Gold Monetisation Scheme (GMS), Gold Sovereign Bond Scheme and the Gold Coin and Bullion Scheme

PM to launch Gold Related Schemes on 5th November, 2015; First ever National Gold Coin minted in India with National Emblem of Ashok Chakra engraved to be released among others on the occasion

The Prime Minister Shri Narendra Modi will launch the three Gold related Schemes i.e. Gold Monetisation Scheme (GMS), Gold Sovereign Bond Scheme and the Gold Coin and Bullion Scheme on Thursday, 5^thNovember, 2015 in the national capital.

The salient features of each of the aforesaid scheme are as follows:

Gold Monetisation Scheme (GMS), 2015

The GMS will replace the existing Gold Deposit Scheme, 1999. However, the deposits outstanding under the Gold Deposit Scheme will be allowed to run till maturity unless the depositors prematurely withdraw them.

 Resident Indians (Individuals, HUF, Trusts including Mutual Funds/Exchange Traded Funds registered under SEBI (Mutual Fund) Regulations and Companies) can make deposits under the scheme. The minimum deposit at any one time shall be raw gold (bars, coins, jewellery excluding stones and other metals) equivalent to 30 grams of gold. There is no maximum limit for deposit under the scheme.

 The gold will be accepted at the Collection and Purity Testing Centres (CPTC) certified by Bureau of Indian Standards (BIS). The deposit certificates will be issued by banks in equivalent  of 995 fineness of gold. The designated banks will accept gold deposits under the Short Term (1-3 years) Bank Deposit (STBD) as well as Medium (5-7 years) and Long (12-15 years) Term Government Deposit Schemes (MLTGD). While the former will be accepted by banks on their own account, the latter will be on behalf of the Government of India. There will be provision for premature withdrawal subject to a minimum lock-in period and penalty to be determined by individual banks for the STBD. The interest rate  in the STBD will be determined by the banks. The interest rate in the medium term bonds has been fixed at 2.25% and for the long term bonds is 2.5% for the bonds issued in 2015-16.

Interest on deposits under the scheme will start accruing from the date of conversion of gold deposited into tradable gold bars after refinement or 30 days after the receipt of gold at the CPTC or the bank’s designated branch, as the case may be and whichever is earlier. During the period from the date of receipt of gold by the CPTC or the designated branch, as the case may be, to the date on which interest starts accruing in the deposit, the gold accepted by the CPTC or the designated branch of the bank shall be treated as an item in safe custody held by the designated bank.

The Short Term Bank Deposits will attract applicable Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR). However, the stock of gold held by the banks will count towards the general SLR requirement. The opening of Gold Deposit Accounts will be subject to the same rules with regard to customer identification (KYC) as are applicable to any other deposit account.

The designated banks may sell or lend the gold accepted under STBD to MMTC for minting India Gold Coins (IGC) and to jewellers, or sell it to other designated banks participating in GMS. The gold deposited under MLTGD will be auctioned by MMTC or any other agency authorised by the Central Government and the sale proceeds credited to the Central Government’s account with the Reserve Bank of India. The entities participating in the auction may include the Reserve Bank, MMTC, banks and any other entities notified by the Central Government. Banks may utilise the gold purchased in the auction for purposes indicated above. Designated banks should put in place a suitable risk management mechanism, including appropriate limits, to manage the risk arising from gold price movements in respect of their net exposure to gold. For this purpose, they have been allowed to access the international exchanges, London Bullion Market Association or make use of over-the-counter contracts to hedge exposures to bullion prices subject to the guidelines issued by the Reserve Bank.

Complaints against designated banks regarding any discrepancy in issuance of receipts and deposit certificates, redemption of deposits, payment of interest will be handled first by the bank’s grievance redress process and then by the Reserve Bank’s Banking Ombudsman.

It may be recalled that the Government of India announced the Gold Monetisation Scheme vide its Office Memorandum F.No.20/6/2015-FT dated September 15, 2015. The objective of the Scheme is to mobilise gold held by households and institutions of the country and facilitate its use for productive purposes, and in the long run, to reduce country’s reliance on the import of gold..

