Wednesday, January 14, 2015

MGNREGA and its contradictions on Capitalism



Anyone who sticks with the matters brought up by Bharatiya Janata Party (BJP) elites about Mahatma Gandhi National Rural Employment Guarantee Act Programme (MGNREGA) in the media will not be greatly surprised having known BJP and their ideology. But for sure, those irresponsible statements have raised few eyebrows and have triggered a lot of academic and political debates in the country. All those debates lead us to some fundamental yet crucial questions like, does the program really put the final nail in the coffin of agriculture, handicrafts and other labour intensive industries as these ideologues claim? Or all these are done to take us for a ride to protect vested interests? Or these are illogical reconstruction of some misread facts through ideological lenses? A close look into the realities might answer our questions.

Let’s have a scrutiny of the claimed negatives of MGNREGA. One of the two major criticisms is that, MGNREGA reduces the labour force available for agriculture and allied activities and makes them lazy, indolent and sluggish. It claims that after its inception, a rural labourer is not prepared to do hard work even if paid Rs 350 per day. He/She likes to settle for simple and less tiresome work even if they are paid very less. The other important criticism is that, MGNREGA indirectly makes agriculture less profitable.

Are the above criticisms valid? Is it true that labourers are really lazy or contented utility maximisers? When you speak with the labourers you will understand one thing. People love the work culture of MGNREGA than anything else. In MGNREGA, nearly all the willing members of the family get work and they work together, collectively in the same place with their kith and kin. Such a work gives them the much needed mental relief along with work and necessary money. This feature is conspicuously absent in private farm works. In private farms quality, speed and productivity are given preference over provision of mental relief or good work culture. Not to blame the individual farmers who own the land, it is the system of private ownership of production that dictates such preferences. If five people turn up to a job a day and there are requirements for only two people, the farmer picks the stronger two and sends back the remaining three. This when repeatedly done, makes the other three find any other place of work which gives them job security and hence it makes a case for MGNREGA. The fact that is to be examined here is, why the rural labourers are contented and do not go behind money as others generally do? The answer is very simple. They have not yet internalised the capitalist ethos which says “make money for the sake of making money”. It is an irony that the very capitalist landlords, who created the mental wall that stopped the rural labourers from learning and internalising the capitalist ethos, to serve their vested interests, are now shouting against the contradictions these walls are showing with the advent of MGNREGA. For thousands of years the owners of the capital have controlled the social dynamics in such a way that the labourers always remain at the bottom of the pyramid and left without any possibility of acquiring capabilities for mobility. These contended, satisfied and gratified natures of the labourers were the necessary condition for such domination and supremacy. When capitalism knocked the doors of the rural India these very capital owners made sure that the common man do not learn and master the dynamics of capitalism, which for them, if happened, would have drafted the blueprint of their demise. The fact that the owners of the capital are uniting against MGNREGA shows that it has started to quietly toll the death knell of their might and domination. Hence, the evident truth is MGNREGA is not showing contradictions on agriculture or handicrafts as few BJP leaders claim, but only against the capitalist mode of production and appropriation by which these activities are carried out. MGNREGA, hence in the strictest sense, is not threatening to extinct agriculture and its allied activities or handicrafts, but only the domination of capital in carrying out these activities. Thus, if someone says, the legitimate claim of assured 100 days of work is faulted under a specific system of production and distribution, then it is not the legitimate claim, but it is the system of production that has to be done away with. Thus if many persons who seek profit through agriculture and its allied activities feel such a commercial enterprise is no more profitable, then instead of allowing them to unite against scripting the renewed slavery of agricultural labourers and hence the progress of the nation should be encouraged to give way to modern cooperative agricultural societies. The progress of the nation should not be sacrificed for serving the interests of a few notables, in a democracy. When one model of agriculture is showing contradictions, it is nothing wrong in trying out some new innovative model of agricultural production and distribution. India shall be more benefited if a new system of agricultural production based on Public Private Partnership (PPP) emerges where profit is shared by all stake holders equitably. The success of Deng Xiaoping’s China had its roots neither in communism nor in capitalism, but in the innovative models of production and distribution which he devised for each and every sector exclusively. What the today’s power wielders who cry out loudly “make in India” should understand is, Foreign Direct Investment (FDI) is neither a new avatar of lord Krishna nor the dharma chakra of goddess Durga which could solve all the social evils and bring prosperity to the whole nation at once. Economic development and the resultant social development is a process which has to be carefully manoeuvred with innovative models of production and distribution which has a unique blend of all the successful elements of that historical period irrespective of ideology. The need of the hour is not ideologically driven policies but innovative ideas which could truly transform India.

