MUDRA Bank: New Initiative

Introduction

MUDRA bank the term coined in this year Union Budget 2015-16 stands for Micro Units Development and Refinancing Agency. This public institution has been created with the aim of funding the unfunded 5.2 crore micro and small business spread across the length and breath of India employing more than 12 crore individuals. It has been formed with a corpus of 20000 crore INR and credit guarantee of 3000 crore INR (2000 crore claimed by few sources too)

What is micro and small business?

As per the definition given by the RBI, micro units are those where the investments into plant and machinery is not more than 25 lacs INR (for manufacturing, production or processing) and less than 10 lacs INR in case of services. So who all comprises micro businesses? They are none other than tailor shops, cycle repairing shops, electrical and electronic repairing shops, weaving shops and industries and many others.

Same is the case with small businesses, with only difference of investment limit which is between 25 lacs and 5 crore for manufacturing and in between 10 lac and 2 crore INR for services. Local soap factories, paper industries (recycling of paper) are few examples for these.

Why them?

These micro and small businesses employ more than 12 crore unskilled, low skilled and skilled individuals (majority of work force) but only 4% of them have access to bank credit. They usually borrow from individual lenders at exorbitantly high rate (to the tune of 36% per annum) and thus very less fund available to them to invest in training their employees or in machinery. This on one hand reduces productivity of labor (calling for Skill India Mission) and technological backwardness of industries on other hand (calling for investment in R&D).

Funding these businesses can serve multiple purpose like skilling India and innovation in manufacturing and services. Also, it's the MSME sector only who are responsible for bringing new technology and innovation in industries which later on followed by bigger firms.

The other benefits include more jobs creation, increased savings, increased standard of life style and sociological change towards uplifting depressed section of society (as many of them are owned by people from lower and downtrodden section of society).

Hasn't Government done anything for them?

Government has taken many steps towards this direction and SIDBI is one such initiative. SIDBI (Small Industries Development Bank of India) and Mahila Bank (credit to women entrepreneurs) are such few initiative. SIDBI lend to public sector and private sector banks for their exposure to MSME sector and also through direct credit to needy units and achieved success in few industrial clusters.

But, given the large number of needy units in MSME; one SIDBI is not enough and more such institutions are required. Also, because of political interference in disbursal of loan through public sector banks (local MLA directing list to poor bank managers regarding beneficiaries) only a certain group/community reap the benefits. It has also been responsible for high NPA for PSB and RRB. And thus there is need for autonomous institutions with no government influence and can distribute  credit directly to needy individuals.

Can MUDRA solve this?

Answer to this question lies in its implementation. For now, MUDRA acting as NBFC under the guidance of SIDBI also given the task of micro-finance regulator. In future, if MUDRA would not be kept out of government influence the fate would be similar to SIDBI with little benefits reaching to micro businesses and more NPA.

Also, given the task of regulating MFI (micro finance institution) as well as funding micro businesses can be contradictory for MUDRA bank effective functioning. Alone, it can't serve the vast needs of 96% of 5 crore businesses and more such institutions are necessary (both in public and private sphere) to augment their businesses.

HDI and Union Budget 2015

The topic seems a bit strange but when at international level, development of a country is measured through indices prepared by various world organizations like UN, World Bank etc. And Union Budget is an exercise (planning exercise) by union government of India regarding growth of economy and benefitting every citizen of India. Then why not, judging the decisions taken under Union Budget in the light of those indices. And how the steps taken under union budget umbrella will make us improve our indices (representing growth and prosperity)

Now, Human Development Index (HDI) is one such index calculated by United Nation Development Programme (UNDP) that not only measures the economic growth of a country but also emphasize on people and their capabilities. HDI is the aggregator of health of an individual, knowledge level of people and standard of living of the citizens. They are calculated through:

1. Health is assessed through the life expectancy at birth (minimum value of 20 and maximum of 85 years)
2. Education is assessed through average year of schooling for adults till 25 years and expected years of schooling for children entering in school.
3. Standard of living is assessed through gross national income per capita adjusted for their PPP (Purchasing power parity). Logarithm of income is taken to take into account of diminishing importance of income with increasing GNI

Now judging the Union budget decisions under the light of these three criteria:

Health: Health of an individual is dependent upon sanitation, water, healthcare facilities and nutrition. Now, there is no need to mention the Swachh Bharat Mission, AYUSH, ASHA (Accredited Social health activists). However, government steps in budget regarding Swachh Bharat is commendable with 100% tax benefit in contribution to Swachh Bharat fund (susceptible to corruption and lackluster use) and high duty on polymer bags. Government has also emphasized on the construction of toilets with target of 6 crore units and health insurance through PMSBY (Pradhan Mantri Suraksha Bima Yojana) and establishment of more AIIMS and research institutions in medical field. As it seems government has lost its will to renovate the public health care system and trying to cover private health expenditure bill. 

