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Banking News dated 4th October 2018

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Banking News: October 4, 2018


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Wage Revision: Discussions with IBA

Wage Revision: Discussions with IBA

Text of UFBU Circular No. UFBU/2018/16 dated 01.10.2018
Issued by Sanjeev Bandlish, Convenor, UFBU


Dear Comrades,
  • Discussions with IBA on our Charter of Demands
  • IBA proposes Fixed Pay & Variable Pay Scheme/Performance Linked Emoluments based on Operating Profits and Return on Assets


One more round of Bipartite Discussions were held on 29-9-2018 between UFBU and IBA at Mumbai.  In continuation of the last round of discussions, IBA wanted to know our reaction to their offer of 6% hike made in the last round of talks.  Responding to their question from our side, we pointed out that their offer is too inadequate and we asked IBA to improve their earlier offer.

However, IBA proposed that in addition to 6% hike offered by them which would be common to all Banks, additional wage increase can be worked out through a scheme by which in each Bank annual increase in emoluments can be offered based on Operating Profits and Return on Assets of the individual Bank with a view to add an element of performance linked compensation over and above the uniform pay structure.

IBA detailed their proposal as under:


%  increase YoY in Operating Profit
Return on Assets - ROA
Category C
0.01 % to 7 %
- 0.75 to – 0.25
Category B
7.1 % to 15 %
- 0.24 to 0
Category A
Above 15 %
Above 0

No. of days for which Establishment Cost shall be paid out
Return on Assets

Category
A
B
C

Operating Profit
(YoY Growth)
A
30
25
15
B
25
20
10
C
10
10
5

Pay Out as % of Establishment Cost
Return on Assets

Category
A
B
        C

Operating Profit
(YoY Growth)
A
8.2 %
6.8 %
4.1 %
B
6.8 %
5.5 %
2.7 %
C
4.1 %
2.7 %
1.4 %


YoY Growth   in Operating Profit

Return on Assets

Cate-gory
No. of days
for which Establish-
ment Cost will be paid out
Pay Out  as %  of Establish-ment  Cost
Above 15 %
Above 0
AA
30 days
8.2 %
Above 15 %
- 0.24 to 0
AB
25 days
6.8 %
Above 15 %
- 0.75 to – 0.25
AC
15 days
4.1 %
7.1 % to 15 %
Above 0
BA
25 days
6.8 %
7.1 % to 15 %
- 0.24 to 0
BB
20 days
5.5 %
7.1 % to 15 %
- 0.75 to – 0.25
BC
10 days
2.7 %
0.01 % to 7 %
Above 0
CA
15 days
4.1 %
0.01 % to 7 %
- 0.24 to 0
CB
10 days
2.7 %
0.01 % to 7 %
-0.75 to –0.25
CC
5 days
1.4 %

IBA sought the reaction of UFBU to their proposal.  From UFBU, we have pointed out that their above proposal based on performance/profits of the Banks is not an answer to our demand for increase in wages due to inflation, price rise, cost of living, increased workload and job profile of bank employees and officers.  We reiterated that the IBA’s offer of 6% hike should be substantially improved upon.

IBA while stating they are not averse to increasing their 6% offer, wanted UFBU to consider their proposal looking to the present varying Operating Profits of the Banks and consequent paying capacity.  IBA proposed that UFBU may study their proposal and come out with suggestions or alternative proposals for their consideration.  IBA also informed UFBU to revise the demands in terms of total cost in order to arrive at a negotiated solution.  It was decided that the issue would be further discussed in the next round of discussions.

Merger of DA with Basic Pay:  We proposed that Dearness Allowance upto 6352 points of Consumer Price Index (Quarterly Average of July, August, September, 2017 i.e. DA paid from November, 2016) be merged with Basic Pay for constructing the revised Pay Scales.  IBA informed that they would give their reaction in the next round of discussions.

UFBU Meeting:  In the UFBU meeting held thereafter, it has been decided to hold UFBU meeting on 14th October, 2018 to discuss the proposal of IBA and give our reactions thereupon.

Renewal of Medical Insurance Policy:  The Medical Insurance Policy for serving employees and officers of the Banks is being renewed w.e.f. 1-10-2018 based on the revised quotation received UIIC. 


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India risks U.S. sanctions with
$5-billion purchase of Russian missiles

Sanjeev Miglani & Lesley Wroughton
The Reuters
Published on October 3, 2018


New Delhi & Washington, October 3 (Reuters): The United States has warned India against a planned purchase of S-400 surface-to-air missiles from Russia when President Vladimir Putin visits New Delhi this week, saying such an acquisition would attract sanctions under U.S. law.

India’s military wants the missile batteries, both as a deterrent against China and to gain an edge over traditional rival, Pakistan, as they are able to track and shoot down combat aircraft, even stealth planes, at unprecedented ranges. India and Russia will sign the missile deal, estimated at more than $5 billion, during Putin’s visit for annual summit talks with Indian Prime Minister Narendra Modi beginning on Thursday, a Kremlin aide said.

