Interview tips by IAS topper Gaurav Agarwal

Nayar Committee Report

The committee shares the
widespread perception
that excessive
and misdirected government control is
at
the heart of the problem. Consequently, it believes
that
reducing the government
equity
stake to minority
levels
and then empowering boards and
managements
to function within
the performance and
accountability frameworks of typical corporate organisations is the best way for these banks to get themselves out of
the three-way trap
Nayak Committee Report
What it would like is
for
the government to distance itself from
“several bank
regulatory
functions
it discharges.” To do this, it would like the repeal
of
the Bank Nationalisation Act of 1970 and 1980,
SBI Act and that relating to its
subsidiaries; all
banks should be incorporated under the Companies
Act.
The government’s holdings should be transferred to a Bank Investment Company (BIC)
along with
its regulatory functions. The
government’s holdings in PSBs should
come down to less than 50 per
cent, but it can and will remain the dominant partner. But its regulatory functions will now pass to
the
BIC. At this
point, one might think that the Nayak Committee is talking about privatisation. Its concerns, however, seem
to lie elsewhere.
The key lies in the appointment of boards and senior officials in banks. Right now
the
finance ministry plays big brother with most appointments
of
bank chiefs. Under the new dispensation, a Bank
Boards Bureau would deal with
senior level
appointments till the BIC
is formed. Eventually, at
the
end of a three year process, however, the responsibilities
would rest with the boards
themselves.
It is interesting that among other
things, the committee should list the RTI Act as a deterrent. Look across the spectrum of services
Indian citizens are offered and you will
find
a similar
sentiment expressed by
bureaucrats and even prestigious
higher educational institutions.
. A core recommendation is to unshackle banks from
government control
and
finance ministry’s interference, by reducing government holding to under
50%
and bringing banks under
the sole
regulation of RBI. It suggests that when government shareholding is
brought below
50%,
the rest should be transferred to a bank investment company
(BIC).
The committee recommends the creation of a category
of
authorised bank
investors
(ABIs) who
can invest in banks without prior approval.
It recommends that these ‘privatised’
PSU
banks be removed from dual regulation of the finance
ministry
and
RBI and brought solely under
RBI.
Q. Give me few problems ailing our economy
and solutions to address them ?
1.
Low
growth -
manufacturing as
well
as services.
2. Stalled projects.
1.
Multiple clearances, bureaucratic
red tape.
2. India’s rank in the World Bank’s Ease of doing business index fell from 116 out of 189
countries in 2006 to 134 in 2013—clear
evidence of stalled reforms. The new government needs
to reverse
this trend and improve
the environment
for doing business.
3. Unskilled workers / low
human capital development.
1. Rope in private sector, allow for profit.
4. Supply side constraints in infrastructure - roads, power plants.
1.
Road sector - fresh bids, independent regulator to oversee performance, CAG audit.
2.
Power sector - free up coal mining, pass through mechanism, discom reforms, CAG
audit.
3.
Ports
sector
- free up port management and construction.
4. Railways sector - More PPP, independent regulator and auditor.
5. Uncertain policy
environment.
1. Increase transparency, reduce discretionary decision making.
in
recent years
the lack of fiscal discipline has been costly
for
the Indian economy,
as excessive demand arising
from
large deficits
translated
into stubbornly high inflation and
was partly responsible for large current-account deficits. Fiscal discipline should be a priority, not an
afterthought.
improving the quantity and quality of
education and healthcare through partnerships with the
private and non-profit
sector and researchers is
essential to sustain growth
beyond the next five years.
There are currently three ministries
in the energy
sector—power, petroleum
and natural gas, and
renewable energy. It
makes
sense to fuse them into
a single ministry.
The recent problem of power plants
being built without proper coal supplies
could
have
been avoided if policy
had been handled
by one minister. There is
no need for a ministry
of information and
broadcasting, as
the former minister in charge of the portfolio, Manish
Tewari, reportedly admitted
last week. Is there a need for a separate ministry of urban
poverty alleviation? A ministry of culture? A ministry of heavy
industries? And a ministry
for at
micro, small and medium enterprises? What about
a ministry of pensions?
Foodgrain stocks,
as on April 1, 2014, were estimated
at 38 million tonnes, way
above the minimum buffer requirement. To
the extent that there is a speculative increase in
foodgrain prices, the government should aggressively
sell its stocks in the market.
From
all counts, there would be
an avalanche of capital
inflows in the immediate ensuing
period; this would
swell domestic liquidity
and generate inflation, unless immediate countervailing measures
are
taken.
The opportunity should be used to build up the forex reserves.
Also, there should be a tilt
towards longer-term flows
rather than
short-term flows
and more foreign direct investment rather than
portfolio investment.
The share of manufacturing
in GDP declined
from 14.8 per cent in 2011-12 to 14.1 per cent
in 2012-13 and to 12.7 per cent
in 2013-14, implying that this sector is
steadily losing
its relevance in
the economy, and that
the real economy
is weakening.
Poor growth
of the manufacturing
sector has
resulted in joblessness.
This can be gleaned
from the performance of two
sub-segments of manufacturing
— capital goods and
consumer durables.
Both segments are highly intensive in
the
use of components and
ancillaries,
and thereby encourage growth of
large number of small and
medium
scale industries as
they
grow.
Any crisis in these two sub-segments affects the
supporting SMEs and gives
rise to unemployment. Growth
in capital
goods and consumer goods
sectors suffers
due to
lack
of investment and consumption
demand. In
the case of basic and intermediate goods,
however, growth is hampered
by lack
of governance
and excessive regulatory
hurdles and interventions.
Govt should follow cluster approach
and give investment incentives.
Q. What are 2nd generation reforms.
1. Manufacturing reforms
1.
Labor reforms.
2.
Land acquisition.
3. Multiple clearances
and single window.
2. Governance reforms
1.
Transparency and rule of law.
2.
Rationalization of subsidies.
3. Restructuring of government schemes.
3. Trade reforms
1. GST and unified market.
4. Financial reforms
1.
Financial
sector liberalization and more competition.
2. FSLRC
recommendations.
Q. Whether subsidies good or
bad?
1.
In a poor country
like India,
certain subsidies are essential. Eg.
talk about
PDS and
Himanshu's
findings.
2. What we need is
to plug leakages in the subsidies.
1.
UID
was a good initiative, but after SC's
decision, its
fate is undecided.
2.
Still
we can reform subsidy regime by use of IT
and mobile. eg. PDS.
3. Also we can create NREGA like architecture where demand is generated from the
bottom and is backed by legal rights.
4.
We also need effective grievance redressal
mechanisms.
5. Social audits.
3. The Indian media rails against the government’s “fiscal irresponsibility” in introducing food subsidies, but the government spends far more on subsidies for the rich, including 1% on electricity
and 1%
on
diesel and petroleum products, which benefit the middle classes.
Q. What should we do to promote manufacturing sector?
1. Cut red tape, reduce number of clearances, single window mechanism. Transparency, reduce discretions.
2.
Reduce compliance costs.
3.
Labor laws.
4.
Develop infrastructure.
5.
Skill
development.
6.
Land acquisitions.
7. Friendly policies.
Amartya Sen
Nobel
Prize
1. Sen got the noble prize for
his work in - social choice (Impossibility theorem), distribution,
poverty
(Capabilities
based approach).
Sen's Capabilities
Based Approach
1. Functionings are states of ‘being and doing’ which measure an individual's well
being such as
being well-nourished, having shelter.
2.
Capability refers to the set of valuable functionings that a person has
effective access
to. Capability represents
the
effective freedom
of
an individual to choose between different
functioning combinations.
3.
Freedoms = capabilities. Unfreedom = deprivation of capabilities.