 The list of CPTCs and Refiners are certified by the Bureau of Indian Standards. Indian Banks Association has finalized the necessary documentation including the tripartite agreements between the designated banks, CPTCs and the Refiners under the Scheme. Banks have put in place the requisite systems and procedures to implement the scheme and will continue to improve them.

Sovereign Gold Bond Scheme

The Government of India has decided to issue Sovereign Gold Bonds. The Bonds will be issued in multiple tranches subject to the overall borrowing limits of GOI. Applications for the bond under the first tranche will be accepted from November 05, 2015 to November 20, 2015. The Bonds will be issued on November 26, 2015. The Bonds will be sold through banks and designated post offices as notified. It may be recalled that the Union Finance Minister had announced in Union Budget 2015-16 about developing a financial asset, Sovereign Gold Bond, as an alternative to purchasing metal gold.

Sovereign Gold Bond will be issued by Reserve Bank India on behalf of the Government of India. The Bonds will be restricted for sale to resident Indian entities including individuals, HUFs, trusts, Universities, charitable institutions. The Bonds will be denominated in multiples of gram(s) of gold with a basic unit of 1 gram. The tenor of the Bond will be for a period of 8 years with exit option from 5th year to be exercised on the interest payment dates. Minimum permissible investment will be 2 units (i.e. 2 grams of gold).The maximum amount subscribed by an entity will not be more than 500 grams per person per fiscal year (April-March). A self-declaration to this effect will be obtained. A mechanism will be put in place for internal verification of the self declarations.

In case of joint holding, the investment limit of 500 grams will be applied to the first applicant only. Each tranche will be kept open for a period to be notified. The issuance date will also be specified in the notification. Price of Bond will be fixed in Indian Rupees on the basis of the previous week’s (Monday–Friday) simple average of closing price of gold of 999 purity published by the India Bullion and Jewellers Association Ltd. (IBJA).Payment for the Bonds will be through electronic funds transfer/cash payment/ cheque/ demand draft. The investors will be issued a Stock/Holding Certificate.

 The Bonds are eligible for conversion into demat form. The redemption price will be in Indian Rupees based on previous week’s (Monday-Friday) simple average of closing price of gold of 999 purity published by IBJA. Bonds will be sold through banks and designated Post Offices, as notified, either directly or through agents. The investors will get interest at a  fixed rate of 2.75 per cent per annum payable semi-annually on the initial value of investment for the bonds issued in 2015-16.

Bonds can be used as collateral for loans. The loan-to-value (LTV) ratio is to be set equal to ordinary gold loan mandated by the Reserve Bank from time to time. Know-your-customer (KYC) norms will be the same as that for purchase of physical gold. KYC documents such as Voter ID, Aadhaar Card/PAN or TAN /Passport will be required. The interest on Gold Bonds shall be taxable as per the provision of Income Tax Act, 1961 (43 of 1961) and the capital gains tax shall also remain same as in the case of physical gold. Department of Revenue has agreed to ensure tax neutrality between the purchase of physical gold and investment in the gold bonds. This will require amendments in the existing provisions of the Income Tax act , which will be considered in the 2016-17 Budget. Bonds will be tradable on exchanges/NDS-OM from a date to be notified by RBI..The Bonds will be eligible for Statutory Liquidity Ratio (SLR). Commission for distribution shall be paid at the rate of 1% of the subscription amount.

Gold Coin/Bullion Scheme

The Indian gold coin & bullion is a part of the Gold Monetisation Programme. The coin will be the first  ever national gold coin minted in India and will have the National Emblem of Ashok Chakra engraved  on one side and Mahatma Gandhi on the other side . Initially the coins will be available in denominations of 5 and 10 grams. A 20 gram bullion will also be available. Initially, 15,000 coins of 5gm, 20,000 coins of 10 gm and 3,750 of  bullions of 20 gm  will be made available through MMTC outlets. The Indian Gold coin & bullion is unique in many aspects and will carry advanced anti-counterfeit features and tamper proof packaging.

The Indian Cold coin & bullion will be of 24 karat purity and 999 fineness. All coins & bullion will be hallmarked as per the BIS standards. These coins will be distributed initially through designated & recognised MMTC outlets and later through specified bank branches and post offices.

