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Thursday, December 9, 2021

A Piece of Advice to Government and Bimal Jalan Committee

Bharat’s real estate sector is facing a big challenge of 12.76 lakhs of unsold houses in top 30 cities. Bharat’s automobile sector is witnessing its worst phase in 18 years. Piled up inventory has 5,00,000 passenger vehicles and 2,00,000 two wheelers in May, 2019 forcing seven out of country’s the top 10  auto majors to shut down the production temporarily.  

Data released by SIAM (Society of Indian Automobile Manufacturers) on June 11, 2019 showed production exceeding sales in the April-May period, across all categories. More than 3.5 lakh jobs are lost in automobile industry since April, 2019. 

The National Sample Survey Office’s (NSSO) job survey for 2017-18 had shown a spike in the unemployment rate to over 6 per cent, a 45-year high. According to the State of Environment (SOE) report the unemployment has gone up from 4 % to 7.6% during May, 2017 – April, 2019. 

The Australia and New Zealand Banking Group predicts Bharat‘s GDP at 6.2% in 2019-20 slashing its own earlier estimates of 6.5%. Even RBI revised its GDP estimates from 7% to 6.9% for the year 2019-20.

Direct tax collections during 2018-19 registered a shortfall by Rs.82,000 crores and the GST collections too have a shortfall by Rs. 70,000 crores during the same period (both the shortfalls are against the annual targets.)

All the above figures clearly indicate Bharat is not only facing a decline in its economic growth but falling towards recession. RBI, fourth time in a row (since February, 2019) has reduced the key policy rates cumulatively amounting to 110 bps. Yet the government and the banking regulators are unable to arrest the declining trend in the economy.

It is not the shortage of the funds or higher interest rates of borrowing that is crippling the economy but decline in overall demand. We are now getting caught in a web of surplus inventories, layoffs, unemployment, job losses and decline in demand.

In such a scenario it is natural for the private sector to become more cautious to cut losses by stalling production and therefore reduction in borrowing cost will not induce them to produce more since there is lack of demand in the market. Hence, it is for the government to take the initiative to kick start the measures to boost the demand in the economy.     

The author suggests the following key measures to the government which need to be implemented on priority basis.

1. Kick start the works in stalled and delayed central infrastructure projects to cut down the time and cost overruns.

Cost escalation in various Central Infrastructure Projects (projects costing Rs.150 Crs and above) as on 30th September, 2018 stood at Rs. 3580 Bn! By reviving the works in these stalled and delayed projects the government can provide employment to the people and the demand for major construction materials like steel and cement will pick up momentum.

The government can think of the following strategic plan of action in this regard. As the above stalled and delayed central infrastructure projects consist of both EPC and PPP Projects, the government can fast track the approvals for PPP Projects for speedy implementation. The RBI can consider a onetime restructuring of the debts of these PPP Projects borrowed with the banks and also release a special line of credit from its massive reserves of Rs. 9.58 lakh crores with a longer tenure for repayment.

The banks can in turn lend this money to the above mentioned PPP Projects and repay the same to RBI in due course once these projects take off and the loan recovery process takes off. This is a prudent method of using the surplus reserves with RBI as it will ensure proper utilization of the funds and repayment of the same in due course to RBI compared to the proposed measure of filling up the government’s coffers by directly transferring the surplus reserves of RBI. 

2. Special focus on rural infrastructure   

Studies indicate poor infrastructure like bad roads and shortage of godowns and cold storage centres is resulting in around 10 percent additional transport and storage costs to the Bharatiya farmers. Food loss in Bharat is estimated at  920 billion per annum (harvest and post harvest losses). Globally the food loss is estimated at 24% during production, 24% during handling and storage and 35% at consumption.

Therefore, strengthening the rural infrastructure mainly the rural roads, godowns and cold storage centres can save the annual food loss of  920 billion in Bharat, in addition to creating rural employment. Government’s spending on rural infrastructure in the above mentioned areas will not only lead to generating rural employment but improving the public distribution system (PDS) which is the back bone for Bharat’s rural economy. 

3. Major reforms in agriculture 

The government should disband the MSP mechanism and allow free market access to the farmer to get remunerative prices for his produce. This can become a reality only when there is a strong supply chain consisting of storage, transportation, distribution and wider market access as a viable alternative to come out of the clutches of the middlemen.

The existing network and infrastructure of both central government and the states under PDS (Public Distribution System) to be transferred to a SPV (Special Purpose Vehicle i.e., special purpose entity) and this SPV should take up the task of providing free market access to the farmer across the country. This SPV may retain a portion of the market price realized by selling the farm produce towards the cost of services provided under the SPV and share the balance revenues with the farmer.

