Introduction of the #AtalPensionYojana

The Government of India is extremely concerned about the old age income security of the working poor and is focused on encouraging and enabling them to join the National Pension System (NPS).  To address the longevity risks among the workers in unorganised sector and to encourage the workers in unorganised sector to voluntarily save for their retirement, who constitute 88% of the total labour force of 47.29 crore as per the 66th Round of NSSO Survey of 2011-12, but do not have any formal pension provision, the Government had started the Swavalamban Scheme in 2010-11. However, coverage under Swavalamban Scheme is inadequate mainly due to lack of clarity of pension benefits at the age after 60. 2.       The Finance Minister has, therefore, announced a new initiative called Atal Pension Yojana (APY) in his Budget Speech for 2015-16. The APY will be focussed on all citizens in the unorganised sector, who join the National Pension System (NPS) administered by the Pension Fund Regulatory and Development Authority (PFRDA) and who are not members of any statutory social security scheme. Under the APY, the subscribers would receive the fixed pension of    Rs. 1000 per month, Rs. 2000 per month, Rs. 3000 per month, Rs. 4000 per month, Rs. 5000 per month, at the age of 60 years, depending on their contributions, which itself would vary on the age of joining the APY. The minimum age of joining APY is 18 years and maximum age is 40 years. Therefore, minimum period of contribution by the subscriber under APY would be 20 years or more. The benefit of fixed pension would be guaranteed by the Government. The Central Government would also co-contribute 50% of the subscriber’s contribution or Rs. 1000 per annum, whichever is lower, to each eligible subscriber account, for a period of 5 years, i.e., from 2015-16 to      2019-20, who join the NPS before 31st December, 2015 and who are not income tax payers. The APY would be launched from 1st June, 2015. The existing subscribers of Swavalamban Scheme would be automatically migrated to APY, unless they opt out. 3.       A copy of the Note on APY is enclosed.   Note on Atal Pension Yojana Benefit of APY:   Fixed pension for the subscribers ranging between Rs. 1000 to Rs. 5000, if he joins and contributes between the age of 18 years and 40 years. The contribution levels would vary and would be low if subscriber joins early and increase if he joins late. Eligibility for APY:       Atal Pension Yojana (APY) is open to all bank account holders who are not members of any statutory social security scheme.  Age of joining and contribution period:   The minimum age of joining APY is 18 years and maximum age is 40 years. Therefore, minimum period of contribution by the subscriber under APY would be 20 years or more. Focus of APY:     Mainly targeted at unorganised sector workers. Enrolment and Subscriber Payment:       All bank account holders under the eligible category may join APY with auto-debit facility to accounts, leading to reduction in contribution collection charges. Enrolment agencies:    All Points of Presence (Service Providers) and Aggregators under Swavalamban Scheme would enrol subscribers through architecture of National Pension System.   Operational Framework of APY:   It is Government of India Scheme, which is administered by the Pension Fund Regulatory and Development Authority. The Institutional Architecture of NPS would be utilised to enrol subscribers under APY. Funding of APY: Government would provide (i) fixed pension guarantee for the subscribers; (ii) would co-contribute 50% of the subscriber contribution or Rs. 1000 per annum, whichever is lower, to eligible subscribers; and (iii) would also reimburse the promotional and development activities including incentive to the contribution collection agencies to encourage people to join the APY. Age of Joining, Contribution Levels, Fixed Monthly Pension and Return of Corpus to the nominee of subscribers The Table of contribution levels, fixed monthly pension to subscribers and his spouse and return of corpus to nominees of subscribers and the contribution period is given below. For example, to get a fixed monthly pension between   Rs. 1,000 per month and Rs. 5,000 per month, the subscriber has to contribute on monthly basis between Rs. 42 and Rs. 210, if he joins at the age of 18 years. For the same fixed pension levels, the contribution would range between        Rs. 291 and Rs. 1,454, if the subscriber joins at the age of 40 years.

