20/12/2016
Our stand on GDS committee report
Today after attending Departmental Council Meeting, FNPO affiliated General Secretaries along with SG FNPO met Chairman Postal Services Board and requested him to release the GDS committee report which was submitted on 24-11-2016. After discussion FNPO Secretariat met and took the following decision.
1) Not to conduct any agitational programme up to31st December 2016 pressurising the publication of GDS committee report.
2) FNPO is not interested on agitation Programme for release of report. But we will insist the Department to implement all Positive recommendations of GDS committee.
In view of this we appeal to all our colleagues to be patient up to December end. If Department did not initiate action to release the report, FNPO secretariat will meet and decide further course of action
In view of this we appeal to all our colleagues to be patient up to December end. If Department did not initiate action to release the report, FNPO secretariat will meet and decide further course of action
19/12/2016
Today FNPO submitted memorandum to the Prime Minister
Today, a massive demonstration was held in front of Dak Bhawan, New Delhi.
SG FNPO and General Secretaries, S/Shri TN Rahate, D Kishan Rao, OP Khanna and Circle/Divisional Secretaries of Delhi Circle addressed the meeting.
After the demonstration SGFNPO and General Secretaries submitted memorandum to the Prime Minister at PM office. Copy of the letter is furnished below.
Today FNPO submitted memorandum to the Prime Minister
Today, a massive demonstration was held in front of Dak Bhawan, New Delhi.
SG FNPO and General Secretaries, S/Shri TN Rahate, D Kishan Rao, OP Khanna and Circle/Divisional Secretaries of Delhi Circle addressed the meeting.
After the demonstration SGFNPO and General Secretaries submitted memorandum to the Prime Minister at PM office. Copy of the letter is furnished below.
16/12/2016
LETTER TO THE HONOURABLE PRIME MINISTER OF INDIA BY FNPO AND ITS AFFILIATED UNIONS / ASSOCIATIONS.
To
Shri Narendra Modiji,
Hon’ble Prime Minister of India,
South Block,
Raisina Hill,
New Delhi-l10011
Respected Sir,
We, the Federation of National Postal Organisation and its affiliated unions submit this letter to express our deep concern and request to honour the commitment given by the Group of Ministers in the meetings held with JCM (Staff Side) leaders on 30th June 2016 & 06th July 2016.
Subsequently, an assurance was given that a High-Level Committee will examine the 7th CPC issues, mainly the Minimum Wage and Multiplying Factor. Based on the assurance, the JCM Constituent deferred the Strike action on 06th July 2016.
Though a Committee was constituted under the chairmanship of Addl. Secretary (Exp), Ministry of Finance and discussions held, the response has been disappointing.
The employees of the Postal and other Central Government employees are greatly disappointed over the nonsettlement of the main issues.
More so, many of the recommendations of the 7th CPC have created unrest in the minds of Central government employees in general and Postal employees in particular.
The issues raised after the implementation of 7th CPC & other long pending issues are enclosed.
We request your kind attention to the issues listed in the enclosure and action thereof at the earliest.
Thanking you, sir,
Yours Sincerely,
S-d
THE ISSUES RAISED AFTER THE IMPLEMENTATION OF 7TH CPC & OTHER LONG PENDING ISSUES
1. Request to Settle the demands raised by NJCA regarding modifications of 7th CPC recommendations as submitted in the memorandum to Cabinet Secretary on 10th December 2015. Honour the assurance given by the Group of Ministers to NJCA on 30th June 2016 and 6th July 2016, especially the increase in minimum wage and fitment factor. Grant revised HRA, at the existing percentage itself, i.e. 30%, 20% and 10%. Accept the proposal of the staff side regarding Transport Allowance. Settle all anomalies arising out of the implementation of 7th CPC recommendations, in a time bound manner.
2. Request to Implement option-I recommended by 7th CPC and accepted by the Government regarding parity in pension of pre-2016 pensioners, without any further delay. Settle the pension related issues raised by NJCA against item 13 of its memorandum submitted to Cabinet Secretary on 10th December 2015.
3. Request to Scrap PFRDA Act and New Pension System (NPS) and grant pensions and Family Pension to all Central Government employees recruited after 01.01.2004, under CCS (Pension) Rules 1972.
4. Request to Treat Gramin Dak Sewaks of Postal department as Civil Servants, and extend all benefits like pay, pension, allowances etc. of departmental employees to GDS.
5.Request to Regularise all casual, contract, part-time, contingent and Daily rated mazdoors and grant equal pay and other benefits. Revise the wages as per 7th CPC minimum pay
6. Request to avoid Downsizing, Privatisation, outsourcing and contractorisation of Government functions.
7. Request to Withdraw the arbitrary decision of the Government to enhance the benchmark for performance appraisal for promotion and financial upgradations under MACP from “GOOD” to VERY GOOD” and also decided to withhold annual increments in the case of those employees who are not able to meet the bench march either for MACP or for regular promotion within the first 20 years of service. Grant MACP pay fixation benefits on promotional hierarchy and not on pay-matrix hierarchy. Personnel promoted on the basis of examination should be treated as a fresh entrance to the cadre for grant of the MACP.
8. Request to Withdraw the draconian FR 56 (J) and Rule 48 of CCs (Pension) Rules 1972 which is being misused as a shortcut as a purity measure to punish and victimize the employees.
9. Request to Fill up all vacant posts, including promotional posts in a time bound manner. Lift ban on creation of posts.
10. Request to remove 5% ceiling on compassionate appointments and grant appointment in all deserving cases.
11. Request for Grant five promotions in the service career to all Central Govt. Employees..
12. Request to Reject the stipulation of 7th CPC to reduce the salary to 80% for the second year of Child Care leave and retain the existing provision.
13. Request for Ensure cashless medical treatment to all Central Government employees & Pensioners in all recognized Government and Private hospitals.
14. Request to Revision of Overtime Allowance (OTA) and Outstation allowance (OSA) w.e.f 01.01.2016 based on 7th CPC pay scale.
15. Request to Revision of wages of Central Government employees in every five years. 16. Request to Revive JCM functioning at all levels.
16/12/2016
RBI Imposes Restrictions On Withdrawal From Certain Bank Accounts
The Reserve Bank imposed certain restrictions on withdrawal if more than Rs 2 lakh has been deposited after November 9 in an account which has a balance of over Rs 5 lakh.
Mumbai: Tightening the noose around people who misused banking channels to park unaccounted money, the Reserve Bank on Thursday imposed certain restrictions on withdrawal if more than Rs 2 lakh has been deposited after November 9 in an account which has a balance of over Rs 5 lakh.
As per a RBI notification, withdrawal or transfer of funds will not be permitted in accounts without quoting of PAN or submission of Form 60 (persons who do not have PAN).