On comparison at international level, India is still spending only 1% of its GDP on health while countries like China spend 3% and US spend more than 8% of its GDP on healthcare.

Education: Education requires infrastructure both in form of schools, colleges and in form of trained teachers and professors. Besides this, it requires social security to families that enable children to attend schools (MGNREGA is one such example in places where it has been successful). This year budget has led to opening of IITs, IIMs, AIIMS and other educational and research institutions with few in north Indian states (institute for film in Arunachal Pradesh), increased expenditure on MGNREGA by additional 5000 crore INR and allocated approx 68000 crore to education.

But the main problem of Indian education is its quality (highlighted in ASER report by Pratham NGO) and it has not even been addressed in budget. In fact, regarding the educational infrastructure the problem is regarding the governance rather than funding and resources. Also reviving the syllabus, making it more close to job skills are few of important concerns to be taken into account by government rather than just increasing numbers (either of colleges, schools and universities)

Living Standard: This is dependent more on the earning potential and actual earning of the individual. Regarding the potential which is more dependent on skill level and for actual earning the requirement is available of opportunities in industries, production, infrastructure and entrepreneurship. This budget seems to have a lot in this direction from encouraging entrepreneurship and MSME through MUDRA bank, incubator with 1000 crore under NITI for startups and easy availability working capital finance; to emphasis on developing skills of the youth through Deen Dayal Grameen Kaushal Yojana, National Skill Mission and scholarships. The budget has incentivized private corporate to invest through reduction in corporate tax and generate employment (what happens if they spend on labor reducing technology as usual since 1991).

The budget seems to prioritize growth through industries over education and health. May education and health find its true worth in next year budget or in governance improvement initiative throughout the year. And only then, we can expect of improving our HDI rank with respect to other nations.

How I see this Budget (Part1)

It has been said that there aren't big bang reforms in this budget. The point here is, we are living in a democracy and in a democracy government's future (parliamentary and assembly elections) is dependent upon majority. In India, this majority is formed by middle and lower class people. And they must be taken into account while formulating budget. Subsidies can't be wiped out in one go without building institutions to streamline distribution of subsidies. And institution building takes time. JAM (Jan Dhan, Aadhar and Mobile)  as coined in Economic survey as best tool for limiting the leakage in subsidy will take time to be resilient and successful.

Tax benefits can't be provided leniently without compromising with government revenue (many expecting tax limit to increase to 3 lacs). At the same time, government needs more fund to invest in infrastructure and minimize deficit. But still, government has given hint of following direction of fiscal expansion by reducing fiscal deficit to 3% by next three years instead to 2 years.

Now looking at the measures announced:

1. Ease of doing business

• Bankruptcy laws help resolving insolvency (one measure of easing of doing business)
• Other measuring units are getting electricity, registering property, getting credit, enforcing contracts, paying taxes, protection of minority shareholders, dealing with construction permits. Improvement in these require more of governance reforms rather than budgetary reforms
• Few of the governance measures announced includes encouraging compliance and dispute resolution, simplifying tax procedure and implementing recommendations of TARC (Tax Administrative Reforms Commission)

2. Agriculture

• In urgent need of public investment towards capital building like irrigation, there is also growing demand of making a national market for agriculture products. Both these need has been addressed in this budget
• 25000 crore fund to Rural Infrastructure Development Bank, 5300 crore to Micro Irrigation Programme, watershed development and PMKSY (Pradhan Mantri Krishi Sichai Yojana)
• Farmer's credit to the tune of 8.5lakh crore

3. Infrastructure

• Infrastructure bottleneck is due to lack of funds, non viability and litigants in PPP projects, delay in land acquisition
• Funds problem has been tried to solve through 70,000 crore additional fund to Infrastructure from Union government, tax free bonds, and revitalizing the PPP projects with government bearing maximum risk
• To improve the functioning of public sector ports; they will be encouraged to come under Companies Act.
• Emphasized Research through Atal Innovation Mission with 150 crore to foster culture of innovation in development of infrastructure.

