How about an ethics policy in the Budget?

T.V. Gopalakrishnan

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Can the Finance Minister think of introducing ethics in business transactions through the Budget 2011-12?

India has a sound Constitution, strong democratic principles, well-recognised demographic dividend, abundant natural resources, internationally recognised and well-sought after information technology, and an enviable culture, heritage and civilisation. With all these favourable factors, it discards the opportunity to reach the top of the world because of the greed, corruption, malpractices, lack of commitment and accountability from a few who matter. The series of scams reported every now and then only smack of disrespect and disregard for the laws of the country, and its image and reputation. It is a shame that things go from bad to worse, and there is no sign of improvement. This needs to be seriously dealt with, and it should be possible to a great extent through simple rules with strict enforcement. Here are a few suggestions for Mr Pranab Mukherjee as he prepares to unveil his Budget in a fortnight.

Business Ethics and Corporate Tax

Tax evasion and tax avoidance have been an open secret. These need to be plugged through checks and balances by way of practically enforceable rules and regulations. Adherence to tax rules and laws of the country in general, corporate governance principles, sensitivity to corporate social responsibility, compliance with financial market regulations and provisions of the Companies Act, satisfactory conduct of bank transactions and discipline followed as a borrower, and so on, should be assessed, rated and made public. Concessions, reliefs and special benefits, if any, from Government and authorities that are to be granted to corporates/firms/others, should have a bearing on this assessment. Excise and Customs duties payable and paid should reflect in the profit-and-loss account of companies, and should be independently verifiable by tax authorities, accountants and auditors. The board of directors should separately certify that all tax dues have been paid. There can be a thumb-rule to verify the levies payable/paid in relation to production, sales, imports and exports. Any violation/non-compliance should attract punishment and the financial regulator should be notified. Corporate governance and accountability to the Government and shareholders have to be made transparent through balance sheets. Once in a while shareholders' assessment of the company's response to investors also needs to be independently assessed through surveys. These steps may appear cumbersome, but need to be considered for implementation with the aid of information technology.

I-Tax of Individuals

There is a feeling that the tax and number of tax payers are insignificant and do not compare well with the wealth created, economic growth achieved in the past few years, jobs created both in India and abroad, transactions taking place — particularly in real estate, gold and commodities market.

In the absence of tax compliance, ways have to be thought of that link the transactions with income tax compliance. Banking inclusion at the initiative of tax authorities is the only solution to bring under the tax-net traders, skilled and semi-skilled professionals, service providers, etc. Bank accounts should be made obligatory for all. The simplest way is to insist on PAN number for all transactions above a limit and compulsory payment through cheques and plastic cards. Payment by cash is very common — particularly for buying gold and jewellery, land, furnishing of houses, etc. Tracking transactions using IT will go a long way in improving tax compliance and revenue collection both for the State Governments and Central Government. It will also facilitate for providing unique identity cards for a large segment of population. Tax returns should also reflect movement of assets and liabilities yearly. As it is, there is no way to know assets owned by an individual easily.

Tax on Dividend, bonus shares and stock-option issues

Canons of taxation demand that broader shoulders should carry heavier weight. Instead of periodically increasing prices of petroleum products, the Government can introduce levies on dividend payments beyond a cut-off, say Rs 5 lakh and above. Likewise, levies on bonus shares and stock-option issues can be made, and these funds can be used to meet the demands of oil companies. Increase in oil prices has a chain effect, and all items become costlier. It may not be judicious to leave the oil prices to market forces, for some more years of regulation may be required till the economy matures, and inflationary expectations and conditions stabilise. Pricing of commodities, levying of taxes, etc., which affect mass-consumption items directly through inflation, need to be carefully considered. Revenue mobilisation is easy by taxing such items, but it hurts the masses, incurs the wrath of the public and leads to unpleasant consequences. As rightly said, “Once a nation begins to think, it is impossible to stop it.” That is what we are witnessing now on account of the 2G scam and spiralling prices all around.

black money

The most painful thing is the prevalence of black money particularly in real estate, charities, etc. Innovative ways have to be introduced through Budget provisions to prevent such practices. Middle-class people are the worst affected, as they are compelled to bribe to realise their dream of acquiring houses. Morale and confidence in the system evaporate. This is not good for the society and the economy in the long run. The easiest way to solve this issue is to have a tie up among all parties to the transaction through IT and see that cash element is kept to the minimum. Black money in real estate transactions has to be eliminated gradually. Monitoring of real-estate deals can bring a lot of relief to people and the economy.

