RBI’s Viral Acharya calls for reprivatization of nationalized banks

RBI deputy governor Viral Acharya says reprivatization of nationalized banks will reduce the amount govt has to inject as part of bank recapitalization

ome nationalized banks need to be re-privatized, to reduce the amount of capital that the government needs to infuse in them and help maintain fiscal discipline, said Viral Acharya, deputy governor of the Reserve Bank of India (RBI) on Friday.

“This (reprivatization) will reduce the overall amount that the government needs to inject as bank capital and help preserve its hard-earned fiscal discipline, along with stable inflation outlook and the diverse nature of our growth engine,” Acharya said at an event in Mumbai.
The gross bad loans of government banks stood at Rs6.15 trillion as of December 2016.
“Clearly more recapitalization with government funds is essential. However, as a majority shareholder of public sector banks, the government runs the risk of ending up paying for it all. The expectation of government dole-outs has been set by the past practice of throwing more good money after bad,” he said.
To curb this practice, Acharya spelt out five options for resolution of the stress on public sector banks’ balance sheets:
One, healthier public sector banks could raise private capital and thus reduce the government’s burden of recapitalizing banks.
Two, some banks with assets or loan portfolios that are in good shape can sell them on the market. Such asset sales can generate some of the needed capital.
Three, a consolidation exercise that leads to fewer but healthier banks.
Four, under-capitalized banks could be subjected to corrective action, such as under the revised Prompt Corrective Action (PCA) guidelines recently released by the RBI. Such action would entail no further growth in deposit base and lending for the worst-capitalized banks. This would ensure a gradual “run-off” of such banks, and encourage deposit migration away from the weakest public sector banks to healthier public sector banks and private sector banks.
Under the PCA framework, banks will be assessed on three parameters, namely capital ratios, asset quality and profitability. Failure to meet any of these norms could invite RBI action, which could include restrictions on branch expansion, change in management and reduction in assets.
Five, the measures listed above would improve the overall health of the banking sector, creating an opportune time for the government to divest some of its ownership in the restructured banks.
The government is infusing Rs70,000 crore in state-owned banks over four years starting from financial year 2015-16 under the Indradhanush programme. Of this, Rs50,000 crore is the allocation for the first two years, with the balance split between financial years 2017-18 and 2018-19.
On Wednesday, RBI governor Urjit Patel had also hinted at a consolidation in public sector banks.
“The weaker banks are losing market share (and) that is a good thing. The stronger banks are gaining market share...those who need to shrink are shrinking,” Patel said.
The finance ministry recently laid down specific targets for 10 public sector banks for receiving future capital infusion under the Indradhanush programme.
“It (re-privatization) would be a viable way for the government to realize value. The regulator can make suggestions but it is up to Parliament to decide, being a policy matter,”

SAMPADA, for 2016-20,Rs 6,000 crore scheme for food processing sector

Govt clears Rs 6,000 crore scheme for food processing sector

The CCEA has given its approval for re-structuring the schemes of the ministry of food processing industries under a new scheme-, SAMPADA, for 2016-20

During 2015-16, the food processing sector contributed 9.1 and 8.6% of gross value added in manufacturing and agriculture sector, respectively.

The government on Wednesday approved a new Rs6,000 crore central scheme ‘SAMPADA’ for the 2016-20 period with an aim to boost processing of marine and agriculture produce.

A decision in this regard was taken at the meeting of the Cabinet Committee on Economic Affairs (CCEA), headed by Prime Minister Narendra Modi in New Delhi.
“The CCEA has given its approval for re-structuring the schemes of the ministry of food processing industries under new central sector scheme—SAMPADA (scheme for agro-marine processing and development of agro-processing clusters) for the period 2016-20,” an official release said.
The new scheme has an allocation of Rs6,000 crore. It will help in generating an investment of Rs31,400 crore and facilitate handling of 334 lakh tonnes of agro-produce valuing Rs1,04,125 crore. This is expected to benefit 20 lakh farmers and create about 5,30,500 direct and indirect employment.
“The objective of SAMPADA is to supplement agriculture, modernise processing and decrease agri-waste,” finance minister Arun Jaitley said after the meeting.
SAMPADA is an umbrella scheme incorporating ongoing schemes like mega food parks, integrated cold chain and value addition infrastructure, food safety and quality assurance infrastructure, and others. It also includes new schemes like infrastructure for agro-processing clusters, creation of backward and forward linkages, creation/expansion of food processing and preservation capacities.
According to the statement, the SAMPADA will give a thrust to the food processing sector and help in providing better prices to farmers and achieve the government’s target to double farmers income by 2022. During 2015-16, the food processing sector contributed 9.1 and 8.6% of gross value added (GVA) in manufacturing and agriculture sector, respectively.