Monday, February 10, 2014

Priority sector lending – a corporate computation !!!

Hope most of you are aware of computation techniques used in today’s employee’s salary figures in a corporate company. The total salary would be divided into few categories like basic salary, housing allowances, travel allowances, night shift allowances etc. All this are done to cheat the employee and the government to deprive the employee from getting more terminal benefits. Now why is that I am referring this here? I found a parallel in government practice!! That too in its human development initiatives!!!
 My servant maid has a dream to live in own house at least in her last few years. She is already 50 and without husband. She has 2 daughters and one son. Her son and one of her daughter are employed and earn around Rs 6000. And she belongs to SC community. She asked help from my dad and he did what he can. Seeing her sufferings i told her about government regulations on PRIORITY SECTOR and its mandate to banks to lend money to people of this category on a priority!
Before narrating rest of the story i like the readers to read the RBI released document on priority sector lending and understand what it is and why it is instituted.


Now hope all would have understood why priority sector concept is introduced in India. It implies two things. 1. Economic development is possible only if certain priority sectors are funded effectively. 2. Economic development will transform into a true human development only if certain sectors of people are taken care of.
Now let’s come back to the story. One day i took her to my bank (IOB, Vyasarpadi) and enquired for a loan. We showed them her son and daughter’s salary slips and requested for a loan. They rejected the request saying low repaying capability. I told them that she belongs to SC community as well and demanded a loan on priority sector category. Astonishingly no one in the bank knows anything of such a mandate. They were equally puzzled! I walked out disgustedly. The curious George in me woke up. I wanted to know “Which bank in my area knows such a policy?” I immediately dropped her back home and started my trip to all public sector banks in my area. SBI, Repco, Indian Bank (two Branches) and met managers in all these banks. Believe me ..... none of them knew what it is?
Amazing! Isn't it! Every year Economic survey notifies that all such targets are achieved in stipulated time period; But the managers who actually lend the loans doesn't know anything about such a scheme. How on earth it is possible? Either Government should be lying or the bank managers should be joking!
Actually neither was the case! One of my friends in a bank explained me that. The computation happens in regional offices and zonal offices. After calculating all the loans that are dispatched in the target period they see whether the target is achieved automatically by just a computation. In most cases, it will be served automatically. If it is not the case, bank takes special measures through rural branches or donates to RIDF, Rural infrastructure development fund as per government policy! Actually RBI regulation clearly states that bank must facilitate loans under certain schemes like SGSY etc and it should take responsibility in coordinating with authorities like DRDAs etc to help the people. But in practice none of the managers know such schemes.
How the real people in need would be served by just computing in central offices? RBI says weaker sections should be lent money to repay their balances with unauthorised money lenders. But where is the system in place to do that. None of the officials tend to know about this scheme. Then how the bank can help such people? How real economically backward SC and ST people would be benefited if you centrally compute. Hope people understand my point here. A doctor who belongs to SC community gets a loan from a bank and when you centrally compute it you can easily compute this loan under priority sector category, but actually he is not the needy to whom the scheme is originally designed!

The truth is that, the government, RBI and every other person involved here knows it is done only on paper and they don’t have the will to interrupt this because if they strictly enforce these schemes, there is a fear of many foreign banks exiting from Indian market fearing of losses. Hence everyone concerned are ready to compute as corporates do in employee’s salary and create a corporate governance in India. 

Saturday, April 14, 2012

Understanding my blog


Dear Friends,

Please read my blog posts systematically to understand my research work in the complete sense. I am re-posting the links for the better understanding of my blog posts. I have done a small research on priority sector lending and results will be posted soon. I am planning my next research on bonded labour and child labour in firework industries of Sivakasi and Rajapalayam in Tamilnadu. Hope it materializes soon.



  

Thursday, March 15, 2012

Economic concepts: Money Markets


It is the market in which high liquidity instruments are traded for a short term(less than 1 year) period. It is a part of financial markets. It can be classified into three
overnight market – for one day
notice money market – 2 to 14 days
term money market – 15 days .