Summary of the Recommendations of the Bankruptcy Law Reforms Committee (BLRC)

Summary of the Recommendations of the Bankruptcy Law Reforms Committee (BLRC)

Following is the Summary of the Recommendations of the Bankruptcy Law Reforms Committee (BLRC)

The Report of the BLRC is in two parts:

i.                    Rationale and Design/Recommendations;

ii.                  A comprehensive draft Insolvency and Bankruptcy Bill covering all entities.

 The draft Bill has consolidated the existing laws relating to insolvency of companies, limited liability entities (including limited liability partnerships and other entities with limited liability), unlimited liability partnerships and individuals which are presently scattered in a number of legislations, into a single legislation. The committee has observed that the enactment of the proposed Bill will provide greater clarity in the law and facilitate the application of consistent and coherent provisions to different stakeholders affected by business failure or inability to pay debt and will address the challenges being faced at present for swift and effective bankruptcy resolution. The Bill seeks to improve the handling of conflicts between creditors and debtors, avoid destruction of value, distinguish malfeasance vis-a-vis business failure and clearly allocate losses in macroeconomic downturns.

 The major recommendations of the Report are as follows:

i.                    Insolvency Regulator: The Bill proposes to establish an Insolvency Regulator to exercise regulatory oversight over insolvency professionals, insolvency professional agencies and informational utilities.

ii.                  Insolvency Adjudicating Authority: The Adjudicating Authority will have the jurisdiction to hear and dispose of cases by or against the debtor.

a.       The Debt Recovery Tribunal (“DRT”) shall be the Adjudicating Authority with jurisdiction over individuals and unlimited liability partnership firms. Appeals from the order of DRT shall lie to the Debt Recovery Appellate Tribunal (“DRAT”).

b.  The National Company Law Tribunal (“NCLT”) shall be the Adjudicating Authority with jurisdiction over companies, limited liability entities. Appeals from the order of NCLT shall lie to the National Company Law Appellate Tribunal (“NCLAT”).

 c.  NCLAT shall be the appellate authority to hear appeals arising out of the orders       passed by the Regulator in respect of insolvency professionals or information utilities.

iii.                Insolvency Professionals: The draft Bill proposes to regulate insolvency professionals and insolvency professional agencies. Under Regulator’s oversight, these agencies will develop professional standards, codes of ethics and exercise a disciplinary role over errant members leading to the development of a competitive industry for insolvency professionals.

iv.                 Insolvency Information Utilities: The draft Bill proposes for information utilities which would collect, collate, authenticate and disseminate financial information from listed companies and financial and operational creditors of companies. An individual insolvency database is also proposed to be set up with the goal of providing information on insolvency status of individuals.

v.                   Bankruptcy and Insolvency Processes for Companies and Limited Liability Entities: The draft Bill proposes to revamp the revival/re-organisation regime applicable to financially distressed companies and limited liability entities; and the insolvency related liquidation regime applicable to companies and limited liability entities.

a. The draft Bill lays down a clear, coherent and speedy process for early identification of financial distress and revival of the companies and limited liability entities if the underlying business is found to be viable.

 b. The draft Bill prescribes a swift process and timeline of 180 days for dealing with applications for insolvency resolution. This can be extended for 90 days by the Adjudicating Authority only in exceptional cases. During insolvency resolution period (of 180/270 days), the management of the debtor is placed in the hands of an interim resolution professional/resolution professional.

 c. An insolvency resolution plan prepared by the resolution professional has to be approved by a majority of 75% of voting share of the financial creditors. Once the plan is approved, it would require sanction of the Adjudicating Authority. If an insolvency resolution plan is rejected, the Adjudicating Authority will make an order for the liquidation.

 d. The draft Bill also provides for a fast track insolvency resolution process which may be applicable to certain categories of entities. In such a case, the insolvency resolution process has to be completed within a period of 90 days from the trigger date. However, on request from the resolution professional based on the resolution passed by the committee of creditors, a one-time extension of 45 days can be granted by the Adjudicating Authority. The order of priorities [waterfall] in which the proceeds from the realisation of the assets of the entity are to be distributed to its creditors is also provided for.

