Moody's on Thursday (30 July) cautioned against tampering with the independence of the Reserve Bank of India (RBI) in deciding on interest rates saying it would hurt India's economic prospects. Moody's Analytics, an economic research unit of Moody's Corp, also raised a red flag over the Parliament logjam and said it is denting business confidence as key reform bills like land and GST are stuck. A revised draft of the Indian Financial Code (IFC) calls for creation of an interest rate-setting panel, where majority of the seven members will be nominated by the government. While the earlier version of the code gave RBI Governor veto power over panel's decision, the revised draft does not confer any such powers on him. "We believe that a government-elected panel undermines the RBIs independence. Moving to the new model would severely dent the RBI's competency: Credibility would be lower, politics would drive decisions, and transparency would be reduced. Overall, we believe that tampering with the central bank's independence would make it difficult to anchor inflation expectations. This would weigh on India's economic prospects, particularly financial market stability", Moody's Analytics said in a report. It said India's monetary policy, with Governor Raghuram Rajan at the helm, has been effective. The report titled- India's Outlook: Waiting for Reforms to Fuel Growth- said inflation has fallen, external accounts have improved, and the economy is poised for further rate cuts.Terming the measure as a dangerous road ahead, it said a recent draft bill could undo the RBI's good work. It, however, hoped that given the criticism of the draft Indian Financial Code Bill, it is unlikely to pass Parliament. Talking about reform measures of the Government, Moody's Analytics said: "India's political infighting is denting business confidence. Without a majority in the Upper House, the ruling Bharatiya Janata Party's power has been nullified and the opposition has blocked proposed reforms"."Key reforms such as the land acquisition bill, flexible labour laws, and the goods and services tax (GST) have failed to pass Parliament. Given the political see-saw, these are unlikely to be delivered until later this year or even 2016", the report said. "The land acquisition bill is a catalyst to investment", it said, adding passing the bill will improve Indias business environment by speeding up the conversion of land for infrastructure use. Foreign firms are wary of investing in India, as lengthy delays in acquiring land tend to stall projects. Moody's Analytics is the economic research analysis unit of Moody's Corporation and is independent of Moody's Investor Service, the credit rating agency of the US-based firm.(PTI)
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K Yatish Rajawat on how lack of inter-state co-operation has hindered the growth of the tourism industry and how to solve the problemThe tourism industry contributes over 9 per cent of the employment base almost 37 million people in India are employed in it, it contributes 7 per cent to the national GDP. Inspite of the massive employment generation capability of the tourism industry it has been ignored in the last ten years. The last tourism policy -- a half- baked one -- came out more than 10 years back. On Wednesday (28 July), the tourism minister told the Parliament that a draft tourism policy is in the works and will be introduced shortly. As per the draft National Tourism Policy 2015 (NTP-15) which is available now, the government is looking at major regulatory and legislative changes under NTP-15. One of the major legislative reform recommended under the NTP-15 is to make tourism a concurrent subject so the central government can also be involved in shaping the industry. Currently, tourism is a state subject and there is very little that the central government can do. The most visible thing the government has done in the past couple of years is ‘Incredible India’ campaign to promote India as a tourism spot.K Yatish RajawatUnfortunately while the government burnt enormous amount of money under Incredible India and made several agencies like Ogilvy & Mather rich, it mainly remained an advertising campaign. With almost negligible resources spent in developing or creating facilities for tourists. Some of the states like Kerala, Madhya Pradesh and Gujarat did a better job of creating tourism infrastructure. But the lack of inter-state co-operation and a concerted approach to create tourism circuits has hindered the growth of the tourism industry. For instance, if a Buddhist tourism circuit has to be developed it will span Bihar , Jharkhand and even Madhya Pradesh. Two of these states have their own approach in terms of tourism, and Jharkhand seems to have none. Moreover, the high paying tourists for this will come from Japan who required international airport, easy visa and international facilities, all of which require central government intervention. Therefore, bringing tourism in as a concurrent subject will be an important move. NTP-15 also envisages setting up a tourism regulatory authority, that would draft laws and regulate the tourism industry. In order to achieve a common vision and address issues that affect the tourism ministry, a new institutional structure is expected to come up. The three