Reserve bank of India being the apex body uses various tools to control the money supply(liquidity) in the money market, for ensuring effective demand for money, bearable rate of inflation and steady economic growth.
The various tools that are used are as follows
Liquidity adjustment facility.
It is the options by which RBI adjusts the liquidity available in the system and there by influences the interest rate prevailing in the system. As of now, RBI uses three tools under the LAF. They are Repo , Reverse repo and MSF.

Repo:
These are basically short term lending tools. Repo means repurchase options. Generally, in India, 1 day Repo is only used. But RBI reserves the decision of using more day Repos and uses them occasionally.
Repo stands for repurchase option. In repo, the scheduled commercial banks (including RRB and LAB) and primary dealers(specialized dealers who acts as intermediaries in trading government securities) can sell their Government securities to the RBI, with a repurchase clause. The banks and the RBI have to repurchase the securities in the specific time period as mentioned in the clause. Generally it will be one day. Whenever the banks need money immediately at night for ending that day's transactions and when the call money interest rate are higher or there is very high liquidity deficit in the system, the banks and dealers will prefer this option to borrow money. The rate at which repo transactions are done is known as Repo rate.
Repo is used by the RBI to inject liquidity into the system and there by reduce the inter – bank interest rates. In India, repo auctions are conducted by RBI twice a day. The first time repo(in a day) is called as LAF-REPO and the second time repo (in a day) is known as SLAF – REPO.

Reverse repo:
It is the reverse of the previous thing. Whenever there is a liquidity surplus, the banks and the dealers lend the money to the RBI, by buying the government securities from the RBI with a clause of reselling them back after a specific time period. The rate at which the reverse repo transactions are done is known as Reverse repo rate.

Marginal Standing Facility:
All scheduled commercial banks can avail overnight up-to one percent of their net demand and time liabilities(NDTL) outstanding at the end of the second preceding fortnight.
The rate is always 100 basis points above the LAF- repo rate. The MSF rate dependent on LAF – REPO rate ans varies dependent on variations in repo rate.(from MAY 2011)

 
Liquidity Corridor or Interest Corridor:
The difference between the interest rates of Reverse Repo rate and the MSF rate is known as liquidity corridor.(Now after May 2011) RBI has fixed the corridor as 200 basis points(always) and Repo rate comes in the middle of the corridor. And the Repo rate is the only independent varying LAF policy rate of RBI as reverse repo rate is always set 100 basis points below repo rate and the MSF rate is fixed always 100 basis pts above the Repo rate.
Significance of the liquidity corridor:
Consider today's rates (as of January 26, 2012) MSF rate is 9.5% and reverse repo is 7.5%
If there is surplus liquidity in the system, the call money rate (the rate at which the interbank overnight money transaction takes place) goes below 7.5% and hence for banks using reverse repo tool is profitable than lending to other banks. Similarly, if there is a liquidity deficit in the system, the call money rate goes above 8.5% and subsequently banks starts to use repo tool than call money option as repo tool becomes profitable now. But, when the money required is very high than that is auctioned through the LAF - REPO tool, then the banks use MSF tool to borrow money. Hence the call money is not preferred even in very difficult circumstances, which stops the call money interest rate to float above the MSF rate, that is 9.5%.
The major significance of the narrow corridor like 200 basis points is that it provides more stability (less variation of call money rates) in the system. Hence, LAF becomes a important a important monetary tool and not just a liquidity supplier or a absorber tool(like CRR).
The accepted 'system deficit' or 'liquidity deficit' in the system is +/- 1% of net deposit time liability(NDTL).

Note: repo can also be undertaken in corporate debt securities (all SCB)

CRR:
It is a statutory requirement for all scheduled banks to maintain a particular amount of cash reserves with the Reserve bank of India. It is a fixed percentage of their net demand and time liabilities as fixed by RBI. Reduction of CRR injects one time liquidity into the system. It is basically a liquidity tool rather a monetary tool.

Statutory Liquidity Ratio:
It is a minimum amount of liquid assets (cash, gold , government securities and SDL) that has to be maintained by scheduled banks among themselves. It is generally fixed as a percentage of NET DEMAND AND TIME LIABILITY of that particular bank by RBI. The present rate of SLR is 24%. but most banks maintain maintain it at 28% on a average.

