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Banking News dated 1st October 2018

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Banking News: October 1, 2018


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SBI halves daily Cash Withdrawal  Limit in ATMs to Rs 20,000


SBI halves daily Cash Withdrawal
Limit in ATMs to Rs 20,000

Sugata Ghosh
The Economic Times
Published on October 1, 2018


Mumbai, September 30: The country’s largest lender, State Bank of India, has lowered the ATM cash withdrawal limit to Rs 20,000 a day, from Rs 40,000. The lower limit will be effective from October 31.

“In view of the increase in the number of complaints received by banks around fraudulent transactions at ATMs and to encourage digital and cashless transactions, it has been decided to decrease the cash withdrawal limits of debit cards issued or being issued on ‘Classic’ and ‘Maestro’ platforms,” said a bank communiqué to offices.


Skimmers, as reported in multiple cases in the past decade, steal the PIN for debit cards from unsuspecting customers using hidden cameras and electronic devices. The Classic cards constitute a sizeable chunk of SBI’s card portfolio. The restriction on cash withdrawals comes weeks before the festival season.

Despite the government’s digital push and rise in digital transactions, the demand for cash continues to be high and, according to some estimates, it is as high as pre-demonetisation levels. Asked whether this could cause any inconvenience, SBI managing director PK Gupta said, “Our internal analysis shows most actual withdrawals are of smaller amounts. So, Rs 20,000 should be adequate for most customers. We are trying to see whether smaller withdrawals could minimise frauds.”

He said customers with a requirement for more can ask for card variants that offer higher withdrawal limits. Such cards are issued to those keeping a higher minimum balance in their bank accounts.

According to a person in the payments technology industry, debit card users are most gullible when it comes to card frauds. “Information such as PIN is not just stolen at ATMs,” he said.

“In fact, I would say (this also happens at) point of sale terminals in merchant outlets and also by some people carrying mobile card swipe devices. Many debit cards still follow the magnetic stripe technology and are comparatively more prone to frauds. Only for international debit cards is the transition to chip-based technology taking place.”

Smaller cities are driving credit card growth of some of the large banks, with cardholders outside the top 10 cities accounting for 40-45% of spending. As per Banking Codes & Standards Board of India (BCSBI) guidelines, at least 30 days’ notice has to be given to customers for any change in terms and conditions or charges. SBI has directed all its branches to display the message on notice boards.


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Weak rupee may prompt RBI to raise repo rate

The Business Line
Published on October 1, 2018


Costlier oil imports too could swing decision; 25 bps hike seen

Mumbai, September 30: Inflationary concerns due to costlier oil imports and a weakening rupee could prompt the Reserve Bank of India to raise the repo rate by 25 basis points (bps) in the upcoming monetary policy review, which is scheduled to be announced on October 5.

Also, with a rate hike, the RBI could attempt to stem the increasing foreign exchange outflows — foreign portfolio investors are seen to prefer safe-haven investment in the US in the backdrop of that country’s escalating trade war with China, and given the Federal Reserve’s latest rate hike.

Third successive hike?

A widening current account deficit, which again negatively impacts the rupee, will also weigh on the members of the monetary policy committee (MPC) when they vote on the policy rate. Market experts feel that if the rate is hiked — for the third consecutive instance — it could lead to the central bank changing its ‘neutral’ policy stance.

Repo rate is the interest rate at which the RBI provides liquidity to banks to help them overcome short-term liquidity mismatches. This rate, which currently stands at 6.50 per cent, has been upped twice in the previous two policy reviews, by 25 bps on each occasion.

Soumya Kanti Ghosh, Group Chief Economic Advisor, SBI, said that as the case (rupee depreciating against the dollar) is similar to the 2013 currency crisis, the RBI should raise the policy repo rate by at least 25 bps.

“We rule out a hike of 50 bps, as it may spook the market. However, there is an outside probability of change in the neutral stance too, as three successive rate hikes with a neutral stance could contradict the RBI message,” he said.

Retail inflation

While retail inflation or Consumer Price Inflation (CPI) — it stood at a 10-month low of 3.69 per cent for August compared to 4.17 per cent the previous month — and GDP growth — in the first three months (April-June) of the current fiscal it measured a robust 8.2 per cent — both warrant a hold in the policy rate, experts say the volatility in the rupee has become a cause for concern, requiring a policy response.

Aditya Narain, Head of Research, Edelweiss Securities, said in a report that the RBI is likely to raise the policy rate by 25 bps.

“Policy-makers face a tough macro-economic backdrop. While softer-than-expected inflation calls for a pause, persistent pressure on the rupee perhaps warrants a rate hike (much in line with other emerging market central banks).