But the United States has warned countries trading with Russia’s defence and intelligence sectors they would face automatic sanctions under a sweeping legislation called Countering America’s Adversaries Through Sanctions Act (CAATSA) that President Donald Trump signed into law last August. The law is designed to punish Putin for the 2014 annexation of Crimea from Ukraine, involvement in the Syrian civil war and meddling in the 2016 U.S. presidential election.

“We urge all of our allies and partners to forgo transactions with Russia that would trigger sanctions under the CAATSA,” a U.S. State Department representative said. “The administration has indicated that a focus area for the implementation of CAATSA Section 231 is new or qualitative upgrades in capability – including the S-400 air and missile defence system.”

Last month, the United States imposed sanctions on China’s military for its purchase of combat fighters as well as the S-400 missile system it bought from Russia this year. The United States is also concerned about NATO ally Turkey’s decision to buy the Russian missile system, seeing it as incompatible with the alliance systems.

Modi’s government, caught in the U.S.-Russia crossfire, hopes the Trump administration will give it a pass on the proposed arms transfer from Russia, officials in New Delhi said. Defence Minister Nirmala Sitharaman told reporters India was closing in on the deal to buy the air defence system from Russia, with which it has long-standing military ties.

“Negotiation on S-400 air defence systems has been on for a long while and it is at a stage where it can be finalised,” Sitharaman said last week. “We have a big legacy of buying defence equipment from Russia.”  More than 80 percent of India’s military equipment was of Soviet origin during the days of the Cold War, but since its breakup New Delhi has diversified its weaponry.

The United States is one of its top arms suppliers, closing $15 billion worth of deals in just the last decade.  U.S. firms Lockheed Martin and Boeing lead the race to sell the Indian military hundreds of aircraft to replace its ageing Russian MiG planes. The Modi government hopes the Trump administration will not disrupt burgeoning defence ties with the world’s biggest arm importer by levying sanctions the U.S. Congress has sought.

The Trump administration faced competing pressures from Congress pursuing a hard line on Russia, said Jeff Smith, a specialist on South Asia at the Heritage Foundation. “The administration was critical of the CAATSA and fought hard for a national security waiver at the cabinet secretary level but was denied by Congress,” he said. “The administration is not only trying to navigate competing geopolitical interests but relatively stringent conditions imposed by a Congress determined to tie its hands on Russia policy.”


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India's rescue of debt-ridden IL&FS
may spell Major losses for Lenders

Manoj Kumar & Promit Mukherjee
The Reuters
Published on October 3, 2018


It is becoming clear some of its lenders will need
to suffer major losses: Finance Ministry Official

New Delhi & Mumbai, October 3 (Reuters):  India’s move to take control of debt-laden Infrastructure Leasing and Financial Services (IL&FS) will only succeed if lenders agree to take substantial losses, government sources familiar with the discussions told Reuters.

The federal government on Monday replaced the board of IL&FS, a major infrastructure financing and construction firm, after its failure to honour debt obligations sent shockwaves through Indian financial markets.

The beleaguered company’s debt pile had grown to more than 900 billion rupees ($12.33 billion) as it rode a lending boom among so-called non-bank financial companies (NBFCs), or the shadow banking sector, which manage an aggregate loan book of nearly $300 billion.

But IL&FS had compromised on corporate governance and risk management norms, the government told the company law tribunal on Monday as it explained why it intended to take over the firm. The new six-member IL&FS board will prepare a revival plan, but it is becoming clear some of its lenders will need to suffer major losses, one finance ministry official said.

“It may be difficult to save it (IL&FS) unless the lenders agree to take substantial haircuts,” said the official, who declined to be identified due to the sensitivity of the matter. The official added that there had been no discussions with the company’s lenders, among them India’s largest bank, the State Bank of India, and state-owned lenders, such as Bank of India and Punjab National Bank.

A second government source echoed those views, saying IL&FS needed nearly 150 billion rupees ($2 billion) in financial support to avert a collapse and could only be saved if lenders agreed to take a big haircut. The IL&FS fallout has already roiled stock markets and the government has scrambled to contain further damage that could undermine confidence in the financial sector.

A credit crunch in financial markets also does not bode well for Prime Minister Narendra Modi, who is already facing a growing backlash over rising fuel prices, a falling rupee currency and farmer protests over low crop prices months before he seeks a second term at an election due by next May.

The government has said IL&FS was presenting a “rosy picture and camouflaging” its financial statements, but still wants to ensure adequate liquidity for it to avoid further defaults. One of the government sources, however, cautioned that more defaults cannot be ruled out, as IL&FS needs to repay more than 250 billion rupees by March 2019.

India’s parliamentary panel on finance on Wednesday decided to investigate the IL&FS matter and its members will visit Mumbai this month to meet the new board, a source with direct knowledge of the deliberations said. They will also talk to finance ministry officials, the source added.