The Reserve Bank also said monthly withdrawal limit of Rs 10,000 will be maintained even if a 'small account' has witnessed increase in annual permissible deposit of Rs 1 lakh.
The notification follows after it was brought to the notice of the RBI that "strict compliance" with KYC (Know Your Customer) provisions is not being ensured in some cases.
In respect of KYC compliant accounts where the required Customer Due Diligence (CDD) procedure has been complied with, RBI said banks and NBFCs should ensure compliance regarding quoting of PAN/obtaining of Form 60 for all transactions.
"No debit transaction, transfer or otherwise shall be allowed in accounts which do not comply with the above mentioned requirements.
"To begin with, this rule shall be strictly applied in accounts where both the thresholds listed -- (i) balance of rupees five lakh or more; and (ii) the total deposits (including credits by electronic or other means) made after November 9, 2016, exceed rupees two lakh," RBI said.
RBI further said if any account is rendered ineligible for being classified as a small account due to credits/balance in the account exceeding the permissible limits, withdrawals may be allowed within the limit prescribed for small accounts.
The monthly limit for withdrawal and transfer from a small account is Rs 10,000. Also, aggregate of all credits in a financial year cannot exceed Rs 1 lakh.
Basic Savings Bank Deposit Accounts (Jan Dhan accounts are akin to BSBDAs), which are not KYC compliant accounts are to be treated as 'small accounts', the RBI added.
Government demonetised old Rs 500/1000 from November 9.
Earlier, RBI had asked banks to strictly follow norms while allowing deposits in dormant accounts.
There have been reports some people misused Jan Dhan and dormant accounts to deposit unaccounted money following demonetisation.
As per a RBI notification, withdrawal or transfer of funds will not be permitted in accounts without quoting of PAN or submission of Form 60 (persons who do not have PAN).
The Reserve Bank also said monthly withdrawal limit of Rs 10,000 will be maintained even if a 'small account' has witnessed increase in annual permissible deposit of Rs 1 lakh.
The notification follows after it was brought to the notice of the RBI that "strict compliance" with KYC (Know Your Customer) provisions is not being ensured in some cases.
In respect of KYC compliant accounts where the required Customer Due Diligence (CDD) procedure has been complied with, RBI said banks and NBFCs should ensure compliance regarding quoting of PAN/obtaining of Form 60 for all transactions.
"No debit transaction, transfer or otherwise shall be allowed in accounts which do not comply with the above mentioned requirements.
"To begin with, this rule shall be strictly applied in accounts where both the thresholds listed -- (i) balance of rupees five lakh or more; and (ii) the total deposits (including credits by electronic or other means) made after November 9, 2016, exceed rupees two lakh," RBI said.
RBI further said if any account is rendered ineligible for being classified as a small account due to credits/balance in the account exceeding the permissible limits, withdrawals may be allowed within the limit prescribed for small accounts.
The monthly limit for withdrawal and transfer from a small account is Rs 10,000. Also, aggregate of all credits in a financial year cannot exceed Rs 1 lakh.
Basic Savings Bank Deposit Accounts (Jan Dhan accounts are akin to BSBDAs), which are not KYC compliant accounts are to be treated as 'small accounts', the RBI added.
Government demonetised old Rs 500/1000 from November 9.
Earlier, RBI had asked banks to strictly follow norms while allowing deposits in dormant accounts.
There have been reports some people misused Jan Dhan and dormant accounts to deposit unaccounted money following demonetisation.
16/12/2016
There is No Magical On-Off Switch That Will Allow India to Transform Into a Cashless Economy
India falls well short of the pre-requisites needed to become a digital economy.
he demonetisation step of the Modi government, for the most part, appears to be hugely problematic. Several expert commentators – including Ajay Shah, Prabhat Patnaik, Swaminathan Aiyer, Manmohan Singh and several others – have pointed out that given the high dependence on cash transactions in the Indian economy, the resulting liquidity crunch, the diminished purchasing power and the reduced ability to transact is likely to badly hurt the macroeconomy and the damage to the informal sector – especially to small firms and retailers – is likely to be severe and permanent. Also, being saddled with cash and unable to invest due to a lack of economic activity, the banking sector may face a crisis. Ultimately, the poor and the underprivileged will likely be the worst hit – as they usually are.
Given that 86% of the currency was wiped out overnight, it seems unlikely that the RBI can systematically pump money into the economy soon enough to mitigate the problem. We will have to wait and see how the events will unfold and how soon the economy can recover, but it will be naive to assume that the demonetisation step will eradicate the deep rooted corruption and the black money problem forever.
Given the likely negative impact, demonetisation is perhaps not even in the feasible space of solutions as far as combating black money is concerned, so a cost-benefit analysis is somewhat infructuous.
Towards a cashless economy?
The issue of black money – the money on which due tax has not been paid – is undoubtedly a huge problem. Not only are the estimates scary, the overall moral degradation and cynicism that comes with financial corruption also has damaging implications.
So, if not demonetisation, what may be the solution? The erstwhile governor of the RBI has suggested stricter tax administration, whereas several voices in the government (for example, see here, here and here) and some others are clamouring for a cashless economy.
Perhaps they all mean the same thing, because what else but electronic monitoring and real-time auditing can bring in the necessary efficiency in tax administration? The anonymity of cash makes it convenient to hide transactions from the tax authorities, and, given the widespread corruption in the country, no manual audit can possibly be sufficient. The complaints can always be suppressed without tamper-proof records and the powerful can always favour the other powerful. Going cashless can definitely widen the tax base and contain the parallel economy; it can also encourage conversion of savings into consumption or investments by reducing idle assets, giving an overall boost to the economy.
But can we really go the Swedish way? Is it even desirable? The issue is far from resolved (for example, see here and here).
Are we ready?
About 68% of transactions in India are cash-based. Hence, despite some progress, and the enormous possibilities that the penetration of mobile network in rural India offers, we may still be far from ready. In fact, India falls well short of the pre-requisites specified in a 2013 report of MasterCard and ranks pretty low in their readiness score.
Also, apart from the consideration that the digital infrastructure is inadequate, even the desirability of a cashless economy in rural India, from a socio-economic point of view, has to be carefully examined. Although it is undeniable that the big ticket transactions of the formal sectors, the election spending of political parties, real estate etc. must come under the ambit of electronic auditing to the extent possible and also perhaps data mining to detect anomalies and irregularities in patterns of spending, one has to be extremely careful about the informal sector and the rural economy.