“At the same time, the recent turmoil in domestic wholesale funding markets and tightening liquidity make a case for liquidity easing measures. Not all objectives are fully aligned, if not inconsistent. Yet, at this stage, we think the RBI is likely to prioritise external stability and would thus raise the interest rate.”
                 

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RBI data on Public Sector Banks: In four years,
banks’ write-off over seven times recovery

Anil Sasi
The Indian Express
Published on October 1, 2018


Even as the government has been trying to shore up PSB books through equity capital infusion and other measures, stressed assets have registered a steady rise since 2011.

New Delhi, September 30: Between April 2014 and April 2018, the country’s 21 State-owned banks ended up writing off Rs 3,16,500 crore of loans even as they recovered Rs 44,900 crore written off on a cumulative basis — or less than one-seventh the write-off amount — according to RBI data.

The recovery takes place on the total cumulative write-off and not only on write-off for a specific period. To put this number in perspective, the amount of bad loans written off by public sector banks (PSBs) during the four-year period is well over twice the projected budgetary expenditure on health, education and social protection for 2018-19, at Rs 1.38 lakh crore. Further, from April 2014 to April 2018, the loans written off by the 21 PSBs were over 166 per cent of the amount in the 10 years till 2014.

According to data submitted by the central bank during its post-evidence reply before the parliamentary standing committee on finance, the recovery rate in PSBs during the four years to March-end 2018, at 14.2 per cent, is nearly three times higher than the 5 per cent for private banks. So, while the 21 PSBs account for around 70 per cent of the total banking assets, their contribution to bad loans is about 86 per cent of the total NPAs in India’s banking sector.

Even as the government has been trying to shore up PSB books through equity capital infusion and other measures, stressed assets have registered a steady rise since 2011. However, when it comes to NPAs, the growth was muted until 2014, followed by a dramatic rise since, particularly after 2015-16. This is because of the RBI undertaking an Asset Quality Review (AQR) of banks in 2014, which led to the recognition of many bank loans as NPAs, considered by banks as standard assets till then. So, while bad loans written off by PSBs between 2004 and 2014 added up to a little under Rs 1.9 lakh crore, more than half were waived off between 2013 and 2015.

After that, the NPAs went up from 4.62 per cent in 2014-15 to 7.79 per cent in 2015-16, and climbed to as high as 10.41 per cent by December 2017. By the end of 2017, as a result of the AQR, gross NPAs of PSBs were up to around Rs 7.70 lakh crore. It is because of this increase in bad loans that PSBs were forced to make upfront provisioning on account of the expected losses.

In 2017, the RBI also constituted an Internal Advisory Committee to determine cases to be referred under the Insolvency and Bankruptcy Code (IBC), a platform for time-bound recovery of bad loans. Based on its recommendations, 41 accounts were identified in two tranches. Of the entire NPAs, 12 accounts, involving Rs 1.75 lakh crore approximately, have gone to the NCLT (National Company Law Tribunal) since June 2017.

This was extended to another 28-29 accounts in the second round, entailing an amount of Rs 90,000 crore.

According to a senior bank official, the decision to write off loans, either fully or partially, is a business decision taken by banks to clean up their balance sheets, based on various viability factors such as scope of up-gradation of an NPA asset into standard category, chances of recovery from such assets, market conditions, availability of security, and its valuation. At times, such decisions are taken keeping in view the available taxation benefits and also to manage the level of NPA ratios of banks.

In ‘Technically Written Off’ accounts, loans are written off from the bank books, without foregoing the right to recovery. Further, write-offs are generally carried out against accumulated provisions made for such loans. Once recovered, the provisions made for those loans flow back into the profit and loss account of banks. In case of technically written-off accounts, the recovery efforts “continue as usual”, an official said.


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Broken system

The Indian Express
Published on October 1, 2018


The IL&FS crisis may be contained for now,
but issues it has flagged need to be fixed.

The Centre and the Reserve Bank of India have, for now, seemingly staved off the crisis resulting from the series of defaults by the Infrastructure Leasing and Financial Services (IL&FS) and its subsidiaries. The infrastructure developer and financing institution has unveiled a restructuring plan that involves a short-term bridge loan and a Rs 4,500-crore capital infusion through subscription to a rights issue by its primary shareholders, besides raising money via sale of existing assets. The whole objective has been to demonstrate that both IL&FS and its shareholders, especially the state-owned Life Insurance Corporation and State Bank of India, are fully behind the institution to ensure that its liabilities aggregating some Rs 91,000 crore are fully discharged. IL&FS has already moved the National Company Law Tribunal to reach an agreement with creditors for settling outstanding dues. The proposed plan, together with the RBI announcing liquidity infusion measures through open market operations, should help assuage fears of any contagion from defaults by a major financial institution. That would have been a disaster in the current scenario, where emerging markets, including India, are bearing the brunt of capital outflows due to the US Federal Reserve raising interest rates and soaring global crude prices causing a widening of current account deficits.