4. Financial Sector

• Indian financial sector that enable the companies and developmental organizations to raise funds for investment and infrastructure building and opportunity for investors has many shortcomings (insider trading,
• Forward Market Commission (which looks after commodity trading) is proposed to be merged with SEBI (can be said to be moving towards one uniform regulator)
• For a very long time now, economists have been arguing in favour of an independent debt management office, which in the Indian discourse is called " National treasury management agency" or debt management agency, so that RBI can be relieved of the burden of being the Centre's investment banker. And Public debt management agency being formed is one of the recommendation of IFC (given by  Financial Sector Legislative Reform Commission)
• PJ Nayak Committee has recommended Banks Board Bureau for appointment of chairman to PSU banks to ease them off government controls. This has been approved of in new budget
• Gold imports has been a major concern since last two to three years for India; to case off gold monetization has been attempted through Sovereign Gold Bond (equal to holding gold) and Indigenous gold coin with Ashok Chakra

5. Industries

• At present, India has seen a surge in entrepreneurial activity across the sectors. These activities bring innovation in industry and need to be promoted. Indian democracy can be best justified if it enable its weakest individual (financially)to dream of becoming a millionaire by just business. And establishment of Mudra bank with initial capitalization of 20,000 crore to finance micro-finance firms  who lend to small units.
• Regarding the high class educated entrepreneurs willing to start in technology related business, SETU incubation programme  has been launched with funds coming through NITI.
• Regarding the big corporate houses, corporate tax will be reduced to 25% over four years (nothing in this year) with end to all the exemptions phase wise (exemptions are responsible for reducing effective tax). It is believed that this will boost investment; but when already companies are sitting on pile of cash worth 8-9 lacs crore and not investing, this justification seems questionable. 

FFC and Cooperative Federalism

FFC stands for Fourteenth Finance Commission. Finance Commission is a constitutional body  constituted under Article 280 with the main task of division of resources among centre and state government through tax devolution and grants in aid. Besides this, it also give recommendations to problems as requested/directed by the government of India.

FFC was constituted under the leadership of Y V Reddy (erstwhile RBI governor, IAS officer renowned for sailing India out of BoP crisis and appreciated by Nobel Laureate Stiglitz for his work as RBI governor during global financial crisis) . FFC was further given the task of:

1. Effect of GST on finances of state and Union governments
2. Amendments to FRBM Act
3. Pricing of Natural resources
4. Subsidies level for inclusive growth

The recommendations of FFC is aiming towards achieving cooperative federalism (equal say to states and centre on developmental activities). Also, this is in line with recent trend of growing decentralization in decision making which was started with 73rd and 74th amendment in early 1990s.

Funds and Grants in Aid

FFC major recommendation is regarding fund given to states through tax devolution to 42% from current 32% ( recommended by 13th FC) and change in weightage of factors like per capita income distance, forest cover, population, demography and area. To be precise, tax devolution will now on the basis of distance from highest per capita income district (50%), Population (1971 census, 17.5%), demography (2011 census, 10%), area (15%) and forest cover (7.5%). This changed formula has given more funds to special category states (states like Arunachal Pradesh, HP, Mizoram, Nagaland, Sikkim with difficult terrain and near border and strategically located). It will also benefit states with high forest cover like Jharkhand, MP and Chhattisgarh, but definitely a loss to UP and Bihar with population as low weightage.

Regarding the grants in aid which are more discretionary in nature; FFC  recommended a specific institutional arrangement be introduced for this purpose. And Inter State Council has been suggested to expand its role into this area. If implemented with true intention, this can be a milestone in achieving fiscal federalism among states and union.

Local Bodies

Local bodies often complain of less fund available, to take care of amenities. FFC has gone further towards decentralization in this with more fund to local bodies to tune of 2.8 lacs crore over five year period. And recommended states to pass advertisement tax to local bodies. FFC has kept check on working of local bodies by incorporating performance grant to funds being granted.

FRBM

As usual, FC commented on reducing fiscal deficit of centre to 35 ceiling level by 2016-17 and zero revenue deficit by 2019-20. And reduce the debt of centre to  36.3% by 2020 (from 45%). All these measures are suggested to be part of amendment to FRBM act. Or alternative to that, FRBM should rather be replaced Debt ceiling and fiscal responsibility legislation (as per Article 293). 