Separately, India’s Serious Fraud Investigation Office (SFIO) has launched an inquiry into alleged financial irregularities at IL&FS, questioning its top management and searching its offices, the Economic Times newspaper said. Reuters could not immediately reach SFIO officials to seek comment.


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KC Chakrabarty’s PNB stint under
CBI lens for alleged wrongdoing

Raghav Ohri
The Economic Times
Published on October 4, 2018


New Delhi, October 3: The Reserve Bank of India (RBI) deputy governor KC Chakrabarty is under scrutiny by the Central Bureau of Investigation (CBI) over his alleged “indiscretions” as chairman of Punjab National Bank, said one of several people with knowledge of the matter.

The investigations don’t relate to his time at the regulator, they said. A second case involving Chakrabarty pertains to allegations of forgery made by Indian Overseas Bank against a travel company. Chakrabarty has denied all allegations of wrongdoing.

He figures as a suspect in CBI’s investigation into the debt default by Vijay Mallya founded Kingfisher Airlines. Chakrabarty was chairman and managing director of PNB from 2007 to 2009. The agency is probing his role in the disbursal of “high-risk” loans to Mallya’s companies “with minimal security,” said one of the persons cited above.

ET has also learnt that the role of another top-level RBI officer, who was in office until 2010, was examined by the agency. The RBI’s regulatory role in maintaining standards for lending was also looked into. Besides the RBI officer, the role of two former top bureaucrats during the second term of the United Progressive Alliance (2009-14) was also scrutinised by the agency. They belonged to the finance and civil aviation ministry, said the people cited above.

The agency is said to be probing a “larger conspiracy” involving government officials and bankers over loans to Mallya without ensuring adequate collateral. ET was the first to report on August 1 that CBI is preparing a charge-sheet in the case pertaining to loans of more than Rs 6,000 crore to Kingfisher Airlines by a consortium of 17 banks led by State Bank of India (SBI). The banks are seeking more than Rs 9,000 crore after adding penalties.

A first information report (FIR) was registered against Mallya in August 2016 on the complaint of SBI, which had an exposure of Rs 1,600 crore. PNB and IDBI Bank have an exposure of Rs 800 crore each, followed by Bank of India at Rs 650 crore, Bank of Baroda at Rs 550 crore and Central Bank of India at Rs 410 crore. ET had reported on September 17 that CBI informed a local court that Chakrabarty was a “suspect” in two cases.

Besides the Mallya case, Chakrabarty is a suspect in a forgery case filed by Indian Overseas Bank against a Delhi-based travel company-  Airworth Travels & Tours. Chakrabarty, who was deputy RBI governor between 2009 and 2014, denied all accusations of wrongdoing in a May 15 letter to the CBI director. Dismissing his petition seeking to be allowed to travel abroad, CBI court special Judge Savita Rao had held that the agency’s concern that Chakrabarty may not return from overseas and escape justice was legitimate.

“We, advocates of KC Chakrabarty, Shailesh N Pathak and Vibhav Mishra of VSP Legals, decline to comment on the merits of the case except for the fact that KC Chakrabarty is completely innocent and the order of the lower court is based entirely on conjecture and surmise, over which, we have a firm belief that it shall not sustain in appeal,” the law firm had told ET last month in an email. The court held Chakrabarty’s presence was required in the two cases.

“The applicant had been summoned as witness but it is stated by IO (investigating officer of CBI) that the applicant is the suspect and required for further interrogation as well as his presence is required for confrontation with records as well as with the accused TK Bose and Gaurav Mehra (promoter of Airworth),” according to the September 5 court order.


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Rupee closes at record low of Rs 73.34 per USD

The Moneycontrol News
Published on October 3, 2018


Mumbai, October 3: Indian rupee ended at a record closing low of 73.34 per dollar on Wednesday on the back of strong demand for US dollar from importers amid rising global oil prices. It has touched a record low of 73.41 in the morning trade, while it saw some recovery during the day after it opened lower at 73.24 against Monday's close of 72.91 per dollar.

Forex market remained closed Tuesday on account of Gandhi Jayanti. According to IFA Global currency report, higher crude prices would continue to weigh on domestic bonds and the rupee. The next domestic trigger would be the tone of the RBI policy on Friday.

Rushabh Maru - Research Analyst, Anand Rathi Shares and Stock Brokers said, The rupee has made a new record low today on back of consistent rise in the crude oil prices. Sharp rise in the crude oil prices along with steep depreciation in the rupee might push inflation higher in coming months."

"Sharp volatility in the domestic equities and steep FIIs outflows from equity and debt segments keeping sentiments bearish for the rupee. The dollar index is hovering around multi-months high as the Federal Reserve continues to raise interest rates aggressively," he added.


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Oil shock puts rupee on course to
beat taper-tantrum losses in 2013

Kartik Goyal
The Bloomberg News
Published on October 3, 2018


Predictions that crude could return to $100 per barrel signal that things may get a lot worse for rupee in final 3 months of 2018.

Mumbai, October 3 (Bloomberg):  Move over taper tantrum. The Indian rupee looks set to outpace losses seen in 2013 as efforts by policy makers to stem its rout fall flat in the face of rising oil prices and relentless foreign outflows.

