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excel career - current affairs 21.11.2016


1. Financial pokhran hits neighbours

Demonetization has impacted our neighbours too. And no, we are not talking about Pakistan, where government printing presses churn out counterfeit Indian currency bills to undermine the Indian economy and help fund terror. Nepal, Bangladesh, Sri Lanka and even Bhutan are nations where signifi cant amounts of Indian currency is held and circulated. Prime Minister Narendra Modi’s announcement banning high value Indian bills with immediate effect has hit each one of them. While banks and other fi nancial institutions in these nations holding Indian currency should not face a problem, small traders, businessmen as well as tourists are feeling the pinch. Let’s take Nepal, often seen as a transit point for fake Indian currency printed in Pakistan. The 1700 km border is extremely porous and unregulated, and many Nepalis living and working along it possess Indian currency. Then there’s thousands of Nepalese who work in India and send or take their earnings back home in Indian rupees. Nepal’s Rashtra Bank says banned notes worth `33.6 million were within Nepal’s offi cial fi nancial system, but the actual figures are likely to be much higher since Nepalese are offi cially allowed to keep upto `25,000 in Indian currency. Bhutan, where the Indian rupee is legal tender, acted quickly, with the Royal Monetary Authority of Bhutan giving people time (initially till December 15, then revised it to November 30) to deposit their Indian currency into the banks, which in turn would send it to the India’s Reserve Bank for swapping with the new notes. The RMA governor estimates that almost `100 crore would be deposited by Bhutanese nationals. In Sri Lanka, small businesses that trade with India and hence keep some Indian currency are likely to be the most affected. While the RBI has set up a task force to help these neighbouring nations deal with the crisis, it will take a while for the heartburn and unease to tide over

2. As tragedy sinks in, queries on fate of  Rs 1.2 L cr safety fund float around

In the wake of the Kanpur train tragedy, questions have been raised about the railways’ plans to enhance passenger security and the proposal for a Rs 1.2 lakh crore safety fund, which the ministry of finance has rejected. This when the implementation of the recommendations of the High-level Safety Review Committee headed by former Atomic Energy Commission chairman Anil Kakodkar would require roughly Rs 1,00,000 crore. The railways has been very slow in implementing the 2012 report that stated “the present environment on the railways reveals a grim picture of inadequate performance largely due to poor infrastructure and resources and lack of empowerment at the functional level”. In the 2016 rail budget, Railways Minister Suresh Prabhu announced ‘Mission Zero Accident’ and he wrote to the finance minister requesting him to make a provision for a dedicated fund of Rs 1,19,183 crore, called Rashtriya Rail Sanraksha Kosh, for carrying out safety-related projects. According to the railways, of the 106 recommendations of the Kakodkar panel, 68 have been fully accepted and 19 partially accepted. Twenty-two of these recommendations have been implemented while 20 recommendations are in the final stages of implementation, according to data tabled in Parliament. Minister of State for Railways Rajen Gohain told Parliament last week that the safety-related work involved track work, bridge rehabilitation, safety work at level crossings, replacement and improvement of the signalling system, improvement and upgrade of rolling stock, replacement of electrical assets and human resource development.

