Indian Economy, 5th edition (111 page)

But institutionally the
PRIs remain weak
and do not have the required capacity to plan or implement programmes effectively. The
12th Plan
proposes a ‘complete break from the past’ and provides sizeable resources to the Ministry of Panchayati Raj. These higher outlays should be converted into
outcomes
. This calls for greater
focus on empowering PRIs
through training and awareness generation coupled with social audit of all social sector programmes. Cash transfers to the intended beneficiaries can also help empower citizens, even while giving them choice of provider. This too can help improve the quality of
service delivery
.

To the extent the GoI is concerned, the issues highlighted by the
Survey
are neither new nor un-attended. But the main thing is that in a democracy things can only move in the desired direction once there is required level of public awareness and participation in place – the things for which the PRI level planning was given Constitutional status by the Constitutional Amendments 73rd and 74th. It is a matter of time that the PRIs start functioning in their right mode and the dream of inclusive growth and development gets realised – we can work in this direction with all zeal.

Q. 1. Discuss the challenges faced by the public sector banks in the light of the emerging business opportunities in the banking sector.

Ans.
Once India started banking sector reforms in the early 1990s, the banking industry saw multidimensional growth where new private banks were given licences, foreign banks allowed entry, universal banking became possible, etc. The hitherto closed banking sector with almost complete state monopoly (via the public sector banks–PSBs) was faced with multiple challenges. Private sector banks started entering the sector with state-of-the-art technology, making it more difficult for the PSBs to complete. Another challenging task for PSBs in the near future will be related to their human resource management
.
The market in the financial sector and especially in banking, is seeing growth driven by new products and services that include opportunities in:

(i)
credit cards, consumer finance, and wealth management on the
retail side,
and

(ii)
fee-based income and investment banking on the
wholesale side
. These require new skills in sales and marketing, credit and operations. Furthermore, given the demographic shifts resulting from changes in age profile and household income, consumers will increasingly demand enhanced institutional capabilities and levels of service from banks. The PSBs need to fundamentally strengthen institutional skill levels especially in sales and marketing, service operations, risk management, and overall organisational performance.

The following steps (suggested by the RBI and experts) may help PSBs in handling these challenges:

(i)
use of technology to reduce the gap created by shortage of staff and improving overall manpower efficiency.

(ii)
a pool of talent for occupying leadership positions may be built up by banks by training and preparing promising officers to assume future leadership roles.

The challenges are going to be even tougher as the RBI has recently announced releasing some fresh licences for setting up new banks in the country.

Q. 2 Write a note on the need and the current government policy regarding disinvestment of the PSUs.

Ans.
As many of the reserved sectors of industries were opened for private investment in the reforms era, the PSUs were thrown into a very tough competition posed by the Indian and foreign private investors who are equipped not only with the state-of-the-art technology but cutting edge management and marketing skills. To keep the PSUs in profitable condition and save their assets, they require heavy investment which the government lacks. Thus, disinvestment was opted for strengthing our PSUs.

The issue of disinvestment has been in debate since it was started. But recently it created news when the present Government (the UPA) did show a shift in its policy. By the end of 1999, the last Government had announced that the government holding in the ‘non-strategic’ industries would be cut down to 26 per cent—it meant that other than arms & ammunition; atomic power; mining R&D, fabrication, etc. of heavy metals; and the railways, all PSUs will become private industries.

Though the present government has not announced anything very clearly on this issue, it has said that as a policy, profit-making PSUs would not be disinvested.

w
hat will be the degree of disinvestment? Experts believe that the ‘strategic’ sale of the PSUs would not be followed as the government is trying to go for reforms with a ‘human face’.

Meanwhile, the government looks committed towards the PSUs in many ways—how to make them more profitable, protecting the interest of the labourers in the process of reviewing the MoUs signed by the PSUs, etc. Protecting economic interests of the economy also includes the protection of social and human interests.

Q. 3 Cite the reasons for the state of under-developed corporate bond markets in India and suggest measures for its development.