But even as IL&FS goes about repairing its broken balance sheet, the government and RBI need to seriously address the glaring governance failures and regulatory oversight responsible for the crisis. The problem with institutions like IL&FS is that they operate in a regulatory twilight zone of not being a bank and yet financing long-term infrastructure projects through mostly short-term borrowings. Worse, IL&FS used its private institution status to float innumerable subsidiaries and special purpose vehicle, even while choosing not be publicly listed. Where it was convenient, it also positioned itself as a quasi government entity for attracting investor funds. This was a model that allowed for little transparency and, at the same time, gave plenty of leeway for the senior management to reward itself top dog pay packets, including stock options, sans any accountability. That party has thankfully ended, but the revellers need to be brought to book.

More importantly, the IL&FS episode is a pointer to future challenges in infrastructure financing. India no longer has the old development finance institutions that were charged with funding capital-intensive long-gestation projects. Their absence led to banks filling the void during the 2000s with disastrous consequences. With the likes of IL&FS and IDFC (Infrastructure Development and Finance Company) also failing, a serious thought has to be given to the right institutional model for financing infrastructure — without which India can’t grow at 8 per cent on a sustained basis.


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Time for RBI to take control
of regulation & supervision

Mythili Bhusnurmath
The Economic Times
Published on October 1, 2018


It’s been two months since the Monetary Policy Committee (MPC) met and decided to raise the repo rate (at which the Reserve Bank of India (RBI) infuses liquidity) by 25 basis points to 6.25 per cent. The rate hike was then seen as mostly pre-emptive. The economy was chugging along nicely, with both demonetisation and goods and services tax (GST) woes largely behind, and inflation was under control.

Sure, the rupee was depreciating. But it was below Rs 70 to the dollar. There were some rumblings on the trade front, but those were early days. The yield on 10-year US treasury bills had not yet hit 3% (they would do so on the morning of August 1, US time, after the MPC meeting had concluded), suggesting the Fed would stick to three rate hikes in 2018. The monetary policy statement did not quite say, ‘God’s in his heaven, all’s well with the world’. But there was no mistaking the overall sense of satisfaction with the way macro-fundamentals were shaping up.

How Red is My Rupee

Two months down the line, the picture could not be more different. The gentle depreciation of the rupee against the dollar has given way to a more rapid, and unruly, fall, depreciating almost 6% over the past two months. If the fall was initially driven almost entirely by the contagion effect of developments in Turkey and Argentina, the widening current account deficit (CAD) has contributed to the bearish sentiment more recently.

Fortunately, sense has since returned to the currency market. But for RBI, the reprieve from financial sector woes was short-lived. By end-September, Infrastructure Leasing & Financial Services (IL&FS), the ‘systemically important’ non-banking financial company (NBFC), had all but collapsed, with a host of its subsidiaries defaulting on repayments. As fear replaced the earlier ebullience, stock markets turned skittish and the BSE Sensex fell more than 1,100 points on September 21.

Overnight, yesterday’s darlings, non-banking finance companies, became pariahs. Their shares have been hammered down mercilessly, and no one is willing to lend to them. With liquidity turning tight, thanks to advance tax payments, RBI’s market intervention in support of the rupee (sale of dollars drains rupees from the system) and its fetish for keeping liquidity tight, there is now a real danger that troubles in IL&FS could spread and imperil financial stability.

Alas, troubles never come singly. So, even as RBI and GoI battled to prevent the contagion effect, if necessary by infusing liquidity, US-China trade wars intensified, oil crossed $80 a barrel and the US Federal Reserve raised the Fed rate by 25 basis points to 2-2.25%, the highest in a decade. Worse, the accompanying statement left no one in any doubt that it would hike interest rates again in December 2018.

The underlying message was clear. The Fed would not risk any overheating of the US economy. Emerging markets had best watch out for themselves.

What does all this mean for the MPC when it meets later this week? If external vulnerabilities, the result of a widening CAD and exit of portfolio investors to safe haven avenues are not to coalesce into a larger economic problem, it has only one option: hike interest rates, like many emerging markets, including more recently, the Philippines and Indonesia.