In due course, the SPV can build a corpus that will not only take care of the maintenance of its assets but also development and expansion of the same to strengthen its overall supply chain. This mechanism will not only enable the government to save on its annual PDS expenditure but more importantly provide wider market access at remunerative prices to the farmer and eliminate the exploitation by the middlemen.

From the substantial annual savings on PDS expenditure the government can instead provide a comprehensive rural insurance cover to the farmer (i.e., the small, marginal and medium farmers) to protect them against the risks of crop failure, farm debt defaults and market price fluctuations, in addition to providing a reasonable insurance cover towards life and health of the farmer and his family.

Studies reveal that the farmer’s access to formal credit (i.e., banks and microfinance institutions) will improve when it is backed by credit insurance. A suitable mechanism can be devised by the government to fully fund the premium cost for small and marginal farmers and subsidize the premium cost for medium farmers for the above comprehensive insurance cover.

Greater attention needs to be paid towards the small, landless farmers who either work as labourers or till the land on lease basis to ensure that these people are duly covered under the comprehensive rural insurance.

4. Allied activities in agriculture and agro based industries 

The government was aiming to double the farmers’ incomes by 2022-23 from the base year of 2015-16 which requires an annual growth rate of 10.40% in agriculture sector. Whereas, the Economic Survey 2018 has warned the government that climate change could lower the farmers’ income by up to 25% if the necessary remedial measures are not taken.

Doubling the farmers’ income is possible provided greater emphasis is laid on allied activities like- dairy, poultry, horticulture, floriculture and food processing. RBI may extend a special line of credit (as mentioned earlier in this article) to NABARD who in turn can step up its refinancing to the banks in order to expand bank credit to agriculture and allied activities as mentioned above.    

5. MSME Sector 

Expanding micro credit-

  • Mudra Corporation to be adequately capitalized and permitted to raise funds for refinancing Mudra loans by floating tradable debt instruments which can be subscribed by PSBs and other approved financial institutions that are to be ranked at par with other SLR instruments. 
  • Developing active reinsurance market for transfer of the risk of Mudra Corporation under insurance portfolio consisting of Mudra loans.
  • All Mudra loans to be fully covered under the CGTMSE for insurance with SIDBI.

Linking of all Mudra loans with Aadhar cards of the beneficiaries for tracking the whereabouts of the beneficiaries since they are by and large highly mobile. 

RBI may also extend a similar line of credit as mentioned earlier to Mudra Corporation in order to enable the RRBs, payment banks and Micro finance companies to expand their micro lending portfolio. 

RBI can also extend this line of credit to SIDBI so that its refinance portfolio of MSME will increase which in turn will enable the banks to pump more funds towards MSME lending. 

The government can increase its budgetary allocation towards Scheme of Fund for Regeneration of Traditional Industries (SFURTI) which is covered under MSME Ministry with a special focus to step up financing of development of clusters for the activities like- coir, jute, bamboo, khadi, leather, pottery etc.  

As evidenced from the following data bamboo production alone has the potential to generate 516.33 million man days of work in Bharat every year! (Needless to mention that the overall job creation potential in the above mentioned activities including bamboo is very large.) 

Therefore, instead of toying with the idea of transferring the massive surplus reserves of Rs. 9.58 lakh crores of RBI to its coffers, the government can think of having a special line of credit from RBI in place to enable the institutions like- NABARD, Mudra Corporation and SIDBI to in turn increase their refinancing portfolio towards rural credit, micro and small enterprises which in turn will lead the banking system to expand their credit to these sectors. Whereas the line of credit from RBI to banks to lend towards stalled and delayed central infrastructure projects will result in reviving these projects leading to creation of jobs and stepping up the demand in the key sectors like steel and cement.

These measures would revive the growth engine in the economy and hope the government and the Bimal Jalan Committee which is likely to finalise its report on 23rd August, 2019 with regard to transfer of RBI‘s reserves are listening.

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Dr. B.N.V. Parthasarathi
Ex- Senior Banker, Financial and Management Consultant and Visiting faculty at premier B Schools and Universities. Areas of Specialization & Teaching interests - Banking, Finance, Entrepreneurship, Economics, Global Business & Behavioural Sciences. Qualification- M.Com., M.B.A., A.I.I.B.F., PhD. Experience- 25 years of banking and 14 years of teaching, research and consulting. 100 plus national and international publications on various topics like- banking, global trade, economy, public finance, public policy and spirituality. One book in English “In Search of Eternal Truth”, two books in Telugu and 20 short stories and 27 articles published in Telugu. Email id: [email protected]


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