‘development’ is understood as capability expansion.
1. Income approach to poverty is not enough: Defining poverty as simply income below an accepted level is not enough as
there can be variations in converting this income
into various capabilities. These variations may arise due to personal, environmental,
social factors. Hence the need to go beyond income in poverty
measurement.
2. Utility approach to poverty
is not enough: People can internalize the harshness
of
their circumstances so that they do not desire what they can never
expect to achieve. This is the phenomenon of ‘adaptive preferences’ in which people who are objectively very sick may, for example, still declare, and believe, that their
health is fine.
3. Resource based approach to poverty is not enough: Because it only focuses
on
what goods
a person has, not what he can do with those goods.
Q. sen's policies
have become irrelevant now.
1.
Not irrelevant, but the new
government may
be
less guided by
them.
2. In fact rights
based approach is
in alignment with the new thought in administration that the
citizen must be empowered and government held accountable. RTI, NREGA are examples of success.
3. What we need is to
cut down on wasteful
expenditure and red tape, opacity. We need to
increase transparency
and rule of law.
Q. Compare n contrast bhagwati
sen
model
1. Bhagwati model
1. He talks of 2 track
reforms. Track
1 reforms are reforms
aimed at boosting GDP growth
and industrialization. It involves
building infrastructure, increasing transparency,
incentives to industry
etc.
2. Track 2 reforms which will follow track 1 are increased state spending on education
and health.
3. Track 2 can follow track 1 because: a) Track 1 will help lift people out of poverty via
additional jobs and incomes. b) Track 1 will also generate revenues for
the
state to spend on track
2.