Remember, the combination of rising oil prices and a depreciating rupee also makes for a deadly cocktail as far as inflation is concerned. The case for a rate hike is, therefore, indisputable. The only question is whether it should hike by 25 basis points or 50 basis points.

Inflate Your Role

At a time when liquidity is already tight, this is not going to be an easy decision. It certainly won’t do anything for RBI’s popularity. But there are times when tough love is needed. This is one such occasion.

Much more than rate action, RBI must devote greater attention to its regulatory and supervisory roles. Ever since it shifted to a formal ‘inflation targeting’ regime, these have not received their due attention. Indeed, the post of deputy governor in charge of commercial banking was left vacant for close to a year after previous incumbent, S S Mundra, retired, with the result that RBI’s top echelon was sadly wanting in practical knowledge of banking.

Good regulation is like good parenting. It is important to lay down rules or boundaries (sensible ones) beyond which transgression will not be appreciated, or tolerated. But as any wise parent will tell you, it is equally —if not more — important to know when to apply the rules and when to be flexible. By that criterion, RBI has been a complete failure. It laid down strict, often unrealistic, rules and refused to show any flexibility. Regardless of extenuating circumstances or banks’ pleas.

Sadly, RBI’s inability to see the big picture has cost the economy dear. With so many banks on prompt corrective action (PCA), bank lending has been squeezed. Apart from slowing down investment, this led to borrowers turning to NBFCs, where the same story of aggressive lending, followed by defaults, has been repeated. With much less accountability.

Clearly, it is time RBI stopped thinking in silos and began to think beyond interest rates.

Time, perhaps, for a dose of its own medicine, some PCA?


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Bank Merger: What a Terrible Idea, Sirji!

Sanjiv Bhatia
The India-Legal Live
Published on September 30, 2018

The ill-timed merger of three troubled PSU banks—Vijaya Bank, Dena Bank and Bank of Baroda—reveals the patchwork policies of the government, resulting in massive losses for shareholders


“Who pays when you make a mistake? You do. Who pays when the government makes a mistake? Yes, still you….”
                                                                             —Anonymous

In a bizarre move, the government, which controls 70 percent of all bank assets in India through State-controlled banks, decided to merge three of them into a larger entity. Two smaller banks, Vijaya Bank and Dena Bank, were combined with a larger bank, Bank of Baroda. Each of these banks, like other State-run banks, is in trouble from bad loans—Dena Bank’s bad loans are 22.5 percent of its total loans, Bank of Baroda’s 12.2 percent and Vijaya Bank’s 6.2 percent. For the merged entity, bad loans will constitute 13 percent of the total loans—much higher than that of the largest contributor to the merger, Bank of Baroda.

The notion that merging two or more banks can create a larger, more viable and profitable bank and somehow magically increase shareholder value sounds good in committee discussions. But it has not worked well in practice. In 1993, a profitable Punjab National Bank (PNB) merged with the smaller New Bank of India. But the clash of cultures and turf protection by entrenched employees created significant personnel issues which destroyed morale and efficiency. As a result of this, PNB posted its first loss of Rs 96 crore in 1996.

In 2017, five associate banks of the State Bank of India (SBI), each with substantial bad loans on their books, merged with the parent bank and in the process, wiped out the net profit of SBI for 2016-17, resulting in the first-ever loss for it in 19 years. Even the much-touted 2009 merger between Merrill Lynch and Bank of America destroyed almost $50 billion in shareholder wea­lth in addition to $20 billion of bailout money from US taxpayers.

Mergers are tricky business for the best of professionals. And they can be treacherous for a government that has shown little proclivity to understand the deep-rooted connection between capital markets and economic growth. Corp­orate mergers do not have a good track record. Evidence shows that the vast majority of mergers fail. A recent Harvard Business Review study shows that the failure rate of mergers is anywhere between 70-90 percent depending on the industry. So bad is the success rate of mergers that investment bankers often jokingly say that every merger negotiation must start with the warning that “this activity is bad for your corporate health”.

There are several reasons for these failures. The main problem is the inability to define the strategic rationale for the merger and pinpoint the attributes that make it attractive. I have yet to see a well-articulated reason from the government for this proposed bank merger. It is clear that the decision-makers haven’t thought through things carefully. For them, the most significant risk is the perception of inaction. They need to show that they are still relevant, so better to do something even if it defies financial rationale. None of these decision-makers, be it bureaucrats or politicians, have any skin in the game. These are public sector banks and the taxpayers eventually bear all the risk. Burea­ucrats, who are conveniently separated from the consequences of their decisions, have no compunction about transferring the additional risk from this merger onto the taxpayers.