Down more than 12 per cent as Asia’s worst currency in 2018, predictions that crude — India’s biggest import — could return to $100 per barrel signal that things may get a lot worse for the rupee in the final three months of the year.

Back in 2013, the currency had rallied in the October-December period following a two-quarter plunge of more than 13 per cent on indications the Federal Reserve would wind back stimulus.

“It’s pretty difficult to see a huge turnaround in the rupee,” said Khoon Goh, the head of research at Australia and New Zealand Banking Group Ltd. in Singapore. The underlying causes for the rupee’s weakness — higher oil and foreign outflows due to higher U.S. rates — will still remain, he said.

The rupee has been setting one record low after another recently, with overseas investors having pulled a net $9.1 billion from Indian stocks and bonds this year amid an emerging-market selloff. Strategists have been playing catch up as losses accelerate, with the median year-end estimate for the currency now at 72 per dollar versus 69 at the end of August.

ANZ is far more bearish, with a forecast of 74. That compares with the rupee’s latest record low of 72.9750 reached on Sept. 18, and is 1.5 per cent weaker than its close of 72.9125 on Monday. Indian markets were shut Tuesday for a holiday.

One positive for the rupee is that its implied volatility has remained lower than in 2013. That also perhaps explains the lack of aggressive intervention by the Reserve Bank of India in the currency market, even as policy makers have taken other measures. The RBI has for long maintained that it steps in only to curb undue volatility and doesn’t target any particular level of exchange rate.

As comparisons are made with 2013, there has been some speculation that the central bank may revisit a policy it employed that year of opening a foreign-exchange swap window to meet the entire daily dollar requirements of Indian oil-marketing companies.

For now, the oil surge means that India’s current-account deficit is estimated to widen to $75 billion in the fiscal year to March, or 2.8 per cent of gross domestic product, according to Bank of America Merrill Lynch. That would be the highest since fiscal 2013.

The RBI has limited options to meaningfully influence the rupee’s trajectory in the near term, which implies that the currency will remain exposed to the ebbs and flows of global tides, according to Siddhartha Sanyal, an economist at Barclays Plc. He predicts the rupee will depreciate to 74.50 per dollar by end-December.
 – Bloomberg


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State Bank of Mauritius' India operations hit
by USD 14 million cyber fraud on October 2

The Press Trust of India
Published on October 3, 2018


An internal inquiry has been initiated and the matter
reported to the relevant authorities for investigation.

New Delhi, October 3 (PTI): India operations of State Bank of Mauritius were hit by cyber fraud on October 2, according to a statement.

In a statement, SBM Holdings (SBMH) said that no loss has been caused to customers and the Indian business operations would continue as normal.

On October 2, the India operations of SBM Bank (Mauritius) Ltd was the subject of cyber fraud with a maximum potential loss of USD 14 million, it added.

According to the statement, an internal inquiry has been initiated and the matter reported to the relevant authorities for investigation.

The SBM Group remains well capitalised and has sufficient liquidity to continue to finance its future plans, it added. SBM Bank is part of the group.


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Why merger of PSBs is not a good idea

B Yerram Raju
The Business Line
Published on October 4, 2018


Human resource and cultural issues apart, most mergers
in the past haven’t led to improvement in profits

Emboldened by the apparently frictionless merger of the associate banks with SBI, the Ministry of Finance has decided to merge two weak banks with one strong bank, namely, Bank of Baroda, Dena Bank and Vijaya Bank, in the PSB (public sector bank) space. That this should happen exactly 10 years after the Great Recession of 2008, which was triggered by big banks, indicates a certain overconfidence about financial stability in India.

Since nationalisation, Indian banking has grown and exhibited much diversity in size, content and structure, represented by PSBs, regional rural banks, new generation private banks, old private banks, foreign banks, cooperative urban banks, cooperative rural banks, small payments banks, small finance banks, and NBFCs.

Business correspondents support the financial inclusion efforts of banks. Such diversity and effective regulatory oversight contained the contagion effect of the decade-old global recession on the Indian economy. The Narasimham Committee (1994), while arguing for six large globally competitive banks, preferred closing the weak banks to merging them with strong ones.

There have been 39 mergers and takeovers during the post-nationalisation period, which includes the SBI merger. It is important to draw lessons from all these mergers.

While all banks reduced their presence in rural and semi-urban, non-profitable centres post-liberalisation, SBI, post-merger, closed 5,000 branches, thus effectively guillotining the plan to reach the unbanked poor.

Regulator-driven financial inclusion efforts of 2005, board-monitored measures, and Jan Dhan have supplemented the financial inclusion agenda. India Post Bank is the new institution aimed at taking banking services to the doorsteps of the least banked.

Against this backdrop, the latest merger is enigmatic.

Former RBI Governors YV Reddy, D Subba Rao and Raghuram Rajan have, on one occasion or the other, cautioned the government against seeing consolidation as a panacea for the ills of the banking system.