vi.              Bankruptcy and Insolvency Processes for Individuals and Unlimited Liability Partnerships: The draft Bill also proposes an insolvency regime for individuals and unlimited liability partnerships also. As a precursor to a bankruptcy process, the draft Bill envisages two distinct processes under this Part, namely, Fresh Start and Insolvency Resolution.

a.               In the Fresh Start process, indigent individuals with income and assets lesser than specified thresholds (annual gross income does not exceed Rs. 60,000 and aggregate value of assets does not exceed Rs.20,000) shall be eligible to apply for a discharge from their “qualifying debts” (i.e. debts which are liquidated, unsecured and not excluded debts and up to Rs.35,000). The resolution professional will investigate and prepare a final list of all qualifying debts within 180 days from the date of application. On the expiry of this period, the Adjudicating Authority will pass an order on discharging of the debtor from the qualifying debts and accord an opportunity to the debtor to start afresh, financially.

b.             In the Insolvency Resolution Process, the creditors and the debtor will engage in negotiations to arrive at an agreeable repayment plan for composition of the debts and affairs of the debtor, supervised by a resolution professional.

c.                   The bankruptcy of an individual can be initiated only after the failure of the resolution process. The bankruptcy trustee is responsible for administration of the estate of the bankrupt and for distribution of the proceeds on the basis of the priority.

vii.   Transition Provision: The draft Bill lays down a transition provision during which the Central Government shall exercise all the powers of the Regulator till the time the Regulator is established. This transition provision will enable quick starting of the process on the ground without waiting for the proposed institutional structure to develop.

      viii.             Transfer of proceedings: Any proceeding pending before the AAIFR or the BIFR under the SICA, 1985, immediately before the commencement of this law shall stand abated. However, a company in respect of which such proceeding stands abated may make a reference to Adjudicating Authority within 180 days from the commencement of this law

President to launch ‘Imprint India’ tomorrow

President to launch ‘Imprint India’ tomorrow

‘IMPRINT India’, a Pan-IIT and IISc joint initiative to develop a roadmap for research to solve major engineering and technology challenges in ten technology domains relevant to India will be launched by the President of India, Shri Pranab Mukherjee  tomorrow (November 5, 2015) at Rashtrapati Bhavan.  The launch will be done at a function being held as part of the Visitor’s Conference. 

Prime Minister Narendra Modi will release the IMPRINT India brochure and hand over the first copy to the President of India.  Union Minister of Human Resource Development Smt. Smriti Zubin Irani will also address the gathering. 

The idea of launching ‘IMPRINT India’ originated during the conference of Chairmen, Board of Governors and Directors of Indian Institutes of Technology convened by the President at Rashtrapati Bhavan on August 22, 2014. It is based on the Prime Minister’s suggestion that research done by institutions of national importance must be linked with immediate requirements of the society at large. 

The objectives of this initiative is to  (1) identify areas of immediate relevance to society requiring innovation, (2) direct scientific research into identified areas, (3) ensure higher funding support for research into these areas and (4) measure outcomes of the research effort with reference to impact on the standard of living in the rural/urban areas.

            IMPRINT India will focus on ten themes with each to be coordinated by one IIT/IISc, namely:-

(a) Health Care - IIT Kharagpur,

(b) Computer Science and ICT – IIT Kharagpur,

(c) Advance Materials – IIT Kanpur,

(d) Water Resources and River systems – IIT Kanpur,

(e) Sustainable Urban Design – IIT Roorkee,

(f) Defence – IIT Madras,

(g) Manufacturing – IIT Madras,

(h) Nano-technology Hardware- IIT Bombay,

(i) Environmental Science and Climate Change – IISc, Bangalore and

(j) Energy Security – IIT Bombay. 

The ten coordinating institutions have done extensive consultations and arrived at specific themes in each area of research that has immediate social relevance.  IMPRINT India is being launched during the Visitor’s Conference so that wide discussion can be held amongst the academic community leading to further scientific collaboration between various institutions in these areas.  The top research community from acrossCentral Universities, IITs, NITs, IISc, Bangalore, IISERs, IIITs, NIPERs, NIFT, IIEST, Shibpur, RGIPT, Rae Bareli, RGNIYD, Sreperumbudur, School of Planing and Architecture Bhopal and New Delhi and senior government officials  will attend the function when ‘IMPRINT India’ will be launched as well as the Visitor’s Conference where follow up discussions will be held.  