While most of the latter are outside the tax net, the majority of the transactions here are legitimate and honest, and payments are usually made against genuine goods or services. Bringing them into the formal sector should be done slowly and with utmost care and planning so as not to cause exclusions and distress. Running part of the economy cashless and part of it cash based, without furthering segregation and inequality, will require considerable tact in public policy design and execution, and adequate time and planning have to be given for the complex process of behavioural adaptation. If the Aadhaar experience is anything to go by, extreme care has to be exercised in order to avoid large-scale exclusions due to a disruptive introduction of technology. The potential of a cashless economy to cause havoc among the poor, the old and the infirm and the underprivileged, is enormous.
Privacy and security
The potential loss of privacy is an obvious concern that comes with a cashless economy. Possibilities of personal surveillance and electronic snooping as well as profiling without consent have been pointed out by many (for example, see here and here). A cashless society can potentially give the government of the day unprecedented access to information and power over the citizens and would require strong technical and legal frameworks to protect against misuse of power. The problem is compounded by the fact that data protection laws and public policies often lag way behind technology anywhere in the world (see, for example, here, here and here). In India, privacy is not a major concern and there is a lack of privacy or data protection laws.
The Attorney General of India has even claimed before the Supreme Court that Indian citizens have no constitutional right to privacy. Given the situation, the spectre of a cashless economy is scary indeed. Most of us do need the comfort of anonymity that cash provides, even while carrying out legitimate and harmless businesses. It will require a fair amount of informed debate before the privacy rights of citizens can be properly worked out, and it will definitely be premature to consider going cashless before that can happen. The government needs to clearly spell out the technical standards and the legal measures required to ensure the protection of privacy of its citizens, even from itself. The possibility of electronic mass surveillance on all monetary transactions does not augur well for civil liberty and democracy.
Security is yet another poorly understood issue. For example, cashless transactions presuppose that users have a working knowledge of public key certificate (among several other things), a crucial component for protecting passwords and credentials from getting compromised through man-in-the-middle attacks, but this is not usually true. Given this unfortunate situation, they may easily lose control of their bank accounts or electronic wallets in case of determined cyber attacks. Clearly, the government has to worry about user education and familiarisation in a big way and needs to work out the public policies and legal frameworks that may have to be invoked to give quick comfort and grievance redressal to its citizens who may lose their hard earned money because of ordinary ignorance. This is obviously not a mean task given the complex demography, and the problem is bound to get compounded as we move further towards cashless. Fiercely protecting our cash is a skill that we learn from our early childhood and is one that suits us naturally, and the skill may have to be completely re-learnt if and when we go cashless – which is not comforting. Besides, the government also has to define security standards for the back end infrastructure and make it as transparent to its citizens as possible. It also has to explain to its citizens why it expects their banks and wallets to be safe. So far it has failed to do so and we remain unaware of the data protection standards followed by the retail banks, Paytm or Airtel money.
Citizen’s rights
Most fundamentally, we need to know our rights as citizens. The government has reneged on the solemn averment of “I promise to pay the bearer a sum of…” written in bold on the cash that we carried. It was the understanding of most of us from childhood that the statement was a legal contract between us and the government, and we implicitly assumed that there was no last date of use. So, if some of us return from abroad or wake up from amnesia in 2017, we may suddenly find that we misunderstood the statement completely and we are holding on to some useless pieces of paper.
What will be the corresponding promise for the digital money in our accounts or electronic wallets? Can they also disappear with such impunity?
Also, we need to consider what will happen if we have money in our banks and the will of our heart to procure some goods or services, but fail to do so because of technology failure. Will such transactions be denied to the poor or the elderly even in an emergency? If not, then how will such transactions be recorded? What will happen if there is a prolonged service disruption, perhaps due to a disaster? Will it result in us returning to primitive forms of bartering?
Can we be denied cashless facilities like wallets or credit cards? Can our transactions be censored? In the absence of any privacy law, there is no transparency regarding the kind of data mining or profiling that is carried out, for example by banks and credit card providers, on our transaction data. In fact, an article in the Financial Times proclaims MasterCard and Visa’s business model as a well-protected oligopoly. This is problematic, because if some such entity suddenly decides that some of us do not deserve a facility or are not credit worthy, we will definitely need a quick and efficient grievance redressal mechanism.
All of the above can potentially increase the inequality to dangerous levels if not done with a great deal of thoughtfulness and care. We definitely cannot afford to be flippant about migration to a cashless economy.
Subhashis Banerjee is a professor in the department of Computer Science at IIT Delhi.
Sorce : The wire.
Given that 86% of the currency was wiped out overnight, it seems unlikely that the RBI can systematically pump money into the economy soon enough to mitigate the problem. We will have to wait and see how the events will unfold and how soon the economy can recover, but it will be naive to assume that the demonetisation step will eradicate the deep rooted corruption and the black money problem forever.
Given the likely negative impact, demonetisation is perhaps not even in the feasible space of solutions as far as combating black money is concerned, so a cost-benefit analysis is somewhat infructuous.
Towards a cashless economy?
The issue of black money – the money on which due tax has not been paid – is undoubtedly a huge problem. Not only are the estimates scary, the overall moral degradation and cynicism that comes with financial corruption also has damaging implications.
So, if not demonetisation, what may be the solution? The erstwhile governor of the RBI has suggested stricter tax administration, whereas several voices in the government (for example, see here, here and here) and some others are clamouring for a cashless economy.
Perhaps they all mean the same thing, because what else but electronic monitoring and real-time auditing can bring in the necessary efficiency in tax administration? The anonymity of cash makes it convenient to hide transactions from the tax authorities, and, given the widespread corruption in the country, no manual audit can possibly be sufficient. The complaints can always be suppressed without tamper-proof records and the powerful can always favour the other powerful. Going cashless can definitely widen the tax base and contain the parallel economy; it can also encourage conversion of savings into consumption or investments by reducing idle assets, giving an overall boost to the economy.
But can we really go the Swedish way? Is it even desirable? The issue is far from resolved (for example, see here and here).
Are we ready?
About 68% of transactions in India are cash-based. Hence, despite some progress, and the enormous possibilities that the penetration of mobile network in rural India offers, we may still be far from ready. In fact, India falls well short of the pre-requisites specified in a 2013 report of MasterCard and ranks pretty low in their readiness score.
Also, apart from the consideration that the digital infrastructure is inadequate, even the desirability of a cashless economy in rural India, from a socio-economic point of view, has to be carefully examined. Although it is undeniable that the big ticket transactions of the formal sectors, the election spending of political parties, real estate etc. must come under the ambit of electronic auditing to the extent possible and also perhaps data mining to detect anomalies and irregularities in patterns of spending, one has to be extremely careful about the informal sector and the rural economy.