As it is, agricultural income is exempt from tax. However, there is nothing wrong if farmers with large holdings are made to file returns beyond a cut-off at least. This will at least pave the way for an assessment of wealth created in the economy and improvement in distribution of fertilisers and other essential items meant for poor farmers. Income-tax payers should be taken out of the public-distribution system wherever possible.
This appeared in The Business Line dated 14/02/11.

Case for a National Gold Bank

India owns over 18,000 tons of above ground gold stocks worth approximately $800 billion and representing at least 11 per cent of global stock, according to World Gold Council.(WGC). estimates.

This is equivalent to nearly half an ounce of gold ownership per capita, a figure which is significantly below consumption in Western markets, representing scope for additional future growth, says a WGC research paper entitled 'India: Heart of Gold'.

Gold Demand

In 2009, total Indian gold demand reached $19 billion, or Rs 974 00 crore, which accounts for 15 per cent of the global gold market, according to WGC.

While Indian consumers continue to stock gold despite rising prices, when it comes to total gold reserves in the country, India ranks 11th in the world with 557.7 tons of gold. Above the ground gold stocks is different from the total gold reserves.

Over the past ten years, the value of gold demand in India has increased at an average rate of 13 per cent per year, outpacing the country's real GDP, inflation and population growth by six per cent, eight per cent and 12 per cent respectively.

The country currently has one of the highest saving rates in the world, estimated at around 30 per cent of total income, of which 10 per cent is already invested in gold.

Storing surplus gold

In this backdrop, the setting up of a National Gold Bank (NGB) assumes importance and needs to be seriously considered. Such a Bank if set up can gradually pave way to have stock of surplus gold in the economy in one place.

Over a period, the Bank can have a say in controlling the volatility of gold prices in domestic market in particular and can also act as a regulator of bullion market which is fast expanding and having international linkages.

The Bank can engage in the purchase and sale of gold and act as a trustee/pledgee for banks/institutions having gold surplus and also keep gold for safe custody or raise funds against gold to meet their liquidity constraints.

As it is, the rate of growth of deposits of commercial banks has been on the decline for the past few months and the investments in gold and real assets have been on the increase.

Generally Indians have a weakness for gold and the demand for gold is price insensitive as per the experience. It is all the more so, when the real rate of interest on deposit has been negative or insignificant compared to the rise in gold price

The banking system has been facing the liquidity problem off and on and rising of funds from the market poses series of difficulties. Funds are becoming a major constraint to develop infrastructure badly needed by the economy to grow and sustain growth. It is time for banks to find alternate sources of funds to continue to be vibrant in business and providing the well needed support system for the economic growth. One of the means to attract deposits is to encash the idle gold lying in the economy. In this context, the revival of the gold deposit scheme introduced in 1999 has to be seriously considered. As per the World Gold Council, India’s annual gold consumption Is around 800 tons per year and the reserves of gold could be in the order of 25000 ---30000 tons.

Gold as Deposit

The banks should be encouraged to accept gold as deposits and create fixed deposits linked to gold keeping very good margin. To start with, for instance, for pure gold worth Rs 50,000, the banks can create a fixed deposit for Rs 25,000 for a minimum period of three years and give an interest rate of say 3 or 4 percent per year. The investor earns interest rate on the idle gold while securing his holdings the same time it is safer under the custody of the bank.

For the banks, they get gold as deposits and they should be in a position to raise funds against the security of gold. The borrowing power of the banks increases in the market and they will have required resources to expand their credit portfolio.

The banks should be given exemption from SLR for these deposits against the gold as there is no additional liquidity created and the liabilities are fully backed by the gold they possesses. However, the borrowings that these banks subsequently make against the gold can attract SLR and the advances they create can attract usual capital adequacy norms.

