T.V.Gopalakrishnan , Mumbai , says: The indirect tax hikes will further worsen the inflationary conditions.Though inflation is stated to be the worst enemy of poor people, nothing is done to contain inflation.The savings rate has been declining and if one analyses even the pesent savings, it will be from upper middle class and hign net worth individuals. The savings from poor strata of society and lower middle class people have been on the decline because of inflation and this trend is not good for the economy.Any economy which maintains low inflation and low cost of funds will always be performing well interms of GDP growth and unfortunately, this is one aspect which has been ignored by policy makers. Aam admi is suffering and the increase to this lot will be the result of price hike through indirect taxxes.There is paralysis in thinking and action and common man suffers.
(this is in response to an opinion poll in ET dated 2/04/12
Showing posts with label inflation. Show all posts
Showing posts with label inflation. Show all posts
Monday, April 2, 2012
Wednesday, March 14, 2012
Wiil RBI go for a rate cut on 14th in its policy review?
Dr.T.V.Gopalakrishnan , Mumbai , says: The RBI cannot afford to effect any rate cut in its policy review due on 15th for the simple reason that the review comes just before the budget.Further,RBI would like to have an idea about the Govt's approach to contain fiscal deficit.The inflationary pressures continue to persist in the economy and it is too early for the RBI to take a call on rate cut although manufacturing side needs a boost by reduced interest rate. In all probability, the Reserve Bank would prefer to revise the rate downwards in its annual policy review in April.
14 Mar 2012, 1747 hrs IST
(This appeared in ET in response to their Opinion Poll on RBI Rate cut)
14 Mar 2012, 1747 hrs IST
(This appeared in ET in response to their Opinion Poll on RBI Rate cut)
Sunday, March 4, 2012
Budget and Governance Deficit
The Budget should aim at capturing all forms of economic activities, particularly under the unorganised sector, and bring them under the information system formally.
March 4, 2012:
The economy has not been doing well for the past couple of years on account of both domestic and external factors. GDP growth has slowed and is expected to be at 7-7.5 per cent as against the required 9 per cent to make it internationally competitive and justify its position as a fast growing economy among the BRIC nations.
The fiscal deficit, current account deficit and inflation continue to remain high and if the GDP growth does not pick up, the situation will be grim and will erase not only the potential to make up for the loss but also to regain the credibility of investors in particular, which is vital to put the economy back on fast track.
The Finance Minister has a key and a challenging role to perform. He has to make Budget 2012-13 a tool to set right the past mistakes and make the economy perform better.
Plugging the loopholes
There is no disputing the strength of the economy and its potential to make a comeback. Perhaps, the Budget can do the trick provided it is drafted to plug the loopholes in governance and enhance investment, production and consumption, with equal attention to augmenting the revenues without any leakage due to corruption, lack of accountability and proper information system.
The approach should be to ensure accountability for the gaps between expectations and achievements. The industrial, agriculture and services sectors contribute to the GDP and there should be separate targets for investment, production and revenue contributions from these sectors.
To have a clear idea as to which sector performs well and which needs special attention, there should be a separate target for indirect taxes from these three sectors.
The indirect taxes in the form of excise and Customs duties where the scope for corruption is reported to be very high needs to be re examined and thoroughly revamped to ensure that there is absolutely no possibility for manipulation and leakage either in the reporting of transactions or in the revenue collection.
The Government expenditure on these three sectors also needs to be closely monitored to fix responsibility for leakage. The monetary and social benefits from Government spending should be assessed at periodical intervals and accountability for any shortfalls in the achievements needs to be fixed.
There should be adequate checks and balances to ensure that there exists a proper relationship between investment, production, exports, imports and revenue collections and there is no undue misrepresentation of facts by any agency involved.
Usage of subsidies is one area requiring close surveillance and for this the Central Government should have special arrangement, even at a cost, to ensure that subsidy has the desired impact. Information technology should be put to optimum use to strengthen the database and initiate follow-up action.
Corporate governance
The institutions involved should practice corporate governance in letter and spirit and this has to be made verifiable by any agency under social audit. Ethics and code of conduct pursued by institutions and various agencies need to be made transparent and their contribution to national wealth needs to be assessed, rated and recognised. The Budget can definitely find some provision towards this end.
The Budget should aim at capturing all forms of economic activities, particularly under the unorganised sector, and bring them under the information system formally. Many States face labour shortage for agricultural activities even as people are employed in metros and urban areas on contract basis or otherwise and, possibly, without being accounted for employment or income. Though this has helped improve the poverty levels, it does not seem to have captured the attention of the authorities. Financial inclusion, particularly banking, with the support of State governments can be an easy solution for many of the labour-related problems both in the rural and urban areas.
Fiscal deficit which continues to rise unabated has to be closely monitored and reviewed along with the monetary policy review. The agricultural sector, which is identified as one of the major factors influencing inflation, has not been performing well despite having enjoyed favourable monsoon and financial support.
The institutions responsible for poor performance of this sector have to be identified and made accountable. Though agriculture is a State subject, the interference of the Central Government is often blamed for the failure of this sector in not contributing to the GDP to the extent required and reducing inflationary pressures.
The Finance Minister can identify the areas and make necessary changes in the Budgetary provisions to ensure that the Central Government is not blamed. Food subsidy and food security can be made the responsibility of the State Governments with appropriate contribution from the Central Government based on some performance criteria.
Direct taxes
The direct taxes need to be completely re-examined, although the Direct Taxes Code will take care of it as and when it is brought into force. The direct tax for corporates and individuals has to undergo drastic changes.
The uniformity pursued currently for all corporates — irrespective of their capital base, business turnover, exports/imports, corporate governance practices, and social responsibility — has to undergo change to improve competition, transparency, accountability and overall performance and contribution to the economy.
The corporates having more of capital contribution from retail investors and having a turnover of some cut-off limit fixed by the Government should attract lower taxes. This will ensure better distribution of wealth and stability to the capital market.