 

Understanding NITI Aayog’s action agenda NITI Aayog’s Three Year Action Agenda forms part of a larger vision document which spans a seven-year strategy and a 15-year vision till FY32

Understanding NITI Aayog’s action agenda

NITI Aayog’s Three Year Action Agenda forms part of a larger vision document which spans a seven-year strategy and a 15-year vision till FY32

On 23 April, NITI Aayog released its Three Year Action Agenda document, a comprehensive framework for proposed policy changes to be implemented in the short term in India. The Agenda is wide-ranging: It covers the different sectors of the economy—agriculture, industry and manufacturing—discusses the policies necessary for urban and rural transformation and a range of growth-enabling ingredients such as transport, digital connectivity and entrepreneurship.

As such, the Action Agenda forms part of a larger Vision Document which spans a seven-year strategy and a 15-year vision till fiscal year 2031-32. Let us recall the context. As of the end of the last fiscal year, the 12th Five-Year Plan breathed its last gasp, and as of 1 April, India is no longer officially a planned economy, with the old distinction between “Plan” and “non-Plan” expenditure, which lent the erstwhile Planning Commission its fearsome power, now relegated to the dustbin of history.

No longer do state chief ministers come to the imposing Yojana Bhawan on Parliament Street in Delhi cap in hand, but as equal partners in the development project in a new federalist conception. In short, India is now on the road to becoming a full-fledged market economy, with the legacy of planning behind us. But all governments need to look forward, if not explicitly to “plan” in the sense of the rubbished Stalinist five-year plans, but to set priorities and develop instrumentalities to achieve those priorities. That is the rationale for NITI Aayog’s approach.

A framework document of this scope could run the risk of saying something about everything, while offering nothing specific or actionable about anything. Contrary to the carping of some critics, this document pleasantly surprises. In just over 200 pages, it manages to inform, reason, and offer a distilled sense of priorities for policy reform.

The agenda describes well the fundamental dilemma concerning economic transformation of India: Roughly 50% of India’s workforce is employed in agriculture, which contributes only 15% of output. On the one hand, that suggests that workers should be moved away from this relatively low-productivity activity. On the other, it also requires that productivity in agriculture itself be improved to increase yields and benefit those workers who remain in the sector.

Equally, the service sector and manufacturing jobs that await workers exiting the agricultural sector are not always high-productivity jobs. Firms with less than 20 workers employ 72% of the manufacturing workforce and produce merely 12% of the manufacturing output. And nearly 40% of the services output is produced by merely 2% of the service sector workers, employed in the largest services firms.

These facts in themselves point to the urgent need for productivity-enhancing reforms—in agriculture, manufacturing as well as services. How can productivity be enhanced?

The Agenda offers a number of compelling proposals ranging from the use of high-yield seeds to improved irrigation techniques to the removal of the infamous tariff inversion problem (where the high level of trade barriers on intermediate inputs relative to final goods disincentivizes domestic production). In laying out these proposals, it also underscores the critical need to enhance the scale of production in each of the sectors: Landholdings in India are typically too small, the average manufacturing firm is small and under-productive, as are firms in the services sector.

On the issue of scale, a few proposals are especially noteworthy. To deal with small and fragmented landholdings, the document proposes the use of a modern land-leasing law that balances and protects the rights of the tenant and landowners as a potential solution.

For manufacturing, the document proposes the development of a few Coastal Economic Zones (CEZs) operating under a liberal economic environment (for instance, without the restrictive labour laws that bedevil the rest of the economy) and with an abundance of land—much as in China, where large firms, operating in its special economic zones, sometimes each employ hundreds of thousands of workers.

The document’s chapters on transport and physical connectivity, as also on digital connectivity, offer a detailed picture of the existing infrastructure framework, with many specific proposals on improving efficiency and closing gaps in coverage.

The government’s desire to leverage technology to improve efficacy, while laudable, requires a strong digital network and an ability to provide reliable end-to-end e-services. There is considerable unevenness across the country in access to the digital network and in the ability to benefit from such services. The Agenda highlights priorities in this area and offers its thoughts on how these gaps might be bridged.

The analysis and proposals provided in the Three Year Action Agenda range from the actionable to the aspirational. We shall, in the fullness of time, see how many of its proposals are taken up and implemented. Be that as it may, we believe that its primary contribution will be in serving as a base of knowledge and analysis to support any future discussions on policy reform; it should be welcomed.

Cabinet has approved the National Steel Policy, which seeks to outline a roadmap to increase the country’s annual steel production to 300 million tonnes by 2025.

Cabinet clears National Steel Policy that favours Indian steelmakers

Under the new National Steel Policy, priority will be given to Indian steelmakers in government tenders for infrastructure projects, says finance minister Arun Jaitley

Cabinet has approved the National Steel Policy, which seeks to outline a roadmap to increase the country’s annual steel production to 300 million tonnes by 2025.  