Ans.
Measures taken towards different segments of the finncial sector reforms since early 1990s have given visible results – in terms of market features and depth the Indian equity market today ranks among the best in the world; the government securities market has also evolved over the years and expanded. In contrast, the corporate bond market has not shown such a synergy and has remained a laggard - both in terms of market participation and structure. Emerging economies like Mexico, Russia, Poland, Brazil and Indonesia have more vibrant corporate bond markets in comparision to India.

Experts, together with the
Economic Survey 2010-11,
have cited several reasons for the under-development of the corporate bond market in India:

(i)
Banks loans being the popular and predominant mode of raising long-term capital;

(ii)
Participation of the FIIs is limited ;

(iii)
Due of lack of investor confidence, pensions and insurance companies as well as household are limited participants; and

(iv)
Crowding out of fund/investible capital by Government bonds.

Non-bank finance companies are the main issuers and very small amounts of finance are raised by companies/corporates directly.The corporate bond market as a result, is only about 14 per cent of the total bond market, while on the other hand, liquidity in the market and investment in the infrastructure sector remain constrained. With the intervention of the
Patil Committee
recommendations, the corporate bond market is slowly evolving. With bank finance drying up for long-term infrastructure projects in view of asset liability problems (faced by banking system), further development of a deep and vibrant corporate bond market is need of the hour (also suggested by the
World Bank
, recently).

Following steps may be taken for the promotion and development of corporate bond market in India:

(i)
Clearing/settlement on DvP (Delivery versus Payment) basis; market making with primary dealers; enabling Credit Default Swap; guaranteeing of corporate bonds by banks; and relaxing norms on short selling of Government bonds (all fall under RBI’s preview).

(ii)
Relaxing norms for use of shelf prospectus (requires amendment to Section 60 of Companies Act by the MCA).

(iii)
Putting corporate bonds under SARFAESI (Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest) Act (so that recovery becomes full- proof and investor’s confidence comes in).

(iv)
Arrangement for a comprehensive bond data base.

(v)
Lowering the stamp duties on the bond and making them uniform across states (Stamp Act needs to be amended by the Department of Revenue).

Q. 4
‘f
inance Commission (FC) and Planning Commission (PC) should work together for better development.’ Elucidate.

Ans.
The Constitution provides for a finance
c
ommission to promote fiscal federalism and ensure decentralised ways of development. But Parliament gave it only the power to suggest the distribution of the Union’s tax revenue. Meanwhile, the extra-constitutional body, Planning
c
ommission started playing a more proactive role in the area of developmental issues and allocation of funds. It was the fourth Finance
c
ommission (headed by P. V. Rajamannar) which, for the first time, suggested a cooperative approach between PC and FC.
i
n the last few years, academicians and the experts have been suggesting the same thing.

It was in 2002 that the government, for the first time, announced such an idea (The then finance minister Mr. Jaswant Singh suggested this while announcing the setting up of the 12
th
FC)—
the PC will be playing more or less a role of callaborator to the FC.
Mr. Som Pal was made a common member to both the bodies (after the UPA came to power, he resigned from the FC).

Experts appreciated the above governmental step as in the process of development; the FC has been left on the margins of the development process and the PC was playing a more important role. It is better they work in tandem since both are committed to economic development. The recent view of decentralised planning, coalition government, and requirement of greater fiscal federalism together demand a collaborative approach between these two bodies. By doing so, there is no doubt that a greater developmental purpose will be served.

Q. 5 Briefly describe the National Mission for Sustainable Agriculture.

Ans.
Climate change has enormous implications for the natural resources and livelihood of the people. Various studies indicate that the key sectors in India such as the agriculture, water, natural ecosystem, biodiversity, and health are vulnerable to climate change. This is happening precisely at a time when it is confronted with huge development imperatives. The Indian Network for Climate Change Assessment (INCCA) released a report in November 2010 on assessment of the impact of climate change on key sectors and regions of India in the 2030s – agriculture being one among the four key sectors. The report warns of impacts such as sea-level rise, increase in cyclonic intensity,
reduced crop yield in rainfed crops, stress on livestock, reduction in milk productivity, increased flooding,
and spread of malaria. This called for urgency of action in reducing vulnerability to adverse impacts of climate change. India announced a National Action Plan on Climate Change (NAPCC) in June, 2008 to realise it, which includes 8 National Missions.