Similarly, companies having good retail distribution of capital and which are regularly distributing dividends and bonus shares need tax incentives from the angle of capital formation.
Companies that contribute to infrastructure development deserve preferential treatment both for capital formation and distribution of wealth. Companies which are monopolies and closely-held need a different tax treatment from tax angle.
The direct tax for individuals which forms only a insignificant portion of overall tax collections and the exemptions allowed therein have to be made simple and attractive for better compliance.
Savings in the form of financial instruments need to be encouraged and those in the form of gold, silver, real estate, and so on, need to be discouraged. The tax incentives now given for acquisition of house need to continue, but it should be restricted to one house for a family.
The current tax return does not reflect the total assets and liabilities of taxpayers. The return should enable one to report all incomes from various sources without any ambiguity. The return should be made obligatory for all taxpayers above a cut-off point of, say, Rs 10 lakh.
The concept of capital gains/losses should be done away with by suitably changing the Securities Transaction Tax or by introducing some form of transaction tax. Tax should be collected as far as possible at source without expecting individuals, particularly senior citizens, to keep track of transactions, compute taxes and file returns.
TDS
Make the institutions responsible to deduct tax at source and make the individuals, particularly those having income less than Rs 10 lakh, free from grappling with tax matters. It is necessary that all transactions above Rs 5,000 are made through banking channels or through plastic cards, which itself will help improve tax compliance.
The Indian economy has all the resources and talent, but what is missing is the commitment and involvement of all the segments to make it really strong, healthy and vibrant.
As Gandhiji put it, “The difference between what we do and what we are capable of doing would suffice to solve most of the world's problems.”
The Finance Minister through his Budget of 2012-13 should aim to bridge this gap and take the economy forward and fulfil the aspirations of the people.
Dr.T.V.Gopalakrishnan.
( This article appeared in Business Line dt5/3/12
March 4, 2012:
The economy has not been doing well for the past couple of years on account of both domestic and external factors. GDP growth has slowed and is expected to be at 7-7.5 per cent as against the required 9 per cent to make it internationally competitive and justify its position as a fast growing economy among the BRIC nations.
The fiscal deficit, current account deficit and inflation continue to remain high and if the GDP growth does not pick up, the situation will be grim and will erase not only the potential to make up for the loss but also to regain the credibility of investors in particular, which is vital to put the economy back on fast track.
The Finance Minister has a key and a challenging role to perform. He has to make Budget 2012-13 a tool to set right the past mistakes and make the economy perform better.
Plugging the loopholes
There is no disputing the strength of the economy and its potential to make a comeback. Perhaps, the Budget can do the trick provided it is drafted to plug the loopholes in governance and enhance investment, production and consumption, with equal attention to augmenting the revenues without any leakage due to corruption, lack of accountability and proper information system.
The approach should be to ensure accountability for the gaps between expectations and achievements. The industrial, agriculture and services sectors contribute to the GDP and there should be separate targets for investment, production and revenue contributions from these sectors.
To have a clear idea as to which sector performs well and which needs special attention, there should be a separate target for indirect taxes from these three sectors.
The indirect taxes in the form of excise and Customs duties where the scope for corruption is reported to be very high needs to be re examined and thoroughly revamped to ensure that there is absolutely no possibility for manipulation and leakage either in the reporting of transactions or in the revenue collection.
The Government expenditure on these three sectors also needs to be closely monitored to fix responsibility for leakage. The monetary and social benefits from Government spending should be assessed at periodical intervals and accountability for any shortfalls in the achievements needs to be fixed.
There should be adequate checks and balances to ensure that there exists a proper relationship between investment, production, exports, imports and revenue collections and there is no undue misrepresentation of facts by any agency involved.
Usage of subsidies is one area requiring close surveillance and for this the Central Government should have special arrangement, even at a cost, to ensure that subsidy has the desired impact. Information technology should be put to optimum use to strengthen the database and initiate follow-up action.
Corporate governance
The institutions involved should practice corporate governance in letter and spirit and this has to be made verifiable by any agency under social audit. Ethics and code of conduct pursued by institutions and various agencies need to be made transparent and their contribution to national wealth needs to be assessed, rated and recognised. The Budget can definitely find some provision towards this end.
The Budget should aim at capturing all forms of economic activities, particularly under the unorganised sector, and bring them under the information system formally. Many States face labour shortage for agricultural activities even as people are employed in metros and urban areas on contract basis or otherwise and, possibly, without being accounted for employment or income. Though this has helped improve the poverty levels, it does not seem to have captured the attention of the authorities. Financial inclusion, particularly banking, with the support of State governments can be an easy solution for many of the labour-related problems both in the rural and urban areas.
Fiscal deficit which continues to rise unabated has to be closely monitored and reviewed along with the monetary policy review. The agricultural sector, which is identified as one of the major factors influencing inflation, has not been performing well despite having enjoyed favourable monsoon and financial support.
The institutions responsible for poor performance of this sector have to be identified and made accountable. Though agriculture is a State subject, the interference of the Central Government is often blamed for the failure of this sector in not contributing to the GDP to the extent required and reducing inflationary pressures.
The Finance Minister can identify the areas and make necessary changes in the Budgetary provisions to ensure that the Central Government is not blamed. Food subsidy and food security can be made the responsibility of the State Governments with appropriate contribution from the Central Government based on some performance criteria.
Direct taxes
The direct taxes need to be completely re-examined, although the Direct Taxes Code will take care of it as and when it is brought into force. The direct tax for corporates and individuals has to undergo drastic changes.
The uniformity pursued currently for all corporates — irrespective of their capital base, business turnover, exports/imports, corporate governance practices, and social responsibility — has to undergo change to improve competition, transparency, accountability and overall performance and contribution to the economy.
The corporates having more of capital contribution from retail investors and having a turnover of some cut-off limit fixed by the Government should attract lower taxes. This will ensure better distribution of wealth and stability to the capital market.