Though the RBI’s Financial Stability Report has estimated healthy economic growth of over 7.5 per cent for 2018, it has warned against complacency. And, this comes despite legal and regulatory measures to stem the NPA (non-performing asset) rot in banking through ‘market-based resolution plan for insolvency’ (IBC), putting 11 banks under surveillance via prompt corrective action plan, and continuing efforts to de-stress the sector.

The government, however, has put together another merger, even before the results of the PCA were known.

Of the three banks — Bank of Baroda, Vijaya Bank and Dena Bank — slated for merger, BoB is on the plate for the second time in the merger exercise. As at the end of 2017-18, BoB was the biggest with a total income of Rs. 50,306 crore, a net loss of Rs. 2,432 crore and net NPA of 5.5 per cent.

Vijaya Bank comes next, with a total income of Rs. 14,190 crore, a net profit of Rs. 727 crore, and net NPA of 4.4 per cent. And, Dena Bank recorded a total income of Rs. 10,096 crore, a net loss of Rs. 1,923 crore, and a net NPA of 11.95 per cent.

Profitability ratios

Results of a study by Jagadeeswaran et al on the pre- and post-merger comparisons of profitability — with the year of merger as base year — in the case of SBI, IOB, BoB, PNB, IDBI and OBC reveal that net profit to total income, net profit to interest income, net profit to total assets and net profit to net worth declined for all except PNB and BoB. The exception was partly due to the period of merger, when the capital regulations post-Basel did not hit them. Banking is all about financial intermediation.

People are at the epicentre, both in front and behind the counters. The culture of the institutions is intertwined with the culture of the regions. Human resource and cultural issues have impeded the success of mergers across periods and nations.

It is, therefore, important that the big banks think twice before turning into unwieldy conglomerates. Basic banking and customer services cannot be compromised.

The government would do well to start development banks to fund infrastructure projects and, thereby, relieve PSBs of this task. Experience has demonstrated that PSBs are not right channel for the job as it involves their funding long-term projects with short term resources.

Universal banking did enough damage with banks selling more third-party products, eyeing hefty commissions, instead of focussing on core banking operations. Hopefully, thanks to the latest directive from the Finance Ministry, this damage will be minimal, where banks alone will stand to gain, and not the officials selling such products.

Looking ahead

While past accomplishments are no guarantee to future success, past failures can serve as good foundation for enduring success. To improve its own stock, the government would do well to concentrate on improving governance in PSBs, pledge not to interfere in loan sanctions, and move a resolution in Parliament that no party would indulge in loan write-offs either for the farm or other sectors unless the areas are affected by severe natural calamities.

Further, higher capital allocation with or without Basel-III cannot prevent bank failures triggered by systems, people and processes.

Both demonetisation and GST had hit not just the MSMEs but also resulted in the lengthening of processing time. Even politically speaking, with elections round the corner, toying with the financial sector with mergers looks faulty, unwise and untimely.

The writer is an economist and risk-management specialist.


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Would not suggest demonetisation to any country: New IMF chief economist Gita Gopinath

Mahua Venkatesh
The Print Online
Published on October 2, 2018


Gita Gopinath also criticised the RBI for its communication
strategy during demonetisation but called GST a ‘real reform’

New Delhi, October 2: The newly-appointed chief economist of the International Monetary Fund, Gita Gopinath, was a vocal critic of the Narendra Modi government’s demonetisation move, but called the Goods and Services Tax a ‘real reform’.

In a Walk the Talk conversation last year with ThePrint Editor-in-Chief Shekhar Gupta, Gopinath said no macro-economist would recommend this prescription (demonetisation) for any developing or advanced economy. The Modi government’s demonetisation drive shook the Indian economy on 8 November 2016 by sucking out 86 per cent of the cash in circulation overnight.

Demonetisation

In Walk the Talk, the 46-year-old economist called the drive unprecedented. “Not only unprecedented in terms of practice, it is also unprecedented in terms of theory. Because pretty much every single macro-economist colleague of mine, whom I have spoken to, would say that this is something that we probably do not recommend to any developing country,” said Gopinath.

“Even in an advanced economy, you wouldn’t do that,” said the John Zwaanstra professor of International Studies and Economics at Harvard University.

However, Gopinath added that India could move towards a less-cash economy, leaving more money in the banks, as a positive impact of the demonetisation drive.

“So, for demonetisation, I think the biggest plus has been the shift away from a cash-driven economy to a cashless economy. Maybe more parts of the informal economy become formal, but everything we know on this transition process is that it’s a slow one. So, I don’t expect anything to happen very quickly,” Gopinath said.

Referring to the argument that more cash meant more corruption, Gopinath said Japan had the highest cash per capita, way more than India. “The cash in circulation, relative to the gross domestic product (GDP) for India was 10 per cent, whereas in Japan it is 60 per cent. That is not black money, that is not corruption,” she noted in an interview to news daily Business Standard.