While most of the latter are outside the tax net, the majority of the transactions here are legitimate and honest, and payments are usually made against genuine goods or services. Bringing them into the formal sector should be done slowly and with utmost care and planning so as not to cause exclusions and distress. Running part of the economy cashless and part of it cash based, without furthering segregation and inequality, will require considerable tact in public policy design and execution, and adequate time and planning have to be given for the complex process of behavioural adaptation. If the Aadhaar experience is anything to go by, extreme care has to be exercised in order to avoid large-scale exclusions due to a disruptive introduction of technology. The potential of a cashless economy to cause havoc among the poor, the old and the infirm and the underprivileged, is enormous.
Privacy and security
The potential loss of privacy is an obvious concern that comes with a cashless economy. Possibilities of personal surveillance and electronic snooping as well as profiling without consent have been pointed out by many (for example, see here and here). A cashless society can potentially give the government of the day unprecedented access to information and power over the citizens and would require strong technical and legal frameworks to protect against misuse of power. The problem is compounded by the fact that data protection laws and public policies often lag way behind technology anywhere in the world (see, for example, here, here and here). In India, privacy is not a major concern and there is a lack of privacy or data protection laws.
The Attorney General of India has even claimed before the Supreme Court that Indian citizens have no constitutional right to privacy. Given the situation, the spectre of a cashless economy is scary indeed. Most of us do need the comfort of anonymity that cash provides, even while carrying out legitimate and harmless businesses. It will require a fair amount of informed debate before the privacy rights of citizens can be properly worked out, and it will definitely be premature to consider going cashless before that can happen. The government needs to clearly spell out the technical standards and the legal measures required to ensure the protection of privacy of its citizens, even from itself. The possibility of electronic mass surveillance on all monetary transactions does not augur well for civil liberty and democracy.
Security is yet another poorly understood issue. For example, cashless transactions presuppose that users have a working knowledge of public key certificate (among several other things), a crucial component for protecting passwords and credentials from getting compromised through man-in-the-middle attacks, but this is not usually true. Given this unfortunate situation, they may easily lose control of their bank accounts or electronic wallets in case of determined cyber attacks. Clearly, the government has to worry about user education and familiarisation in a big way and needs to work out the public policies and legal frameworks that may have to be invoked to give quick comfort and grievance redressal to its citizens who may lose their hard earned money because of ordinary ignorance. This is obviously not a mean task given the complex demography, and the problem is bound to get compounded as we move further towards cashless. Fiercely protecting our cash is a skill that we learn from our early childhood and is one that suits us naturally, and the skill may have to be completely re-learnt if and when we go cashless – which is not comforting. Besides, the government also has to define security standards for the back end infrastructure and make it as transparent to its citizens as possible. It also has to explain to its citizens why it expects their banks and wallets to be safe. So far it has failed to do so and we remain unaware of the data protection standards followed by the retail banks, Paytm or Airtel money.
Citizen’s rights
Most fundamentally, we need to know our rights as citizens. The government has reneged on the solemn averment of “I promise to pay the bearer a sum of…” written in bold on the cash that we carried. It was the understanding of most of us from childhood that the statement was a legal contract between us and the government, and we implicitly assumed that there was no last date of use. So, if some of us return from abroad or wake up from amnesia in 2017, we may suddenly find that we misunderstood the statement completely and we are holding on to some useless pieces of paper.
What will be the corresponding promise for the digital money in our accounts or electronic wallets? Can they also disappear with such impunity?
Also, we need to consider what will happen if we have money in our banks and the will of our heart to procure some goods or services, but fail to do so because of technology failure. Will such transactions be denied to the poor or the elderly even in an emergency? If not, then how will such transactions be recorded? What will happen if there is a prolonged service disruption, perhaps due to a disaster? Will it result in us returning to primitive forms of bartering?
Can we be denied cashless facilities like wallets or credit cards? Can our transactions be censored? In the absence of any privacy law, there is no transparency regarding the kind of data mining or profiling that is carried out, for example by banks and credit card providers, on our transaction data. In fact, an article in the Financial Times proclaims MasterCard and Visa’s business model as a well-protected oligopoly. This is problematic, because if some such entity suddenly decides that some of us do not deserve a facility or are not credit worthy, we will definitely need a quick and efficient grievance redressal mechanism.
All of the above can potentially increase the inequality to dangerous levels if not done with a great deal of thoughtfulness and care. We definitely cannot afford to be flippant about migration to a cashless economy.
Subhashis Banerjee is a professor in the department of Computer Science at IIT Delhi.
Sorce : The wire.
15/12/2016
Aadhaar seeding is not mandatory for release of pension
There is, at present, no proposal to make Aadhaar seeding mandatory for release of pension to the Central Government pensioners.
Eighty-seven percent of Central Government pensioners of all age categories have seeded their bank accounts with Aadhaar number. The remaining thirteen percent, including those Government pensioners of the age of 80 and 90 years have not yet seeded their bank accounts with Aadhaar number. The Government has made efforts to seed accounts of all Central Government pensioners with Aadhaar numbers so as to enable them to benefit from the additional facility of submission of Digital Life Certificate. Public Sector Banks are authorised to enroll pensioners for issue of Aadhaar number, including old and infirm pensioners.
This was stated by the Minister of State for Personnel, Public Grievances and Pensions and Minister of State in the Prime Minister’s Office Dr. Jitendra Singh in written reply to a question by Shri Natubhai Gomanbhai Patel in the Lok Sabha today.
Source:-PIB
15/12/2016
Court orders against Government of India instructions on
service matters - consultation with Ministry of Law and Department of Personnel
and Training on question of filing appealsClick
here to view
13/12/2016
Dear Branch/Division/Circle Secretaries
Click the above link to view details.
Dear Branch/Division/Circle Secretaries
Make arrangements to conduct protest week from12th December to19th December 2016.
Protest week programme should be completed before.
*12/12/2016 or 13/12/2016at the Division level.
*15/12/2016 or 16/12/2016 at circle level.
Click the above link to view details.
13/12/2016
Can only love for our postman ensure success for India Post Payments Bank?
The key to the success of India Post Payments Bank will be its business plan and if that’s in place, technology
People have been waiting eagerly for the launch of the India Post Payments Bank or IPPB, the largest among the eight that are likely to start operations over the next few months. Eleven entities received the Reserve Bank of India’s (RBI’s) in-principle approval for floating payments banks but three of them have left the field.
Originally, the department of posts, or DoP, which has been running the post office savings bank, wanted to set up a universal bank. It had even applied for a licence. The proposal was discussed at the Public Investment Board, which examines the investment plans of various ministries worth at least Rs100 crore, and it advised DoP to set up a “differentiated bank”.
Accordingly, DoP applied to RBI, seeking a licence for a payments bank and got an in-principle approval on 7 September 2015. The bank has to be made operational by March 2017 but it seems the government wants it to be launched in January. This makes eminent sense in the wake of the demonetization drive— India’s financial sector is witnessing turbulence and the payments space is waiting to be grabbed with new ideas and innovations to give a big push to a cash-less economy.
