the conspicuous consumption being offered, leading to entrapment.
- As market matures and securitisation of such loans happens, the end result is anyone’s guess.
Providing jobs to the rising workforce is a daunting task. Livelihood linkages play a critical role in ensuring work opportunities. Training and capacity building is required to sustain SHGs. Training programmes should be linked with credit and sustainable income generation activities and time bound outcome oriented programmes.
SHGs have been a key instrument to promote inclusiveness among women. There are 87.44 lakh SHGs as on March 2018. SHGs suffer due to poor credit linkages and also the lack of proper handholding. A lot of money spent has been spent on skill development. Why can’t we provide skill development training to the members of SHGs? Close to 10 crore women could be benefited from this.
The performance of FLCCs and RUDSETI leaves a lot to be desired. Their performance has been largely sub-optimal. Mostly, the persons trained by these have neither been linked to credit nor employed. RUDSETIs should be used to train and create SHGs, producer companies and cooperatives that scale. Credit, forward linkages and ongoing mentoring should be provided. Performance of RUDSETIs should be evaluated on the basis of direct jobs and livelihoods created.
Industrial policy needs to be reviewed and the district industrial training centres could be more tightly coupled with employment and incentives could be provided for this. Similarly, in terms of finance, external commercial borrowings (ECBs) should be liberalised and urgent attention paid to exports as global economy decelerates.
The government cannot – and should not – absorb more and more job seekers into the lower rungs of state machinery. To create jobs, investments are needed. And the obstacles in way of setting up of new businesses and expansion of existing ones need to be removed so that new jobs can be created. For this the policy constraints need to be identified and removed. The regressive steps taken on financial regulation, tax policy and capital controls that have led to a capital flight out of India, need to be reversed.
With the advent of newer technologies like Artificial Intelligence (AI), Internet of Things (IoT), Blockchain and the fourth industrial revolution underway, the impact on banking and financial services sector is going to be enormous. The areas that need to be addressed are as follows:
- Capacity building and awareness on these technologies and their likely impact on the banking sector needs to be undertaken in a big way.
- The sector needs to work on roadmaps and plans, how to deal with these changes and harness them for growth as well as competitive edge. Next big area of concern is that the new technologies draw upon the knowledge-banks given to them and therefore, end-up amplifying existing biases. It is imperative to ensure that the technology does not end-up excluding the already excluded, even more.
- In this context, the regulatory Fintech sandbox initiative is a good step but perhaps these technologies also need to be whetted on their socio-economic impact, besides being regulatory appropriate. Somebody needs to independently assess this. It makes the role of independent think-tanks critically important.
The supervisory technology and regulatory technology initiatives being undertaken by RBI are good initiatives and can be enriched further through a wider consultative and multi-stakeholder participative approach.
The biggest operational risk looming large is the cyber security and this is an area where the knowledge across the world is still evolving. India’s national cyber security strategy was last articulated in 2013 and even that has not been fully implemented. This subject in the meantime has evolved and requires near real-time correctives, information sharing and collaborative working across centres.
In these areas we find, the preparedness of our country is far short of the maturity and requirements of our banking system.
It is very heartening to note the financial inclusion progress that has been made over the past several years and now is the time to build on that and ensure a greater financial deepening.
The biggest unmet need for the poor is instant availability of consumption credit. This still keeps the moneylenders flourishing and people slipping back into the poverty trap. There was a provision of R5,000 overdraft under PMJDY, but it had too many conditionalities to be really effective and has willy-nilly become an appendage of PMMY, which is not supposed to deal with consumption credit. It is my belief that a modest unconditional overdraft of R500 can be given to every Jan Dhan account through the instrument of a card or a mobile wallet. This amount could be secured by mandating that the DBT amount should be transferred only to Jan Dhan accounts. This then, essentially becomes an OD against DBT. It may also be prudent to offer this OD on an interest of say 14 per cent. The advantages of this scheme are as follows:
- It carries no risk.
- It inculcates a credit pay-back habit.
- It increases digital payments manifold.
- It generates demand for acceptance of digital payments and market is likely to follow by investing in the requisite infrastructure.