Similarly, companies having good retail distribution of capital and which are regularly distributing dividends and bonus shares need tax incentives from the angle of capital formation.
Companies that contribute to infrastructure development deserve preferential treatment both for capital formation and distribution of wealth. Companies which are monopolies and closely-held need a different tax treatment from tax angle.
The direct tax for individuals which forms only a insignificant portion of overall tax collections and the exemptions allowed therein have to be made simple and attractive for better compliance.
Savings in the form of financial instruments need to be encouraged and those in the form of gold, silver, real estate, and so on, need to be discouraged. The tax incentives now given for acquisition of house need to continue, but it should be restricted to one house for a family.
The current tax return does not reflect the total assets and liabilities of taxpayers. The return should enable one to report all incomes from various sources without any ambiguity. The return should be made obligatory for all taxpayers above a cut-off point of, say, Rs 10 lakh.
The concept of capital gains/losses should be done away with by suitably changing the Securities Transaction Tax or by introducing some form of transaction tax. Tax should be collected as far as possible at source without expecting individuals, particularly senior citizens, to keep track of transactions, compute taxes and file returns.
TDS
Make the institutions responsible to deduct tax at source and make the individuals, particularly those having income less than Rs 10 lakh, free from grappling with tax matters. It is necessary that all transactions above Rs 5,000 are made through banking channels or through plastic cards, which itself will help improve tax compliance.
The Indian economy has all the resources and talent, but what is missing is the commitment and involvement of all the segments to make it really strong, healthy and vibrant.
As Gandhiji put it, “The difference between what we do and what we are capable of doing would suffice to solve most of the world's problems.”
The Finance Minister through his Budget of 2012-13 should aim to bridge this gap and take the economy forward and fulfil the aspirations of the people.
Dr.T.V.Gopalakrishnan.
( This article appeared in Business Line dt5/3/12
Tuesday, February 7, 2012
Cash Deposit Ratio continues to be still High
Is the Cash Deposit Ratio of Indian Scheduled Commercial Banks very high?
The Cash -Deposit ratio of scheduled commercial Banks in India (Cash in hand and Balances with RBI as percentage of Deposits) is observed to be high at 8.2% for all scheduled Commercial Banks as at end march 2011. The ratio ranges between 6.9% (old Private Sector banks) and 9.2% (New generation Private sector banks). This includes the Cash Reserve Ratio of 6 percent statutorily required to be maintained with the Reserve Bank in terms of the Reserve Bank Act 1934 which has since been brought down to 5.5 % in the recent credit policy review held in January 2012. The need for such a high cash deposit ratio ratio, in these days when plastic cards, inter-net payments, electronic funds transfer etc are on the increase is surprising and needs to be viewed seriously in the context of efficiency and profitability of banks. In fact the ratio which remained at 7.1% in March 2002 has gone up to 8.2% in March 2011.
Since the culture of ATMs has been spreading fast, no doubt the banks need to maintain hard cash to meet the demands of customers. There are 74505 ATMs functioning all over the country as at end March 2011.The public preference for hard cash continues to be strong perhaps indicating lack of spread of banking habit in its fullest sense, the persistence of corruption, prevalence of black money, high level of inflation and general insistence for cash payments for commodities like gold and silver in particular. The high level of cash transactions in the economy necessitates more physical notes in circulation adding responsibilities to the Reserve Bank and increasing the Seignorage cost. This has been well evidenced in the increase in Bank notes in circulation by 18.7% i.e. from Rs.7, 88,299 crores in March 2010 to Rs. 9, 35,856 crores in March 2011.
Banks have been provided with currency chests to improve their cash management. The Reserve Bank through its 18 issue offices, one sub office and a wide net work of 4248 currency chests carries out the issue of notes and management of currency and helps the banking system to improve its funds management.
The cash deposit ratio of late, seems to have its importance it had in the good old days. With the implementation of prudential norms as per Narasimham Committee’s recommendations on Financial System and Banking sector reforms and also Basel I and Basel ii guidelines for improving banks’ efficiency, productivity and profitability, the attention paid in the maintenance of cash and the cost it adds to banks’ overall cost of funds seems to have been somewhat missing affecting adversely the profitability of banks among other things. The old private sector bank maintains the best cash deposit ratio (at 6.9%) and their cost of borrowings is comparatively the lowest (at 2.2%) as on March 2011 among all the bank groups.
Position of Cash Deposit Ratio* of All Commercial Banks
As at end March
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
7.1 6.3 7.2 6.4 6.7 7.2 9.7 7.3 7.7 8.2
• Cash in hand and balances with RBI as percentage of Deposits.
Position of ATMs of Scheduled Commercial Banks:
(As at end March 2011)
Sl. No. Public Sector Banks Old Private Sector Banks New Private Sector Banks Foreign Banks All Scheduled Commercial Bank
1 2 3 4 5 6 7
1. On-Site ATMs 29,795
(23,797) 2,641
(2,266) 8,007
(6,337) 286
(279) 40,729
(32,679)
2 Off-Site ATMS 19,692
(16,883) 1,485
(1,124) 11,518
(8,720) 1,081
(747) 33,776
(27,474)
3 Total No.of ATMs 49,487
(40,680) 4,126
(3,390) 19,525
(15,057) 1,367
(1,026) 74,505
(60,153)
Figures in brackets relate to March 2010
Source: Report on Trend and Progress of Banking in India 2010-11.
Payment and settlement system has been well strengthened over a period to facilitate smooth functioning of financial markets in particular and the economy in general. Both paper based like Express cheques clearing and grid based cheques truncation system and electronic payments like electronic clearing service, electronic funds transfer systems have been very well developed to ensure fast, efficient and well secured payment and settlements not only to obviate the need for physical movement of cash but also to bring in efficient funds management among banks. The Reserve Bank has thus streamlined the process flow in credit push systems like National Electronic Funds transfer, Real Time Gross Settlement, Electronic Credit System (credit) and National Electronic Clearing Service systems and banks are in a position to credit beneficiaries account without any hassles.