Advantages

The advantages of setting up a National Gold Bank are very many. The Bank can make bulk purchases from the open market including international market and act as a store house of gold for banks and institutions. The banks and institutions holding gold can sell the same to the National Gold Bank or raise funds by pledging the gold. This will bring down banks' borrowings from the Reserve Bank. The National Gold Bank can have a refinance arrangement with the Reserve Bank till such time it stabilizes its operations. Money market operations can be better regulated as the black money component gradually come down if the gold held in the country is brought under regulated market.

Over a period when the Gold Bank’s operations get fully stabilized, the influence of gold in the market becomes somewhat predictable and circulation of hard cash and black money gets reduced, then framing of monetary policy and transmission of signals to financial markets by the Reserve Bank will prove to be easy.

For the banks, such an arrangement provides opportunities to expand their business in terms of deposits, borrowings and loans.

For the economy, benefits out of the Gold Bank are tremendous. The idle gold turns into cash to expand economic activities particularly the infrastructure and the gold and financial markets widen. It facilitates to minimize generation of black money in a way as the gold becomes a declared asset with the banks.

Once a large quantum of gold comes under the custody of the Gold Bank, the Governments fiscal policy and fiscal deficit can hope to have a totally different scenario than what is today. The image of the economy in the International market will improve It will be a win- win situation for banks, investors, the economy, and the Government.

T.V.Gopalakrishnan

(Views are Personal)

(This appeared in Business Line dt 24/01/11)

Monetary Policy and vegetable Prices

This refers to your edit Dr Subbarao's desperation (business Line, January 19). As rightly pointed out, it would be an extreme act of faith to link vegetable prices -which are driving up the inflation rate -to monetary policy. The present atmosphere in the economy does not warrant any drastic monetary policy which can upset the growth trajectory. The measures can be in the form of controlling speculative advances in the rural semi urban and urban branches where hoarding and speculative activities with bank funds are suspect. Some specific higher margin requiremwnts and higher interest rates on advances against some food items and intensive supervision of these advances by the controlling offices can take care of these temporary spurt in prices. Banks should also be encouraged to step up advances to augment production of vegetables and commododities which influence food prices. Incentives to ease transporttation of vegetables and improve storage facilities through bank finance can also be thought of. There is also a need to spread the message of monetary policy among the various officials at ground level which itself will act as a measure to prevent wrong financing and encourage anti social activities. Dr.T.V.Gopalakrishnan

Adding fuel to fire

Adding fuel to fire
The latest increase in petrol price made effective from the midnight of 15 th January 2011 has added fuel to fire and the apprehension of the people that the Government is least concerned with the inflation affecting the masses and the middle class people is confirmed. The timing of the price rise is most inappropriate as the people have not come out of the shock of the high food prices in general and onion prices in particular. The justification for oil price increase may be due to the increase in the international prices of crude oil, but it is cruel on the part of the Government to pass it on at this juncture when people are already suffering from unabated inflation for the past months. This approach only reflects the Government's lack of concern for the masses and inefficiency in managing the economy. Oil price increase ( at frequent intervals) will have chain effect and there will be all round increase of prices for all commodities and services in the economy. When this vicious circle of increase of prices will have a break is the worry of common man ?
Dr.T.V.Gopalakrishnan

Containing inflation demands more than monetary policy measures

The reasons for containing inflation despite a good monsoon and a reasonably balanced monetary policy have to be identified and measures other than conventional ones need to be thought of.

The monetary policy measures of the Reserve Bank to contain inflation keeping in view at the same time the need to support the economic growth envisaged at around 9 percent do not seem to have any desired impact indicating that the solution for the present inflation lies elsewhere. Monetary policy alone cannot bring down inflation beyond certain level is what the figures indicate. The food inflation continues to soar touching 18.32 per cent and the whole sale price index hovers around 7. 5 per cent. The authorities particularly the Government do not seem to have any clues as to how to contain the inflation particularly food inflation as the prices of very essential items consumed by the masses in particular for their very survival continue to be raising.