3. Battling black money

The Hindu
After nearly two weeks of demonetisation, it is clear that its immediate effects have been more unpleasant than what the Government had perhaps anticipated. The informal sector in rural and urban India (proprietary and partnership enterprises employing less than 10 workers) accounting for 45 per cent of the GDP and 80 per cent of total employment, has been badly hurt by the withdrawal of 86 per cent of the value of currency in circulation. Rabi sowing and kharif marketing and harvesting operations have been hit. At stake are the livelihoods of over 400 million people. Not surprisingly, economists and market analysts expect GDP growth to contract by 50 basis points or more this fiscal — owing to a collapse in the circulation of currency in a cash-dominated economy. The point here is not to write off the strike on black money, but to ensure that this pain to ordinary citizens does not last long and — what’s most important — black money recedes into insignificance. The second cannot be achieved by a single stroke. It would require a multi-pronged approach that attacks not just the stock of black money (in this case, cash has been the target to the exclusion of other forms of hoarding such as property, bullion and financial instruments) but also its flow. Black money is an integral aspect of activities concerning elections, realty, mining and bullion and even capital markets. Without looking at such flows — the Centre has made a start in the case of coal mining and capital markets, by introducing auctions and amending double taxation avoidance pacts with Mauritius and Cyprus — we may soon be back to square one. It is crucial to note that black money flows are a product of cumbersome procedures and high taxes, and cannot be countered by policing alone. The Centre should not lose sight of the fact that an economy with less regulatory clutter is cleaner and more efficient, as it seeks to rewrite the rules in certain sectors. Realising that black money will not disappear in a single stroke, the Centre has announced a drive against benami holdings. While demonetisation has already brought about a welcome correction in the distorted realty sector, a clean-up should encompass the shady secondary market. The Real Estate (Regulation and Development) Bill focuses on one aspect — time-bound, transparent regulations, which should reduce bribery and make it easier for bonafide entrepreneurs to enter the fray. But overhaul of the secondary market calls for a relook at income tax, stamp duty and registration laws across States.
In order to bolster popular support, it is crucial that the Centre implements electoral reforms. The loopholes in the Representation of the Peoples Act, which include not questioning donations under 20,000 and allowing exemptions to a candidate’s expenditure limits, among other things, must be addressed. The Centre should not be seen as getting after the ‘small fish’ alone. Only then will the surgical strike against cash hoarders seem worth it for all.

4. Watch out for more financial disruption

A week after the announcement of demonetisation (a misnomer, given that high–denomination currency notes have not really been withdrawn and merely replaced), the jury is still out on its effects. The Government would want the common man to believe that the pain is limited only to the short run. In the medium to long run, with banks being flush with funds, interest rates will be lowered. Further, it would like us believe that there are definitive gains to be made by all in the form of a more transparent and cleaner economy in the long run. Unfortunately, macroeconomic implications of any policy change are not as simply explained.
Impact on interest rates
Bank repo rates, it is likely, will be cut in the run–up to the Fifth Bi-monthly Monetary Policy Review on December 7, 2016, on account of the huge funds that have been mopped up by banks. An indicator of the southward movement of interest rates can be seen by looking at the money market operations and the behaviour of the daily weighted average call money rate (WACR). The WACR is the operating target which the Reserve Bank of India seeks to influence through its policy rate —the repo rate. With the repo rate at 6.25 per cent, the weighted average call money rate, which was 6.21 per cent on November 8, 2016 — the day “demonetisation” was announced, dipped to 4.44 per cent on November 14, and was 6.03 per cent on November 17, 2016. It is clear that banks need to resort less to the inter-bank call money market funds for their daily requirements of maintaining the cash reserve ratio.
Who benefits from such rate cuts and will such rate cuts really have a positive impact on the economy? One, the rate cuts hardly impact the large percentage of population (estimated at 58 per cent), who constitute the unbanked segments. On the contrary, the decline in liquidity on account of the restrictions in the amount of notes in circulation, as also on the extent of withdrawals, will lead to a rise in the interest rates in the unorganised sector and impact them negatively. Will this drive larger numbers to be part of the formal banking system? Highly unlikely, since the reasons for the financial non-inclusion may be more deliberate, owing to factors such as lack of ability to provide collateral, bureaucratic hassles and red-tapism, lack of adequate banking infrastructure as also suspicion of the banking system at large among the poor unbanked and under-banked segments. Second, banks cannot use these transitory deposits turned into current and savings (CASA) accounts (these are essentially short-term deposits), for giving out long-term loans. It has been suggested that sectors such as highways and shipping, where the demand for investments is huge, may be the natural choice for such surplus funds. However, given the long gestational lags in such sectors, can banks afford to use CASA funds to finance the country’s infrastructure needs? These may simply add to the banking system’s strain by imposing higher mandatory capital adequacy ratio requirements.
Third, as rates of interest in India decline, we can expect an outflow of funds from India into more lucrative emerging markets, as also towards advanced economies which have been experiencing a rising trend in their bond yields since the beginning of the month. Thus, while the 10-year G-sec yield on Indian government bonds declined by 30 basis points in the last month, yields on other emerging market bonds have shot up by at least 30 basis points in the same time, with Brazilian yields going up by 68 basis points. Further, yields on German bunds have risen 22 basis points, on US 10-year bonds have risen by 56 bps and on Turkey’s bills have gone up 82.50 bps in the same period. Such a bearish bond trend exhibited by India in the face of a global bullish bond trend, will lead to capital outflows from India and difficulties in financing our current account deficit (CAD).
People’s expectations
It is important to analyse the outcomes of the demonetisation effort from the point of view of what people ‘expect to happen’. The Rational Expectations Theory — an influential Nobel prize winning theory by Robert Lucas, based on expectations of economic agents — asserts that people try to forecast what will actually occur, when forming their expectations. In doing so, there is a constant effort to adjust forecasting rules so as to eliminate avoidable errors. Past outcomes thus feed current expectations. In such a scenario then, outcomes do not differ systematically (i.e., regularly or predictably) from what people expected them to be. From the rational expectations perspective, people may be caught unawares sometime, and make certain forecasting errors. However, such errors cannot occur persistently in one direction.
The current ‘unsystematic’ and unanticipated move would have caught the purveyors of black money and counterfeit money unawares. This may led to a short-term impact on the amount of fake money in circulation, as also some destruction of black money. However, as people begin to factor in these developments into their expectations, the premiums and commissions associated with corruption will only increase. As such, the government may be better off adopting a credible policy stance — one that is understood by people and credible in its approach. Such a stance would have have far greater chances of success. There is no question of the reversal of the decision to demonetise. However, the policy makers are better advised not to throw the economy out of gear through persistent, unanticipated policy shocks. Otherwise, the outcomes in the long run would be one akin to a more virulent strain of bacteria resistant to all forms of antibiotics.