There are many reasons for companies to merge, but the principal benefit eventually has to be an increase in the value of the combined entity brought about through synergy. Two entities merge because they can either jointly capture a bigger market by offering a broader range of complementary products, or open new business opportunities from the combination of proprietary technologies and processes. It makes sense for a fruit and a vegetable seller to merge because people who buy vegetables also end up buying fruits. But a merger of two fruit sellers makes little sense as there are no benefits from synergy for the combined entity. Similarly, there are no synergies at play in the merger of three troubled banks into one big troubled bank.

There could be other reasons for this
 Merger- efficiency and scale:

Efficiencies and cost-reduction will come only if the combined entity can operate more efficiently with fewer people, but the government has already indicated that there will be no retrenchment of staff. Bank of Baroda is the most efficient of these banks with each employee generating Rs 13.3 crore in business. In contrast, each employee created only Rs 8.5 crore in business at Dena Bank and Rs 11.1 crore at Vijaya Bank. The merger makes the sum worse than the parts. There is also the risk of turf wars bet­ween competing interests. This increases the likelihood of the new entity being less efficient.

Another reason to merge is scale and improvement in capital adequacy that comes with size and diversification of the loan portfolio. Banks must have enough capital to meet regulatory norms. India is a signatory to the Basel-III Agreement which makes it mandatory for all banks to meet the minimum capital adequacy ratio (CAR) of 10.5 percent by March 2019. CAR is a measure of how much capital a bank must have in relation to its risk-weighted loan exposure. So, if a bank has risky loans of Rs 100, it must have a capital of 10.5 (including reserves) to meet the requirements of Basel III. The more bad loans a bank has, the riskier its assets, and the smaller its CAR. Of the three merged banks, Dena Bank has the worst CAR at 10.3, Bank of Baroda is at 11.8 and Vijaya Bank at 12.9. The combined CAR for these banks weighted in proportion to their assets would be 11.7. So, merging these banks and creating a bigger bank in the hope of getting a significant improvement in capital adequacy for the overall entity is unlikely.

What does the market think of this merger? In free capital markets, the final adjudicators are the millions of market participants. Of the three merging banks, only one bank, Vijaya Bank, was profitable last year. It had a net profit margin of 5.8 percent. Dena Bank was hugely unprofitable with a net profit margin of –21.5 percent and Bank of Baroda had a net profit margin of –5.6 percent. The combined net profit margin of the merged entity is –6.1 percent. The merger, therefore, short-changes the stockholders of Vijaya Bank and its stock price tumbled 20 percent after the announcement of the merger. Share­holders of Bank of Baroda also disapproved of the merger and its stock price dropped 17 percent since the announcement. The only company whose stock went up was Dena Bank. Its shares are up 14 percent.

Collectively, the three merging banks have lost almost Rs 7,000 crore (as of market close on September 25) in market value since the announcement on September 17. Almost all public sector banks have seen their stock prices drop—the index of public sector banks is down 7.1 percent since the merger announcement. The message from the market is clear: mergers of public sector banks are non-accretive and a terrible idea.

In today’s banking model, acquiring additional branches through mergers is less important for serving customers than acquiring innovative fintech firms with new technologies. In a world of rapid change, low-cost and high-technology banking, the old, staid and non-innovative public sector banks are getting increasingly irrelevant. In this environment, selling off smaller banks to strategic buyers makes more sense than merging them into a bigger entity.

t is a shame to see the government systematically destroying the value of public sector banks. Since May 2014, the collective value of all these banks drop­ped by almost Rs 1.4 lakh crore. The government’s stubborn refusal to privatise these banks has created systemic risks in the banking sector and resulted in massive losses for its shareholders.

State-run banks control 70 percent of all banking assets, yet their total market capitalisation of Rs 4.37 lakh crore is less than a third of the Rs 14.32 lakh crore market capitalisation of private banks. This is astounding evidence of the lack of trust capital markets have in State-run banks: the value of the group that controls 70 percent of the industry is one-third of the group that controls 30 percent of the industry. Just a single private bank, HDFC, has a market capitalisation of Rs 5.4 lakh crore which is Rs 1 lakh crore higher than the combined market capitalisation of all public sector banks.

There is an adage in the financial world—listen to the markets, they never lie. The markets are sending a clear signal to the government—stop patchwork policies, instead do the imperative and do it soon: privatise all State-run banks because each passing day further erodes the value of these banks. The government desperately needs experts experienced in the world of financial markets who can advise it on how to maximise the shareholder value of public banks. Otherwise, these assets belonging to the citizens of India will keep losing value.