Catch 22 situation

As regards containing prices of commodities, the authorities are in a catch 22 situation now. The economy needs credit for growth, but money supply needs to be curtailed to contain inflation. The dearer money policy already in vogue if intensified and pursued further will have other long term implications as such a policy can attract hot money from abroad and then the problem of absorbing inflows without increasing money supply has to be tackled.

Further, cost of production which is already high if allowed to be increased on account of dearer money policy as it will have an all round effect of increasing input costs may again affect growth of the economy. Balancing growth with price stability is always the objective of the Reserve Banks’ monetary policy and it is always a challenge in a growing economy with a sizeable population suffering from poverty and unemployment.
No doubt the high level of inflation continues to be a cause for concern and there are no signs of it coming down. The reasons for continued persistence of inflation despite a good monsoon and reasonably balanced monetary policy have to be identified and measures other than conventional have to be thought of.

Anticipate Demand

The increased demand for food items due to improved purchasing power cited as a cause for inflation although reflects positively the good GDP growth registered by the economy and is a sign of welfare of the economy, then the policy and planning to anticipate such a demand and improve the supply have been completely lost sight of and need to be factored into in future planning and framing of policies.

Supply needs to be augmented for which production and export, import policies need to be fine tuned. Corruption, black money and mal administration in the procurement, transportation, storage, whole sale and retail distribution of products of mass consumption have been well known and no serious attempt has been made for decades to set right the situation.

Hoarding and black marketing of essential items with the support of both bank funds and black money have been an open secret and with the removal of selective credit control on sensitive commodities by the Reserve Bank as part of liberalization, these problems have got accentuated. As long as good character, ethics and values are absent, rules have to be strictly observed and any violation of rules needs to be severely dealt with to bring some order in carrying out economic activities. Liberalization cannot be at the cost of ethics in the economy is the message what the present inflation broadly indicates.

Selective Controls

With all the limitations, the Reserve banks’ next policy review due in the end of January may have to consider reintroduction of the selective control on sensitive commodities and discourage hoarding and black marketing using bank funds.

Cost of advances in particular to traders / wholesalers dealing in essential items need to be made costlier and continuous and close monitoring of banks’ exposure to these advances need to be ensured. Risk weights for such advances can also be hiked giving the signal that the Reserve Bank cannot any more tolerate banks using deposits for undesirable activities.

The negative rate of return on deposit interest rate because of high level of inflation persisting for quite some time seem to have prompted savers to spend more and divert their deposits from banks to other forms of assets such as post office savings, real estate, gold and other commodities. This has increased the price of commodities in general.

Of course banks taking the cue from the Reserve Banks’ Governor’s message made in the Bank Economists’ conference to increase deposit rate and lower interest rate on advances, have, of late, started realizing the need to raise deposits as the only source of dependable funds and have since been raisings deposit rates to attract savings. Bringing back the deposits to the banking system will have a softening effect on the prices of commodities.

Cash Transactions

Cash circulation in the economy is very high and transactions in cash encourage black money and corruption. This supports the inflationary trend in the economy. Some measures from the Reserve Bank to discourage cash transactions by insisting on cheque card payments etc for transactions beyond Rs 5000 can have some positive effects in the long run to contain inflation. Ensuring financial inclusion particularly of those having good means is very essential in the economy.

Deregulation of Savings Bank Deposit rate needs to be expedited to attract small savers to banks and banks have to find ways and means to reduce their intermediation cost through improved products and productivity.

Assessment of individual bank’s performance in keeping the intermediation cost low, attracting fresh deposits, bringing down NIM and at the same time improving the profit margin through earnings other than high interest on advances, quality of advances taking into account speculative advances etc needs to be made separately and high performers to be encouraged with special incentives. There is an urgent need to fight inflation and keep the cost of production and supply in the economy low.

