Author: Thyagarajan

FLSRC: Government’s writ on monetary policy is suicidal

The sweeping recommendations of the Financial Sector Legislative Reforms Commission (FSLRC) headed by Justice B N Srikrishna has stirred a hornet’s nest. Prima facie, the report gives an impression that it is aimed at clipping the wings of the Reserve Bank of India (RBI) Governor and seeks greater role for the government in financial regulation, especially in monetary policy affairs.

The Finance Ministry and the RBI Governor have always been at loggerheads. Current Finance Minister P Chidambaram’s run-ins with past Governor YV Reddy and his predecessor and current Governor D Subbarao is now part of financial folklore.

POLICY RATES OF COUNTRIES The proposals that have generated much noise are setting up of a unified financial regulator by subsuming current sectoral heads like Sebi, Irda, PFRDA and FMC. Regulators will no doubt be fuming, as they will be jobless once FSLRC proposals are implemented. It is debatable if multiple regulators have stifled growth in the financial sector or lack of innovative financial products.

But the over-arching proposals concerning greater accountability of the RBI and the government setting monetary policy goals for the central bank will have wide ramifications.

According to FSLRC, policy rates will be determined by a MPC (monetary policy committee) comprising of two members from the RBI and five members appointed by the government, thereby giving the government greater say over policy. This means, effectively, the RBI governor will no longer have the final word on monetary policy.

There is logic in this view, since in a democracy, an elected government must helm policy affairs. The objective that the central bank must pursue should be defined by the government. But vesting powers with the centre can be dangerous as politically-elected governments tend to favour cheap money policy, while economically sound central banks generally are far more conservative and look for macro-economic stability and not merely growth. Also, it is debatable if the government possesses the necessary expertise and domain knowledge to carry out monetary policy functions considering that they are not elected through merit.



The unified financial regulatory model has been prevalent in global financial system. But with global economy ravaged by one crisis after another, it is foolhardy to borrow a failed model. Rather, the Indian financial system, with its multiple regulators and stiff norms, had come in for immense praise after the global financial crisis in 2008. Isn’t it practical to stick to a model that has withstood the tough times?

The report said that there will be a quantifiable numerical target set by the government that must be met. In the Indian context, it is doubtful if it is feasible to set an inflation or growth target.


The committee has also suggested that the government will frame rules with respect to capital inflows like FDI, FII and NRI deposits against the present system of RBI. Four members of the panel have expressed their opposition to dilution of RBI’s powers on this front.

One area where unanimity seems to exist is the creation of a debt management office (DMO) for raising resources for the government which, at present, is managed by the RBI.

Many experts have warned of conflict of interest saying RBI’s role in monetary policy and managing the centre’s borrowing calendar may give the central bank a bias in keeping interest rates low. Creation of a separate agency will eliminate this loophole.

While FSLRC talks about accountability of the RBI, it is silent on seeking more answers from the government on fiscal policies. The government’s track record of fiscal deficit is there for all to see. The RBI, currently, enjoys the highest levels of credibility in the eyes of the public.


If the government, in its current form and public perception, takes control of monetary policy, the credibility and legitimacy of the entire process will be seen as suspect. Already, the government’s writ runs over financial regulators since almost all the current sectoral watchdogs are appointed by the government. Should we reward the government’s ineptitude with more responsibility? I think not!

Banking for the poor: Will corporates do what PSUs failed to?

In India, there are about 6,00,000 villages, but out of these only 60,000 villages have banking facilities which means 90 % of the villages are unbanked. Against such a grim background, the Reserve Bank of India’s (RBI) recent decision to issue new licences to private corporates and public sector entities has aroused renewed hopes of improving banking services in unbanked areas.

Since India has opted for a bank-driven model to achieve financial inclusion, banks will play a crucial role in the whole process of inclusive growth.


So far, RBI has made the right noises as far as improving financial inclusion is concerned saying banks must view it as a business opportunity rather than an obligation. While issuing guidelines for bank licences in February, RBI had said, “The business plan of applicants will have to address how the bank proposes to achieve financial inclusion.”

While the intent of institutions and regulators is little to doubt, they have all come a cropper as far as execution is concerned and it is high time that we differentiate the ‘doers’ from the ‘talkers’?

Financial inclusion has been a dud so far due to lack of technology, lack of a viable business model, higher cost of transactions and absence of reach and coverage, etc.

SEPT 2012

Every year, the government spends thousands of crores (Rs 14,000 crore in 2013-14) in recapitalising public sector banks to enable timely and adequate credit and other financial services to the weaker sections and low income groups. However, PSU banks have failed to extend basic banking services to the ‘bottom of the pyramid’ due to various factors like lack of clear policy framework and poor infrastructure and execution, resulting in financial inclusion remaining only on paper.