IPPB will start with a Rs400 crore equity capital and a Rs400 crore grant from the government to set up a technology network in rural India. Incidentally, India Post, which is run by DoP, is not converting itself into a bank even as there have been many instances globally of post offices transforming themselves into banks. For instance, Germany’s Deutsche Postbank, originally a postal bank, is currently a private retail bank. In Japan, a large bank is run by its postal service but this is likely to be privatized next year.
Under the present scheme, there will be no conversion of any of the current activities of India Post for the payments bank. While the postal savings bank arm of DoP will continue its business, IPPB will come up as a new bank ostensibly for providing payments services to the masses in the hinterland. Indeed, India Post and IPPB will primarily cater to the same group of customers but the customers will have a choice—whether to continue to bank with India Post or go to IPPB for their savings deposits. Of course, the limit for a savings deposits in a payments bank is capped at Rs100,000.
IPPB is entirely owned by the government of India and will be run independently by a professional management even as DoP plays the role of a mentor.
Too Many Suitors
A Mint 12 January report (bit.ly/2hrDHEL) said IPPB was the “hottest game in town” and that 50 entities, including International Finance Corp., Barclays Bank, Deutsche Bank AG, Citibank NA and several state-owned banks have sent proposals to DoP for different kinds of partnerships. Going by the report, banks, insurance firms and asset management companies have been approaching IPPB to form equity partnerships, joint ventures and many other mutually beneficial arrangements.
None should be surprised by the enthusiasm that IPPB is generating. After all, DoP has a network of 154,939 post offices, the largest such network in the world. Its beginning can be traced back to 1727 when the first post office was set up in Kolkata. (The current postal system came into existence with the Indian Post Office Act of 1854.) As of 31 March 2015, 90% of the post offices were located in rural India—on an average 8,354 people are served by one post office, which covers 21.22 sq km.
IPPB has tremendous possibilities as it can bring millions of individuals and small businesses into the formal banking channel by offering savings accounts of up to Rs100,000 and current accounts with a special focus on micro, small and medium enterprises, small merchants, village panchayats, self-help groups, etc. It can also be the vehicle for the direct benefits transfer of social security payments of various ministries and pay utility bills, beside taking care of payments of various central and state governments and municipalities as well as colleges, universities and other educational institutions.
It can also play a major role in remittances—both domestic and cross-border—with a special focus on migrant labourers, low-income households and, finally, distribute third-party financial products such as insurance, mutual funds, pension and credit products.
The post office savings bank has a customer base of at least 330 million and the outstanding balance under all post office schemes were at least Rs6.19 trillion (in March 2015). Clearly, with its network, it can give India’s largest lender, the State Bank of India— which, after the merger of all its associate banks with itself, will become one of the top 50 banks globally in terms of assets—a run for its money.
Technology is Key
The key to the success of IPPB will be its business plan and if that’s in place, technology. In October 2009, DoP awarded a 45-month information technology (IT) modernization contract to Accenture to design a new enterprise IT architecture and migrate the DoP to a more efficient, reliable and user-friendly IT system. Tata Consultancy Services Ltd bagged the contract for an end-to-end IT modernization programme to equip India Post with modern technologies and systems to enable it to offer more services to a larger set of customers in an effective manner. Infosys Ltd was employed to put in place the so-called core banking solution as well as constructing a rural connectivity network.
The India Post website says that in November 2012 the government approved a Rs4,909 crore IT modernization project for DoP for transforming DoP into a technology-driven department. While Accenture came in early, TCS and Infosys were awarded the projects in 2013.
I understand, till now none of projects have been completed. There have been glitches galore in the core banking solution while the rural network is only partially done even as the back-end work of TCS remains incomplete. There have been disputes and disagreements with the service providers and, in a few instances, even penalty provisions for delayed delivery have been invoked.
The 2015 annual report of India Post says the entire project is in implementation phase and also outlines the achievements made so far, which include computerisation of the north eastern region, establishment of a data centre and a disaster recovery centre and networking 27,736 departmental post offices, rolling out core banking solution in more than 17,000 post offices, and setting up 500 ATMs, among a few other things.
Clearly, not even half of the technology work has been done. So, how will IPPB revolutionalize India’s payments system? At the initial stage, EY helped DoP to prepare the project report for the bank, based on which the in-principle licence was given. Now, Deloitte Touche Tohmatsu India LLP is advising IPPB for setting up the bank. According to communications and information technology minister Ravi Shankar Prasad, IPPB will have 650 branches. They will be located at all district headquarters across India and connected to 155,000 post offices.
The Hub and Spoke Model
This is a typical hub and spoke model with one major difference —the IPPB branches or control offices will be the back office while the post office branches which, for all practical purpose, will play the role of business correspondents for IPPB, will be its front office. Every post office branch will host an IPPB desk to source business.
To make this model successful, it needs to have the right technology. I understand that DoP floated a request for proposal (RFP) to invite bids from various companies in July. For any large, complex project, an RFP is considered to be the heart and soul of the procurement. If the software firms are to be believed, there were a few thousands of queries by the initial bidders but only one entity, Polaris Financial Technology Ltd, made a bid which got cancelled. A fresh RFP has been recently floated but I am not aware how many bidders it has attracted. The cost of the project could be as much as Rs600 crore.
Typically, it takes at least a couple of months to evaluate the bids and then another six months to implement the project. If IPPB wants to launch its payments bank in January, how will it get the technology platform? Certainly, it cannot use the unfinished technology architecture of DoP. The only option left before it is to tie up with a bank for the time being for using the IT infrastructure till its own IT backbone is in place. Only the State Bank of India has the capability to support IPPB but will the nation’s largest lender extend a helping hand? I doubt it, as IPPB will directly compete with the State Bank. Probably, IPPB will explore a tie up with Punjab National Bank, majority owned by the government. It is large and is based in Delhi. If indeed such an arrangement is worked out to launch the bank even before its IT infrastructure is ready, this will be a unique instance of a bank launch in India.
In fiscal year 2015, India Post generated Rs11,636 crore in revenue, 8% higher than the previous year and its total gross expenditure was to the tune of Rs 18,557—11.6% higher than 2014. Post recoveries, the deficit was Rs6,259 crore, 14% higher than the previous year. A look at the average cost and average revenue of the most popular 18 items sold by India Post reveals that only two of them are profitable—competition post card and letter—and all the others, including the money order business, which charges a hefty fee, are losing money.
IPPB can make a new beginning only if it is run as a business entity and not a government department. Till now, a CEO has not been appointed (Vinod Rai of the Banks Board Bureau is in the process of identifying one). DoP has asked the public sector banks to recommend senior executives for responsible positions at IPPB but I am not sure how the response has been. Meanwhile, the Institute of Banking Personnel Selection has been looking around to recruit around 3,000 people.