The National Mission for Sustainable Agriculture (NMSA) is among the 8 national missions which seeks to address issues regarding ‘sustainable agriculture’ in the context of risks associated with climate change. Major functions of the Mission have been defined as given below:

(i)
devising appropriate adaptation and mitigation strategies for ensuring food security,

(ii)
enhancing livelihood opportunities, and contributing to economic stability,

(iii)
mainstreaming the adaptation and mitigation measures in R & D activities,

(iv)
absorption of improved technology and best practices,

(v)
creation of physical and financial infrastructure and institutional framework,

(vi)
facilitating access to information and promoting capacity building,

(vii)
promoting dryland agriculture by developing drought- and pest-resistant crop varieties,

(viii)
expanding its coverage to rainfed areas for integrating farming systems with livestock and fisheries.

Under the aegis of the Central government, state governments are also preparing their State Action Plans aimed at creating institutional and programme-oriented capacities to address climate change. These, together with the National Missions, will enhance climate change-related actions in the public and private domains.

Q. 6 Write a note on the recent steps taken by the Government in the direction of fiscal consolidation.

Ans.
After the IMF cautioned about the economy’s fiscal parameters and the condition put by it concerning immediate fiscal consolidation, the Union government in mid-90s looked concerned about the matter. After a longer time of deliberations, ultimately an Act was passed by the Parliament in 2003—the Fiscal Responsibility and Budget Management (FRBM) Act—All political parties voted in favour of this Act. This should be considered the most important legislation in India in the direction of fiscal consolidation which envisages:

(i)
Revenue deficit to be cut by 0.5 per cent of GDP per year.

(ii)
Fiscal deficit to be cut by 0.3 per cent of GDP per year.

(iii)
Fiscal deficit must be brought down to less than 3 per cent of GDP by 2007–08 and revenue deficit to zero by that time (UPA Government did it in 2008–09).

Further, the government did set stiffer targets; the revenue deficit down from 3.6 per cent to 2.5 per cent of GDP by March 2005.
o
ther than FRBM Act, the government is also committed on the following fronts:

•
Increasing
tax revenue
—imposing new taxes (service tax, transaction tax, etc.) besides broadening the tax base (income tax) as well as trying for better tax compliance and evasionless tax regime.

•
Cutting down
revenue expenditure
—controlling interest burden by lesser borrowings, rationalising subsidies, right-sizing the government, etc.

•
Encouraging states to adopt a uniform VAT so that the state government’s revenue could be increased and cascading effect of tax could be restricted.

•
Saving state governments from bankruptcy by proposing for them a share in the service tax and the custom duties.

a
committee (task force) headed by Mr. Kelkar handed over its report to the government concerning the feasibility of the FRBM Act. Meanwhile, some populist tendencies have been seen among the states as many have gone for promising free electicity to the farmers; such sops are surely detrimental to the attempts of fiscal consolidation, as states are the real culprit in fiscal deficit at present.

Q. 7 What are tax-havens and how are they promoting corruption in India?

Ans.
‘Tax havens’ are nation-states or dominions imposing low or no taxes on personal and corporate incomes, and as a consequence tend to attract wealthy individuals and corporates seeking to minimize their tax liabilities. Other than saving taxes these havens are also used as a safe hub for parking
‘black money’
created in different countries. As per the data of the OECD, there are at present over 70 such destinations in the world – popular ones are British Virgin Islands, Cayman Islands, Cook Islands, Dubai, Isle of Maw, Liechtenstein, Marshall Islands, St. Kitts and Nevis, Switzerland, Marritius, US Virgin Islands, etc.