bodies likely to be set up at the central level are as follows: - National Tourism Authority (NTA)- National Tourism Advisory Board (NTAB)- Inter-Ministerial Coordination Committee on Tourism (IMCCT) This is an interesting move as though the tourism industry affects several companies in the hotel, restaurants, aviation , transportation none of them look at themselves as tourism company. It will be interesting how these different sectors will react once they come under a regulator. For instance, the hotel and aviation industry is largely unregulated from fare/tariff point of view. Hotel rates and service quality vary widely across the spectrum and are a huge deterrence for visitors looking at a certain level of consistency and affordability. The hotel industry is a very powerful lobby very closely connected to the real estate lobby it is also a very fragmented industry with small to large players. Unfortunately it does not have any quality of service parameters that are regulated. Only food or kitchens are regulated by the local state excise and food departments. Similarly, transportation both local and national particularly at tourist spots have nobody to regulate their fares. The promotion of tourism particularly for foreign tourists is an expense that individual location, cities, or even states cannot bear. It needs a concerted effort at the central level. Tourism is also a major foreign exchange generator, it is the third largest just after gems and jewellery and readymade garments. Therefore, every country spend enormous resources to ensure that it has a positive image in the world. Currently, the ratio of foreign to domestic tourists is in favour of the latter which shows the enormous potential that there is in terms of foreign tourism. Foreign visitors represent 19.3 per cent of the total spend in the tourism industry, that means more than 80 per cent of the spend comes from local tourists. It is also an attractive sector for FDI as with domestic tourists being larger than foreign tourists it means that it is relatively insulated from slowdown in the rest of the world. Foreign companies looking at investments into tourist locations are hampered by local laws. For instance, several foreign companies are interested in setting up jetties to attract tourists travelling on their own yatchs or boats from south east asia. Currently, the regulation for setting up a jetty is so cumbersome with defence, coast guard and even Ministry of External Affairs involved that it has not happened. FDI or any other form of investment in tourism sector is also important because of its huge employment generation capacity. An investment of $1 million in the T&T sector creates 78 jobs . To put it in perspective, the same amount generates only 45 jobs in agriculture and 18 in the manufacturing sector, respectively. Of course with the investment also comes the requirement for skilled labour. The problem of talent and skills shortage seems to be more acute at the entry level. Increase in the number of employees at the supervisory and managerial levels has been growing at a CAGR of 4.7 per cent over the past five years, whereas the number of entry level employees per hotel has increased by 1.7 per cent. NTP-15 will also have to take into account the requirement of skilled labour and invest to create, expand and increase the supply of skilled labours. The industry has made very little investment in creating training facilities as it has had a very short term horizon for its own needs. Such investment can only be done at central level if such certification has to attract the aspirational class and good talent. K Yatish Rajawat is a senior journalist, he tweets @yatishrajawat
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The Reserve Bank of India (RBI) is unlikely to loosen policy before October, particularly with retail inflation at an eight-month high after food prices spiked, a Reuters poll of economists found. All but four of 51 forecasters polled expect the RBI to hold its key repo rate at 7.25 percent on Aug. 4. It has already cut the rate three times this year to loosen credit and boost slowing growth in Asia's third-largest economy. A majority of economists also said the tone of this month's central bank policy statement would be unchanged from June's. "The RBI is likely to maintain its stance that the evolving inflation outlook needs to be monitored closely," said Radhika Rao, economist at DBS in Singapore. Twenty-four analysts in this week's poll predicted the repo rate would be cut to 7.0 percent by the end of December. But 23 saw no change. Two said it would sit at 6.75 percent. That contrasts with the RBI's U.S. counterpart, which is expected to tighten policy for the first time in a decade this year, probably in September. Economists said assessing the extent of crop damage from India's poor monsoon season and its impact on inflation was difficult and made forecasting policy that much harder. Farmers rely on rains for irrigation, and lack of rain has delayed planting of staple crops such as onions, whose prices are already near a two-year high. "Despite policy reforms to iron out food supply bottlenecks, the impact is yet to be felt on the streets. This, coupled with over-reliance on rain-fed irrigation, will continue to provide food price shocks," said Debopam Chaudhuri, chief economist at ZyFin Research. After easing policy in June, RBI Governor Raghuram Rajan said further moves would depend on changes in food prices, which matter immensely for India where over a quarter of the population survives on a maximum of 74 U.S. cents a day. But only nine of 32 analysts in the poll said rising food prices would threaten the RBI's target of 6 percent inflation by January 2016, giving it room to prop up the economy. A separate Reuters poll predicted India's economy would grow 7.6 percent this fiscal year. (Reuters)