Even if the business strategy and the right kind of people are in place for the launch, the technology will hold the key to the success of a payments bank. With its phenomenal reach across India, IPPB can do wonders—geo-mapping every inch of the country and making every kirana store, petrol pump, mandi its business correspondent, and usher in a revolution in the payments space when the government is pushing hard for a digital economy.
In his Independence Day speech at the Red Fort, on 15 August 2016, Prime Minister Narendra Modi said the Post Office is an example of our identity. “If any government representative gets the affection of a common man in India, it is the postman. Everyone loves the postman and the postman also loves everybody... We have taken a step to convert our post offices into payments banks. Starting with this, the payments bank will spread the chain of banks in the villages across the country in one go.”
Love for the postman alone cannot make IPPB a success, it needs to do much more.
Tamal Bandyopadhyay, a consulting editor at Mint, is adviser to Bandhan Bank. He is also the author of A Bank for the Buck, Sahara: The Untold Story and Bandhan: The Making of a Bank.
His Twitter handle is @tamalbandyo
Comments are welcome at tamal.b@livemint.com
source:www.livemint.com
13/12/2016
Demonetisation Will Likely Lead to a Protracted Economic Slowdown
The impact of the contractionary demand shock triggered by the note ban will gradually radiate from cash-intensive activities to virtually every sector of the economy.
In most emerging economies, an important driver of GDP growth is investment demand. In India, private sector investment has been sluggish for consecutive quarters over the last two years. The principal driver of GDP growth in India in recent times has been private consumption demand, which contributes 60% to the GDP.
The announcement by the government on November 8 to ban the Rs 500 and Rs 1000 currency notes is a monetary contraction that will translate into a massive negative shock for consumption demand. As more and more firms start feeling the pressure of declining demand, investment will get adversely affected. The combination of a slowdown in consumption and investment may result in a fall in GDP growth rate lasting beyond two quarters.
GDP growth rate was estimated at 7.3% in the July-September quarter of 2016-17. The marginal increase from 7.1% in the April-June quarter was primarily driven by agriculture, construction and the services sector. Ironically, these sectors are now likely to bear the brunt of the currency-ban shock. Year-on-year manufacturing growth rate has declined from 9.1% in the previous quarter to 7.1%. In the July-September quarter investment demand contracted by 5.6%, resulting in a large negative contribution to the GDP.
In general, private sector activity in the economy has been weak in the recent quarters. The state of the economy prior to the announcement of the currency ban is essential because it highlights the structural weaknesses in the economy that may worsen as a result of this shock and aggravate the economic slowdown.
Cash in the economy
Estimates suggest that the reduction in GDP could be somewhere between ten to 330 basis points. Given the widespread reliance on cash, the actual impact could be bigger. The following highlight the dependence of the Indian economy on cash:
Beyond the initial impact, the shock from demonetisation is likely to set off a domino effect that will impinge on activities far removed from the cash-intensive sectors. This impact may result in a protracted economic slowdown going beyond the current financial year.
It is likely that firms and households will innovate in an attempt to get around the cash constraint. Formal financial services will provide support to those who have access to them. Firms in the retail business that utilise the formal financial services will face a rise in demand as consumers shift from the cash economy to the digital economy. These innovations will dampen the effects of the shock to some extent, however, they cannot act as much of a cushion in an economy which is so overwhelmingly dependent on cash. So, even if the share of digital transactions doubles, it would still represent only a small portion of the transactions in the economy.
Will the economy rebound after a short period of distress?
While some initial data has already started signalling a slowdown, experts opine that the slowdown in the next two quarters would be temporary and would be followed by a quick and strong period of rebound. They conjecture that as the expected benefits of the currency ban start kicking in and as the cash supply in the economy gets replenished, normalcy will be restored.
We, however, argue that reviving the real economy and getting it back on a high growth track could be a much more difficult and time-consuming process.
A continued shortage of cash is already forcing consumers to postpone their purchases, especially of non-essential goods and services. There have been reports of a decline in footfall in shopping malls and retail outlets have reported a sharp drop in sales over the last month.
In an environment of uncertainty, it is natural for economic agents to behave cautiously. Two kinds of currency have now emerged – cash and deposits. While people are able to convert cash into deposits, going the other way round is more difficult due to the administrative restrictions imposed by the government on withdrawals along with the unavailability of sufficient usable banknotes even a month after the demonetisation.
Given the widespread uncertainty about more restrictive withdrawal limits being imposed and about the time taken by banks and ATMs to disburse the new notes, it is likely that households will hoard whatever cash they are able to obtain instead of spending it. This tendency to build up precautionary savings could continue for a while even after the money supply is restored. This will exert an additional downward pressure on consumption demand.
The quantity theory of money states that there is a direct relationship between the quantity of money in an economy and the level of prices of goods and services sold, i.e. MV=PY, where M is the money supply, V is the velocity of circulation of money, P is the price level and Y denotes output.
The currency ban has reduced the money supply drastically. As people hold back consumption and hoard cash, the velocity of circulation will fall. This means both P and Y have to decrease commensurately in order to restore equilibrium in the system. Estimates suggest that it may take six to eight months for the new currency notes to fully come back into circulation. The time taken to restore money supply may reduce the velocity of circulation for an even longer period, thereby resulting in a protracted GDP contraction.
Long-term impact
A stable, sophisticated economy is one where economic agents are able to take risks as well as make long-term plans. This includes private businesses, financial investors and households. A major shock like the currency ban disrupts the overall stability of the economy. The continuous change of rules almost on a daily basis further adds to the uncertainty. Since November 8, the government has changed rules related to the currency ban over 20 times and the RBI has released more than 15 sets of frequently asked questions to clarify this change in rules. These actions create an environment of unpredictability and in such an environment, firms and households hold back their investment and consumption plans. This further puts a brake on real economic activity and it is likely that even after the currency notes are back in circulation, the brakes stay on or are only gradually lifted.
One segment of the real economy that could be severely hit by demonetisation is the medium, small and micro enterprises (MSME) sector. This sector plays a pivotal role in the economy, contributing about 8% to the GDP, 45% to the total manufacturing output and 40% to the total exports from the country. Given the reliance of the sector on cash, especially for the small and micro enterprises, and the cost of compliance with regulations in the formal sector, some of these firms may not remain viable or solvent in the changed environment.
Some of these firms that were already struggling to meet their interest payments amidst the business cycle downturn over the past few years, may now tip over and become bankrupt as a result of the liquidity crunch. Once businesses start failing, valuable organisational capital gets eroded. Irrespective of how quickly money is put back into circulation again, some of these losses could be irreversible, thereby inflicting long-lasting damage on the growth of this sector.