The fraught politics of the Trans-Pacific Partnership

Last month, 12 countries on both sides of the Pacific finalized the historic Trans-Pacific Partnership (TPP) trade agreement. The scope of the TPP is vast. If ratified and implemented, it will have a monumental impact on trade and capital flows along the Pacific Rim. Indeed, it will contribute to the ongoing transformation of the international order. Unfortunately, whether this will happen remains uncertain.

The economics of trade and finance that form the TPP’s foundations are rather simple, and have been known since the British political economist David Ricardo described them in the 19th century. By enabling countries to make the most of their comparative advantages, the liberalization of trade and investment provides net economic benefits, although it may hurt particular groups that previously benefited from tariff protections.

But the politics of trade liberalization—that is, the way in which countries proceed to accept free trade—is much more complex, largely because of those particular groups it hurts. For them, the overall economic benefits of trade liberalization matter little, if their own narrow interests are being undercut. Even if these groups are relatively small, the discipline and unity with which they fight trade liberalization can amplify their political influence considerably—especially if a powerful political figure takes up their cause.

That is what is now happening in the United States. Former secretary of state Hillary Clinton undoubtedly understands the economics of the TPP, which she once called the “gold standard” in trade agreements. But now that she is on the presidential campaign trail, she has changed her tune.

The reason is apparent: she has judged that she cannot afford to lose the support of American trade unions such as the United Automobile Workers, whose members fear a reduction in tariffs on car and trucks.

This shift may make sense politically, but it is abysmal economics. In reality, the TPP is a great bargain for the US. The concessions it contains on manufactured products like automobiles are much smaller than those on, say, agricultural products, which will involve profound sacrifices from other TPP countries, such as Japan. After all, existing tariff levels on manufactured goods are already much lower than those on agriculture or dairy products.

In short, with the TPP, the US is catching a big fish with small bait. But the increased trade and investment flows brought about by the TPP’s ratification and implementation will benefit even the countries that must make larger sacrifices.

Japan, for example, will find that the TPP enhances “Abenomics”, the three-pronged economic revitalization strategy introduced by Prime Minister Shinzo Abe in 2012. The third component, or “arrow”, of Abenomics—structural reforms—aims to restore growth by raising productivity. But increasing efficiency in a wide variety of sectors, as Japan must do, can be a long, difficult and piecemeal process, as it involves the upgrading of virtually every technology and process.

By connecting Japan’s industries more closely with those of other countries, the TPP can accelerate this process considerably. Moreover, it can spur faster administrative reform. Simply put, the TPP will amount to a powerful tailwind for Abenomics.

It should be noted that liberalization does involve some economic trade-offs, as protection can, in some areas, serve an important purpose. As the economist Jagdish Bhagwati points out, maintaining increased protections for, say, intellectual property (IP) may encourage research and innovation. At the same time, however, excessive IP protections can deter the proliferation of existing knowledge and the development of high-tech products. In the case of pharmaceuticals, for example, this trade-off can be difficult to navigate. Nonetheless, Bhagwati maintains, when it comes to overall trade and capital movements, freer is better.

Given all of this, one hopes that opposition from political figures like Clinton amounts to naught—an entirely plausible outcome, in Clinton’s case, because the TPP should be enacted before the presidential election in November 2016. This would, to some extent, be in line with the TPP negotiation process, in which the political challenges associated with trade liberalization have been handled remarkably well. It seems that involving so many sectors in so many countries actually made it easier to overcome resistance, as it diffused the opposition and prevented any single specific interest from getting the upper hand.

Of course, that does not mean that the negotiations were easy. On the contrary, trade representatives had to display impressive endurance and patience—for more than five years, for some countries. To enable progress, confidentiality was vital (despite US negotiators’ claims that the discussions were wholly transparent).

Failure to ratify the TPP in all 12 countries would be a major disappointment, not just because of the tremendous amount of effort that has gone into it, but also—and more important—because of the vast economic benefits it would bring to all countries involved.