As always, it is the citizens that suffer when governments screw up.

The writer is a financial economist
and founder, contractwithindia.com


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Aadhar and Cash Transfers
The poor are left to themselves

Reetika Khera, The Hindu
Published on September 30, 2018


The benefits being projected in
Aadhaar’s name are not backed by the data

The first death anniversary of Santoshi Kumar, a Dalit girl from Simdega, Jharkhand, was this week. She died of hunger, at the age of 11, a few weeks after her family’s ration card was cancelled by the State government because they failed to link it to Aadhaar.

The Aadhaar judgment of September 26 provided an opportunity for the Supreme Court to make amends for her tragic death. The upholding (by and large) of Section 7 by the majority judges is, therefore, the biggest let-down in the Aadhaar judgment. This is because the judges decided to accept the government’s ‘assertions’ — wrongly — as ‘facts’.

Assertions versus facts

In the majority opinion, they state: “The entire aim behind launching this programme is the ‘inclusion’ of the deserving persons who need to get such benefits. When it is serving much larger purpose by reaching hundreds of millions of deserving persons, it cannot be crucified on the unproven plea of exclusion of some. We again repeat that the Court is not trivialising the problem of exclusion if it is there.” (p. 389.) There are many instances of assertions being accepted as facts. This piece seeks to show why they were wrong in believing the assertion about inclusion, identification and exclusion, to illustrate the bigger problem with the majority view.

For instance, the Unique Identification Authority of India (UIDAI) submitted to the court that the ‘failed percentage’ of iris and finger authentication are 8.54% and 6%, respectively. Later, on Page 384, discussing the issue of exclusion, the judgment notes that the UIDAI is said to have claimed 99.76% “biometric accuracy”, suggesting that two different failure rates have been submitted to the court.

Though the UIDAI claims to have taken care of these failures by issuing a circular on October 24, 2017 (after Santoshi’s death), to put in place an exemption mechanism, until then there was no exemption. Even after the circular has been issued, there is little evidence of it being implemented. Since 2017, there have been at least 25 hunger deaths that can be traced to Aadhaar-related disruption in rations and pensions, of which around 20 deaths occurred after the aforementioned circular was issued.

The idea that Aadhaar enables inclusion has taken firm root in people’s minds, as well as the judges’. This belief, however, is misconceived. If it means that Aadhaar is an easy ID to get, that is perhaps true. Only ‘perhaps’ because there are many people who have paid to get Aadhaar even though it is meant to be free; many have had to try several times before they succeeded in getting it. Those with any disability have found it very hard to enrol or have failed to enrol.

The number of people excluded from getting Aadhaar may be small (as a percentage of the population), but they happen to be the most vulnerable — bed-ridden old persons, victims of accidents, people with visual disabilities, etc.

Further, it is a misconception that for millions of Indians, it is the only (or first) ID they have. According to a response to an RTI, 99.97% of those who got Aadhaar numbers did so on the basis of existing IDs.

More importantly, no one in government has been able to explain how Aadhaar enables inclusion into government welfare programmes. Each government programme has its own eligibility criterion. In the Public Distribution System (PDS), there are State-specific inclusion/exclusion criteria. In some States, if you have a government job or live in a concrete/pucca home, you cannot get a PDS ration card — even if you have an Aadhaar card.

Conversely, if you lived in a mud hut or were an Adivasi, you would get a PDS ration card. After the coming of Aadhaar, on top of satisfying the State eligibility criteria, you need to procure and link your Aadhaar number in order to continue to remain eligible for your PDS ration card.

Before Aadhaar was made mandatory, it was neither necessary (you could get subsidised PDS grain without Aadhaar), nor sufficient (possessing Aadhaar alone did not entitle you to PDS grain). With Aadhaar being made compulsory, it has become necessary, but it is not sufficient to get welfare. It is a pity that the majority judges were unable to grasp this point.

The biggest source of exclusion from government programmes (before and after Aadhaar) remains the fact that India’s spending on welfare remains abysmally low. Before the National Food Security Act (NFSA), 2013 was implemented, roughly 50% of the Indian population was covered by the PDS. The NFSA expanded coverage to about two-thirds. This expansion of the PDS is what has led to inclusion though exclusion errors persist in some areas (for example, regions such as western Odisha where universal coverage is necessary).

It’s about budgets

The question that arises is, did the government misdiagnose the source of exclusion by blaming it on a lack of IDs rather than inadequate budgets and faulty selection of eligible households? Or, did the government purposely mislead the public on this issue because fixing the real problem would have entailed an increase in government spending?