The initial contractionary effect on the sale of goods and services will negatively impact business investment at a time when private sector investment is already sluggish.
The revival of private sector investment requires a sustained flow of credit. Bank credit to the corporate sector has remained tepid over the last few months. Analysis shows that despite banks receiving a large volume of deposits since November 8, their ability to make fresh loans remains limited. In addition to this, if a large number of firms in the MSME sector default on their loans, this will exacerbate the existing non-performing asset (NPA) problem of the banks. This, in turn, may further affect their capacity to extend credit given their already precarious capital adequacy position. These developments coupled with the heightened macroeconomic instability triggered by the currency ban do not augur well for the private investment scenario.
Another long-term impact of the shock may result from the negative wealth effect on consumption demand. For example, the real estate sector is likely to take a severe hit due to the currency ban since a large percentage of the transactions in this sector have traditionally been cash-based. As real estate prices start falling due to the liquidity crunch, people who had invested their savings in real estate will experience wealth erosion and may cut back on future consumption plans. This is likely to impose a lingering effect on aggregate demand.
The long lasting nature of the economic slowdown may also result from the ripple effects spreading across the entire real economy. It is well understood by now that the large informal sector accounting for 80% of the country’s employment and 45% of the GDP will be disproportionately affected by the liquidity crunch because of its inherent dependence on cash. While the share of the informal sector is estimated at ‘only’ 45%, this hardly means that majority of the economy will be insulated from the shock. A reason for that is that firms are interlinked in production. The production and sale of a good require a long chain of transactions, many of which involve cash.
If just one link in this chain breaks down, there will be problems. For example, one tends to imagine that exports will not be affected, because exports generally involve bank transactions and not cash. But that is only true at the final stage. At the earlier stages, cash can be quite important, for example, in the textile sector where many of the activities are carried out in small workshops and are cash-dependent. If a large number of these workshops start shutting down because of liquidity constraints and a decline in sales revenues, the entire supply chain in the textile sector will get disrupted. Even if the new notes come back into circulation in a few months’ time, this kind of real economic disruption may last much longer.
All these point to the possibility that once GDP growth starts falling, it may take several quarters before the economy gets back on track again.
Conclusion
The impact of the contractionary demand shock triggered by the November 8 currency ban will gradually radiate from cash-intensive activities to virtually every sector of the economy. This will lower the GDP growth. The resurgence in growth may prove to be a challenge and may take longer than expected in an already sluggish investment scenario. Given the magnitude of the shock and the channels through which economic activity may get disrupted for close to a year, if not more, it is surprising that the RBI estimated the impact on growth to be limited and transitory as announced in its recent monetary policy review meeting.
It may be worthwhile to ask, had the currency ban announcement not been made, how would the economy have progressed? Before November 8, India’s GDP was growing roughly at 7%, primarily boosted by growth in consumption expenditure. Private investment activity has been weak. Banks have been saddled with NPAs and till now no well-defined policy measure has been devised to resolve the problem and boost credit off-take in the economy. Demand for corporate credit has been stagnant for several quarters and an overleveraged corporate sector has been refraining from initiating new investment projects.
During this time, the singular objective of the government should have been to adopt structural reforms to stimulate GDP and achieve a high and sustainable growth rate. Generating jobs to absorb the demographic dividend while it lasts should have been another policy priority. Instead of prioritising these objectives, the government announced a measure that has in fact dealt a severe negative blow to the overall economy.
The associated policy uncertainty is contributing to macroeconomic instability. Arguably, this is the last thing that was needed now given the pervasive weakness in the credit and investment climate. Policymaking over the next couple of quarters is likely to get hijacked by this single event in order to ameliorate a potential economic damage. All this is very costly both in terms of the time spent and the resources used up in first delivering the shock and then in restoring normalcy.
The longer the time taken to normalise the situation, the deeper will be the damage inflicted upon the real economy, and some of the damage caused may end up being irreversible. Perhaps a year later it would be worthwhile to ask whether the costs in terms of a protracted economic slowdown were worth the benefits arising from this move.
The announcement by the government on November 8 to ban the Rs 500 and Rs 1000 currency notes is a monetary contraction that will translate into a massive negative shock for consumption demand. As more and more firms start feeling the pressure of declining demand, investment will get adversely affected. The combination of a slowdown in consumption and investment may result in a fall in GDP growth rate lasting beyond two quarters.
GDP growth rate was estimated at 7.3% in the July-September quarter of 2016-17. The marginal increase from 7.1% in the April-June quarter was primarily driven by agriculture, construction and the services sector. Ironically, these sectors are now likely to bear the brunt of the currency-ban shock. Year-on-year manufacturing growth rate has declined from 9.1% in the previous quarter to 7.1%. In the July-September quarter investment demand contracted by 5.6%, resulting in a large negative contribution to the GDP.
In general, private sector activity in the economy has been weak in the recent quarters. The state of the economy prior to the announcement of the currency ban is essential because it highlights the structural weaknesses in the economy that may worsen as a result of this shock and aggravate the economic slowdown.
Cash in the economy
Estimates suggest that the reduction in GDP could be somewhere between ten to 330 basis points. Given the widespread reliance on cash, the actual impact could be bigger. The following highlight the dependence of the Indian economy on cash:
- India is amongst the most cash-intensive economies in the world with a cash-GDP ratio of 12%. The same ratio in its peer economies such as Brazil and South Korea is one-third of India;
- Cash in circulation to private consumption ratio in India is 20%, and
- Card transactions account for 4% of the personal consumption expenditure.
Beyond the initial impact, the shock from demonetisation is likely to set off a domino effect that will impinge on activities far removed from the cash-intensive sectors. This impact may result in a protracted economic slowdown going beyond the current financial year.
It is likely that firms and households will innovate in an attempt to get around the cash constraint. Formal financial services will provide support to those who have access to them. Firms in the retail business that utilise the formal financial services will face a rise in demand as consumers shift from the cash economy to the digital economy. These innovations will dampen the effects of the shock to some extent, however, they cannot act as much of a cushion in an economy which is so overwhelmingly dependent on cash. So, even if the share of digital transactions doubles, it would still represent only a small portion of the transactions in the economy.
Will the economy rebound after a short period of distress?
While some initial data has already started signalling a slowdown, experts opine that the slowdown in the next two quarters would be temporary and would be followed by a quick and strong period of rebound. They conjecture that as the expected benefits of the currency ban start kicking in and as the cash supply in the economy gets replenished, normalcy will be restored.
We, however, argue that reviving the real economy and getting it back on a high growth track could be a much more difficult and time-consuming process.
A continued shortage of cash is already forcing consumers to postpone their purchases, especially of non-essential goods and services. There have been reports of a decline in footfall in shopping malls and retail outlets have reported a sharp drop in sales over the last month.