With all these facilities, the cash held at banks has been found to be very high and needs to be reviewed and fine tuned for improved efficiency. The cost of funds of banks at 4.7% and the cost of borrowings observed at 2.3% for all scheduled commercial banks as at end March 2011 can be further brought down by minimizing cash balances and related costs. Since the funds management leaves much to be desired, the banks can do a lot by improving the banking habit, spreading the card culture, enhancing the use of cheque and electronic payment systems and putting into optimum use of currency chest facilities.
There is ample scope to reduce the physical handling of cash at branches and banks and save all related expenditures. The cash and bank balances have to be considerably brought down taking advantage of the improved telecommunication system and facilities provided by the Reserve Bank. The asset liability management of the banks will also improve in the process. The Govt and the Reserve Bank can also bring in policy changes by insisting on payments beyond a cutoff point say Rs 5000 by means of instruments like cheque or plastic cards or through electronic payment systems. Payments of cash to organized and unorganized sector where ever possible and feasible should be made only through banks and banking instruments. This will help to reduce the cost and other administrative hassles faced by the Reserve Bank in the issue of currency notes. Less cash in circulation is also an indicator of economic development in general and banking development in particular is a fact which cannot be underestimated by policy makers. Such an approach will also facilitate strengthening Financial and Banking inclusion.
T.V.Gopalakrishnan
(This article appeared in Business Line dated 7/02/12).
The Cash -Deposit ratio of scheduled commercial Banks in India (Cash in hand and Balances with RBI as percentage of Deposits) is observed to be high at 8.2% for all scheduled Commercial Banks as at end march 2011. The ratio ranges between 6.9% (old Private Sector banks) and 9.2% (New generation Private sector banks). This includes the Cash Reserve Ratio of 6 percent statutorily required to be maintained with the Reserve Bank in terms of the Reserve Bank Act 1934 which has since been brought down to 5.5 % in the recent credit policy review held in January 2012. The need for such a high cash deposit ratio ratio, in these days when plastic cards, inter-net payments, electronic funds transfer etc are on the increase is surprising and needs to be viewed seriously in the context of efficiency and profitability of banks. In fact the ratio which remained at 7.1% in March 2002 has gone up to 8.2% in March 2011.
Since the culture of ATMs has been spreading fast, no doubt the banks need to maintain hard cash to meet the demands of customers. There are 74505 ATMs functioning all over the country as at end March 2011.The public preference for hard cash continues to be strong perhaps indicating lack of spread of banking habit in its fullest sense, the persistence of corruption, prevalence of black money, high level of inflation and general insistence for cash payments for commodities like gold and silver in particular. The high level of cash transactions in the economy necessitates more physical notes in circulation adding responsibilities to the Reserve Bank and increasing the Seignorage cost. This has been well evidenced in the increase in Bank notes in circulation by 18.7% i.e. from Rs.7, 88,299 crores in March 2010 to Rs. 9, 35,856 crores in March 2011.
Banks have been provided with currency chests to improve their cash management. The Reserve Bank through its 18 issue offices, one sub office and a wide net work of 4248 currency chests carries out the issue of notes and management of currency and helps the banking system to improve its funds management.
The cash deposit ratio of late, seems to have its importance it had in the good old days. With the implementation of prudential norms as per Narasimham Committee’s recommendations on Financial System and Banking sector reforms and also Basel I and Basel ii guidelines for improving banks’ efficiency, productivity and profitability, the attention paid in the maintenance of cash and the cost it adds to banks’ overall cost of funds seems to have been somewhat missing affecting adversely the profitability of banks among other things. The old private sector bank maintains the best cash deposit ratio (at 6.9%) and their cost of borrowings is comparatively the lowest (at 2.2%) as on March 2011 among all the bank groups.
Position of Cash Deposit Ratio* of All Commercial Banks
As at end March
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
7.1 6.3 7.2 6.4 6.7 7.2 9.7 7.3 7.7 8.2
• Cash in hand and balances with RBI as percentage of Deposits.
Position of ATMs of Scheduled Commercial Banks:
(As at end March 2011)
Sl. No. Public Sector Banks Old Private Sector Banks New Private Sector Banks Foreign Banks All Scheduled Commercial Bank
1 2 3 4 5 6 7
1. On-Site ATMs 29,795
(23,797) 2,641
(2,266) 8,007
(6,337) 286
(279) 40,729
(32,679)
2 Off-Site ATMS 19,692
(16,883) 1,485
(1,124) 11,518
(8,720) 1,081
(747) 33,776
(27,474)
3 Total No.of ATMs 49,487
(40,680) 4,126
(3,390) 19,525
(15,057) 1,367
(1,026) 74,505
(60,153)
Figures in brackets relate to March 2010
Source: Report on Trend and Progress of Banking in India 2010-11.
Payment and settlement system has been well strengthened over a period to facilitate smooth functioning of financial markets in particular and the economy in general. Both paper based like Express cheques clearing and grid based cheques truncation system and electronic payments like electronic clearing service, electronic funds transfer systems have been very well developed to ensure fast, efficient and well secured payment and settlements not only to obviate the need for physical movement of cash but also to bring in efficient funds management among banks. The Reserve Bank has thus streamlined the process flow in credit push systems like National Electronic Funds transfer, Real Time Gross Settlement, Electronic Credit System (credit) and National Electronic Clearing Service systems and banks are in a position to credit beneficiaries account without any hassles.
With all these facilities, the cash held at banks has been found to be very high and needs to be reviewed and fine tuned for improved efficiency. The cost of funds of banks at 4.7% and the cost of borrowings observed at 2.3% for all scheduled commercial banks as at end March 2011 can be further brought down by minimizing cash balances and related costs. Since the funds management leaves much to be desired, the banks can do a lot by improving the banking habit, spreading the card culture, enhancing the use of cheque and electronic payment systems and putting into optimum use of currency chest facilities.