5. The time’s ripe for a rate cut

Like all major economic reform initiatives, the de-legalisation of the high value notes announced by Prime Minister Narendra Modi recently has to be followed up by quick action on other fronts so that the gains are not frittered away and are transmitted to the common man fast. Anecdotal evidence suggests that the people queuing up and undergoing hardships to exchange currency across the country are generally supportive of the objective of this bold and unprecedented move because they believe this will be good for the nation. But it is also true that small businesses and trading have been affected with turnover coming down sharply in the markets.
Falling prices
Cash will continue to be king as far as the daily transactions of crores of our countrymen are concerned, especially in the rural and semi urban centres with payments for groceries, vegetables, milk and wages for farm workers and labourers being done only in cash. Though the banking system has coped remarkably well with the demands placed on it, the prospect of a slowdown till March, 2017 remains a cause for worry. Already a couple of major brokerages and forecasting agencies have put out reports predicting a lower GDP growth in the second half, with some estimates putting it lower than 7 per cent. Whatever the variations in the assessments, there is indeed an urgent need to send out pro-growth signals and see that the Government’s move does not affect earnings, consumption and employment. It will have a great demonstrative effect if a quick response comes from the Monetary Policy Committee of the RBI. The MPC is mandated to “maintain price stability, while keeping in mind the objective of growth”. At the present juncture, growth considerations should override concerns over inflation. Inflation as measured by the Consumer Price Index had come down to 4.2 per cent by October-end itself. It is a no-brainer that the November CPI is likely to be below 4 per cent, as consumer demand has been adversely affected by the de-legalisation of the old high value notes. Prices of fruits and vegetables have fallen drastically. A check in Hyderabad’s largest market at Gudimalkapur indicated that prices of potato, onion, tomato, green chilies and brinjals have crashed (not necessarily a good outcome, especially for farmers). Food and beverages have a weight of 45 per cent in the CPI. The Government had set the inflation target in its August 5, 2016 Gazette notification for the period ending March 31, 2021, at 4 per cent with a tolerance of 2 per cent for the MPC. Also, in its last meeting on October 3 and 4, the MPC had stated that its decision to cut the repo rate from 6.5 to 6.25 is “consistent with an accommodative stance of monetary policy in consonance with the objective of achieving consumer price index (CPI) inflation at 5 per cent by Q4 of 2016-17”.
Cut repo
Given the certainty that inflation is likely to trend around 4 per cent in the next two quarters and growth may be a casualty in the near term, a repo rate cut of 0.5 per cent is a booster that is urgently required. (Of course, as monetary policy affects growth with a lag, fiscal stimuli may also be required for growth.) Other indicators also make the case for an immediate cut self-evident. The 10-year G-sec rate which was at 7.68 per cent in January, 2016 is now at 6.55 per cent. State governments which borrowed money at about 8 per cent in March, 2016 can now raise 10 year loans at about 7 per cent. Call money, which was 7.20 per cent in January, is now at 6 per cent and the one year dollar-rupee premium has come down to 4.68 per cent from 6.10 per cent during this period. A repo rate cut now will be just formalising the inevitable and will be ahead of the curve. It will be seen as one of the instantaneous results of de-legalisation and temper the hardships, especially of the micro, small and medium enterprises, by lowering their borrowing costs. Banks which have seen a huge deposit surge will be forced to cut lending rates, even though not all inflows are likely to stick. This will also lead, sooner than later, to still lower housing and car loan rates, which will have a positive impact on housing demand and neutralise at least partially, the realty slowdown anticipated by many. More importantly, such a before-the-due-date cut will denote what de-legalisation means for the common man immediately -- lower borrowing costs. And it will blunt the criticism of the nay-sayers who miss the ground-breaking reform potential of the Prime Minister’s November 8 announcement.