In the same interview, Gopinath underlined the implementation of the Goods and Services Tax (GST) as a favourable move and termed it a “real reform”. She said GST was a way of formalising the economy and ensuring tax compliance. The time that was used to manage the aftermath of demonetisation should have been effectively used to roll out GST smoothly, she added.

RBI

Gopinath also criticised India’s central bank for its communication strategy during demonetisation. “I think a few things that could have been done better would have been the communication from the RBI (Reserve Bank of India), even in real time, about how they expect things to play out, where things stand. So, there could have been a more regular communication with the public than has happened,” she said in Walk the Talk.

“There could have been more transparency in terms of how they thought this particular policy would affect the economy.”

Even as many raised questions on the role of RBI in the demonetisation drive, Gopinath said its governor Urjit Patel was “terrific” and his appointment made her happy.

However, the economist added that demonetisation could eventually benefit the Indian economy, six months or a year ahead.

Lack of authenticity of data

In the interview to Business Standard, Gopinath said India needed to focus on data and its collation as gathering credible data is a tall task in the country.

“What needs to be done generally for policy in India is just better data. It’s not great when everybody, everywhere, seems to be suspicious of the GDP numbers,” Gopinath said.

She further pointed out that investment remained weak in India and this trend existed even prior to demonetisation.


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RBI has the unenviable job
of facing multiple challenges

Radhika Rao
The Moneycontrol News
Published on October 3, 2018


Being a central banker is an unenviable job in this environment. The Reserve Bank of India (RBI) has been no exception, as it juggles multiple priorities, in the face of external and domestic challenges. After five years of relative calm in the global environment, risk catalysts have concurrently re-surfaced. This has jeopardised the central bank’s policy response framework, as it tackles the need to raise rates to safeguard the rupee, ensure ample domestic liquidity to lift growth, and compensate, when required, for fiscal slippage risks.

Globally, the US Federal Reserve has delivered eight rate hikes in the ongoing cycle, with 4-5 more in the pipeline before 2019-end. This has raised risks of capital outflows from emerging markets and lifted dollar funding costs, hurting firms with unhedged exposure or without natural cover from dollar receivables. The economy’s gross external financing ratio also paints an unfavourable picture for India next year as short term external debt falls due for payment. A stronger dollar has meanwhile spelt trouble for the rupee, which has retained its position as the regional underperformer since Q2 CY18.

Oil prices are clearly the biggest risk facing the economy, worsening the current account, inflation and fiscal balances. The government has prudently held back from either reinstating subsidies or cut taxes to lower record high domestic fuel prices. Approaching elections and relative inelasticity of domestic energy demand, however, suggests the fiscal and external balances will continue to be tested. Finally, global protectionist policies threaten world demand, providing little respite to India’s exports performance. A cheaper rupee is unlikely to materially add to competitiveness or lift exports if global demand wanes on tighter trade controls.

These challenges complicate the RBI’s policy framework. At home, the likelihood of inflation undershooting RBI’s H2 FY19 projection calls for a rate cut. However, persistent cost-push factors i.e. high oil prices and a weak rupee, risks hardening inflationary expectations and disrupting the current benign inflation outlook.

It is necessary to acknowledge that India is more open than is believed, and hence monetary policy should factor in the direction of global interest rates and what it means for the domestic market. To this extent, a gradual rate hiking cycle is likely, with the gradient subject to evolving global and domestic drivers. In addition to a likely 25 bps hike this week, we foresee at least another 25 bps increase in CY18.

We are also mindful that an aggressive rate hiking cycle, akin to Indonesia (150 bps this year) and Philippines (150 bps), is unlikely. A smaller exposure of foreign investors to Indian government debt (which is more sensitive to rate movements) limits the upside from a sharp increase in policy rates. Also, a higher proportion of FPIs into India are invested in equities than debt, with the latter already subject to regulatory controls and pre-set thresholds.

Moreover, a rate hike at this juncture is largely symbolic, with market-based borrowing cost up 90-100 bps since January on tighter liquidity, while the repo rate is up 50 bps over the same period. Capital outflows, slower deposit growth, higher currency in circulation and persistent forex intervention have squeezed liquidity conditions. Ample support is necessary to support ongoing deleveraging efforts in the banking sector, apart from accommodating the government’s bond issuances. In the rupee-denominated credit space, spill over worries from a domestic NBFC default and potential asset-liability mismatch drove up short term rates, widening credit spreads, depressing equity price action and driving down the rupee. To address these, the central bank has undertaken directed measures to ensure that systemic liquidity remains close to neutral rather than a significant deficit.

The extent of RBI’s heavy lifting also depends on fiscal slippage risks. Political priorities are likely to rise in this pre-election year. However, fiscal orthodoxy should not be sidestepped, particularly after the medium term deficit target of -3 percent of GDP has been pushed back multiple times. The Centre’s April-August fiscal deficit has already hit 95 percent of the budgeted target, as capital expenditure is being frontloaded (44 percent of budgeted versus 36 percent last year).