The cabinet cleared wide-ranging economic measures on Wednesday, including a national steel policy that favours domestic manufacturers in government projects.

“All government tenders will give preference to domestically manufactured iron and steel products. There will be a condition in it (tender) so that the surplus capacity is consumed,” said finance minister Arun Jaitley.
Indian steel makers who import raw materials or intermediate products can claim the benefits of the domestic procurement provision if they add a minimum of 15% value to the product.
The policy has a waiver for specific kinds of steel not manufactured in the country, or where domestic makers can’t meet the quality standards required by a project.
“This is a supportive mechanism to the domestic steel producers. This will also go a long way to address the growth appetite the government is envisaging. It will further boost demand,” said Anjani Agrawal, global steel leader at audit and consulting firm EY.
The National Steel Policy 2017 aims to make India self-sufficient in steel production. It projects crude steel capacity of 300 million tonnes (mt), production of 255mt and per capita consumption of 158kg of finished steel by 2030-31, as against the current consumption of 61kg. The policy also envisages adequate local manufacturing to meet the demand for high-grade automotive steel, electrical steel, special steels and alloys for strategic applications by the same year. It also sees an increase in domestic availability of washed coking coal so as to reduce import dependence on coking coal from about 85% to around 65% by 2030-31.
“The 300 million tonne (capacity by 2030-31) is an ambitious target; we should be careful in calibrating the capacity additions to real long-term domestic demand of steel rather than hoping to rely on export markets,” EY’s Agrawal added.
Among other key decisions, the cabinet approved modifications in the recommendations of the 7th Central Pay Commission (CPC) relating to the pension of pre-2016 pensioners and family pensioners based on suggestions made by a committee chaired by the secretary (pensions).
The modified formulation will entail an additional benefit to the pensioners and an additional expenditure of about Rs5,031 crore for 2016-17 over and above the expenditure already incurred in revision of pensions as per the second formulation. It will benefit over 5.5 million individuals.
The cabinet also approved the retention of percentage-based regime of disability pension implemented after the 6th CPC report, which the 7th CPC had recommended be replaced by a slab-based system.
The issue of disability pension was referred to the National Anomaly Committee by the ministry of defence on account of a representation received from the Defence Forces to retain the older system. The representation argued that the new system would reduce disability pension.
The cabinet also approved international status for the Vijayawada airport and the disinvestment of properties of the India Tourism Development Corporation Ltd (ITDC)

Why India should tax agricultural income

Why India should tax agricultural income

The political establishment must move beyond a reflexive rejection of the very concept of agricultural tax

In 1925, the Indian taxation enquiry committee noted, “There is no historical or theoretical justification for the continued exemption from the income tax of income derived from agriculture. There are, however, administrative and political objections to the removal of the exemption at the present time.” Almost a century later, both parts of that observation still hold true.

NITI Aayog member Bibek Debroy’s suggestion last week that agricultural income above a certain threshold should be taxed is a case in point. The political reaction was swift and predictable, from both the government and the opposition. But Debroy’s stand—backed by chief economic adviser Arvind Subramanian—is no heterodoxy. Six states currently have agricultural tax legislation on the books—Tamil Nadu, Kerala, Assam, Bihar, Odisha and West Bengal—even if implementation varies substantially, from taxes not being levied at all to being levied only upon income from plantations. A number of other states such as Uttar Pradesh and Rajasthan have flip-flopped on the issue over the decades, introducing and then rolling back agricultural tax.

The economic and governance necessity of such a tax has always been apparent. Yoginder K. Alagh’s 1961 analysis of agricultural tax yields, Case For An Agricultural Income Tax, in The Economic Weekly—now The Economic And Political Weekly—is illuminating, showing a substantial rise in revenue over the previous decade, vital for a young nation state. Concurrently, the Planning Commission’s sample study of cooperative farms showed the onset of tax avoidance as mechanized farms with hired labour took advantage of the exemptions provided to cooperative farms. That evasion has grown over the decades into an administrative swamp. In assessment year 2014-15, for instance, nine of the top 10 claimants for tax exemption of agricultural income were corporations; the 10th was a state government department. And an RTI (right to information) query by Vijay Sharma, former income-tax chief commissioner, turned up massive irregularities in agricultural income in 2011-12 and 2012-13.

This goes beyond foregone revenue. As the 2014 Tax Administration Reform Commission report points out, “Agricultural income of non-agriculturists is being increasingly used as a conduit to avoid tax and for laundering funds, resulting in leakage to the tune of crores in revenue annually.” Nor can this government or its predecessors hide behind the fig leaf of honest—if unwise—populism. According to the National Sample Survey’s 70th round, over 86% of agricultural households have land holdings of less than 2 hectares. Low-income farmers—the constituency state legislatures are ostensibly protecting—would thus fall outside the ambit of any sensible tax regime. The reality of political opposition is more sordid: pressure brought to bear by the rural elite that can deliver votes and funds and would fall under the tax net.