Micro Units Development and Refinance Agency (Mudra) Bank

According to the NSSO survey of 2013, there are 5.77 crore small business units, mostly individual proprietorships, which run small manufacturing, trading or services activities. Most of these ‘own account enterprises’ are owned by people belonging to Scheduled Caste, Scheduled Tribe or Other Backward Classes. Only 4% of such units get institutional finance. Providing access to institutional finance to such micro/small business units would turn them into strong instrument of GDP growth and also employment. Micro Finance is an economic development tool whose objective is to assist the poor to work their way out of poverty. It covers a range of services which include, in addition to the provision of credit, many other services such as savings, insurance, money transfers, counseling etc. The players in the Micro Finance sector can be qualified as falling into 3 main groups:- the SHG-Bank linkage model started by NABARD, the Non Banking Finance companies and the others including Trusts, Societies etc. The government proposes to set up a Micro Units Development and Refinance Agency (MUDRA) Bank through a statutory enactment. This Bank would be responsible for regulating and refinancing all Micro-finance Institutions (MFI) which are in the business of lending to micro/small business entities engaged in manufacturing, trading and services activities. The Bank would partner with state level/regional level co-ordinators to provide finance to Last Mile Financer of small/micro business enterprises. The MUDRA Bank would primarily be responsible for – 1)    Laying down policy guidelines for micro/small enterprise financing business 2)    Registration of MFI entities 3)    Regulation of MFI entities 4)    Accreditation /rating of MFI entities 5)    Laying down responsible financing practices to ward off indebtedness and ensure proper client protection principles and methods of recovery 6)    Development of standardised set of covenants governing last mile lending to micro/small enterprises 7)    Promoting right technology solutions for the last mile 8)    Formulating and running  a Credit Guarantee scheme for providing guarantees to the loans which are being extended to micro enterprises 9)    Creating  a good architecture of Last Mile Credit Delivery to micro businesses under the scheme of Pradhan Mantri Mudra Yojana A sum of Rs 20,000 crores would be allocated to the  MUDRA Bank from the money available from shortfalls of Priority Sector Lending for creating a Refinance Fund to provide refinance to the Last Mile Financers. Another Rs 3,000 crore would be provided to the MUDRA Bank from the budget to create a Credit Guarantee corpus for guaranteeing loans being provided to the micro enterprises.

Changes proposed in priority sector lending (psl)-regarding

Since the vision of Priority Sector Lending (PSL) first took shape, the structure of the Indian economy, the contribution by various sectors to GDP and the demographic profile has changed significantly. These emerging realities have also shaped the perception of national priorities. Total credit extended by Banks in Priority sector Lending is Rs.2154356.29 Crore. There is a need to increase employment, create basic infrastructure and improve competitiveness of the economy, thus creating more jobs. It is, therefore, time to re-orient the Priority Sector Lending Guidelines towards today’s growth and inclusion agenda.             The following changes are being proposed in the Priority Sector lending:- ·       To enhance credit to Small and marginal farmers, a separate sub limit of upto 8% (for 1st year - 7% and 2nd year - 8%) is being introduced for the first time. ·       Loans for agri-processing & agri-infrastructure would be included in PSL without any limit on the size of loans. ·       Loans to Medium Enterprises being included in PSL. ·       For the first time a separate sub limit of 7.5% of ANBC is being created for the Micro Enterprises. ·       Loans upto Rs.5 crore for Social infrastructure, like schools and health care facilities, drinking water facilities, sanitation facilities etc. are being included under PSL, for towns of less than 1 lac population. ·       Renewable Energy sector is being added to the PSL, upto Rs.10 crore loans. ·       Introduction of Priority Sector Lending Certificate (PSLCs), which will provide a market-driven incentive for efficiency, will enable banks to sell their surplus lending and thus earning a premium for their efficiency/geographical spread. ·       Progress to be monitored quarterly and not at the end of the year.

Decoding the Budget's '#carbontax'

Finance Minister Arun Jaitley in Budget 2015 delivered a first. India has accepted that it has a de facto carbon tax — on petroleum products and on dirty coal. In fact, arguably the only big green initiative of this Budget is the increase of the cess on coal — from Rs 100 a tonne to Rs 200 a tonne.

The question to ask is if this carbon tax – imposed on the carbon content of fuel – is doing what it should. Is it reducing the greenhouse gas emissions that are responsible for climate change? In other words, is there a design behind the carbon tax to ensure that we move beyond polluting fossil fuels?


The Budget takes its lesson from the Economic Survey, which states that high prices of diesel and petrol are important price signals to limit consumption and, hence, carbon dioxide(CO2) emissions and other externalities like congestion costs and air pollution. In 2014, taking advantage of the global fall in fuel prices, subsidy or under-recovery has gone and government has increased excise duty on both petrol and diesel. So even though fuel is cheaper, the tax component is higher. The Economic Survey estimates that based on emission factors currently, India imposes an implicit carbon tax of $140 a tonne of CO2 on petrol and $64 on diesel.

The Economic Survey also estimates that the cess on coal of Rs 100 a tonne of coal is equivalent to a carbon tax of $1 a tonne of CO2. It argues that this cess should be increased, so that it can lead to CO2 reduction and also better reflect the health cost of emissions from coal-fired power plants. It calculates that a threefold increase from the current cess would lead to an annual CO2 emission reduction of 129 million tonnes — this is equal to seven per cent of India’s current emissions. A fivefold increase in the cess would equalise the domestic coal price with the international price, and would contribute to annual CO2 emission reduction of 214 million tonnes, which is 11 per cent of India’s annual emissions.