- Most of all it addresses a huge felt need
This OD amount can be increased in a graduated fashion based on the track record and may become a cash-credit limit, even higher than the DBT due over a time period. A credit-guarantee fund on the lines of PMMY can also be created, if required, drawing on the universal financial obligation resources.
Having studied several government schemes that proposed providing free or subsidised infrastructure, we find that almost all fail unless the demand for the service in itself matures. The CSC scheme of Government of India is a classic case in point. Today, after so many years, they are finally viable, with most of the revenue coming from non-government sources. Similarly, this scheme can serve as a boost for financial viability of bank BCs.
It was in our conference in November 2006 at North East organised with support of RBI that, we had recommended the CSCs to be allowed to become BCs. Subsequently, RBI issued a policy direction to do so. It is one decision that has served the country in good stead.
The BC channel is doing well and needs to be further strengthened through additional sources of income. Some of the suggestions are as follows:
- The co-origination of loans scheme may be extended to corporate BCs.
- They can also play an important role in loan-recovery.
- They could possibly play a role in SHG formation and credit-linkage as an additional revenue stream.
- A consumption credit scheme of a higher amount could be worked out through this channel.
The role of brick-and-mortar rural branches cannot be undermined for having a direct bearing on credit as well as livelihood linkages. It is not possible to solve people problems with technology alone. Therefore, the harmony between brick-and-mortar and technology initiatives needs to be re-established. In this regard, RRBs can play a pivotal role and need to be strengthened. The number of bank branches closed post bank mergers should be allocated to rural and under-banked areas. It is important to note that running a bank branch in rural area with say five-seven personnel is not the same as the big branches run in the urban areas that deploys several times more resources.
Financial literacy programme is central to financial deepening. Financial literacy remains a huge area of concern with only lip-service or advertising expenditure being disguised as financial literacy. This is true for both markets as well as the banking sector. Financial literacy is the hard work of identifying, mobilising and then doing face-to-face training through a rural-outreach programme, which needs to be periodically repeated. This is both time and resource intensive. I find, only for reporting purposes, this money is given to TV channels to run some programmes that have zero impact on financial literacy.
There is need to regulate and monitor consumption loans being offered by FinTechs. They may emerge as new-age technology enabled loan-sharks competing with the usurious moneylenders. Lessons are to be learnt from the pay-day credit industry and its adverse impact in other countries. The following needs attention:
- Cross-selling is a trap for illiterate consumers, which requires financial literacy at a wide scale.
- While Financial Literacy remains a continuous need at the grassroots, bankers also requires sensitisation on the grassroots realities and felt-needs.
- Payment Banks are an area of concern. We had pointed out since before their inception that they do not really have a business case. Their business models need review on whether to have them at all! Incrementally, adding to their allowed services is not going to make any difference.
- One course of action could be merging Payment Banks with regular banks or closing them down altogether.
The Ministry of Agriculture, NABARD and RBI need to work collaboratively on the New Agriculture Policy, which revolves around the need for food security and the need to address the agrarian distress. We suggest the following:
The government must set productivity and production levels for each state which, in turn, sets the same for each of its respective districts, with adequate fixing of accountability at all levels for non-performance.
- The government should do away with interest subvention scheme on crop loan and take corrective measures to provide institutional credit to small farmers and link them to the market.
- Capital formation and risk diversification through lending in allied agriculture sectors should be encouraged. The fisheries and forestry sectors need massive investments and will help smallholder farmers to diversify incomes and risks.
- Subsidised credit from banks are cornered by big farmers, agents and traders who on-lend to the smallholder farmers at a high rate of interest. Land records are not updated and land reforms and consolidation are ignored. This results in smallholder farmers not getting access to subsidised credit and hence they resort to borrowing from agents/Adhtiyas/moneylenders at exorbitant rate of interest. There are no equity instruments available to farmers, only debt. The government should facilitate funds, insurance, R&D, market support and training to farmers.
- Strengthen awareness campaigns across the country about commodity futures trading. Leveraging price signals from commodity futures market should be a key input into policymaking by government and NABARD.