Open Market Operation:
Government from time to time sells and buys government securities and bonds directly from the market. Banks, dealers, corporates, even FIIs can buys these government securities. In fact, it is mandatory for few government institutions to buy government securities
BANK RATE POLICY:
It is the rate at which RBI re-discounts government securities and bills of exchanges or commercial bills. The present rate is 9.5%.

MARKET STABILIZATION SCHEME:
When the rupee appreciates, RBI will normally buy the foreign exchanges and release money which increases the liquidity in the system. As we are aware, too much liquidity would actually induce inflation in the economy. Hence RBI simultaneously would simultameously do open market operations and absorb the excess liquidity. But during 2004 there came a situation where RBI went short of government securities to sell and absorb liquidity. It can also cant ask the govet to issue new securities as it would increase the fiscal defecit as well. Hence came the concept of Market stabilization scheme.
Here the govt securities which is issued by RBI on behalf of the govt would be sold in a separate scheme called MSS. Govt of India maintains money in an seperate account with RBI called MSS account which would will be equal to the sum of the value of all the secuities thus issued. The collected funds will be maintained in the same account and is rotated to buy and sell securities
 and by the way stabilize the market without increasing the fiscal defecit.
 The high liquidity instruments generally traded are government securities, certificates of deposits, commercial papers etc. Certain important terminologies associated with money markets are described below.

GOVERNMENT SECURITIES:
  • Treasury bills
  • cash management bills
  • Dated government securities
    1. Fixed rate bonds
    2. Floating rate bond
    3. Zero coupon bonds
    4. Capital indexed bonds
    5. Bonds with call/put option
    6. Special securities
7. STRIPS(seperate trading of registered interest and principal of securities)

TREASURY BILLS:
  • 91 days
  • 182 days
  • 364 days
  • 14days intermediate treasury bills/
Treasury bills are zero coupon securities and they pay no interest. They are generally lesser than the face value of the bills and the difference in the amount gain of the buyers. For example, consider a treasury bill of Rs.100. It is auctioned at a lesser value of only Rs.90. And if the treasury bill is 91 days type, then after 91 days the person who bought the bill for Rs. 90 could get Rs.100.

Cash Management Bills:
Introduced on May 2010 , are same as treasury bills but with a 2 major difference
    1. they are given for a period less than 91 days
    2. they are not accepted as eligible securities for SLR purpose.
Dated Government securities:
They are long term securities and carry fixed or floating coupon(interest rate) which is paid on face value, payment at fixed time periods(usually half-yearly). The tenure of dated securities can be upto 30 years.

State Development Loans:
State governments also raise loans from the market. SDLs are dated securities issued through market similar to the way as usual by central government.

Sub – Markets

Call money rate:-
Uncollateralized lending and borrowing of funds is predominantly overnight and is open for participants only to SCBs and primary dealers.

Bill Market:-
Bill market or the discount market is the most important part of money market where short term bills are bought and sold. They can be either commercial or treasury bills.
It is also known as bill of exchange. Consider a small manufacturer buys raw materials from a steel firm for Rs.1000. The manufacturer does not have money now. Hence gives a bill of exchange, stating to pay Rs. 1100 at a fixed future date. The steel firm holds the bill in exchange for actual cash. Now if the steel firm runs into liquidity deficit, it can deposit the bill of exchange in any commercial bank and get money at a discount rate i.e, Rs.1050. The Rs.50 difference(1100-1050) is the earning of the bank. Now if the commercial bank wants cash, they can do the same with the RBI. The RBI will re-discount this bill at Bank Rate and give the balance money.
This is a important tool used in western countries, less famous in India.

Treasury Billl Market:-
Same thing can be done with treasury bill too.

Certificate of Deposit:-
It is a negotiable money market instrument. Banks will issue CDs for maturities from 7 days to one year where as FIs can issue maturities one yr to two yr.
They are issued by banks in multiples of Rs.25 lakhs. Now, the minimum value is reduced to one lakh. They are issued at a discount to this face value and the difference is their rate of interest.

Commercial Papers:-
It is issued by corporates, FIs, primary dealers with a net worth of Rs. 5 crore. They are issued in the multiples of 25 lakhs subject to a minimum issue of 1 crore. They are issued to raise funds. They are issued at a discount to the face value and difference is the rate of interest.
Maturity period-- 7days to one year

Collateralized Borrowing and Lending Obligations:-
It is operated by CCIL- Clearing Corporation of India ltd. It lends money on collaterals(government and other securities).