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Alarmed by the Shiv Sena representative’s decision to attend a meet called by NCP’s Sharad Power to devise a joint strategy on the Land Bill, the chairman of the 30-member joint committee, BJP’s S S Ahluwalia, on Wednesday (29 July) reached out to Opposition members to “arrive at a compromise”, said sources. The joint committee will take up the bill clause by clause in its meeting on Thursday, July 30. Interestingly, after Ahluwalia had called the Opposition members, Congress’s K V Thomas told Businessworld that his party was for “the middle ground”, as opposed to the Left and the Trinamool which are for total withdrawal of the bill. Parties like the NCP, BJD too would be for the middle ground, said sources. The BJP, meanwhile, was alarmed by the Sena public stance which said that it was not averse to taking support of NDA allies on the amendments it wanted to move. Sena’s Anandrao Adsul, who attended the strategy session at Pawar’s residence, told Businessworld that the Sena had made its public stand on the bill clear “from the very first day” and party head Uddhav Thackeray “had even written to Prime Minister Modi on the subject”. Sena wants an amendment for retaining consent clause “in the interest of farmers”. Asked by BW if the Sena would seek the support of NDA allies like the Telugu Desam Party and the Lok Janshakti Party on the committee, Adsul said, “why not?”. The NDA commands support of 14 members on the joint committee – 11 of the BJP, and one each of the Telugu Desam Party, Lok Jan Shakti Party and the Shiv Sena. Ram Vilas Paswan, in an interview on Wednesday, pledged his party’s support to the NDA on the issue. TDP, too, is likely to go with the government. Adsul meanwhile also claimed on Wednesday that while his party’s stand on the land bill was quite clear, NCP chief Sharad Pawar was also trying to drive a wedge in the NDA.
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Union Minister of State for Finance’s Jayant Sinha’s stance that the Financial Sector Legislative Reforms Commission (FSLRC) recommendations are only an input; and does not in any way reflect its thinking may have calmed frayed nerves at Mint Road for now, but the issue refuses to go away. The FSLRC is a body set up by the Centre (North Block) on 24th March 2011, to review and rewrite the legal-institutional architecture of the financial sector to create an Indian Financial Code (IFC). The current round of tension is due to the fact that in its revised draft submitted on 23rd July, the FSLRC makes reference to the Reserve Bank of India’s governor as “the Reserve Bank Chairperson”. And that “inflation target for each financial year will be determined in terms of the Consumer Price Index by the Central Government in consultation with the Reserve Bank every three years”. To that extent, a Monetary Policy Committee (MPC) is to be set up which will determine “by majority vote the Policy Rate required to achieve the inflation target”. The power of the Centre is higher (in voting strength terms in the said committee) due to the fact while Mint Road will have three members on it (which includes the “Governor” (as we now know of it), one executive member of the RBI Board and an RBI employee, four persons appointed by the Central Government. As on date, the RBI Governor only “consults” a Technical Advisory Committee, but can veto it. But in the proposed MPC system, there is no such veto power; and the revised draft says “in the event of a tie amongst the members of the MPC, the Reserve Bank Chairperson will have a second and casting vote”. What is not clear at this point in time is if the “second and casting vote” is not as good as a veto though technically not called one. There is a school of thought that in these complex times, no one institution should have the unbridled power to take decisions which affects the life of a billion people. That the time has come to make the RBI more responsive within a new architecture with checks and balances. While there is merit in such a view, Mint Road’s institutional memory will not let it give up so soon. Some of the FSLRC suggestions have evoked a sharp response from RBI governor, Raghuram Rajan. At State Bank of India’s Banking and Economic Conclave (17th June 17, 2014), he reacted to the proposal for a Financial Sector Appellate Tribunal: “But how much checking and balancing is enough? Do we want even policy decisions to be appealable? Can legal oversight become excessive?” He was of the view that such an approach can vitiate the flexibility afforded by rewriting laws. “The RBI, despite the general deterioration in the probity of public institutions, has maintained a reputation for integrity,” he had said.