Either way, a very successful programme of propaganda was set in motion to convince people into believing that Aadhaar was a project of inclusion and the ultimate tool against corruption in welfare programmes.

The claims about what and how much Aadhaar could do for reducing corruption in welfare were similarly blown out of proportion. For instance, quantity fraud (where a beneficiary is sold less than her entitlement, but signs off on the full amount) continues with Aadhaar-based biometric authentication. A rogue dealer who I cannot easily hold to account can as easily force me to biometrically authenticate a purchase of 35 kg, but give me only 32 kg, as he could force me to sign in a register.

Meanwhile, the propaganda machinery again convinced people by repeating that the welfare rolls in India were full of fakes, ghosts, duplicates, etc. There was no reliable evidence on the scale of this problem (“identity fraud”). Recent independent surveys and government data are beginning to suggest that it wasn’t the main form of corruption. Linking Aadhaar cards with the PDS in Odisha led to the discovery of 0.3% duplicates.

Pointer to a divide

Yet, the majority opinion states that “the objective of the Act is to plug leakages” and that “we have already held that it fulfills legitimate aim” (page 386). For those who work on these programmes, it is very puzzling why these straightforward misrepresentations have not been challenged by the media.

This phenomenon appears to be an outcome of the deep social and economic divide in Indian society. Those who benefit from these programmes and who understand why Aadhaar cannot improve inclusion do not have a voice in the media or policy-making. This allows anecdotes (repeated ad nauseam) to become the basis for taking big decisions. Contrary to the rhetoric of evidence-based policy-making, what we have seen in this case is anecdote-based policy-making. The opinion of the majority judges also betrays this deep divide — caste and class — in society.

Yet, Wednesday’s Aadhaar verdict with four judges latching on to the government’s version of the story, and one of them applying his mind to the matter independently, reaffirms that you can’t mislead all the people all the time.

Reetika Khera is an Associate Professor at the
Indian Institute of Management, Ahmedabad


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The case for another interest rate hike

Editorial: The Mint
Published on October 1, 2018


A comparatively conservative policy stance
will serve India better at this stage

The macroeconomic outlook has changed considerably since the last meeting of the monetary policy committee (MPC) of the Reserve Bank of India (RBI), and so have expectations in financial markets. The majority of analysts now expect the rate-setting committee to raise policy rates later this week, largely due to developments on the external front. This newspaper also believes that there are reasons to raise policy rates at this stage.

Though the MPC is driven by the inflation targeting mandate, renewed weakness in the rupee will affect inflation and inflationary expectations. Further, crude prices have risen over 12% since the last meeting and are expected to remain elevated in the coming months. New forecasts suggest that crude prices could actually rise above $100 per barrel in the foreseeable future. The Organization of the Petroleum Exporting Countries is unwilling to increase production and sanctions on Iran is affecting supplies.

Apart from pushing inflation, higher crude prices would further increase the current account deficit (CAD) and put more pressure on the currency. Financing the CAD would not be easy in the current global environment. Though the US Federal Reserve is raising rates along expected lines, continued tightening will affect capital flows to emerging market economies. The US central bank is expected to raise interest rates once more this year, followed by three rate hikes next year. Foreign investors have sold Indian assets worth over $11 billion so far this year.

The Union government has taken several steps in recent weeks to attract capital flows and reduce “non-essential” imports. However, these measures are unlikely to yield the desired results. On the contrary, encouraging short-term debt inflows and arbitrarily raising import duty can do more harm than good in the medium term. It is important to highlight that there are no easy short-term solutions to reduce pressure on the external account. One of the biggest problems is that India’s exports have remained sluggish in recent years. The government should focus on removing impediments for reviving exports. The depreciation in rupee should help exporters here—but only to an extent given that the data shows that this relationship is somewhat weak in India. Further, the newly constituted high-level advisory group would do well to suggest exact policy measures that will help boost exports.

Higher crude prices will also increase fiscal risks. The government has done well to resist the pressure to reduce taxes on fuel products. However, in an election year, the pressure will only increase with rising retail prices. There will be significant political resistance if the price of petrol goes, say, into three digits. The central bank should be prepared for possible fiscal slippage. Higher crude prices have complicated India’s macroeconomic management. Also, it comes at a time of tightening global financial conditions.