6. Rural India is full of opportunities’

Vijay Mahajan holds the John P Harbin Centennial Chair in Business at the McCombs School of Business, University of Texas at Austin. He is the author of 12 books including Africa Rising, The 86% Solution, and The Arab World Unbound. Businessline recently had a chat with him about his new book — Rise of Rural Consumers in Developing Countries: Harvesting 3 Billion Aspirations (Sage India) — and more. Excerpts:
You’re saying rural incomes are rising across the globe. But some economists have been warning us about disappearing rural incomes. What’s the reality?
My market visits to several countries have showed me that a growing class of emerging rural consumers who are globally connected have seen their incomes rise and have the same aspirations as anyone anywhere. This is what I reported in the book. Several factors are adding to this emerging middle class. Some examples include government interventions, remittances (both from within the country and outside the country), NGOs and social organisations.
Social organisations?
Yes, many such organisations are offering better tools to farmers to, say, manage farming. Entities such as IDE India, Gates Foundation, Tata Trusts are good examples. These organisations also provide farmers and the rural population with sustainable living by teaching them to use natural resources (PRADAN in India with Tasar silk is an example), or train them in various crafts to produce commercial products ( example, Aarong BRAC in Bangladesh). There are also private sector initiatives such as Olam, which works with small-scale farmers to improve supply chain for their crops. All these initiatives help.
You say larger opportunities reside in the up-and-coming rural populations of Asia and Africa. But these are also regions with volatile and unstable regimes. Why would companies take the risk?
Companies do take risks that they can manage. Operations of P&G, Unilever and Coca-Cola in West Asia are examples. At the end, there is the size of the market: there are more than three billion rural consumers in Africa and Asia. That’s almost half of the total population. One-third or one billion of them live in South Asia (India, Pakistan and Bangladesh). Unilever South Asia based in Mumbai have been catering to the needs of these consumers for decades. These companies, what I call, have a rural DNA.
Granted, but there are reports of mass exodus from villages to urban centres.
Rural migration is happening in every developing country I visited. But many of these migrants are still connected with their villages. They send money back home to improve the livelihood of their families and leave cities during the harvest time and attend marriages and religious celebrations in their villages (example: Chinese urban migration during the Chinese new year and Indonesia’s migration called ‘mudik’ or ‘going home’ at the end of Ramadan). The fact remains that in terms of urbanisation, India is where the US was in the 1880s and China is where the US was in the 1920s. So rural population in developing countries is not going south anytime soon.
You observe that religion plays a vital part in political economy. This is interesting especially in the context of countries such as India.
Religious and other cultural/social festivals (such as Chinese and Vietnamese New Year) form the fabric of several developing countries. I just came back from India after celebrating Diwali and Bhai Dhuj in Jammu. I saw that some entrepreneurs have made special sweets for these occasions. Ad budget is the highest in India during Diwali, as I have explained in the book. Similarly, in the US, Christmas season plays a big role in economy. So is in the Philippines.
But India lags some of India’s Asian neighbours in enhancing the rural economy.
There is no secret that the Chinese have a done an incredible job in improving their rural economy and making substantial progress on extreme poverty. Same trend is visible in Vietnam. As a matter of fact, this is happening in almost all the countries I visited including India. To sustain high growth rates, you need an inclusive growth strategy that includes both urban and rural consumers. This is the key message of my book.
How is the advent of new trends such as social media, messaging platforms, online commerce influencing rural consumers?
I have devoted an entire chapter on this question in the book. Technologies such as internet, mobile phones and satellite TV are the game changers. You can see this in almost all the countries I visited. They impact the way people do banking, receive information and entertainment, and education and healthcare. Developing countries are leapfrogging and in some instances are ahead of the developed countries, challenging the notion of digital divide.
Has entrepreneurship become a very urban activity of late? Not many entrepreneurs are coming up from rural areas.
There is a clearly an awareness that we need to focus on rural innovations. Companies understand this. At Unilever, Unilever South Asia is a hub for rural innovations. Working with the IC2 Institute at the University of Texas at Austin and other partners, FICCI in India is catalysing rural innovations and entrepreneurs. But much more needs to be done. Among the developing countries India has the largest rural population. Among the developed world, the US has the largest rural population (9th highest in the world). I have suggested several initiatives that can help here. For example, formation of a global entity called Rural 10 like BRICS. This entity of the ten countries with the largest rural populations should focus on the needs of more than 2.2 billion consumers, almost two thirds of the total rural population of the world. They have common problems such as issues in healthcare, education and infrastructure.
Can you name a few trends that are going to shape Rural India in the immediate future…
Through mobile phones, internet and satellite TV, rural consumers are very well connected and aware. They are aware of what is available for them and their children. Their aspirations are not any different from urban consumers. Rural migrants are also a big source of information and choices for products and services. Urban markets are saturated and competitive.
Rural markets offer an opportunity for expansion and sustainable growth. Companies are developing an inclusive strategy to include both urban and rural consumers.