A weaker-than-required run rate for Goods & Service Tax collections and slower progress on privatisation might require expenditure to be curtailed in H2 FY19 to meet the fiscal deficit target of -3.3 percent of GDP. A bigger problem, however, lies with states, which has diluted the Centre’s fiscal consolidation efforts. As a result, the state plus central deficit at -6.9 percent of GDP in FY18 is little changed from -7.2 percent in FY15. Higher the risk to fiscal consolidation, more the risks of monetary tightening this year.

In nutshell, the RBI will seek a balance between its various priorities. Any sharp deterioration in the global environment will still require monetary policy to be put forth as the first line of defence, followed by other resource mobilisation efforts (read: non-resident Indians deposits/bonds), if the balance of payments deficit widens sharply.

(Radhika Rao is an economist, DBS Group Research, Singapore)


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India’s ostrich club and the global recession

Parsa Venkateshwar Rao Jr
The Asian Age
Published on October 3, 2018


New Delhi: L’affaire Infrastructure Leasing and Financial Services (IL&FS) meltdown is not a freak incident. It is an inherent market risk for companies to fail, for good reasons and bad. Inquiries might unearth corporate mis-governance in the case of IL&FS, but that is an entirely different story. The moral of the market economy is that small disasters trigger bigger ones, potentially. It is a lesson that Indian economists do not sufficiently emphasise, and to which political leaders turn a blind eye to. This takes us to the main issue: Did India’s eggheads ponder over what has come to be known as the Great Recession, which continues to linger after a decade?

Most Indian politicians, policymakers and economists have displayed a strange indifference to the major quake that shook the global economy, first in the United States and then in the European Union, from 2007-08 through 2017-18. In December 2008-January-2009, then finance minister Pranab Mukherjee announced a Rs 40,000-crore stimulus package for the industry to smoothen their frayed nerves, which had its own deleterious effects on the government’s growth and financial deficit numbers. In 2013, P. Chidambaram, in his second run as finance minister, had to face the rupee volatility after the US Federal Reserve announced its decision to taper its unusual monetary policy (UMP) of infusing funds into the tottering financial and industrial institutions. There was a flight of capital from emerging market economies like India, and it dampened the Indian economy’s prospects.

The leaders of the BJP, who were then in Opposition, including former finance minister Yashwant Sinha, then Leader of the Opposition in Rajya Sabha Arun Jaitley and then Rajya Sabha member Nirmala Sitharaman mercilessly flayed the UPA-2 government over the country’s dithering economy, and refused to accept the argument that the global economic squall had battered the Indian markets, especially exports. The argument put forward by the leaders of the BJP and others was that India did not depend on exports for its economic growth, and that the huge domestic market and the consumption it entailed was good enough to keep the economy in shape and the global developments were marginal. After the BJP came to power in May 2014, Ms Sitharaman, as commerce minister, put up a stoic front in the face of sluggish exports and finance minister Arun Jaitley confessed that seven per cent growth in GDP was laudable in the face of a subdued global economy.

In the immediate aftermath of the outbreak of the financial crisis, the Communist parties claimed credit for the relative stability of the Indian economy because they said they did not allow the government to liberalise the financial sector, and therefore no harm was done. It turned out, however, that the undisclosed global exposure of State Bank of India (SBI) and ICICI Bank ran into a few hundred million dollars. The Left was supporting UPA-1 from the outside and they exerted an invisible veto on what the government could do on the economic policy front. That is the reason for the Left’s tone of triumphant satisfaction.

The Left parties and their intellectual fellow-travellers did not, however, proclaim the end of capitalism after the 2007-08 implosion. The criticism was muted as there was no alternative socialist model anywhere in the world which they could cite as a counter-example. The Left’s discomfiture in raising the ideological battle cry against the failing global markets was understandable. But it was the silence of the market economists, the liberals and right-wingers, that was of greater concern. For over a quarter century after the collapse of the Soviet Union and along with it the state-controlled economy, the boast of the market economists had been that the markets were sure-fire engines of growth and prosperity.

Moral critics of unbridled greed like Nobel Prize-winning economists Joseph Stiglitz and Paul Krugman were gloating in their self-righteousness, but they were not addressing the structural flaw in the market system that had led to the breakdown. Nassim Nicolas Taleb’s “black swan” event explanation is interesting, and it should have led to greater analysis of the unpredictability of the markets and should have created the equivalent of quantum mechanics in economics, but it did not. Perhaps the real world cannot bear too much of probability and unpredictability. The only moment of critical self-awareness among the free market economists came when they rediscovered American economist Hyman Minsky’s 1980s’ analysis of the phenomenon of securitisation and how it could lead to complications of multiple mortgages and thus lead to a collapse. For a moment, Hyman Minsky became the prophet before his time!

In India, the only man who seems to have looked at the reality of the frayed free market system was former Prime Minister Manmohan Singh, who did not ever flaunt his credentials as a trained and professional economist, but who was deferred to at the G-20 meetings that became regular post-2007-08, who made the clear-eyed observation in his speech at the UN General Assembly on September 24, 2011: “Till a few years ago, the world had taken for granted the benefits of globalisation and global interdependence. Today we are being called upon to cope with the negative dimensions of those very phenomena.” But he did not go any further than that.