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Indian Finance Minister Arun Jaitley on Monday (27 July) said that the government will take a view on the draft Indian Financial Code, which proposes to dilute powers of the RBI (Reserve Bank of India) chief, after receiving comments from stakeholders. "FSLRC has made its recommendations, which have been made public for comments. After the comments are received, it is only then that the government will take a view," he told reporters here. The draft had proposed taking away Reserve Bank chief's authority to veto the interest rate decision of the central bank's monetary policy committee. The revised draft of Indian Financial Code (IFC) also proposed that the committee would have four representatives of the government and only three from the central bank, including the 'RBI Chairperson'. The draft talks of 'RBI Chairperson' and not 'RBI Governor'. RBI is headed by a Governor, at present. The revised draft of IFC, released by the Finance Ministry last week, is based on the recommendations of the Financial Sector Legislative Reforms Commission (FSLRC), headed by Justice B N Srikrishna. The IFC, which is conceived as an overarching legislation for the financial sector, proposes a monetary policy committee which will be entrusted with the task of deciding the key policy rate and chasing the annual retail inflation target to be decided by the government in consultation with RBI. Further, it said the RBI "must constitute a Monetary Policy Committee to determine by majority vote on the Policy Rate required to achieve the inflation target". At present, the RBI Governor consults a Technical Advisory Committee, but does not necessarily go by the majority opinion while deciding on the monetary policy stance.(PTI)
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Revenue Secretary Shaktikanta Das said on Friday (24 July) the government would decide in the next 10 days its position on the legal dispute with foreign investors over a controversial tax. Das made the comments on the same day a specially appointed government panel issued its recommendation over how to resolve the stand-off over the so-called minimum alternate tax (MAT). The government has sought to retrospectively impose MAT on foreign investors, sparking a legal row. The Supreme Court is due to hold next month a hearing about the legality of the tax. (Reuters)
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The government will sell a 5 per cent stake in state-run Power Finance Corp Ltd on Monday (27 July) in a stock market transaction that could raise up to $267 million for the central government, as per the current market value. New Delhi will sell about 66 million shares of the company and the base price for the auction will be set on Saturday, said a government notice to the exchanges on Friday (24 July). Power Finance shares ended 0.2 per cent lower on Friday at Rs 259.55. The Power Finance share offering is part of the government's budget target to raise as much as $11 billion from divestment of its stake in state-run companies. The government has missed its divestment target for the last five years in a row. The proceeds from the asset sale programme are critical for Finance Minister Arun Jaitley's plan to narrow the fiscal deficit to 3.9 per cent of gross domestic product in the 2015/16 fiscal year that began in April.(Reuters)
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Proposals from a government panel reviewing monetary policy rattled markets on Friday (24 July), as foreign and domestic traders said a move to increase the government's weight in decision-making could undermine the Reserve Bank of India's independence. Under the panel's latest proposals, published late on Thursday and part of a broad and lengthy financial overhaul, the government would appoint four out of seven positions on a planned monetary policy committee. The Reserve Bank of India (RBI) would appoint three — one more than under earlier plans, but still less than the government. Under the proposal, the RBI governor also has no veto power, though he did under an earlier iteration of the plan. "The government appointing the majority of the external members in the monetary policy committee will dilute the independence of the RBI," said Rupa Rege Nitsure, chief economist at L&T Finance Holdings, who worked on a central bank report on monetary policy published in 2014. "In a political economy set up, it is difficult to have intellectual independence." Traders said they worried that if the proposed changes were implemented it could hurt the RBI's ability to push ahead with policies like inflation targeting, which has helped contain endemic price rises. "After buying into India given the way RBI has managed inflation, forex market, foreign investors will be worried about the credibility of the decision-making process if the government has a bigger say than the RBI," one foreign bank trader said. Government officials directly involved with the drafting process, however, played down market concerns. They said the draft was not final, and the RBI would respond in time. The proposals, from the Financial Sector Legislative Commission (FSLRC), are a revised version of a previous report that was published in 2013. RBI Governor Raghuram Rajan said that report was "schizophrenic", and would turn the RBI into a "paper tiger". The RBI targets consumer price index inflation at 6 per cent by January 2016 and 4 per cent by March 2018. Sticky retail prices and concerns over an inadequate monsoon have kept the central bank cautious, even as the government badly needs lower rates to accelerate economic growth. The RBI has cut interest rates by 75 basis points this year. "There has been no formal discussion with the RBI on this report," said the government official. "The RBI will be formally consulted when we start drafting the bill."(Reuters)