In Japan, as long as most of the ruling Liberal Democratic Party stands firm in supporting the TPP, it should be ratified. But the situation in the US Congress is more dubious. One hopes that America’s leaders do not miss a golden opportunity to give US businesses—and thus the US economy—a significant boost.

The path to sustainable, long-term growth

India will have to increase the productivity of its economy while ensuring that the benefits and opportunities created by growth are shared by all

When Prime Minister Narendra Modi was elected with a mandate to revive the Indian economy, he brought upon himself and his government a burden of expectation not only to fellow Indians but also to the international community. The world’s largest democracy, as many expected, could be doing more to live up to its enormous potential, and was missing out on an historical opportunity to emerge as a major global economic power player.

One year down the road, the global outlook for India today is optimistic. There has also been considerable improvement in the state of the country’s macroeconomic environment. The nation jumped 16 spots in World Economic Forum’s Competitiveness ranking and also moved up to 130th spot in World Bank’s ease of doing business rankings. It emerged as the top destination for foreign direct investment (FDI) in the first half of 2015, and saw a 32% increase in its brand value in the last year. As IMF chief Christine Lagarde put it at the G-20 finance ministers’ meeting earlier this year, India is among the few bright spots in the global economy.

However, bright spots can fade away, and India is at considerable risk of that happening. Despite India’s relatively strong record in terms of economic growth, there has been a parallel rise in inequality and a growth in urban-rural divide. India continues to have the largest number of poor in the world—approximately 300 million are in extreme poverty—and nearly half of the poor are concentrated in five states with large rural population segments. India’s middle class remains small and getting a job is no guarantee of escaping poverty. Many of the fundamentals underpinning India’s competitiveness remain weak and the needs of many of its citizens remain unmet in terms of access to basic services like heath, sanitation, electricity, and education. Social exclusion has left vast shares of the population behind and resulted in untapped human and economic potential.

To ensure long-term, sustainable growth, India will have to increase the productivity of its economy while ensuring that the benefits and opportunities created by growth are shared by all. While many of the recent policy actions from the government have been towards this direction, a further and faster push is required on five key dimensions:

1. Reform the tax code and expand social protection

India’s social insurance system and its public health system remain limited in coverage and fragmented in character. Out-of-pocket expenses are high, limiting affordability. Insurance coverage (old-age pensions, death and disability insurance, maternity benefits) remain limited. Increasing its narrow tax base can give India the required fiscal space to make these much needed social expenditures, and give its citizens the safety net needed to take risks and participate fully in the economy and society.

2. Improve access to basic infrastructure

A quarter of Indians still do not have access to electricity and almost a third of the urban population lives in slums. Sixty-five per cent of the population does not have access to improved sanitation and access remains unevenly distributed. This is also the case for clean drinking water. In a recent report, the World Bank estimates that India might need up to $1.7 trillion to close its gap in infrastructure development. At the same time, private infrastructure financing totalled only 2.4% of GDP per year on average from 2009-13. Closing the basic infrastructure gap requires a more aggressive push on private investments and public-private partnerships.

3. Make education more equitable and geared towards employment

Why competition will be good for the bureaucracy The appointment process at the higher levels should be more open

Why competition will be good for the bureaucracy

The appointment process at the higher levels should be more open

Speaking in the House of Commons in 1922, British prime minister Lloyd George called the civil service in India a “steel frame”, and argued that the structure would collapse without it. A lot has changed with time after India inherited this steel frame from its colonial ruler. In 2012, Political & Economic Risk Consultancy Ltd, a Hong Kong-based consultancy, found that the bureaucracy in India was the worst among 12 Asian countries surveyed. Clearly, the bureaucratic system in the country has not evolved according to the changing nature of administrative challenges and a growing economy where the activity is shifting towards the private sector.

The latest evidence, as reported in this newspaper and elsewhere, is the war of words between members of civil services, as the officers of the elite Indian Administrative Service (IAS) are lobbying hard against parity with other All India Services in compensation, promotions and other benefits. Both sides are making representations before the Seventh Pay Commission, which is expected to submit its report later this month. In effect, the debate is about maintaining the supremacy of one service over all others and reducing competition in appointments at higher levels.