GST

Even FFC unable to estimate the loss of revenues to states amidst absence of clarity and design of GST. However, it recommended the same system as was used in VAT compensation (for three years, 100%, 75% and 50% respectively) but for five years (first three years as 100% then 75 and 50%). Also, Y V Reddy has given the suggestion of autonomous independent GST compensation fund to decrease the discretionary power of centre in such issues (seems his experience at RBI with centre government interference implicitly)

Pricing of Public Utilities

The only major recommendation is regarding the amendment to Railways Act through Railway Tariff Authority as statutory body rather than advisory body. This will rationalize the tariff in India. Currently, India has lowest passenger tariff and there is cross subsidization through freight revenues. But at same time, needs of poor need to be taken in account through use of technology in subsidizing rail travel.

In nutshell it can be said that FFC has given ample room to states to act on its own and share a higher fiscal responsibility for implementing the various central schemes. This will take care of diversity and inequality among states. GST matter is still left uncleared with lack of clarity and may take more time to come into existence. And as usual being a democratic nation, every recommendation's success depends upon the political will power of the party in the government. Although, this government has shown the right mood by accepting greater funds devolution to states.  

Railway Budget: This time its different

When I think of Indian railway, the picture that comes to mind is overcrowded stations, late running trains, tracks full of filth at stations and long lines for enquiry and ticketing. It may be because I was limited to north and East India, most populous region. But, when 65% of an organization's customer are not satisfied with the facilities, it must need to be restructured.

The status of Indian railway can be judged from the facts that only 200 km/year has been added since independence to Indian Railway infrastructure. Also, new trains were announced every other year to woo the voters of whichever states undergoing assembly elections; and they had to run on same limited track length. In last 30 years, only 317 projects out of 676 sanctioned projects have been completed. All this shows the poor decision making and operational efficiency of Indian railway.

This railway budget 2015-16 represented by Suresh Prabhu is bit different as there isn't any announcement of newer trains and jinx regarding focusing on transparency and accountability has been broken. The railway budget rather can be viewed from different angles like

Transparency and Accountability

In order to take care of projects running and prevent time delay, a new delivery mechanism and monitoring system (to prepare deadlines and make sure deliveries sticking to deadlines ) has been proposed. Further management inside railways has been said to be revamped to the need of time and increase the operating efficiency of railways. Training to front line  employees has been proposed to enhance accountability.

Services

Various measures are taken from installing CCTV cameras in Women compartment to declaring 182 as the helpline number . Although, it's efficiency depends on time that whether someone would be there to pick that phone or repair the faulty cameras or not. A separate department is going to be established for cleanliness which will ensure training of employees, coordinate with RDSO regarding vacuum toilets or with NIFT regarding linen that is in use inside bogies.

Technology

This year special emphasis has been given on use of technology by railways to efficiently serve customers. Use of Ipads by TTE, bar code on parcel handling, unreserved tickets available on smartphones are few such measures. But, how railway is going to implement such measures is yet to be seen because it's the same country where there is more than 95% enrollment to schools one side and 8th standard student unable to divide on another side. (truly, we are in a diverse nation). Also, there is emphasis on applied and fundamental research with new centre proposed to be established in four universities.

Infrastructure

The much needed boost to infrastructure has been given in this budget with eyeing finance from international development banks and pension funds, joint ventures for developmental projects with revamped PPP model (specially the contractual clause part), stress on satellite railway terminal to ease off overcrowding at metros and junctions. Also, to increase the freight handling capacity of railway that make it earn 67% of its revenue, private participation has been encouraged through freight terminal scheme.

This railway budget seems realistic with emphasizing completion of already undertaken projects, call for participation of NGO and MPs (through MPLADS), revamping the services being provided by railways and not on populist measures like bullet train. Rather, it led stress on research and use of technology in existing infrastructure. And as said in hard core economics, "All can't be satisfied with sops but can with hope" and this hope seems achievable. 

Fiscal prudence versus Fiscal deficit

In a country like India with mixed economy, government plays a major role in economy from investment to making availability of social goods and from running social benefit programmes to supporting the less developed market of certain goods. The recent debate on fiscal discipline versus fiscal expenditure is important because of this role of government in economy and state of Indian economy over last four years.

The first question that comes to mind is what is fiscal discipline. Fiscal discipline is phenomenon where government try to limit its expenditure to the extent it earns from tax, disinvestment and others. Or if there is excess expenditure, it must be controllable (regarding payment of interest) and justifiable (stimulus during recession or capital building).