The free market enthusiasts in the country appear to be too embarrassed to discuss the issue of the inevitable market crashes that are bound to occur because they had rather naively believed the market to be the proverbial horn of plenty, and that no inefficiencies could be associated with it. There is a slow veering round to the view, which would have been laughed out of court a few years ago, that the State has a necessary role to play in sustaining the markets.


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Deepening farm crisis in India
could hurt Modi's re-election bid

Rajendra Jadhav & Mayank Bhardwaj
The Reuters
Published on October 3, 2018


Mumbai & New Delhi, October 3 (Reuters): The financial squeeze on India’s farmers is set to worsen because of record high fuel prices and surging costs of fertilisers, posing a challenge to Prime Minister Narendra Modi in an election that must be held by May.

The rise in input prices could not have come at worse time for farmers, already grappling with falling domestic product prices due to rising yields and abundant harvests.

Yet, the government has few easy options to respond. Rival global producers have complained about Indian state support and falling global farm product prices undermine export prospects.

Indian farmers voted overwhelmingly for Modi in 2014. But a fall in rural incomes risks damaging that support next year.

Thousands of farmers marched on New Delhi on Tuesday to demand better prices for their produce. Police responded with teargas and water cannon. Farmers suspended their protests after talks with officials that ran into early Wednesday morning.

But their demands and those of other agriculture workers, who together make up about half India’s 1.3 billion people, have not gone away.

“Although we have decided to end our protest, we still believe that the government is not serious about addressing the concerns of the farmers,” Anil Talan, national secretary of farmers body Bhartiya Kisan Union, said after the march.

Diesel prices have surged 26 percent this year, making tilling fields, harvesting and transporting crops expensive for India’s 263 million farmers who mostly use diesel tractors.

Alongside rising diesel costs, prices of key fertilisers such as potash and phosphate have jumped nearly 15 and 17 percent respectively in a year, as companies pass on the rise in global prices and the impact of the weak rupee to farmers.

India, the world’s second-biggest producer of staples such as rice and wheat, imports all its potash needs and relies on foreign supplies for nearly 90 percent of the phosphate it uses.

“It’s a double whammy for farmers who have to bear the brunt of lower crop prices and higher input costs,” said Devinder Sharma, an independent food and trade policy analyst, saying this explained “why farmers’ anger has come to the fore.”

Diesel demand is rising as farmers have started harvesting summer crops. After tilling, they will plant wheat and rapeseed, the main winter crops.

Union official Talan said the government needed to prop up commodity prices and keep a lid on farmers’ costs to support the agricultural industry, which accounts for about 16 percent of India’s $2.6 trillion economy.

“Because of higher diesel prices I need to spend nearly 20 percent more on harvesting soybean but soybean prices have crashed this year,” said Uttam Jagdale, a farmer from Pune, about 150 km (94 miles) south of Mumbai.

Nilesh Sable, a cane farmer from Sangli in the western state of Maharashtra, said fertiliser prices were rising each month.

Fertiliser firms say they have little choice but to pass on at least some extra costs due to a sharp fall in the rupee and a 20 percent rise in international potash and phosphate prices.

“Still, we are not passing the entire burden to farmers,” said an official with a state-run fertiliser company, asking not to be named in line with government policy.

Greater farm efficiency is partly to blame. Mechanised farming, high-yielding seed varieties and increased use of pesticides have pushed up harvests. Output of most crops has soared to record levels each year.

India’s production of pulses, such as lentils and beans, surged to 24.51 million tonnes in the year to June 2018, up from 23.13 million tonnes in the previous 12 months.

Imports of pulses, such as lentils from Canada, Australia and Russia, fell to 1.2 million tonnes in the financial year to March 2019, the lowest since 2000/01 and well below the 6.6 million tonnes imported in 2016/17 after back-to-back failures in the monsoon.

Plentiful supplies extend to other crops. India is set to surpass Brazil as the world’s top sugar producer in the 2018/19 season, but rising output has driven down local sugar prices by 15 percent and left mills nursing losses.

In bid to help the sector, the government unveiled measures last week such as transport subsidies and incentives to export at least 5 million tonnes of sugar. Brazil, Thailand, Australia and other rival producers were quick to complain.

Vegetable prices, especially onions, cabbage and tomatoes, have also fallen 25 percent from last year, largely because of overproduction. Without enough refrigerated trucks, excess production cannot be stored.

Domestic milk prices dived more than 25 percent in the past year, but a global glut has made Indian exports uncompetitive.

Harish Galipelli, head of commodities and currencies at Inditrade Derivatives & Commodities in Mumbai, said India needed to find markets abroad to reduce its inventories.

“But exports will not be easy, as global prices are depressed, and there is no export parity for most commodities,” he said.

Source: Internet Newspapers and anupsen articles

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