This again is an indication of the need for structural reforms in the Indian bureaucratic system, especially at the top level. Both administration and policymaking are getting increasingly complex and require specialized skill sets. In fact, a good administrator may not always prove to be a good policymaker or vice-versa.

To be sure, the need for change is well recognized and about 50 committees and commissions have looked into administrative and related issues since independence. For instance, the government in 1966 constituted the First Administrative Reforms Commission (FARC) which was followed by a number of other committees. The United Progressive Alliance government in 2005 constituted the Second Administrative Reforms Commission (SARC). Both the commissions recommended changes in the appointment process at the higher levels of the civil service to make it more open. The crux of the matter is that there should be more competition for appointments at the higher levels as policymaking needs technical knowledge and domain expertise. The FARC had recommended that the entry in middle and senior positions in the Central Secretariat be allowed from all services on the basis of specialization, experience and knowledge.

The SARC went on to argue in favour of lateral entry from the private sector in senior positions, as that would bring in corporate culture and domain expertise which may not be available with civil servants in key areas. However, such recommendations normally don’t cut much ice with the incumbents. Be it in the financial markets, the real economy or the government, incumbents don’t like competition. Unsurprisingly, the SARC in its consultation found that most officers’ associations were not in favour of lateral entry in government jobs from the private sector, though some were in favour of being allowed to join the private sector for a specified period. As a result, higher positions in the government have remained largely with officers belonging to one service. In fact, even appointment to head regulatory agencies also normally goes in the favour of a serving or a retired bureaucrat.

This is contrary to the practice in developed countries such as the United States and the United Kingdom, where appointments at senior levels are made from a wider talent pool, which includes eligible civil servants and aspirants from the private sector with relevant expertise. Outside talent from the private sector is more likely to be target-oriented, which will improve the performance of the government. Also, more competition will encourage career civil servants to develop expertise in areas of their choice.

In its report, the SARC noted, “...the framework, systems and methods of functioning of the civil services based on the Whitehall model of the mid-nineteenth century remains largely unchanged”. It is high time that necessary changes which have been recommended and discussed over and over again are implemented.

Clearly, a 21st century economy needs to look beyond a 19th century model of bureaucracy and governance.

Reform subsidies and redirect expenditure

Wasteful subsidies that do not reach the poor should be reduced. The savings would be better spent and might actually reach the poor, says the author in the second of two articles

Simple proposals to reform subsidies and redirect expenditure can yield high returns. And the savings realised are substantial. On a conservative basis, the proposals outlined here will yield annual savings of Rs 20,000 crore (2015-16), Rs 60,000 crore (2016-17) and Rs 1 lakh crore (2017-18).

LPG attracts a total subsidy of Rs 22,000 crore. By no stretch of imagination is this for the poor. Effectively, it is an annual grant of Rs 2,000-2,500 for every non-poor (read rich) household. And, it would have been Rs 7,000-8,000, if oil prices had not plummeted. The cost per cylinder (14.2 kg) is Rs 585, whereas the price is Rs 418 per cylinder. The price was Rs 345 per cylinder in 2010. Had prices been increased at 10 per cent per annum (the inflation rate since 2010) the price would have been Rs 550 per cylinder today. In January 2014, the price was Rs 414 per cylinder; it hasn't changed in two years. An upfront increase is clearly in order.

The proposal: Immediately hike the price to Rs 460 per cylinder (a 10 per cent increase); the price should be increased by Rs 5 per cylinder per month starting April 1, 2016. This will almost entirely eliminate the subsidy over two fiscal years, that is, by March 31, 2018. Decontrol LPG prices with effect from April 1, 2018. This proposal will yield annual savings of Rs 5,500 crore, Rs 13,350 crore and Rs 21,500 crore in the fiscal years up to 2017-18.

On food, the subsidy amounts to Rs 1.25 lakh crore. It has doubled since 2010-11 because of the growing divergence between procurement costs [minimum support price (MSP)] and central issue prices (CIP), an open-ended procurement, higher procurement-linked costs and an expanded coverage.