There is ample scope to reduce the physical handling of cash at branches and banks and save all related expenditures. The cash and bank balances have to be considerably brought down taking advantage of the improved telecommunication system and facilities provided by the Reserve Bank. The asset liability management of the banks will also improve in the process. The Govt and the Reserve Bank can also bring in policy changes by insisting on payments beyond a cutoff point say Rs 5000 by means of instruments like cheque or plastic cards or through electronic payment systems. Payments of cash to organized and unorganized sector where ever possible and feasible should be made only through banks and banking instruments. This will help to reduce the cost and other administrative hassles faced by the Reserve Bank in the issue of currency notes. Less cash in circulation is also an indicator of economic development in general and banking development in particular is a fact which cannot be underestimated by policy makers. Such an approach will also facilitate strengthening Financial and Banking inclusion.
T.V.Gopalakrishnan
(This article appeared in Business Line dated 7/02/12).
Sunday, January 29, 2012
January 29, 2012:
Kudos to the Reserve Bank for having come out with a bold measure of releasing liquidity to the funds-starved market through reduction of CRR by 50 basis points from 6.0 per cent to 5.5 per cent.
This measure alone should help the banking system take care of partially the gaps in the credit needs of the manufacturing sector to augment investment and production, although the cost of funds is comparatively higher as policy rates have not been changed.
The Reserve Bank is fully justified in keeping the repo rate and reverse repo rate unchanged in the background of persisting high level of headline inflation which averaged at 9.7 per cent (y-o-y) during April-October 2011 and ever increasing fiscal deficit expected to be far more than the budgeted figure of 4.6 per cent.
Thus, the repo rate and the reverse repo rate will continue to be at 8.5 per cent and 7.5 per cent respectively. This has been done perhaps keeping in view the RBI's continued apprehension, and justifiably so, in containing the inflation and inflation expectations.
Comfort to liquidity
The relaxation in CRR is to provide comfort to the liquidity constraints, of late, faced by the banking system. The borrowings of banks from the Reserve Bank have been exceeding the limits and often much higher than the RBI's comfort level of Rs 60,000 crore.
These borrowings add to the cost of funds whereas banks do not get any return on their cash reserves kept with Reserve Bank out of their costly deposits. The reduction in CRR is expected to release funds to the tune of Rs 32,000 crore and this can be used to expand the credit particularly to the manufacturing sector. This should also help the banks to reduce the rate of interest to the borrowers to the extent they save on their borrowings from the Reserve Bank.
The banks got partially what they want but they also have got a lot to do in the economy taking into account the fiscal, monetary and economic conditions of the country. They have a major role to play to make inclusive growth a reality by taking advantage of financial and banking inclusion through innovative methods as a great business opportunity.
Improved offerings
The potential to increase deposits is manifold and the tendency of people to go in for other types of investments, particularly in gold and real estate, needs to be curbed by offering improved savings products. The NIM continues to be high in banks and this needs to be checked and brought down by improving the credit portfolio and recycling of funds.
The Asset-Liability management needs fining and cost of funds need to be brought down further. The Reserve Bank has been liberal with the banks by deregulating the SB NRI deposits rates and permitting them to restructure the sticky loans to improve their competitiveness and project a better balance-sheet.
The Reserve Bank has, however, moderated the GDP growth at 7 per cent as against 7.6 per cent projected earlier in its October 2011 review of credit policy. Considering, the external and domestic factors, even the 7 per cent growth is good enough to keep the confidence level high and to better the performance further in the next fiscal.
The need of the hour is the development of infrastructure which impedes the growth of the economy. Making available quality coal at reasonable price to the power sector through all possible means i.e. by rail and road will itself go a long way to give a boost to the economic growth.
The ease of doing business by removing administrative and legal bottlenecks, facilitating FDI investments in infrastructural developments, improving productivity both in agricultural and industrial areas without too much of interference by the Government and bringing in efficiency in the marketing and distribution of products, particularly agricultural products, need urgent attention which only the Government can provide. There is also an imperative need to activate and coordinate all rural development related agencies to give a facelift to the rural economy which requires more freedom for State Governments to take initiative.
Now, it is the turn of the Central Government to do its bit to contain fiscal deficit, improve supply constraints and provide the much needed infrastructure to give a boost to GDP growth and bring down inflation.
On the fiscal front, the Reserve Bank has made its message explicitly clear to the Government by saying that “considering the egregious implications of large fiscal deficits, which are well known , there is an urgent need for decisive fiscal consolidation, which will shift the balance of aggregate demand from public to private, and from consumption to capital formation. This is critical to yielding the space required for lowering rates without the imminent risk of resurgent inflation. The fourth coming Union Budget must exploit the opportunity to begin this process in a credible and sustainable way.”
Hope the Government does its part fast and the economy will flourish.
Dr.T.V.Gopalakrishnan
(This article appeared in The Hindu-Business Line dt29/01/12).
Kudos to the Reserve Bank for having come out with a bold measure of releasing liquidity to the funds-starved market through reduction of CRR by 50 basis points from 6.0 per cent to 5.5 per cent.
This measure alone should help the banking system take care of partially the gaps in the credit needs of the manufacturing sector to augment investment and production, although the cost of funds is comparatively higher as policy rates have not been changed.
The Reserve Bank is fully justified in keeping the repo rate and reverse repo rate unchanged in the background of persisting high level of headline inflation which averaged at 9.7 per cent (y-o-y) during April-October 2011 and ever increasing fiscal deficit expected to be far more than the budgeted figure of 4.6 per cent.
Thus, the repo rate and the reverse repo rate will continue to be at 8.5 per cent and 7.5 per cent respectively. This has been done perhaps keeping in view the RBI's continued apprehension, and justifiably so, in containing the inflation and inflation expectations.
Comfort to liquidity
The relaxation in CRR is to provide comfort to the liquidity constraints, of late, faced by the banking system. The borrowings of banks from the Reserve Bank have been exceeding the limits and often much higher than the RBI's comfort level of Rs 60,000 crore.