(This appeared in Business Line dated 11/01/11)
Dr T.V.Gopalakrishnan

Liquidity, inflation and economic growth

The mid- term review of monetary policy by the Reserve Bank has not brought out any drastic changes to contain inflation perhaps keeping in view the need to support the economic growth envisaged at around 9 percent and the moderated level of inflation although it continues to remain in the uncomfortable zone. The problem of liquidity of banks is well recognized and the measures introduced to come to banks’ rescue include reduction of Statutory Liquidity Ratio of Scheduled Commercial Banks from 25 percent of their Net Demand and Time Liabilities to 24 percent with effect from December 18,2010 and conduct of open market operation auctions for purchase of Government securities for an aggregate amount of Rs 48,000 crores in the next one month. These measures at best may improve the cash crunch position of banks but cannot improve their liquidity position on an endurable basis.
The present liquidity shortage with the banks is very tricky. Disinvestments by the Government have taken away the deposits of the banks. The advance payment of taxes by the corporate and high net worth individuals also has affected the deposits of banks. The negative rate of return on deposit interest rate because of high level of inflation persisting for quite some time seems to have prompted investors to divert their deposits from banks to other forms of assets such as post office savings, real estate, gold and other commodities.
The funds of Government lying with the Reserve bank at around Rs 85000 crores without earning any income and the borrowings of the Government at a cost from the Reserve bank do not seem to be good funds management and the adverse effect is on the economy. The utilization of the surpluses will ease the liquidity to a great extent. In this context, the measure announced by the Reserve Bank to reduce the Statutory Liquidity Ratio by one percentage point to 24 percent on a permanent basis is a well thought out plan and helps banks to widen their commercial credit instead of locking the funds in Government and other approved securities. To this extent the preemption of bank deposits for the Government Securities goes and the banks can have an improved funds management.
The Cash Reserve Ratio is kept unchanged at 6 percent. Banks can derive the full benefit only if they improve their deposits substantially. The banks’ loss of income on these Reserves and additional expenditure that they have to incur on their borrowings from the Reserve Bank under REPO at 6.25 percent affect not only their liquidity but also their profitability. The only way to come out of this situation is to considerably enhance their deposit base for which banks have to work hard and find innovative ways. The Reserve Bank’s Governor’s call to banks made during the Bank Economists’ conference held recently in Mumbai to enhance deposit interest rate and reduce the interest rate on loans assumes significance and needs to be seriously pursued. The NIM needs to be brought down and the volume of business turnover has to be augmented to improve the profits. Both balance sheet and off balance sheet size have to increase with an eye on improved earnings not counting much on NIM.
Some of the ways to enhance banks’ business turn over would be to seriously step up financial inclusion, tie up their business with tourist operators in the context of increased interests visible in national and international tourism, taking advantage of investors new found interest in commodity market particularly gold and derivative trading in foreign currencies and encouraging transactions through banks and banking instruments like cheques, demand drafts, plastic cards, mobile and internet banking. The public preference for cash needs to be drastically curbed to improve the bank deposits. Management of advances portfolio keeping the non performing and the potential non performing advances as low as possible by avoiding aggressive and speculative lending will also help the banks to improve their liquidity and profitability.
The high level of inflation continues to be a cause of concern and there are no signs of it coming down. The increase in oil prices both in domestic and international markets, continued high prices of food items despite a favorable monsoon season, the ever raising trend observed in the manufacturing cost due to increased cost of materials , transportation charges, and cost of funds in general and bank loans in particular etc pose a challenge and to what extent monetary policy alone can contain the inflationary trend is a matter to be seriously pondered? Continuance of inflation at a high level for a long time can harm the economy in the long run and the fact that inflation is the number one enemy of public cannot be ignored or forgotten. Economic Growth should bring in benefits to the masses who need food, cloth and shelter. If these essentials cannot be provided, there is no point in having any policy and the economy should not be proud of its growth.

T.V.Gopalakrishnan

National Gold Bank

This refers to the article on "India's fetish for gold( ET Dt, 20 th Dec2010).It is well known that India has a weakness for Gold and it is unlikely to have a shift away from gold into financial savings.The crux of the matter is that investments in gold is unproductive as the economy is concerned. The economy has high growth aspirations and there is urgent need to develop the infrastructure to support the growth.It would be worthwhile to think of establishing a National Gold Bank taking advantage of huge holdings of gold and with the backing of gold money can be raised to finance the infrastructure. There can also be a regulated way of investments in gold and subsequent dealings in gold if there is such a bank.


T.V,Gopalakrishnan

( This appeared in ET dated 24 th December 2010)