In an environment of uncertainty, it is natural for economic agents to behave cautiously. Two kinds of currency have now emerged – cash and deposits. While people are able to convert cash into deposits, going the other way round is more difficult due to the administrative restrictions imposed by the government on withdrawals along with the unavailability of sufficient usable banknotes even a month after the demonetisation.
Given the widespread uncertainty about more restrictive withdrawal limits being imposed and about the time taken by banks and ATMs to disburse the new notes, it is likely that households will hoard whatever cash they are able to obtain instead of spending it. This tendency to build up precautionary savings could continue for a while even after the money supply is restored. This will exert an additional downward pressure on consumption demand.
The quantity theory of money states that there is a direct relationship between the quantity of money in an economy and the level of prices of goods and services sold, i.e. MV=PY, where M is the money supply, V is the velocity of circulation of money, P is the price level and Y denotes output.
The currency ban has reduced the money supply drastically. As people hold back consumption and hoard cash, the velocity of circulation will fall. This means both P and Y have to decrease commensurately in order to restore equilibrium in the system. Estimates suggest that it may take six to eight months for the new currency notes to fully come back into circulation. The time taken to restore money supply may reduce the velocity of circulation for an even longer period, thereby resulting in a protracted GDP contraction.
Long-term impact
A stable, sophisticated economy is one where economic agents are able to take risks as well as make long-term plans. This includes private businesses, financial investors and households. A major shock like the currency ban disrupts the overall stability of the economy. The continuous change of rules almost on a daily basis further adds to the uncertainty. Since November 8, the government has changed rules related to the currency ban over 20 times and the RBI has released more than 15 sets of frequently asked questions to clarify this change in rules. These actions create an environment of unpredictability and in such an environment, firms and households hold back their investment and consumption plans. This further puts a brake on real economic activity and it is likely that even after the currency notes are back in circulation, the brakes stay on or are only gradually lifted.
One segment of the real economy that could be severely hit by demonetisation is the medium, small and micro enterprises (MSME) sector. This sector plays a pivotal role in the economy, contributing about 8% to the GDP, 45% to the total manufacturing output and 40% to the total exports from the country. Given the reliance of the sector on cash, especially for the small and micro enterprises, and the cost of compliance with regulations in the formal sector, some of these firms may not remain viable or solvent in the changed environment.
Some of these firms that were already struggling to meet their interest payments amidst the business cycle downturn over the past few years, may now tip over and become bankrupt as a result of the liquidity crunch. Once businesses start failing, valuable organisational capital gets eroded. Irrespective of how quickly money is put back into circulation again, some of these losses could be irreversible, thereby inflicting long-lasting damage on the growth of this sector.
The initial contractionary effect on the sale of goods and services will negatively impact business investment at a time when private sector investment is already sluggish.
The revival of private sector investment requires a sustained flow of credit. Bank credit to the corporate sector has remained tepid over the last few months. Analysis shows that despite banks receiving a large volume of deposits since November 8, their ability to make fresh loans remains limited. In addition to this, if a large number of firms in the MSME sector default on their loans, this will exacerbate the existing non-performing asset (NPA) problem of the banks. This, in turn, may further affect their capacity to extend credit given their already precarious capital adequacy position. These developments coupled with the heightened macroeconomic instability triggered by the currency ban do not augur well for the private investment scenario.
Another long-term impact of the shock may result from the negative wealth effect on consumption demand. For example, the real estate sector is likely to take a severe hit due to the currency ban since a large percentage of the transactions in this sector have traditionally been cash-based. As real estate prices start falling due to the liquidity crunch, people who had invested their savings in real estate will experience wealth erosion and may cut back on future consumption plans. This is likely to impose a lingering effect on aggregate demand.
The long lasting nature of the economic slowdown may also result from the ripple effects spreading across the entire real economy. It is well understood by now that the large informal sector accounting for 80% of the country’s employment and 45% of the GDP will be disproportionately affected by the liquidity crunch because of its inherent dependence on cash. While the share of the informal sector is estimated at ‘only’ 45%, this hardly means that majority of the economy will be insulated from the shock. A reason for that is that firms are interlinked in production. The production and sale of a good require a long chain of transactions, many of which involve cash.
If just one link in this chain breaks down, there will be problems. For example, one tends to imagine that exports will not be affected, because exports generally involve bank transactions and not cash. But that is only true at the final stage. At the earlier stages, cash can be quite important, for example, in the textile sector where many of the activities are carried out in small workshops and are cash-dependent. If a large number of these workshops start shutting down because of liquidity constraints and a decline in sales revenues, the entire supply chain in the textile sector will get disrupted. Even if the new notes come back into circulation in a few months’ time, this kind of real economic disruption may last much longer.
All these point to the possibility that once GDP growth starts falling, it may take several quarters before the economy gets back on track again.
Conclusion
The impact of the contractionary demand shock triggered by the November 8 currency ban will gradually radiate from cash-intensive activities to virtually every sector of the economy. This will lower the GDP growth. The resurgence in growth may prove to be a challenge and may take longer than expected in an already sluggish investment scenario. Given the magnitude of the shock and the channels through which economic activity may get disrupted for close to a year, if not more, it is surprising that the RBI estimated the impact on growth to be limited and transitory as announced in its recent monetary policy review meeting.
It may be worthwhile to ask, had the currency ban announcement not been made, how would the economy have progressed? Before November 8, India’s GDP was growing roughly at 7%, primarily boosted by growth in consumption expenditure. Private investment activity has been weak. Banks have been saddled with NPAs and till now no well-defined policy measure has been devised to resolve the problem and boost credit off-take in the economy. Demand for corporate credit has been stagnant for several quarters and an overleveraged corporate sector has been refraining from initiating new investment projects.
During this time, the singular objective of the government should have been to adopt structural reforms to stimulate GDP and achieve a high and sustainable growth rate. Generating jobs to absorb the demographic dividend while it lasts should have been another policy priority. Instead of prioritising these objectives, the government announced a measure that has in fact dealt a severe negative blow to the overall economy.
The associated policy uncertainty is contributing to macroeconomic instability. Arguably, this is the last thing that was needed now given the pervasive weakness in the credit and investment climate. Policymaking over the next couple of quarters is likely to get hijacked by this single event in order to ameliorate a potential economic damage. All this is very costly both in terms of the time spent and the resources used up in first delivering the shock and then in restoring normalcy.
The longer the time taken to normalise the situation, the deeper will be the damage inflicted upon the real economy, and some of the damage caused may end up being irreversible. Perhaps a year later it would be worthwhile to ask whether the costs in terms of a protracted economic slowdown were worth the benefits arising from this move.
Subscribe to:
Posts (Atom)