Institutions must overcome primary challenges like high cost of transactions, huge initial investments to create the necessary infrastructure and other expenses like financial education for the poor before financial inclusion can yield dividends.

But in this era of cut-throat competition, where banks are constantly driven by higher interest margins and intoxicated by the ideology of profit maximisation, asking bankers and financial executives to opt for social banking is a conflicting proposition that makes for a great headline but will make little headway.

Past efforts like nationalisation of banks, Lead Bank Scheme, development of Regional Rural Banks and formation of Self-Help Groups to take banking services to the masses have failed to increase penetration. Even the much-famed business correspondents (BCs) model has been a laggard.



In this context, a critical question that matters is- will corporates be able to design and deliver innovative financial services at affordable cost?

Corporates must create better awareness about banking facilities and design products which are poor-centric to ensure that the poor shed their inhibitions while approaching a bank.

Another area that corporates must grapple with is the high clout that politicians and bureaucrats wield in rural areas. Driven by electoral gains, many politicians exercise undue influence to push PSU banks to extend agricultural credit and other goodies to rural households, particularly close to elections. (Example- Rs 52,000 crore Farm Loan waiver.)



In the case of the farm loan waiver, a lot of funds, aimed at poor farmers, were allegedly diverted by middlemen and politicians. The mandate for corporates is to use financial inclusion to effectively check corruption and empower the poor.

But since they have been mandated to open only 25% of the branches in unbanked areas, it is hard to figure out if they can make any meaningful impact in addressing financial inclusion.

[stockquote]PSUBNKBEES[/stockquote] [stockquote]BANKBEES[/stockquote]

Indian Telecom: Hope at last?

The telecom sector is finally beginning to turn the corner after a difficult two years that was marked by weak operational performance, record low tariffs due to intense competition and regulatory hurdles.

Late last month, India’s biggest mobile carrier Bharti Airtel and Idea Cellular Ltd slashed discounts and freebies on offer to customers, effectively raising calling costs for mobile users. Vodafone India, the second biggest operator, has also hinted at raising tariffs.


Earlier in September, RCom had raised tariffs by 25% for both post-paid and pre-paid customers. Since these top four operators account for nearly half of mobile phone users in the country, more than 400 million subscribers will have to shell out more by way of mobile bills.

With the exit of players like Etisalat, Swan Telecom and Videocon, consolidation has already begun giving room for large operators to hike tariffs. The tariff hikes will come as a huge relief for the industry struggling with increasing regulatory costs and weak pricing power.

To improve their operational efficiency, many telcos have deactivated inactive subscribers and instead turned focus towards retaining active users rather than aggressively acquiring new ones. The move reflects an operational shift from volume/subscriber growth to increased focus on pricing/margin front.

On the regulatory front, liabilities with regards to one-time spectrum fee and spectrum re-farming are now clear although the exact payout is yet to be determined. News agency PTI has estimated that the government may get around Rs 23,177 crore by way of one-time spectrum fee from operators.


Spectrum re-farming would mean another blow for incumbent operators as re-allotment of spectrum in a higher frequency band will lead to higher capital investment to maintain current service levels.

If 2012 was a year of regulatory uncertainty, 2013 will be a year of a string of litigation as telcos are likely to contest several decisions like abolition of roaming charges, invalidity of 3G roaming agreements and spectrum re-farming.

The three leading operators and the government are fighting it out in the courts on offering 3G services in areas where they do not hold 3G spectrum. Even the reduction of up to 50% in the reserve price of spectrum in the 800 megahertz (MHz) band, used by CDMA operators, has irked GSM operators.

Removal of roaming charges, if implemented, will hit telcos further as earnings from roaming and STD charges will vanish. Coupled with higher re-farming costs of spectrum, tariffs will only rise further from the current levels despite TRAI’s warning that it may intervene in pricing by fixing a cap.


But the biggest turnaround will come once data revenues start picking up as earnings from voice services have stagnated. Future growth will revolve around data services through 3G and broadband wireless services. While currently, high pricing and higher cost of handsets are a major deterrent, accessibility will improve going forward and that would drive average revenues per user.

In short, it all depends on how telcos navigate regulatory headwinds and avoid a race to the bottom on the pricing front. Exciting times ahead!

[stockquote]BHARTIARTL[/stockquote] [stockquote]RCOM[/stockquote] [stockquote]IDEA[/stockquote]

A Cloudy future for Indian IT?