7. Growth between 7 and 8% likely, says Panagariya

NITI Aayog vice-chairman Arvind Panagariya has said that the Indian economy will grow between 7 per cent and 8 per cent for 2016-17. However, he said that he isn’t certain about hitting the 8 per cent GDP growth milestone over a full financial year by 2018-19. “We are at about seven and a half per cent [now]. So, you know, I have been saying [growth this year would be] between 7 and 8 per cent. I still expect it to remain there. It should remain there,” Mr. Panagariya told The Hindu , while refusing to comment on the impact of demonetisation on the economy in the short or medium term.

8. Getting real on climate

The Hindu
The UN conference on climate change held in Marrakech, with an emphasis on raising the commitment of all countries to reduce greenhouse gas (GHG) emissions, is particularly significant as it provided an opportunity to communicate concerns about the future climate policy of the U.S. It would be untenable for the U.S., with a quarter of all cumulative fossil fuel emissions, to renege on its promise to assist vulnerable and developing nations with climate funding, technology transfer and capacity-building under Donald Trump’s presidency. As the Marrakech Action Proclamation issued at the close of the conference emphasises, the world needs all countries to work together to close the gap between their intended reduction of carbon emissions and what needs to be done to keep the rise of the global average temperature well below 2°C in this century. The Paris Agreement on climate change was forged on the consensus that man-made climate change does have a scientific basis, that the developed countries are responsible for accumulated emissions, and that future action should focus on shifting all nations to a clean energy path. Not much progress was made at Marrakech on raising the $100 billion a year that is intended to help the poorer nations. Political commitment and resource mobilisation will be crucial to meet targets for mitigation of emissions and adaptation. India is in a particularly difficult situation as it has the twin challenges of growing its economy to meet the development aspirations of a large population, and cutting emissions. National GHG levels are small per capita, but when added up they put India in the third place, going by data from the Carbon Dioxide Information Analysis Center in the U.S. As a signatory to the Paris Agreement, which has provisions to monitor emissions and raise targets based on a review, pressure on India to effect big cuts is bound to increase. The UN Framework Convention on Climate Change will hear from the Intergovernmental Panel on Climate Change in 2018 on what impact an additional warming of 1.5°C could have on the planet and what can be done to ensure it is pegged at this level. The pledges made so far are well short of this target, and even if they are all implemented, a minimum rise of 2.9°C is forecast by the UN Environment Programme. India has no historical responsibility for accumulated GHGs, but smaller, more vulnerable countries such as island states and Bangladesh are demanding action to cut emissions. A strategy that involves all State governments will strengthen the case for international funding, and spur domestic action.