1. Public provision of health and education is a must because if labor are not educated
and healthy, they cannot have high productivity and growth will
not increase. There is not a single example in the world where development has
been possible without
investing in education and health.
2. Sen is not against growth, but he says
we must also focus
on
what this
growth does
to people's
lives.
Q Compare n contrast bihar n gujarat model. Which one do we need?
1. Bihar model
1. State actively engaged in promoting education, food and health facilities to citizens.
2. Gujarat model
1. State creates a business friendly
environment. Private investment led model.
3. What we need?
1. We need a synthesis. India is
too
big a country where conditions in one part are
completely
different from another
part. For
example, in a state like Bihar where poverty
and illiteracy are high, government incentives are needed for people to study up to class X. But such a thing is
unnecessary
in Gujarat where already literacy
rates are high. If people are illiterate, then just focusing on private investment will not work
to promote an inclusive growth.
2. We need to focus on what kind of growth we are having. We need a growth which
creates
jobs.
Q. what happened in recent wto?
1. Trade facilitation: A deal was reached. Red tape and delays have to be cut in allowing
international trade.
2. AoA: India got a 4 year
peace clause after which the fate of subsidies
will be decided.
RBI Monetary Policy Review
Recent Policy Action (April 1)
1.
Increased the liquidity
provided under 7-day and 14-day term repos from 0.5% of NDTL to
0.75% in line with Urijit Patel committee recommendations, and decrease the liquidity
provided under
the
overnight repos from 0.5%
to 0.25%. The primary objective is to
improve
the
transmission of policy impulses
across the interest rate spectrum.
2. Policy stance
1.
Kept repo rate under
LAF
unchanged at 8%.
2. The policy stance is
firmly
focused on keeping the economy on a disinflationary glide path that is intended to hit 8 per
cent CPI inflation by January
2015 and 6 per
cent by
January 2016.
3. Furthermore, if inflation continues
along the intended glide path, further
policy tightening in the near
term
is not anticipated at this
juncture.
Macro Forecast
1. GDP growth
1. Itis expected to pick up from below
5% in 2013-14 to 5 - 6%
in 2014-15 though with
downside risks to the central
estimate of 5.5 per cent.
2. Positive factors