Although the headline inflation is currently under the central bank’s target, the MPC’s decision will be based on its future trajectory. The inflation forecast is likely to go up on the back of higher crude prices and a weaker currency. A rate hike at this stage would be a prudent response and give confidence to financial markets that the central bank is willing to sacrifice some growth to maintain price and macro stability. In fact, the increase in CAD and sustained higher core inflation suggest that there is a case for some moderation in demand and, in an election year, monetary policy will have to do a balancing act. This will also help ease pressure on the currency.

Therefore, a pause at this stage could confuse the market and may lead to greater volatility, particularly in the currency market. Yields on 10-year government bonds have gone up by over 30 basis points since the last policy review. Also, if the MPC decides not to act now, it will have to wait till December to make the next policy move. This could lead to greater uncertainty in the market. Apart from the policy action, financial markets will also closely watch the tone of the policy statement. It will be interesting to see if the MPC throws more light on the inflationary impact of currency movement.

As for the view that rates should not be increased for now due to tight liquidity and risk aversion in parts of the financial system, these issues can be dealt with separately and the central bank is working to improve the liquidity situation.

Higher crude prices and the tightening of financial conditions in global markets are the biggest risks to India’s macroeconomic stability at the moment. It is important that policy in India adjusts to changing economic realities and financial markets don’t lose confidence. Thus, a comparatively conservative policy stance will serve India better at this stage.


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The Limits of Rationality

Sreejith Sugunan
The Indian Express
Published on October 1, 2018


The smarter we are, the more likely
we are to re-affirm our political biases.

As part of the Cultural Cognition Project, which aims to study how individuals with preconceived group identities perceive their risk in society, law professor and psychologist Dan Kahan found that people generally engage in “identity protective cognition”. Kahan used this term to refer to our tendency to “selectively credit and discredit evidence” based on the beliefs that predominate our group. One can conclude from Kahan’s analysis that an individual is likely to prioritise evidence that re-affirms one’s weltanschauung (worldview), and may actively resist information that can be “identity-threatening”, thus engaging in politically-motivated reasoning.

Apart from a humanistic consideration, identity protective cognition can explain why the killing of Kashmiri journalist Shujaat Bukhari sparked a greater outrage from liberal quarters than the murder of Kashmiri soldier Aurangzeb. The same framework also explains why the anti-liberal camp in India reads a studied indifference among the Indian liberal intelligentsia towards the sacrifices made by the armed forces, or towards the concerns of Hindu community. The point here is that our interpretation of political events, and the image of the other produced by it, are likely to be affirmative reiterations of those ideological positions we are sympathetic to. Relying on Kahan’s findings, one can argue that there is a definite lack of reason, or at least it’s partial absence, when it comes to our political positions, though we believe them to be well-thought out and rational.

A partially reasoned political judgement, coupled with a post-truth environment, makes it all the more easy to reify the liberal or the anti-liberal as the antagonist of our political imagery. And this is the kind of cognitive template that plays in to the selective information or misinformation campaigns led by divisive political forces, be it from the left, right or centre. A common approach to resist such trappings of political agenda has been to prod us to cultivate scientific temper, specifically a narrow brand of it that recommends a submission of our faculties of judgement to the triad of facts, trials and tests — a mode of rote empiricism. The assumption behind this is that a scientifically-informed public is the best line of defence against politically-motivated news campaigns. But this may not be true according to Kahan’s findings. The smarter we are, the more likely we are to use our intelligence to appropriate information selectively.

German thinker Carl Schmitt, in his 1932 essay, ‘The Concept of the Political’, pointed out that politics, in its most primitive and naked form, is founded on a public distinction between friends and foes. In this framework, politics subscribes to the logic of cultivating the threat of an “enemy” for a group. And this threat may be real, or a mere perception. Being “political”, then, is our ability to recognise our affinity to specific group cognitions that help us identify our friends and enemies. Political parties and identity-focused pressure groups are “political” associations in this sense. Such organisations are appealing to our sense of “difference” from the other. The more these political associations can evoke in us this sense of “difference”, the likelier we are to strengthen our support for them. Perhaps, this explains why some political parties witness an increase in their vote shares when they instigate riots, or at least create a polarised environment.

Given the clout political judgements enjoy over scientific rationality, it becomes all the more important to be cautious and methodical in the reasoning we employ to support a specific political argument. Today, we don’t think twice about endorsing political positions that ignore humanistic principles, just for the momentary satisfaction of expressing anger, disgust or disappointment. But, by doing this, we are merely being pawns in a game orchestrated by our own faulty cognition, which select groups of hate-mongering media houses and political parties capitalise. The sad reality seems to be that we are wielding no true political agency. Contemporary political action should be less about acting against the enemy and more about attaining a mature scepticism towards our own biases.

Source: Internet Newspapers and anupsen articles

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