9. Hitting the refresh button

One of the most distinguishing features of India’s emergence as a preferred investment destination in recent years has been the strength of its policy and institutional frameworks. Decisions such as e-auctioning of natural resources, a rule-based framework for Indian monetary policy, insolvency and bankruptcy code, the goods and services tax, amongst others, have all aimed at enhancing the credibility of policy and institutional frameworks.
On similar lines, gradual changes in the conduct of fiscal policy, although less spoken about, have been a crucial contributor towards improving India’s growth and investment potential. Restraint on unproductive spending amid plugging of subsidy leakage through comprehensive implementation of the DBT (direct benefits transfer) platform, higher devolution of revenue to States and local self-governments, greater autonomy to States for spending on developmental plans have indeed improved the quality and credibility of fiscal policy of late.
Accounting for a changed order
While these measures are encouraging, going forward it will become increasingly critical to codify fiscal rules so as to make it insulated from populist manoeuvres. In this context, the framework regarding fiscal responsibility and discipline as outlined by the previous version of the Fiscal Responsibility and Budget Management (FRBM) Act needs to get urgently revived and fine-tuned taking into account the ongoing changes in the global and domestic economic and financial order. While there is little doubt that in a developing economy such as India the government needs to spearhead a prominent role in funding growth, an institutional mechanism that imposes rule-based parameters on government’s spending and deficit significantly enhances its credibility. The FRBM Act was first introduced in India in December 2000 to rein in burgeoning government deficits both at the Centre and in the States. Enacted in 2003, the FRBM Act institutionalised fiscal discipline, by seeking to eliminate revenue deficit and to bring down fiscal deficit to a manageable 3 per cent of GDP by FY08 from 5.7 per cent of GDP in FY03. However, during the international financial crisis of 2008, as government spending became critical to revive growth amid sharp decline in private investments, the deadline for attainment of the target was pushed forward and later suspended. However, in the 2016 Budget speech, in a bid to reinforce the commitment to fiscal consolidation, the Hon’ble Finance Minister instituted a committee to review the contours of the FRBM Act in the light of current domestic and global dynamics. With the committee expected to submit its report by the end of the current month, I believe the following issues need to be reflected upon. First, what’s the ‘Point’ in ‘Range’? Amid government’s increased role in reviving growth, debate has emanated on whether it would be appropriate to impart flexibility to the government by adopting a range-based target as opposed to a point-based target for fiscal deficit. In my opinion, a point target that infuses fiscal discipline, limits the room for government manoeuvres and provides an unambiguous signal to the bond markets is superior to a range target. A focused policy communication, complementing the objectives of monetary policy, is likely to result in a ratings upgrade for the Indian sovereign, which will eventually percolate down to lower cost of borrowing for the private sector, which is important for new capital and investment formation. Second, determining the ‘appropriate fiscal deficit target’. Macro underpinning of sustainable fiscal deficit comes from the supply of funds in the economy. The fiscal space for the government is expected to be created after meeting the demand for excess funds from the corporate sector in order to ensure there is adequate crowding-in of private investments. Given that the total supply of funds through household financial savings and sustainable capital flows are estimated at 10-12 per cent of GDP and demand for excess funds from the corporate sector is estimated at 4-6 per cent of GDP, a consolidated fiscal space of around 6 per cent of GDP exists for States and the Centre put together. This implies a 3 per cent headline fiscal deficit target for the Centre and States each. Third, rules that serve as a guiding principle. A binding spending rule along with a medium-term debt range that takes into account the specific institutional setting in each country would help to enhance the policy credibility and facilitate effective monitoring that would ensure stability, fairness and efficiency. Moreover, effective rule-based policy would help the governments adopt a countercyclical approach and limit the scope for creative accounting. Regarding a debt sustainability rule, a ceiling on government debt at 60 per cent of GDP can get adopted over the next three years (67.2 per cent of GDP currently) with indicators of sustainable debt serving as guiding principles, in line with the Maastricht Treaty guidelines. And expenditure rules that focus on enhancing the quality of spending and improve accountability are preferred in many countries. In case of India, a preference for capital spending (in both agriculture and manufacturing) should receive budgetary enunciation. Fourth, an independent constitutional body as a watchdog. The revised FRBM framework can consider setting up an independent reviewer, a Fiscal Council, to oversee the adoption of rule-based fiscal policy and also recommend future course of public policy advocacy. A well-designed fiscal council with strict operational independence will boost fiscal accountability and transparency and will further add to the sovereign’s credence and rating potential.
Twin-deficit vulnerability
In conclusion, the adoption of version 2.0 of the FRBM framework will enhance the efficacy of India’s fiscal policy and significantly reduce the twin-deficit vulnerability. At a juncture where most developed economies are struggling with their government’s balance sheet to support the economy, a rule-based system with room for independent advisory and oversight can transform India’s fiscal architecture and create enablers for germination of green field investment appetite.