- Create digital kiosks in each APMC main market yard making available commodity futures prices, forward market prices and prices from other key markets. Create an interconnected Digital Mandi by providing broadband/dedicated Internet connectivity 24*7.
- Link APMC markets for the time being, to institutional credit using NeML (NCDEX e-Markets Limited) Unified Market Platform (UMP) e-pledge facilities to settle loans of farmers. Integrating UMP in skill development programmes to enhance farmer awareness on market mechanism and their capacity building.
- No loan write-offs but instead open up agri-markets. APMCs to be phased out gradually and states to build market yards supporting infrastructure to help farmers market agri-produce.
- Transform existing market yards into productive and useful commodity aggregation, segregation, storage and other basic value addition facilities aided by objective quality assessment and trade.
- Agricultural labourers and women farmers are not treated or given the status of farmers. Given that most agri labour were once farmers who had to sell-off their lands to survive and women do all farming / agricultural activities except ploughing but are denied the status of farmers.
- The need of the hour is to build small, decentralised irrigation infrastructure on farmlands (small holding ponds to avoid water and fertiliser runoff).
- To adopt draught-resistant seeds and planting materials suited for local conditions. The Seed Village concept is a must for localised seed production and use.
- Emphasise on allied agricultural activities like animal husbandry, fisheries, backyard poultry/dairy and forestry to ensure more produce out of the available land, water and other sources, as also to diversify risks and increase farmers’ income.
- Crop insurance penetration of non-loanee farmers is dismal despite substantial public funding. States should take interest in popularising crop insurance among non-loanee farmers and insurance companies should work with states in providing easy access to insurance.
- Weather based crop insurance is appropriate for speciality crops like fruits, vegetables, plantation crops etc, states are free to choose between this and customise indemnity insurance, with the same level of public support. Further, insurance companies may be incentivised to develop customised insurance products to help farmers in distress.
- For all the back breaking labour and production risks being borne by the farmers, their margins are 18-30 per cent only and the traders siphon-off 60 per cent of profits without much risk and the supply chain takes the rest. The farmer pays for all costly inputs and runs the risk of crop failure. Semi-processing or limited agro-processing of fresh farm produce for domestic and foreign markets is essential to enhance the productivity of farmers.
- The Indian Railways can open up 50-60 market yards in areas where vegetables and fruits are grown in abundance and can provide infrastructure and communication facilities.
- Create Hub & Spoke model and back-end infrastructure as Mandi level silos and link with Rail side silos, adopting a seamless Integrated Bulk Handling, Storage and Logistics System thus eliminating gunny bags, reducing losses and minimising dependence on labour.
Creating Robust Data Mechanisms
There has been a widespread mistrust amongst economists, social scientists and statisticians across geographies who have expressed doubt over India’s growth rate and on the way India calculates it. It is a reminder that there is a need to insulate the collection and dissemination of official economic statistics from political interference. The discomfort in the domestic and international statistical community stems mainly from two developments: the statistical robustness of the back-casted GDP series with the base year 2011-12. And two, the government’s decision to hold back the National Sample Survey Organisation’s (NSSO) periodic labour force survey results even after the National Statistical Commission (NSC) had duly cleared the findings. The results – that the unemployment rate reached a 45-year high in 2017-18, the demonetisation year – are politically inconvenient.
Increasingly, it is found that official data defy common sense and run contrary to comparable data generated by non-government agencies. As per revised GDP estimates, the demonetisation year, 2016-17, is the best in the Modi Government’s tenure as far as GDP growth is concerned. This, when nearly every industry association – from traders, consumer durables to cement manufacturers – reported sharp drops in sales that year on account of the note ban.
India, with its vastness and complexities, poses tremendous challenges for data collection. The dualistic nature of the economy means a large unorganised sector coexists with the organised sector that the data collection systems are unable to fully cover. Over the decades, India’s statistical apparatus, despite periodic upgrades, has not kept up with the requirements of an increasingly complex economy. It has come to be fraught with gaps, inconsistencies and lags in estimation. In such a scenario, the statistical systems need strengthening rather than being rendered vulnerable to pressures of electoral politics. When the official employment data and GDP growth estimates seem to lack credibility, it becomes difficult for investors to assess the depth and width of the Indian market, a key determinant of investment decisions. Collected, presented and read right, statistics can vitaminise the policy toolkit.