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Sutanu Guru explains how economic reforms actually started in the 1980s Most young Indians would have no memories of July, 24, 1991. That was when Dr Manmohan Singh presented his first Union Budget as Finance Minister. The consensus now is that the 1991 Budget is both a milestone and a watershed that showcases how a "socialist" and "controlled" economic regime called the "license-permit raj" gave way to liberal economic policies. There are many myths surrounding that Budget; as there are many facts too. One myth is that India had experienced no "economic reforms" or seen no liberal economic policies till the 1991 Budget. That is indeed a myth as facts point otherwise. Here is a list of some sectors, now called verticals, that actually saw reforms and liberal policies long before Dr Singh presented his "historic" Budget. In Januray 1982, the late A. R Antulay was forced to resign as the chief minister of Maharashtra because of the notorious "cement scam" exposed by The Indian Express. In those days, the cement industry was tightly controlled and regulated and both individuals as well as builders needed to apply for a "quota" for cement to be allocated. Inevitably, this had seeded mammoth corruption and a flourishing black market for cement. While the government controlled price for a bag was Rs 40, the black market price was in excess of Rs 150. It was alleged that Antulay was collecting cash in return for cement quotas from builders. This scam did ensure a chief minister lost his job. But it also prompted the then Indira Gandhi government at the centre to do something unusual. It announced that it was completely deregulating the cement industry where market forces, rather than the state would determine prices and production. Numerous cement plants came up across the country and the black market vanished in just a few years. It took more than 15 years then for the "market" pride of cement to reach the "black market" price of 1982. This one decision to deregulate provided proof that markets perform better than government bureaucrats. The year 1982 also saw two other policy moves that transformed the respective industries. India hosted the 1982 Asian Games and colour TV made its appearance. The government announced a policy whereby private companies were given full freedom to import, assemble, manufacture and market colour TV sets in India. This literally gave birth to the consumer electronics revolution in India that is still going on. Brands like Onida, Videocon and BPL became household names. There was another industry that was transformed in 1982. Till then, the two-wheeler market in India was dominated completely by Bajaj Auto, with a few other ailing state run units and some private players like LML trying to play catch up. The government announced a policy that allowed joint ventures between Indian companies and foreign automobile companies to manufacture and market two wheelers in India. In 1982, a consumer had to wait for about three years to get delivery of a Bajaj scooter after paying the full amount in advance. How things changed. All four Japanese auto majors, Yamaha, Suzuki (which had already started making the Maruti cars in a separate joint venture), Kawasaki and Honda signed up with Indian companies. The game changer was the venture between Honda and Hero, then a small company making bicycles and mopeds. Hero has gone on since then to become the largest motorcycle company in the world and India is now certainly emerging as a a manufacturing and export hub for automobiles and auto components. One argument of the "socialists" who opposed the entry of private and foreign investment was that the move would lead to a massive loss of jobs and widespread unemployment. This argument was used as a handy tool by employees of the Indian postal department to vehemently protest the decision of the then Rajiv Gandhi government to allow private companies to launch courier services. There were widespread protests and strikes. But look at the courier industry. Since then, it has become one of the largest source of employment for -semi skilled and skilled- Indian youth. No postal department employee has lost his or her job. But literally millions of jobs have been added directly and indirectly by large and small courier companies across India. In effect, 1991 and the Dr Singh Budget remains a landmark. But the fact is that liberal economic policies were being implemented systematically since 1982. Dr Singh made it "official" in 1991!
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