The national employability report 2011 compiled by Aspiring Minds revealed a shocking trend- the percentage of ready-to-deploy engineers for IT jobs is dismally low at 2.68%. Even though India produces more than five lakh engineers every year, only 17.45 % are ready to be employed in the IT sector. Revenues for Indian information technology (IT) and business process outsourcing (BPO) services companies is expected to cross $100 billion mark this financial year.

Indian IT Sector

However, there are doubts over sustaining this multi-fold growth due to supply-side constraints like talent availability. The report notes that around 92% of graduating engineers do not have the required programming and algorithm skills required for IT product companies whereas 56% showed lack of soft skills and cognitive skills. To retain its competitive edge, the IT industry requires an industry-ready workforce. Sector-specific skill shortages have emerged with middle-management personnel possessing little domain experience.

The IT/BPO sector also faces threat in the form of competition from other offshore destinations who are ready to dislodge India. A number of alternative offshoring locations like Philippines, Eastern Europe, Latin America, and China are emerging as viable options for BPO delivery centers.

Philippines has superior English language and soft skills for customer service operations especially for US buyers, Eastern Europe offers language and time-zone advantages for European buyers.


These competing destinations also offer lower cost, provide quality talent pool and are offering fiscal and regulatory incentives to lure buyers away from India.

Mid-tier IT companies are facing problems of their own. Apart from over-dependence on few clients and increasing attrition, they are also plagued by non-availability of talent. Since the sector biggies get preference in campuses during recruitment, mid-cap firms lose out on top-quality talent. This has impacted their ability to execute projects effectively.

TOP TIERAlso, the emergence of cloud computing has allowed companies to cut fixed costs in terms of buying software or high capital expenditure on IT infrastructure.

Even as cloud computing is yet to address key issues like data security, it has made crucial inroads into traditional outsourcing and the days of companies hiring thousands seems to be over as SECOND TIERthey no longer have to maintain assets such as servers and software.

Even as we dissect the industry on key parameters like order pipeline, demand outlook, decision-making cycle, client IT budgets, pricing power and so on, it is crucial to address the structural issues that plague the IT industry if it is to continue as the blue-eyed sector of the Indian economy.

Instead of resting on its laurels as one of the world’s top providers of IT and BPO services, companies must build new skills in its workforce to maintain its competitive edge and innovate.

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Too early to rejoice over retail FDI

India Inc is euphoric as the red carpet for Walmart, Tesco and its ilk has been formally rolled out with reports suggesting Delhi as the first city to host the global retail giants.

Riding on the retail bandwagon, the analyst community and government voices have fuelled hopes of more measures in the coming weeks like passing of key financial sector reform bills, FDI in insurance and so on.


In a September, 2012 report, Crisil estimated that allowing 51 % FDI in multi-brand retail will result in investment of $2.5 billion-$3billion in the retail sector over the next five years.

FDI in retail will also address the issue of inflation as mandatory creation of backend infrastructure may remove bottlenecks and inefficiencies in the supply chain and pave way for better farm practices and higher prices for farmers.

But getting carried away with the ‘potential’ big investments would be foolhardy as FDI in multi-brand retail is at the discretion of states. With a busy election calendar for the next one year followed by the big Lok Sabha elections, FDI in retail is unlikely to get off the ground.


After the Gujarat polls in December, there are state elections in Karnataka, Meghalaya, Nagaland and Tripura in the first half of 2013 and Madhya Pradesh, Mizoram, Delhi and Rajasthan in the second half. This means implementation of FDI in retail is at risk in the near term as the reform measure will give way to populism. With the latest Walmart controversy over lobbying claims rocking Parliament, FDI in retail has attracted severe negative publicity and is being viewed as anti-people. On current mood, even Congress-ruled states would not invite the wrath of voters and woo global retailers.

Also, riders like minimum $100 million investment, 30% sourcing from small industries, etc may act as barriers for global retailers.

However, retail stocks have been flying high in the last few months on hopes that FDI would help them forge partnerships with global retail chains and bring in funding and technology for the sector.


While FDI in retail will attract capital inflows in the long-term, it is miniscule when compared to India’s annual requirements. C Rangarajan, Prime Minister’s Economic Advisor was quoted as saying in October that India needs capital inflows of up to $ 70 billion annually for the next five years to bring its Current Account Deficit (CAD) down to 2.3% of GDP.


Apart from acting as a sentiment booster, FDI in retail is unlikely to change the fundamental equations at the ground level like elevated inflation, high fiscal and current account deficits and a weakening currency.

For the economy to decisively turnaround, structural reforms like addressing coal and power sector issues, fast-tracking investment proposals and land acquisition and green clearances are crucial.

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