1. Progress on the implementation of stalled projects
already cleared.
2. Stronger
anticipated export growth as
the
world economy picks
up.
1. CAD is
expected to be about 2.0%
of
GDP for 2013-14.
3. Inflation
1.
Forecast of 8 per cent CPI inflation by January 2015.
2. Risk factors
1. Vegetable prices
have entered their seasonal trough and further softening is
unlikely.
2. El Nino and uncertain rainfall.
3.
Uncertainty on the setting of MSPs.
4.
Uncertainty in fiscal
policy.
5.
Geo-political developments and their
impact on international commodity
prices.
6. There will also be a downward statistical pull on CPI inflation later this
year, due to base effects from high inflation during June-November
2013.
Urijit Patel Committee Recommendations
1. Some recommendations of Dr. Urjit R. Patel
Committee report have been implemented including
1. Adoption of the new CPI (combined) as
key measure of inflation.
2.
Explicit recognition of the glide path for
disinflation (8% for
Jan
1015, 6%
for Jan 2016,
4% thereafter).
3.
Transition to a bi-monthly
monetary
policy
cycle.
4. Progressive reduction in access
to
overnight liquidity under the LAF
at
the repo rate and a corresponding increase in access to
liquidity through term repos, and
introduction of longer term repos.
Bimal Jalan Committee Recmmendations
1.
RBI will work to give licenses more regularly, that is virtually “on-tap”.
2. It will also set out categories of differentiated bank licenses
that will
allow
a wider pool
of entrants
into
banking.
Market Development Efforts by
RBI
1. Inflation bonds
1. To expand investor
demand, design changes improving their attractiveness to the
general public are being worked out.
2. Corporate bonds
1. Banks will be allowed to offer partial
credit enhancements to
them.
3. Re-repo of g-secs.
The feasibility
of
limited re-repo/re-hypothecation of “repoed” government securities is
being explored.The idea of rehypothecation typically
works
not so much with term
repos
but reverse repos, with somebody
sort of lent money
and suddenly
feels
that
they
have a squeeze on their
reserve they want to relend to somebody
else,
rehypothecation allows that. So as you move to term reverse repos
this will be a helpful
thing, and we are exploring it, we think we can do it without much risk.
FIIs may be allowed to hedge their currency
risks through exchange traded currency
futures.
KYC
norms
are being simplified for Foreign Portfolio Investors.
To encourage longer-term
flows and reduce volatility, FPI investments
in G-Secs will henceforth be permitted only in dated securities of maturity
one year and above, and existing investments
in T-bills will be allowed to taper off on maturity/sale. Any
investment limits vacated at the shorter end will
however be available at longer maturities, so overall
FPI
limits will not be diminished.
Q. Should we have differentiated licenses?
This will
allow
people to develop banking capabilities even with relatively small size of
operations, which will then allow
them
to may be apply
for full banking licenses
down the line.
Q. Does
it make sense to augment
FX reserves
at this stage?
1. If you focus only on reserves
there is really no point at which you feel
safe, because provided there is
enough uncertainty about
the economy, uncertainty
about conditions, uncertainty
about the treatment of international
investors, 400, 500, 600 any level of reserves, until
you get to Chinese levels,
is probably not enough.
2.
So really
our focus should be on creating the policy
environment which gives
investors confidence.



2. Strengthening
banking structure through
1.
new entry, branch
expansion,
encouraging new
varieties
of banks,
2. and moving foreign banks
into better regulated
organisational
forms.
3.
Broadening
and deepening financial
markets
and increasing
their liquidity
and resilience.
4. Expanding access to finance to small and medium enterprises, the unorganised sector, the poor, and remote and underserved areas of the country through technology, new
business practices, and new organisational structures; that is, we need financial inclusion.
5. Improving the system’s ability to deal with corporate distress and financial institution distress by
strengthening real and
financial restructuring as
well
as
debt recovery.
Global Economy
1. Since January 2014 statement,
global growth outlook remains
broadly
unchanged though weaker initial data to
some
extent cloud optimism.
2. Global
economic activity had
strengthened in H2 of 2013. On the current
reckoning, global growth is likely to
be in the vicinity
of 3½ per cent
in 2014, about ½ a percentage point higher than
in 2013.
3.
Downside risks
1.
Tapering of
quantitative easing
(QE) in the US,
2.
Continuing deflation concerns and
weak
balance sheets in the euro area and,
3.
Inflationary pressures
in the emerging
market and
developing
economies (EMDEs).
4.
Weakening growth
and financial fragilities in China.
5. Capital flows to EMDEs could remain volatile, even if they do not retrench.
Indian Economy
1. Economic
Buffers
1. These buffers effectively bulwarked the Indian economy against the two recent occasions of spillovers
to EMDEs — the first, when the US Fed started the withdrawal
of
its large scale asset purchase programme and the second, which followed escalation of the Ukraine crisis. On both these occasions, Indian markets were less volatile than most of its
emerging market peers.
2. With the narrowing of the twin deficits – both current account and fiscal
– as
well as the replenishment of foreign exchange reserves, adjustment of the rupee exchange rate,
and more importantly, setting in motion disinflationary
impulses, the risks of near-term macro instability have diminished.
2.
Agriculture sector witnessed record production.
3. Industrial growth stagnating
1. IIP showed -0.1% during April-Mar 2013-14. Mining -0.8%, Manufacturing -0.8%. Capital goods: -4%, Consumer durables: -12.2%. Growth of core industries remained sluggish at 2.6% during April-Feb
2013-14 compared to a growth of 6.4% in the corresponding period a year ago.
2. Reduction in excise duty is expected to provide some relief to manufacturing.
4.
Employment scenario showing signs of gradual recovery.
5. External
trade
1. Apr - March: Exports: $312 bio (+3.9%), Imports: $450 bio (-8.1%), Trade deficit: -$138 bio (vs
-$190 bio last year). Oil
imports: $167 bio (+2.2%), non oil
imp: $283 bio
(-13.3%). Agriculture exports: $45 bio.