These borrowings add to the cost of funds whereas banks do not get any return on their cash reserves kept with Reserve Bank out of their costly deposits. The reduction in CRR is expected to release funds to the tune of Rs 32,000 crore and this can be used to expand the credit particularly to the manufacturing sector. This should also help the banks to reduce the rate of interest to the borrowers to the extent they save on their borrowings from the Reserve Bank.
The banks got partially what they want but they also have got a lot to do in the economy taking into account the fiscal, monetary and economic conditions of the country. They have a major role to play to make inclusive growth a reality by taking advantage of financial and banking inclusion through innovative methods as a great business opportunity.
Improved offerings
The potential to increase deposits is manifold and the tendency of people to go in for other types of investments, particularly in gold and real estate, needs to be curbed by offering improved savings products. The NIM continues to be high in banks and this needs to be checked and brought down by improving the credit portfolio and recycling of funds.
The Asset-Liability management needs fining and cost of funds need to be brought down further. The Reserve Bank has been liberal with the banks by deregulating the SB NRI deposits rates and permitting them to restructure the sticky loans to improve their competitiveness and project a better balance-sheet.
The Reserve Bank has, however, moderated the GDP growth at 7 per cent as against 7.6 per cent projected earlier in its October 2011 review of credit policy. Considering, the external and domestic factors, even the 7 per cent growth is good enough to keep the confidence level high and to better the performance further in the next fiscal.
The need of the hour is the development of infrastructure which impedes the growth of the economy. Making available quality coal at reasonable price to the power sector through all possible means i.e. by rail and road will itself go a long way to give a boost to the economic growth.
The ease of doing business by removing administrative and legal bottlenecks, facilitating FDI investments in infrastructural developments, improving productivity both in agricultural and industrial areas without too much of interference by the Government and bringing in efficiency in the marketing and distribution of products, particularly agricultural products, need urgent attention which only the Government can provide. There is also an imperative need to activate and coordinate all rural development related agencies to give a facelift to the rural economy which requires more freedom for State Governments to take initiative.
Now, it is the turn of the Central Government to do its bit to contain fiscal deficit, improve supply constraints and provide the much needed infrastructure to give a boost to GDP growth and bring down inflation.
On the fiscal front, the Reserve Bank has made its message explicitly clear to the Government by saying that “considering the egregious implications of large fiscal deficits, which are well known , there is an urgent need for decisive fiscal consolidation, which will shift the balance of aggregate demand from public to private, and from consumption to capital formation. This is critical to yielding the space required for lowering rates without the imminent risk of resurgent inflation. The fourth coming Union Budget must exploit the opportunity to begin this process in a credible and sustainable way.”
Hope the Government does its part fast and the economy will flourish.
Dr.T.V.Gopalakrishnan
(This article appeared in The Hindu-Business Line dt29/01/12).
Monday, January 16, 2012
Why not a Joint review of Monetary and Fiscal policy ?
The economy needs a morale boost and this can come only if the Government and the RBI jointly initiate measures to revive the confidence of the investors.
January 15, 2012:
The Indian economy, which till a couple of years back was going strong and raising expectations of overtaking even China and other strong economies, has turned weak.
The US financial crisis of 2008, which brought down many economies, did not affect the domestic economy as the crisis was well managed both by the Government and the Reserve Bank of India.
In terms of broad parameters such as GDP growth, inflation, financial stability, exchange rate stability, and so on, the economy was doing well. But the situation changed since 2009.
Erosion of confidence
Many scams, one after another, were detected, revealing governance deficit. Corruption and black money attracted much attention and affected decision making at various levels.
Inflation raised its ugly head and continued to remain unabated. Industrial production declined, with hike in interest rates being cited as one of the major reasons for it. Infrastructure development did not get the priority it deserved.
Favourable monsoon did not bring down food inflation as supply chain constraints and periodical increases in fuel prices affected the marketing and distribution of food products at reasonable prices.
The trade gap widened due to increased imports and reduced exports. And exchange rate fluctuations added fuel to fire. The rupee depreciated by around 17 per cent since August 2011.
Administrative policies were not implemented as expeditiously as the economic conditions of the country demanded. Investments, especially FDI, slowed. And FIIs started pulling out their investments, creating volatility in the stock market.
The downgrading of the US economy and the European crisis have aggravated the situation.
Inflation focus
The Reserve Bank took a series of measures, basically to contain inflation. The approach was to make money dearer and reduce the purchasing power. The RBI raised the repo rate 13 times since March 2010, and brought it to 8.5 per cent in October 2011. The reverse repo was revised to 7.5 per cent and the Marginal Standing Facility was fixed at 9.25 per cent.
Interest rate on savings bank and NRE accounts was deregulated. And sensing the mood of the investing community against further interest rate hikes and seeing some respite in inflation, the RBI decided to keep the rates unchanged in its policy review in December 2011.
But production costs have increased, not only because of the hike in interest rates but also because of input costs going up, reducing thereby the profit margins and fresh investments.
The fiscal policies have not been moving in tune with monetary policies. The general opinion is that the RBI alone is taking action and the Government has been keeping quiet on various fronts.
Direct and indirect tax revenues, which are directly linked to GDP growth, have not been keeping pace with Budget expectations, and the Government is falling behind in achieving the disinvestment targets due to poor market and other conditions.
Infrastructure required for industrial production, particularly energy, has not picked up for want of fresh administrative policies and proper implementation of existing ones.
Fresh impetus
The economy needs a morale boost and this can come only from the Government. To start with, the Government and the RBI should jointly review the monetary and fiscal policies pursued so far and initiate measures to revive the confidence of the investors.
Since food inflation has started declining and the overall inflation is expected to fall to around 7 per cent by March 2011, the RBI can consider effecting some reductions in its policy rates.