 In absence of fiscal discipline, government used to have less room for spending during crisis situation. Also, it would be difficult for government to borrow from international markets (because of poor rating which depend upon fiscal numbers), huge interest to be paid to borrowers and adverse impact on exchange rate  causing low export numbers.  The high exchange rate is a result of high interest rate which would be a result of crowding out phenomenon by government borrowing. Amidst this, fiscal discipline is important and necessary.

But, at the same time fiscal deficit is also important. For a developing country like India, the resources available to the government are often not enough to spend on capital building as well as running social benefit programmes. Under such situation, it is advisable to borrow from market (both national and international) to spend on productive work.

If not, it would take a long time for the nation to come out of poverty, unemployment and malnutrition (prevalent problem of developing economy). Also, going by Keynesian thought fiscal deficit is justifiable if used to augment business activities either during depression or through infrastructure building.

Indian economy which has seen 8-9% growth rate in pre 2008 has declined to below 5% growth rate in 2012-14 (excluding the change in base year, recently done). Amidst this low growth, there was the change of government at the centre in mid 2014. At the time, government was reeling under high deficit of 4.9% of GDP in 2012-13 and 4.5% in 2013-14. This was definitely far beyond comfort level of 3% as specified in FRBM Act . Rather, the main problem is regarding the use of this deficit causing money which was spent heavily on subsidies and less on capital building. And subsidies in India has been very poorly targeted with leaking organizations like TPDS, MSP, Fertilizer subsidy ill targeted.

As a result of high deficit, there was less capital available to private sector leading to slowdown in business activities. Further, government itself has not been spending on capital expenditure, causing infrastructure bottlenecks. And worst of all, more money is available to the people without increase in business activities and production causing inflation.

But in the recent past, fiscal status has been improved with prudential expenditure and reduced international oil price. Now the conflicting point is that to go either for fiscal consolidation through reduced expenditure or go for fiscal expansion with stress on building infrastructure to support production. The resulting fiscal expansion if used judiciously will be cyclical in nature and not structural, but it purely depends upon the intention of the ruling party. Or else, go for fiscal consolidation but  then infrastructural bottlenecks need to be overcome through private players (which in present situation, not capable enough).

Disaster of Kedarnath

Kedarnath has been one among the most religious and pilgrimage place for Hindus in India. Kedarnath temple is famous for its historical importance, association with Lord Shiva and connection with some great personalities of the past like Shankaracharya and Raja Bhoja. These personalities were believed to be behind the construction of this temple in 10th -11th century. But, in the present it has been infamous for the natural disaster of 2013 in form of cloud burst resulting to massive flood.

Kedarnath temple is made up of schist stone found locally in middle Himalayas. The temple was built over a single rock as its platform and it's a totally dry construction. Dry construction is the kind of ancient construction with absence of any binding material like mortar or cementitious material. Dry construction gains its strength through gravity in vertical direction and interlocking of building blocks in horizontal direction. The building blocks are huge Schist boulders locally available in the region and cut into specific shape and size. This prevents the vertical and horizontal movement of the building blocks. And in fact, this aspect of Kedarnath temple prevented it from flash flood carrying millions of gallons of water. At the same time, all the modern construction in the vicinity of temple was washed out. 

 

The intensity of the damage can be guessed from the above image. There was massive landslides and undercutting; infact, the Mandakini river has changed its course during and after the calamity. But Kedarnath temple survived the force of nature by luck and by use of engineering. The flood brought with itself huge volumes of water and massive boulders (some of even size of 10m x 2m x 3m). These boulders were the reason behind the annihilation of Rambara town falling into the course of river. But for the temple, one among such boulder was the savior.

First, small boulders came from top along with water, which got settled in the rear side of temple. Then, a huge boulder of size 10x2.5x3 (m3) came and bifurcated the flow of water along the sides of the temple. Also, since the temple is of dry construction with use of interlocking among building blocks at same level; the damage was minimized. 

Damage was there mainly into projections spreading out from main structure like few columns of the Mandapa (middle portion of temple). Few of the building blocks were broken or missing from the corner of the temple, which can be repaired with locally available stones stitched to remaining one. 

Above figure demonstrates the damaged column of the temple, which for temporarily supported with stone bricks available locally. The only concern regarding the temple is its foundation where water gets deposited after the flood. The exact location of water has to be found in order to pump out; but the concerned technology is not available in India. And the only solution of digging is not there in the list because of sanctity of the area as fixed the so called religious guards. And it's very difficult to make them understand the engineering. The existence and durability of this great Kedarnath temple structure depends on this, which will be decided by time only.