In Budget 2015, the finance minister has opted to take the slow road and has doubled the cess on coal to “balance the need to tax pollution and the price of power” in his words. He also mentions that India’s de facto carbon tax on most petroleum products compares with international norms. But is this tax an adequate signal to bring about change?

Let’s take petrol and diesel. The fact is that the government has increased tax on fuel because it is convenient and opportune. It will be important to maintain this “carbon tax” even when prices of petrol and diesel increase in the international market. But that said, it is also a fact that the prices of these fuels are lower today and, so as far as the consumer is concerned, the signal to change consumption is weak and inadequate.

Therefore, not only does the government need to tax this polluting fuel, it also needs to use the funds and much more to provide infrastructure to wean us away from driving cars or using roads to transport goods.

But Budget 2015 is doing the reverse. It says that it will set aside Rs 4 a litre of the excise duty on petrol and diesel for a dedicated road cess. This tunnel vision, viewing infrastructure for transport only as “roads” – in cities and on highways – is regressive. Instead, what is needed is to reinvent mobility so that it moves goods and people, and not vehicles. This would require massive investment in augmenting public transport in cities; building infrastructure for walking, cycle, bus and metro, and not for cars.

The fact is that Budget 2015 has recognised that this excise duty is a carbon tax, which is putting a price on each tonne of CO2 emitted. This tax must be used to help shift to less carbon-intensive ways of production.

We also know that health costs of air pollution are deadly across the country. Budget 2015 does little to address this concern. It does not say that the excise duty collected on dirty fuel will be used to upgrade refinery technology, so that we can get clean fuel and breathe easy. It is also a fact that even though the government is no longer subsidising diesel, its price remains lower than petrol, mainly because of differential levels of taxation. So even though there has been a decline in the number of diesel private cars being sold, it is not enough to make a dent in deadly pollution levels. Therefore, what is needed is to tax diesel vehicles to equalise the price differential.

This is also the case with the coal cess. The government now aims to use this cess to clean the Ganga or build toilets. All this is important, but takes away from the objective of moving us away from using polluting fuels or cleaning up emissions from thermal power plants to reduce health costs. The coal cess has to be used to provide the biggest climate-change game changer for India — to provide affordable and clean power to the millions who even if connected to the grid do not have energy to light homes or cook food.

What is needed is to walk the talk. Not just talk the talk.

A welfare-oriented Budget

The latest Budget of the Government of India is heavily welfare-oriented. The various schemes of social security, especially for the unorganised sector, and the enhancement of the limits for tax concessions will certainly be beneficial to the common man. There may be a disappointment that there are no changes in the exemption limits for individual income tax or in the tax brackets, though they may be justified by the high level of inflation that has prevailed in the recent years and the bracket creep that has taken place due to increases in nominal, and not real, incomes. It is in this context that the proposal to reduce corporate tax rates from 30 per cent, existing in the last 10 years, to 25 per cent over the next four years, starting April 2016, needs to be taken note of. Finance Minister Arun Jaitley said the process of reduction has to be necessarily accompanied by rationalisation and removal of various tax exemptions and incentives for corporate taxpayers, which incidentally account for a large number of tax disputes. This is a step towards the ideal flat tax rate system, where there is only one rate for all incomes without any provisions for tax rebates, income deductions or exemptions.

Jaitley said that exemptions to individual taxpayers would still continue since they facilitate savings, which get transferred to investment and economic growth. There is enough evidence to show that the level of savings is influenced by income and not yield or return on investment. Once the level of savings is determined, its disposition in various avenues of investment only is influenced by the relative returns. Did not the individual save before there was any institutional arrangement for mobilising savings by paying an interest? People used to keep their savings under mattresses! The theory of savings in India is influenced by Western ideas. Unlike there, we still have a family system where the head desires to leave wealth for posterity.


Jaitley could have very well envisaged a flat rate system for individual taxation also. An official committee, which went into this issue a few years ago, gave it a cursory examination and did not review the experience in a number of other countries while rejecting the proposal. I have shown in my past articles on the subject how the flat tax is also progressive in as much as the average tax rate goes up with a rise in incomes. The current emphasis in progressive taxation is on marginal tax rates, which gets diluted because of various devices such as exemptions. A flat tax already prevails in about 20 countries, including Russia, where it is reported to have resulted in a significant growth in tax revenues. It will make the tax structure simple and encourage people to file returns. Tax assessment and refunds will be quicker. Fiscal incentives by way of deductions and exemptions distort the flow of investments. I suggest that the finance minister commission a paper on the subject for a wide discussion, so that it could be considered for introduction in the Budget for 2016-17.