An effective implementation of policy require reliable socio-economic data. There is hardly any reliable official data depicting the socio-economic condition. Socio-economic caste census was done in 2011. But the data has not been made public yet. It is imperative to have a comprehensive socio-economic input in order to have a proper policy formulation and implementation.
- Agriculture: Given the agricultural distress, there is need to work on a new agriculture policy that focuses on food security, extension services, infrastructure and supply-chain etc and changes stance from the prism of subsidies and loan waivers.
- Fiscal Slippage: The government has failed to adhere to the targets under the Fiscal Responsibility and Budget Management Act. Tax to GDP ratio remains low. Subsidies have not been rationalised. There is a renewed tendency of focus on doles to appease voters. These may lead to further fiscal slippage, already a major macroeconomic concern.
- Oil Prices: The Indian economy is extremely vulnerable to oil price shock. While, Narendra Modi has been lucky with oil prices during most part of his five year tenure, the risk of a spike in crude oil prices in the international market is looming large. The impact of oil prices weigh on the Indian rupee, current account, fiscal balance, inflation and growth.
- Infrastructure Financing: Public-Private-Partnership (PPP) model of infrastructure financing has largely failed. With banks and financial institutions under severe strain and a number of infra firms going bankrupt, raising money for infrastructure development is getting more and more complicated.
- NPAs: Balance sheet of the Indian banking system is hugely strained for the past several years. Not just the balance sheet, future of several banks is in doubt.
- Capital Formation: Economic growth and development is largely dependent on investments. A major cause of concern for the Indian economy is that the investment rate has declined sharply since 2011-12. Gross Fixed Capital Formation, which had touched a high of 35.6 per cent in 2007, slumped by over 9 percentage point to 26.4 per cent in 2017.
- Savings: The countries like China had sustained around three decades of high economic expansion on the back of robust savings. India’s economic growth also got boosted through high savings. But decline in the recent years is a major cause of concern. The ratio of domestic saving to GDP touched a peak of 38.3 per cent in 2007. It has fallen sharply touching a low of 29 per cent in 2016.
- GST: The Goods and Services Tax (GST) is supposed to be simple and ease the burden of compliance, especially from the small businesses. The ground level reports show that the things have become much more complex. For example, during the old tax regime, a company was required to pay service tax only when it received the payment. Now as soon as an invoice is raised one has to pay the GST. In many instances actual payments happen several months or even years of raising the invoice. There is no way one can get money back once paid under the GST. There is provision of only adjustments. Small enterprises are not assured of business and often their money remain stuck with the tax authorities. Remember, this is the crucial capital that could have played significant role in their growth.
- Bank Boards: Banks need to be run by professional bankers. Many of the issues that plagued the banking system in the recent past could have been avoided had there been timely interventions from the board. Presence of retired and seasoned/senior central bankers on the board of the commercial banks would help in timely red flag and corrective action. Bank boards needs to be made more vigilant and accountable for the banking affairs. RBI directors should not be on the bank boards.
- MSMEs: The growth of MSME sector in India is severely stressed due to lack of formal credit and other supports. True, credit to small enterprises is a high risk. But the return is also higher. The government should ensure credit to MSME on risk and reward sharing basis with financial institutions. Another prudent move could be to ensure that bank treasuries invest at least 5 per cent of their money in SME stocks. The presence of SMEs on the equity markets is negligible. Investment by treasuries would encourage SMEs to go to equity markets for fund generation.
- Jobs: Higher economic growth registered in the past two-and-a-half decades has not been able to create sufficient jobs. In fact, the problems of unemployment have got complicated in the recent years despite high economic growth. It’s important to focus on job generative growth.
Given the number of these issues and their complexity, an ongoing engagement with stakeholders outside the government and a wider consultation is called for.
Consultations and Task Forces
SKOCH is organising a series of conferences, consultations, round table discussions and workshops in each of the above mentioned areas to be able to prepare and provide timely and actionable inputs. We have formed Task Forces around these areas to address some of these broad-based issues in order to bring felt-needs to policy.