10. Sharia banking: RBI proposes ‘Islamic window’ in banks

The Hindu
The Reserve Bank of India (RBI) has proposed opening of “Islamic window” in conventional banks for “gradual” introduction of Sharia-compliant or interest-free banking in the country.
Both the Centre and RBI are exploring the possibility of introduction of Islamic banking for long to ensure financial inclusion of those sections of the society that remain excluded due to religious reasons. “In our considered opinion, given the complexities of Islamic finance and various regulatory and supervisory challenges involved in the matter and also due to the fact that Indian banks have no experience in this field, Islamic banking may be introduced in India in a gradual manner. “Initially, a few simple products which are similar to conventional banking products may be considered for introduction through Islamic window of the conventional banks after necessary notification by the government. “Introduction of full-fledged Islamic banking with profit-loss sharing complex products may be considered at a later stage on the basis of experience gained in course of time,” the RBI has told Finance Ministry in a letter, a copy of which was received in response to an RTI query filed by PTI.
Islamic or Sharia banking is a finance system based on the principles of not charging interest, which is prohibited under Islam. “It is also our understanding that interest-free banking for financial inclusion will require a proper process of the product being certified as Sharia compliant will be required both on the asset and liability side and the funds received under the interest-free banking could not be mingled with other funds and therefore, this banking will have to be conducted under a separate window,” it said. The central bank’s proposal is based on examination of legal, technical and regulatory issues regarding feasibility of introducing Islamic banking in India on the basis of recommendation of the Inter Departmental Group (IDG). RBI has also prepared a technical analysis report which has been sent to the Finance Ministry. “In case it is decided to introduce Islamic banking product in India as suggested, RBI would require to undertake further work to put in place the operational and regulatory framework to facilitate introduction of such products by banks in India,” the letter said. The work areas include operationalisation of Sharia boards and committees, feasibility of extending deposit insurance to Islamic banking deposits, identifying the financial risk and suggesting appropriate accounting framework for these products, the central bank had said in the letter written in December last year. The RBI had in February this year also sent a copy of the IDG to the Finance Ministry. It said the RBI also needs to work on formulating suitability and appropriate criteria for Islamic products in addition to what would be determined under Sharia. In its annual report for 2015-16, the central bank had said that some sections of Indian society have remained financially excluded for religious reasons that preclude them from using banking products with an element of interest. “Towards mainstreaming these excluded sections, it is proposed to explore the modalities of introducing interest- free banking products in the country in consultation with the government,” it had said. The plan for Sharia bank was opposed by certain political and non-political groups. In late 2008, a committee on Financial Sector Reforms, headed by former RBI Governor Raghuram Rajan, had opined the need for a closer look at the issue of interest-free banking in the country. The committee had said, “Certain faiths prohibit the use of financial instruments that pay interest. The non- availability of interest-free banking products results in some Indians, including those in the economically disadvantaged strata of society, not being able to access banking products and services due to reasons of faith.”
“This non-availability also denies the country access to substantial sources of savings from other countries in the region,” the panel had said.