Dr.T.V.Gopalakrishnan
(This article appeared in The Hindu-Business Line dt16/01/12)
January 15, 2012:
The Indian economy, which till a couple of years back was going strong and raising expectations of overtaking even China and other strong economies, has turned weak.
The US financial crisis of 2008, which brought down many economies, did not affect the domestic economy as the crisis was well managed both by the Government and the Reserve Bank of India.
In terms of broad parameters such as GDP growth, inflation, financial stability, exchange rate stability, and so on, the economy was doing well. But the situation changed since 2009.
Erosion of confidence
Many scams, one after another, were detected, revealing governance deficit. Corruption and black money attracted much attention and affected decision making at various levels.
Inflation raised its ugly head and continued to remain unabated. Industrial production declined, with hike in interest rates being cited as one of the major reasons for it. Infrastructure development did not get the priority it deserved.
Favourable monsoon did not bring down food inflation as supply chain constraints and periodical increases in fuel prices affected the marketing and distribution of food products at reasonable prices.
The trade gap widened due to increased imports and reduced exports. And exchange rate fluctuations added fuel to fire. The rupee depreciated by around 17 per cent since August 2011.
Administrative policies were not implemented as expeditiously as the economic conditions of the country demanded. Investments, especially FDI, slowed. And FIIs started pulling out their investments, creating volatility in the stock market.
The downgrading of the US economy and the European crisis have aggravated the situation.
Inflation focus
The Reserve Bank took a series of measures, basically to contain inflation. The approach was to make money dearer and reduce the purchasing power. The RBI raised the repo rate 13 times since March 2010, and brought it to 8.5 per cent in October 2011. The reverse repo was revised to 7.5 per cent and the Marginal Standing Facility was fixed at 9.25 per cent.
Interest rate on savings bank and NRE accounts was deregulated. And sensing the mood of the investing community against further interest rate hikes and seeing some respite in inflation, the RBI decided to keep the rates unchanged in its policy review in December 2011.
But production costs have increased, not only because of the hike in interest rates but also because of input costs going up, reducing thereby the profit margins and fresh investments.
The fiscal policies have not been moving in tune with monetary policies. The general opinion is that the RBI alone is taking action and the Government has been keeping quiet on various fronts.
Direct and indirect tax revenues, which are directly linked to GDP growth, have not been keeping pace with Budget expectations, and the Government is falling behind in achieving the disinvestment targets due to poor market and other conditions.
Infrastructure required for industrial production, particularly energy, has not picked up for want of fresh administrative policies and proper implementation of existing ones.
Fresh impetus
The economy needs a morale boost and this can come only from the Government. To start with, the Government and the RBI should jointly review the monetary and fiscal policies pursued so far and initiate measures to revive the confidence of the investors.
Since food inflation has started declining and the overall inflation is expected to fall to around 7 per cent by March 2011, the RBI can consider effecting some reductions in its policy rates.
Dr.T.V.Gopalakrishnan
(This article appeared in The Hindu-Business Line dt16/01/12)
Wednesday, November 23, 2011
Tame the rise
Better Late Than never.
This refers to your editorial Get Going, Montek (Et dt,22/11/11). Inflation is said to the worst enemy of poor and the Govt and the planners have miserably failed to contain the inflation which has been in double digit for the past few months and continues to be defiant despite series of measures taken by the Reserve Bank. Containing inflation cannot be a lone battle by the Reserve Bank has been well proved and the failure of the Govt in this aspect has been very obvious. As rightly pointed out in your editorial, supply chain management with appropraite and effective logistics in the procurement, storage, cheap and quick transporation and distribution of the produce is the need of the hour to check spiralling of prices of food products. Further, incentives for improved productivity, controlling of corruption , black money and hoarding of agricultural products using bank funds will go a long way in bringing down prices. The suggestion to scrap the Agricultural Produce Market Committee Act is very valid and long overdue to be implementd. Coordination is the essence and planning Commission is well suited for that. Involvement of NABARD at state levels and Local Boards ofthe Reserve Bank would be of great help to coordinate.
(edited version of this appeared in ET dt 23/11/11)
Dr.T.V.Gopalakrishnan.
This refers to your editorial Get Going, Montek (Et dt,22/11/11). Inflation is said to the worst enemy of poor and the Govt and the planners have miserably failed to contain the inflation which has been in double digit for the past few months and continues to be defiant despite series of measures taken by the Reserve Bank. Containing inflation cannot be a lone battle by the Reserve Bank has been well proved and the failure of the Govt in this aspect has been very obvious. As rightly pointed out in your editorial, supply chain management with appropraite and effective logistics in the procurement, storage, cheap and quick transporation and distribution of the produce is the need of the hour to check spiralling of prices of food products. Further, incentives for improved productivity, controlling of corruption , black money and hoarding of agricultural products using bank funds will go a long way in bringing down prices. The suggestion to scrap the Agricultural Produce Market Committee Act is very valid and long overdue to be implementd. Coordination is the essence and planning Commission is well suited for that. Involvement of NABARD at state levels and Local Boards ofthe Reserve Bank would be of great help to coordinate.
(edited version of this appeared in ET dt 23/11/11)
Dr.T.V.Gopalakrishnan.
Tuesday, September 27, 2011
Poverty, Statistics, Politics and the common man
The editorial Poverty of Statistics is very apt. The Planning Commission's submission to the Supreme Court that a person who earns Rs 32( not 31 as indicated ) in urban area and Rs 27 in rural area should be treated above poverty line only reflects poor understanding of the poverty, or of the value of the rupee, or the inflation level prevailing in the economy, or the credibility of data by its Members. It also reflects poorly, the concern that the Members have for the people particularly the poor.It is okay if these poor people have access to some canteens maintained by the Govt and the food is made available at these rates.It is time to admit that there is no accuracy of data with regard to the poor people and the method of arriving at the poverty level has no consensus. The amount of subsidies and various poverty linked programmes do not benefit the poor are common knowledge. The UID is the only hope left now and hope some lasting solution to remove poverty will be found soon.