4. Slowdown in exports
in recent months can be attributed to certain sector specific
issues
and global
factors. For instance, decline in exports of gems
and jewellery could be largely reflective of the price effect mainly emanating from
an
20.1 per
cent y-o-y
drop in gold prices.
5. Fall in exports
of
petroleum
products are largely attributed to lower
gross refining margins
6. Destination-wise, while export demand from
economies like the US and China was broadly intact, a significant decline was evident in exports to EU economies, Switzerland, the OPEC
region, Singapore and Hong Kong SAR.
7. Although the decline in imports bodes well from the perspective of a CAD decline, the lowering of CAD on this account may not sustain with the expected revival of domestic aggregate demand.
8. Surge in capital inflows led to accretion of reserves; the rupee has moved in a narrow
range.
6. Inflation
1.
CPI: 8.6%
in April, 8.31% in March, 8.1% in Feb, 11.2% in Dec.
2. Decline mainly due to declining vegetable prices. Apart from vegetables, CPI inflation
in ‘cereals
and products’
posted a significant decline at 9.9 per cent in February 2014
from
12
per cent in November
2013.
3.
Wage price spiral pushed up inflation in the services
segment.
4.
Headline inflation has
moderated in recent months, but upside risks remain in
2014-15.
5.
WPI: 5.2% in April
(lower
due to vegetables), 5.7%
in March (higher due to food items),
4.68% in Feb, 6.16% in Dec.
6. Core inflation: 3% (highest since Apr 13).
7. Efforts to address infrastructure bottlenecks have yielded modest revival so far
1. Cabinet Committee on Investment (CCI) and the Project Monitoring Group (PMG) had together undertaken resolution of impediments for 296 projects with an estimated project cost of `6.6 trillion.
2. However, 15-20 per cent of these projects, mostly in roads, power and petroleum, have reported additional
delays, for which the dates of completion have been extended further.
3. Also, there has been an increase in the number of projects without date of commissioning, mostly in roads reflecting the growing uncertainty about their completion.
8. While fiscal targets were met in 2013-14 (RE), the quality of fiscal adjustment needs improvement.
IV. Differentiated Bank Licensing- Examining Pros and Cons
A. Arguments in Favour of Adopting a Differentiated bank Licensing

The present situation where every
bank
can
carry out every activity
permissible under Section 6 of
Banking Regulation Act, 1949 has the following implications, relevant to the subject under consideration :
For a wholesale bank
dealing with corporate clients only, it becomes
a costly
adjunct to maintain a skeleton retail
banking presence. Moreover
it becomes difficult for such a bank to meet priority
sector obligations
and obligations
for
doing inclusive banking.
Retail banks may have to create risk
management and regulatory compliance structures which are
more appropriate to wholesale banks, thus resulting in non-optimal use of resources.
Similar supervisory resources
are devoted to banks with different business profiles. This may also result in non-optimal
use
of supervisory resources.
The priority sector lending regime for
foreign banks
indicated in paragarph 3.3 has been causing
some discomfort for
some of the foreign banks. For
example, some of the foreign banks find it
difficult to fulfil even the less rigorous
target of 32 per cent in respect of priority
sector
advances.
Some banks
find it difficult to provide ' no frills' facility
to economically
disadvantaged. For
them
the
more liberal
licensing regime causes
a different set of problems.
It appears
that given an opportunity, some of the banks may
like
to follow a niche strategy rather than competing as
full
service all
purpose banks.