The CIP for below-poverty-line (BPL) households per quintal are Rs 415 for wheat and Rs 565 for rice. The estimated economic costs per quintal of the Food Corporation of India (FCI) are Rs 3,000 for rice and Rs 2,200 for wheat. Since 2002 there has been no change in the CIPs. During 2002- 15, the MSP of wheat increased from Rs 620 to Rs 1,400 (125 per cent) and for paddy from Rs 530 to Rs 1,410 (166 per cent). Today, the subsidy is 81 per cent of the economic cost. The subsidy in 2002 was 45 per cent (wheat) and 48 per cent (rice). For above-poverty-line (APL) households, the subsidy has tripled since 2002 and risen from 34 per cent to 63 per cent of the economic cost.

Since 2002, there has been a substantial reduction in the incidence of poverty. If 45 per cent subsidy was deemed sufficient in 2002, what is the justification to raise it to over 80 per cent? Second, the poor do not live on staples alone. The annual inflation on other items of food has been in the range of 7-12 per cent. Surveys show that even the poorest of the poor spend only 35 per cent of their food expenditure on cereals. If so, why should the CIPs remain frozen? The National Food Security Act (NFSA) expands coverage to two-thirds of the population. APL households are also covered, which means prices are to be reduced. Entitlements for the abject poor (Antyodaya) at very low prices are justified. But, not for all BPL households. And, certainly not for APL households. The Shanta Kumar Committee (hereafter, the Committee) report has correctly argued that the NFSA coverage needs urgent and immediate review. In the present form, it is unjustifiable, fiscally unsustainable and administratively impractical.

The total procurement-linked costs have also risen. The FCI is carrying larger stocks than necessary; current levels are far in excess of buffer stock requirements. This entails higher interest, storage, transport and handling costs as well as storage losses. The Committee has brought out that the procurement system has worked primarily to the benefit of 'big' farmers in the north-western states (and a few other states). A meagre six per cent of all farmers sell their produce to the FCI. It is, therefore, a myth that the FCI procurement benefits all (or many) farmers. The Committee has given sensible suggestions on how to reduce these costs. However, at heart, the issue is how to cap total procurement.

The proposal: Increase CIP for wheat and rice to Rs 7.25 and Rs 9 per kg respectively. This amounts to an increase of four per cent per annum over 2002-15. Announce an increase in the CIP by 25 paisa per kg every month starting April 1, 2016. For Antyodaya households, prices as under the Act with an increase of 20 paisa per kg per month starting April 1, 2016. For APL households, increase CIP to Rs 9 per kg for wheat and Rs 10.50 per kg for rice immediately to be followed by increases of 50 paisa per kg every month starting April 1, 2016. (Taking into account MSP increase etc, the subsidy for BPL households at the end of 2018 would be 55 per cent.)

Other measures that ought to be taken include no open-ended procurement; cap procurement to meet buffer stock requirements and Public Distribution System (PDS) needs (at most 50 million tonnes); shift procurement to eastern regions; an implicit ceiling on procurement from north-western states (and Andhra Pradesh, Chhattisgarh and Madhya Pradesh). Surplus states should move to decentralised procurement to meet their own PDS requirements and other suggestions of the Committee should be acted upon within three months.

The savings on subsidies are better spent on reaching the poor with a focus on employment, skills (learning), housing and safety nets and improving rural infrastructure. Accordingly, announce increased outlays (in per cent) (total outlays to be maintained in 2016-17): (i) MGNREGA by Rs 15,000 crore (45 per cent); (ii) National Rural Livelihood Mission by Rs 2,500 crore (100 per cent); (iii) Indira Awas Yojana by Rs 9,500 crore (100 per cent); (iv) National Social Assistance Programme by Rs 4,500 crore (50 per cent); (v) Scholarship for SC, ST, OBCs and minorities by Rs 3,000 crore (63 per cent); (vi) Pradhan Mantri Gram Sadak Yojana by Rs 10,000 crore (100 per cent); (vii) Pradhan Mantri Krishi Sinchai Yojana by Rs 5,000 crore (100 per cent); and (viii) Rashtriya Krishi Vikas Yojana by Rs 4,500 crore (100 per cent).

Wasteful subsidies that do not reach the poor can be reduced. The savings can be better spent and can actually reach the poor. Yes, a political vocabulary has to be devised to deliver this message. Mr Prime Minister, who better than you to do that? It is time to get going.