Jaitley said the move on the reduction in corporate rates will lead to a higher level of investment, higher growth and more jobs. A higher level of investment will depend on higher level of demand for goods and services. There is a slack in demand due to the high level of prices to which not much attention is paid. Instead, the emphasis is on inflation rate. When the prices of common goods such as shoes are high, a pair of the cheapest variety selling at Rs 1,500, it is no consolation to be told that the price rise over the last year is only 5 per cent. What is needed for corporate growth are incentives for expenditure on research and development and introduction of modern machinery through, say, accelerated depreciation provisions.

To give an example, the textile industry is crying for modernisation that would reduce the cost of production. There is no encouragement for the replacement of the old machinery by new because of the high cost of clothing that is seen in the subdued sales even during the festival season. I remember reading a survey report a few years ago that said that farmers, when they find higher incomes due to a good monsoon, spend the additional incomes first on the repayment of the debt owed to the private agencies and then on clothes. It may be true today also.

#BankingReforms

Performance of Public Sector Banks has remained sub-optimal so far.  The Government is taking various steps to improve the situation both on governance side and otherwise.  The focus of these reforms is to improve the quality of deliberations in bank boards, leading to better asset quality and further resulting in better market valuations. What has been done (i)   Separation of the post of Chairman and Managing Director. (ii)  Enabling provision for the appointment as MD & CEO in five major banks, so that wider choice is available.  Both Public Sector and Private Sector bankers can apply.  Higher salary can be given in appropriate cases. (iii)  Revamping of present selection system which inter-alia includes structured three separate interviews, allotment of banks on merit-cum-preference basis. (iv)  Blue print for road map for reforms on the basis of deliberations carried out in GyanSangam, a two days top level retreat organised by the department. (v)   Allocation of capital purely on the basis of efficiency parameters so that banks start focusing on these. (vi)  Clear instructions from the department regarding no interference whatsoever in any matter whether related to HR issues or credit decisions or even otherwise. What Next   (i)      In order to improve the Governance of Public Sector Banks, the Government intends to set up an autonomous Bank Board Bureau with professionals as its members.  It would be responsible for search and selection of heads of PSBs, as also for Non-Official Directors on the Boards of Banks.  This would be an interim step towards moving in the direction of having a Bank Investment Company. (ii)      Guidelines relating to appointment of non-official directors is being revisited to ensure that bank boards get people with relevant expertise.  Anybody eligible would be able to apply through a website which will soon be available in the public domain. (iii)     Government’s role in relation to public sector banks is that of promoter.  As a promoter, the banks have been entering into anMoU for achieving certain objectives known as Statement of Intent.  The whole system of Statement of Intent is being revised with provision for higher cash incentives. (iv)  Government wants to encourage Bank Boards to restructure their business strategy and also suggest way forward for their consolidation and merger with other banks if it is win-win for both.

budget proposals 2015-16 for Petroleum & Natural Gas sector

Various proposals have been made in the Budget 2015-16 which would lead to greater stability, clarity and continuity in the economy and the petroleum and natural gas sector. Subsidies will continue so that there is no adverse impact on the general public. As stated by the Finance Minister, the Government is committed to the process of rationalizing subsidies and cut leakages, not cut subsidies. Adequate funds have been provided for LPG and kerosene subsidies. Finance Minister appealed to the well off strata, including those concerned for the welfare of the poor, to voluntarily give up subsidy on LPG. In context of rationalization and targeting of LPG subsidy, it was highlighted that under DBTL Rs.6335 crore have been transferred to over 11.5 crore beneficiaries. There is revision in specific rates of excise duty on petrol and diesel only to the extent of subsuming the quantum of education cess levied, keeping the total incidence of excise duty unchanged. Further, the effective rates of additional excise duty levied on petrol and diesel is proposed to be increased from Rs.2 per litre to Rs.6 per litre to fund investment in roads and other infrastructure to the extent of Rs.40,000 crore. In order to ensure energy security in the country, strategic crude oil underground storage reserves of 5.33 MMT are being set up by Indian Strategic Petroleum Reserves Limited (ISPRL) at Visakhapatnam, Padur and Mangalore. An amount of Rs.2,400 crore has been provided under the Plan head in 2014-15 (RE) for filling crude oil in the caverns. An amount of Rs.72589 crore is proposed to be allocated in 2015-16 as Plan capital expenditure by oil and gas Central public sector enterprises from the internal and extra budgetary resources (IEBR) of the companies for projects for exploration and production, refining & marketing, petro chemicals and engineering. It has been proposed to reduce the rate of corporate income tax from 30% at present to 25% in the next 4 years. It is expected that this would lead to higher investment and growth in the sector. In order to boost investment in infrastructure, a National Investment and Infrastructure Fund is being established. The PPP mode of infrastructure development would be revitalized. It is expected that this would invite investment for the petroleum and natural gas sector.