In India, the penetration of banking services
is very low. Less
than 59 % of adult population has
access
to a bank
account and less
than 14 % of adult population has a loan account with a with a bank. Under such circumstances, it would be incorrect to create a regime where banks are
allowed to choose a path away from
carrying banking to masses.
Priority sector lending is
important for
banks. The revised guidelines on priority sector lending have rationalized the components of priority sector. For
the
first time, investments by
banks in securitised assets, representing loans to various categories of priority
sector, shall be eligible for classification under respective categories of priority sector (direct or indirect) depending on the underlying assets, provided the securitised assets
are originated by banks and financial institutions
and fulfil
the
Reserve Bank of India guidelines on securitisation. This would mean that the banks' investments
in the above categories
of
securitised assets
shall
be
eligible for
classification under the respective categories
of
priority sector only
if the securitised advances
were eligible to be classified as
priority
sector
advances before their
securitisation. These
measures
would make it easier
to comply with
the priority sector lending requirements by those banks which had faced some difficulties
in this regard.
The business model
adopted by such ‘niche’ banks depends
heavily on ample inter-bank liquidity.
Any shock leading to liquidity
crunch can translate into a run on the bank. This situation has been clearly
illustrated recently in UK in the case of Northern Rock
Bank.
Q how
to draw
private investments to manage problem
to storage of perishable commodities?
1. One way is FDI in multi
brand retail. But for this
we need:
1.
Policy certainty.
2.
Reduce red tape.
3.
Not to frame rules which discourage companies.
2. Another is to
boost local
entrepreneurship.
1.
Create a favorable ecosystem -
ESMA, credit, reduce red tape, give more incentives.
2. National
Food Processing Mission - Mega Food Parks.
Q. GDP of your town
1. $25 bio.
Q. UPA - 2 is failure ? comment
1.
Result has
been good in certain areas and not good in certain other
areas.
2. Success
1.
Social indicators: Poverty, IMR, education.
2.
NREGA -
empower rural workers.
3. RTI.
3. Failures
1.
GDP growth, stalled investments.
2.
Corruption, lack of transparency.
3.
GST and other
critical bills.
4. Foreign policy.
Welfare Indicators
HDI
1.
A long and healthy life: Life expectancy at birth
2. Education index: Mean years of schooling of adults and Expected years
of
schooling of 5
year
old
children
3.
A decent standard of living: GNI per capita (PPP US$)
4. Indian rank is 136 out of 187 countries @ 0.554 (slight improvement of 0.007 from last year).
5. Inequality adjusted HDI is 0.392 and rank
is 91 (improvement from 93 last year).
1. HDI ≥ 0.800 indicates high human development.
2. 0.799 ≥ HDI ≥ 0.500 indicates
medium human development.

CPI (corruption perception index )
1.
India's rank
s 94 out of 177 and is same as last year. Index
is maintained by Transparency
International.
2.
The CPI scores and ranks countries/territories based on how corrupt a country’s
public
sector
is perceived to be. It is
a composite index, a combination of surveys and assessments of corruption, collected by a variety
of
reputable institutions. 0 means that a country
is perceived as
highly
corrupt and a 100 means
that a country
is perceived as
very clean.
Ginni Coefficient
1. It is computed from the National Sample Survey
for 2011-12. In rural areas, the coefficient rose to 0.28 in 2011-12 from
0.26 in 2004-05 and to an all-time high of 0.37 from 0.35 in
|

1. The estimated number of $1.25 poor in India in 2010 falls
from 396 million in 2004-05 to 148
million in 2014. In 2014, the World Bank reported that 11.8%[1]of all
people in India fall
below the international
poverty
line of US$ 1.25 per
day
(PPP).
Q. Interim budget vs Vote on account
1. Vote-on-account deals only with the expenditure side of the government's budget. The government gives an
estimate of funds it requires to