Little wonder there is a robust history of policy reform attempts. The 1972 Raj committee on taxation of agricultural wealth and income report is perhaps the most comprehensive. The Vijay Kelkar committee in 2002 had also addressed the issue, noting that states should be persuaded to pass a resolution authorizing the Centre to pass a tax on agricultural income that would then be assigned to the respective states. The reform attempts stretch as far back as 1947—when the report of the expert committee on financial provisions to the Constituent Assembly suggested consulting with the states to address the issue swiftly—and are as recent as Prime Minister Narendra Modi’s conference with tax administrators in June last year when the latter brought up the issue of taxing agricultural income.

Given the extent of the informality that still exists in the agricultural sector, implementation of an agricultural tax would admittedly not be easy. In a 2004 World Bank paper, Taxing Agriculture In A Developing Country: A Possible Approach, Indira Rajaraman has analysed data from 70 developing countries to show how the twin problems of payments in cash or kind and a lack of standard account-keeping throw up barriers. But there is, demonstrably, a wealth of work done in this area to draw upon.

For instance, Rajaraman herself suggests a crop-specific levy on land rather than on self-declared output, assessed and implemented at the panchayat level for accuracy and flexibility—with the added incentive of tax yields being ploughed back into agricultural sector infrastructure.

However, to engage with such policy debates, the political establishment must first move beyond a reflexive rejection of the very concept of agricultural tax. Given the optics created by decades of grandstanding, this will perhaps be as difficult as actually implementing a tax. But with the Modi government’s push for a less-cash economy and the proscription of cash transactions of over Rs2 lakh, both making money laundering via the agricultural sector more difficult, this is as good a time as any.

It would be a pity if the logic of the colonial administration continued to dictate tax administration in India nine decades later.

Should the political class rethink the idea of taxing agricultural income?

Cabinet clears ordinance to tackle Rs9.64 trillion bad loans at India’s banks

Cabinet has approved promulgation of an ordinance to amend the Banking Regulation Act for resolution of the bad loan crisis facing banks

The cabinet on Wednesday decided to amend the Banking Regulation Act to put in place a scheme to resolve stressed assets in the banking system totalling about Rs9.64 trillion as of end- December and enable this capital to be redeployed productively in the economy.

A proposal to amend the Bill has been sent to President Pranab Mukherjee, who is expected to sign an ordinance to that effect shortly, perhaps as early as Wednesday night, a person with knowledge of the development said on condition of anonymity.
Finance minister Arun Jaitley, who briefed reporters about the decision taken at a cabinet meeting chaired by Prime Minister Narendra Modi, said an important decision related to the banking sector was taken but details could not be made public before the President approves the proposal.

“There is a convention that when some proposal is referred to the President, then details of it cannot be disclosed till it is approved. As soon as approval comes, details will be shared,” the minister said.
The person cited above said the proposed amendments seek to empower banks to resolve large non-performing assets (NPAs) and protect them for loan decisions taken in good faith.
The scheme does not involve setting up a ‘bad bank’ , as recommended by chief economic advisor Arvind Subramanian in the Economic Survey in January, another person briefed about the development said on condition of anonymity.
Early results for the March quarter show that the problem of bad debts has only grown worse since December with big lenders such as ICICI Bank Ltd and Axis Bank Ltd reporting an increase in their gross non-performing loans.
In the last three years, the Reserve Bank of India (RBI) has come out with several schemes to resolve the bad loan problem such as strategic debt restructuring (which allows banks to convert part of their debt in a stressed company to 51% equity, allowing them to take operational control) and scheme for sustainable structuring of stressed assets, or S4A (where banks can break up the debt into sustainable and unsustainable halves, allowing deep restructuring in the latter, while the former continues to be serviced).

But many of these schemes have rigid rules or high entry barriers and do not provide lenders with enough flexibility, bankers complain. Bad-loan resolution has also proved elusive because bankers are reluctant to sacrifice a part of the loan or initiate a one-time settlement process for fear of provoking inquiries by investigative agencies. The government has also put in place an Insolvency and Bankruptcy Board of India (IBBI) to help turn around or to monetise stressed assets.
“The bankruptcy code will help in preventing future generation of stressed assets. It may not be of much use in dealing with the bulk of current non performing loans as they may need liquidation or other flexible solutions more than resolution (restructure),” said Sumant Batra, insolvency expert and managing partner of law firm Kesar Dass B. & Associates. “Banks which are unlikely to approach IBBI for resolving most of their existing NPAs need an alternate mechanism that is efficient and cost effective.

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