Dr.T.V.Gopalakrishnan.
(This appeared in The Hindu-Business Line Dt 27/09/11).
Wrong Approach of the Finance Minstry to abolish STT
The proposal to cut STT and rationalise stamp duty to give a boost to the sagging stock market is welcome. The STT introdoced in 2004-05 budget has several benefits and can emerge as a leveller of the marketfluctuations and a source of recurring revenue to the exchequer without any inflationary implications. The revenue earned through STT at Rs 2223 crores this fiscal may appear less and lower than the expectations, this can be attributed to the volatility seen in the market due to the poor performance of the domestic and international economy.STT can be used as a tool to contain volatility and excessive speculation.STT should be different for purchase and sales,individuals and institutions,various cut off limits,equtuity and bonds,Govt securities of different maturities, Gold and silver,Forex etc.It should emerge as an administrative tool to regulate the various markets in Financial System, replace capital gains tax over a period.The need to retain STT is essential but with changes.
Dr.T.V.Gopalakrishnan
( This appeared in The Hindu-Business Line on 27/09/11).
Dr.T.V.Gopalakrishnan
( This appeared in The Hindu-Business Line on 27/09/11).
Wednesday, September 21, 2011
RBI 's lone role to contain inflation
My comment on the article "RBI Governor: The loneliest job in India" appeared in ET dated 21/09/11. The link is here
The author is right in saying that the Governor's job is the loneliest. The Reserve Bank has raised the interest rates 12 times Since March 2010 to combat inflation without success.Had the Reserve Bank not hiked the rates, perhaps,inflation would have been much higher and done more damage to the economy is a fact to be acknowledged both by the Industrialists and the Government.The Govt cannot claim to have taken any fiscal or administrative measures to support the monetary measures to contain inflation which is driven by excess demand,supply constarints and external factors where the Reserve Bank has very limited control.On the contrary, the prices of petroleum products have been hiked several times though warranted,challenging the monetary measures and creating diffidence in the whole management of the economy keeping at heart the welfare of aam admi.The Govt had several other issues other than managing the economy during the last several months and the the issue of containing inflation became the solitary responsibility of the Reserve Bank.
Speculation in commodities particularly gold and silver has been at its peak and the black money generation in these transactions has always been the rule rather than an exception.Corruption, black money, maladministration in the procurement, processing,storage, transportation,distribution, export and import of commodities which affect the supply and demand where RBI has absolutely no say have an inflationary impact and the Govt can play an effective and supportive role to bring down prices. Agricultural credit has been on the decline for the past several years and it needs to be tackled to improve agricultural productivity and marketing of the agricultural products. Here Central Govt, State Govts and NABARD can contribute a lot leaving RBI.Industrialists have a tendency to clamour for more from the Govt and Banks and this time they find RBIthe scapegoat for their failure.It is time they realiseit.
Dr.T.V.Gopalakrishnan
The author is right in saying that the Governor's job is the loneliest. The Reserve Bank has raised the interest rates 12 times Since March 2010 to combat inflation without success.Had the Reserve Bank not hiked the rates, perhaps,inflation would have been much higher and done more damage to the economy is a fact to be acknowledged both by the Industrialists and the Government.The Govt cannot claim to have taken any fiscal or administrative measures to support the monetary measures to contain inflation which is driven by excess demand,supply constarints and external factors where the Reserve Bank has very limited control.On the contrary, the prices of petroleum products have been hiked several times though warranted,challenging the monetary measures and creating diffidence in the whole management of the economy keeping at heart the welfare of aam admi.The Govt had several other issues other than managing the economy during the last several months and the the issue of containing inflation became the solitary responsibility of the Reserve Bank.
Speculation in commodities particularly gold and silver has been at its peak and the black money generation in these transactions has always been the rule rather than an exception.Corruption, black money, maladministration in the procurement, processing,storage, transportation,distribution, export and import of commodities which affect the supply and demand where RBI has absolutely no say have an inflationary impact and the Govt can play an effective and supportive role to bring down prices. Agricultural credit has been on the decline for the past several years and it needs to be tackled to improve agricultural productivity and marketing of the agricultural products. Here Central Govt, State Govts and NABARD can contribute a lot leaving RBI.Industrialists have a tendency to clamour for more from the Govt and Banks and this time they find RBIthe scapegoat for their failure.It is time they realiseit.
Dr.T.V.Gopalakrishnan
Sunday, September 18, 2011
Petrol Politics, Inflation and Indian masses
This is in response to the write up on "For petrol, Indians shell out the most in the world". The link is here
The only explanation for high prices of oil in India is the total mismanagement of the economy and utter disregard for the concern of the people's suffering. It is a solid example that pricing in india is not based on any rationale.The tax,wastage, extravaganza of companies who deal in petroleum products, maldistribution and wrong method of transportation and excessive cost on tranportation will account for the mismanagement. Black money, corruption and other mal practices like adulteration also add to the cost to the ultimate consumer. Governance is literally absent and accountability is virtually missing. People are helpless and they silently suffer. This is one of the major reasons for continued persistence of high inflation and the Reserve Bank has its own limitations in such matters like pricing of essential consumable items having inflationary impact.
Dr.T.V.Gopalakrishnan
The only explanation for high prices of oil in India is the total mismanagement of the economy and utter disregard for the concern of the people's suffering. It is a solid example that pricing in india is not based on any rationale.The tax,wastage, extravaganza of companies who deal in petroleum products, maldistribution and wrong method of transportation and excessive cost on tranportation will account for the mismanagement. Black money, corruption and other mal practices like adulteration also add to the cost to the ultimate consumer. Governance is literally absent and accountability is virtually missing. People are helpless and they silently suffer. This is one of the major reasons for continued persistence of high inflation and the Reserve Bank has its own limitations in such matters like pricing of essential consumable items having inflationary impact.
Dr.T.V.Gopalakrishnan
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