11. Mounting NPAs nix dividends in 16 of 22 public sector banks

The Hindu
Saddled with mounting bad loans, as many as 16 public sector banks, including PNB, BoB and Canara Bank, skipped paying dividends in 2015-16, leading to a 67 per cent decline in government receipts to Rs.1,444.6 crore, a bulk of which came from State Bank of India.
Only six state-owned banks declared dividends, though at a lower rate for the fiscal ended March 2016. Under the existing guidelines, profit-making banks have to pay a minimum dividend of 20 per cent of their equity or 20 per cent of their post-tax profit, whichever is higher. The government, which is the majority shareholder in all the public sector banks, witnessed a 67 per cent decline in dividend receipts from PSU banks at Rs.1,444.6 crore. According to Finance Ministry data, the highest dividend was paid by SBI to the government at Rs.1,214.6 crore during 2015-16, 22 per cent lower than in the previous fiscal.As regards Union Bank of India, the dividend payout was one-third of the previous fiscal at Rs.85 crore. For Oriental Bank of Commerce, it was one-fifth compared to the previous financial year at Rs.12.4 crore despite an increase in government holdings due to capital infusion. Banks which skipped dividend payments included Allahabad Bank, Bank of Baroda, Bank of India, Canara Bank, Central Bank of India, Corporation Bank, Punjab National Bank, Dena Bank and Syndicate Bank.Balance sheet of most of the banks have been under stress due to the clean-up exercise targeted at non-performing assets. Due to heavy provisioning for bad loans, many banks posted losses in the last quarter of the previous fiscal. Gross NPAs of the PSU banks had surged from 5.43 per cent (Rs 2.67 lakh crore) in 2014-15 to 9.32 per cent (Rs 4.76 lakh crore) in 2015-16 of the total advances. Banks have been given time till March 2017 to clean up their balance sheet.

12. Stalemate over GST jurisdiction continues

The momentum for the implementation of the goods and services tax (GST) slowed on Sunday after the centre and the states failed to reach a political consensus over sharing of administrative powers in the new indirect tax regime. In a meeting with Union finance minister Arun Jaitley, state finance ministers also raised the issue of the impact of demonetisation on states’ revenue, growth and the common man. Sharing administrative powers for control over both goods and service taxpayers has remained a contentious issue. While states want exclusive control over small traders (those with an annual revenue of less than Rs1.5 crore), the centre is unwilling to cede complete control over such traders as it would leave a very small pool of taxpayers with the centre. In the past few months, various formulations have been discussed and discarded by the GST Council. This forced the finance minister to look for a political consensus, albeit unsuccessfully, on Sunday. “The meeting has remained incomplete. Discussions will continue on 25 November,” Jaitley said after the meeting. One option that’s being considered is to divide the tax base horizontally, wherein taxpayers below a threshold of Rs1.5 crore are administered by the states and those above this threshold are divided between the centre and the states. But this is not favoured by the centre. The other option is to divide the entire tax base vertically, wherein the taxpayers are divided between the centre and the states in a fixed proportion. Kerala finance minister Thomas Isaac said the meeting ended in a stalemate and a consensus was unlikely till the centre maintained a rigid stance. “The centre wants a fair share (of taxpayers to administer) but states consider it an unfair share. Kerala is unwilling to compromise. We have virtually given up our taxation rights. This is simply a question of administration. We do not want small traders with a revenue threshold of less than Rs1.5 crore to be under the centre’s control. Uttar Pradesh, West Bengal and Tamil Nadu also have similar views,” he said. “Some states prefer a vertical split from top to bottom where two-third of the traders are controlled by the states and the remaining by the centre. Centre would also like to have a vertical split of all dealers. They are taking a rigid stance, but I hope good sense will prevail at the centre,” he added. The estimated number of total active indirect taxpayers (including those paying value-added tax (VAT), service tax and excise) is around 10 million, of which around 400,000 are common to the centre and the states. This leaves around 9.6 million taxpayers, of which around 6.6 million are VAT assessees, 2.6 million are active service tax assessees and some 400,000 assessees are registered under excise. But a majority of the 9.6 million tax assessees are below the annual revenue threshold of Rs1.5 crore. Only around 1.4 million assessees have an annual revenue of more than Rs1.5 crore. If this is divided equally between the centre and states, this will leave only around 700,000 for the centre to control. “They are not fighting for sharing of work but for sharing of powers of coercion,” said a person familiar with the development. The GST Council will now meet on 25 November to finalize the draft GST laws—the central GST (CGST) law, the integrated GST (IGST) law and the state GST (SGST) laws. Officials from the centre and the states will meet a day earlier to finalize the laws. The government hopes to table the CGST and the IGST laws in the winter session of Parliament to ensure a 1 April 2017 GST roll-out. On the issue of demonetisation, many states have informally said they have seen a significant decline in revenues. “If 86% of your money disappears, there is a problem for people. There is a collateral impact on investment sentiments,” said Isaac.

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