न्यूनतम समथर्न मूल्य: एक जन-केंद्रित परिप्रेक्ष्य (Minimum Support Price: A People-Centric Perspective)

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न्यूनतम समर्थन मूल्य (MSP) एक वायदा है जो भारत सरकार द्वारा किसानों और कृषि श्रमिकों को किसी भी तरह की कृषि उत्पादक दामों में तीव्र गिरावट के दौरान सुरक्षा मुहिया कराता है| न्यूनतम समर्थन मूल्य सरकारी व्यवस्था में एक नीतिगत साधन है और इसे आमतौर पर फसलों की  बीजारोपण  के  शुरुआत में कृषि लागत और मूल्य आयोग (CACP) की सिफारिशों के आधार पर पेश किया जाता है। न्यूनतम समर्थन मूल्य का प्रमुख उद्देश्य  भरपूर  उत्पादन अवधि के दौरान किसानों को सुरक्षा देना, और उन्हें समर्थन करना तथा सार्वजनिक वितरण प्रणाली के लिए अनाज इकठ्ठा करना है.  वस्तुओं की खरीद और पारिश्रमिकरूप, ऐसे दो  माध्यम  है  जिससे एक प्रभावी न्यूनतम समर्थन मूल्य लागू किया जा सकता है. किसानो के लिए पारिश्रमिक की प्रकृति ही न्यूनतम समर्थन मूल्य और  प्राप्त कीमतों के बीच के अंतर की भरपाई कर सकता है |

बड़े पैमाने पर कृषि संकट  के चलते,  ऐसे नीतियों पर जोर देने की आवश्यकता है जो तत्काल प्रभाव से सकारात्मक परिणाम  सामने ला सकते हों। इन  परिणामों  को मूल्य और गैर-मूल्य कारक के घटकों के माध्यम से प्राप्त किया जा सकता है। गैर-मूल्य कारक दीर्घकालिक योजना से संबंधित हैं जो  बाजार  सुधार, संस्थागत सुधार और प्रौद्योगिक   क्षेत्र में नवीनीकरण पर  आश्रित  है,  जिससे  किसानो की स्थिति में सुधर हो सके   उनके  आय  में भी वृद्धि हो सके। मूल्य कारक अल्पकालिक योजना से संबंधित है जो कृषि उपज के लिए पारिश्रमिक कीमतों में तत्काल प्रभाव से वृद्धि करने पर जोर देता है | न्यूनतम समर्थन मूल्य, मूल्य के कारकों के दायरे में शामिल होता है| सरकार 23 वस्तुओं के लिए न्यूनतम समर्थन मूल्य और गन्ने के लिए FRP (उचित और पारिश्रमिक मूल्य) को अधिसूचित करती है। ये फसलें  एक कृषि अवधि में उपयोग होने वाले भूमि के  कुल क्षेत्रफल में से लगभग 84% हिस्से को सम्मिलित करता है |  लगभग 5% क्षेत्र चारा फसलों के अंतर्गत आता है  जिसे न्यूनतम समर्थन मूल्य के अंतर्गत शामिल नहीं किया जाता |  इस गणित के अनुसार, यदि न्यूनतम समर्थन मूल्य को पूरी तरह से लागू किया जाता है तो कीमतों में लाभ के लिए उत्पादकों के एक छोटे से भाग को छोड़कर कुल कृषि क्षेत्र के करीब 90% पर न्यूनतम समर्थन मूल्य लागू  होगा|  

तो, सवाल यह है कि, CACP कैसे न्यूनतम समर्थन मूल्य (MSP) का निर्धारण करता है? न्यूनतम समर्थन मूल्य का निर्धारण करते समय CACP निम्नलिखित कारकों को ध्यान में रखता है:

  1. प्रति हेक्टेयर खेती की लागत और देश में विभिन्न क्षेत्रों में लागत की संरचना और उसमें हुए परिवर्तन।
  2. देश के विभिन्न क्षेत्रों में प्रति क्विंटल उत्पादन की लागत और उसमें हुए परिवर्तन।
  3. विभिन्न उत्पादक सामग्री की कीमतें और उसमें हुए परिवर्तन।
  4. उत्पादों  के बाजार मूल्य और उसमें हुए परिवर्तन।
  5. किसानों द्वारा बेची व खरीदी गयी वस्तुओं की कीमतें और उसमें हुए परिवर्तन।
  6. आपूर्ति से संबंधित जानकारी जैसे क्षेत्र, उपज और उत्पादन, आयात, निर्यात और घरेलू उपलब्धता तथा सरकार / सार्वजनिक एजेंसियों या उपक्रमों के पास भंडार की उपलब्धता| 
  7. मांग से संबंधित जानकारी, जिसमें कुल और प्रति व्यक्ति खपत, प्रोसेसिंग उद्योग की प्रवृत्ति और क्षमता शामिल है।
  8. अंतरराष्ट्रीय बाजारों में कीमतें और उसमें हुए परिवर्तन।
  9. कृषिउत्पाद  से ली गई  साधित वस्तुएं मसलन चीनी, गुड़, जूट, खाद्य और गैर-खाद्य तेलों, सूती धागा की कीमतें और उसमें हुए परिवर्तन।
  10. कृषि उत्पादों की प्रोसेसिंग लागत और उसमें हुए परिवर्तन।
  11. विपणन और सेवाओं की लागत, भंडारण, परिवहन, प्रोसेसिंग, करों / शुल्क, और बाजार के  कारक द्वारा बनाए गए लाभांश, और
  12. व्यापक आर्थिक चर वस्तुएं जैसे की सामान्य स्तर की कीमतें, उपभोक्ता मूल्य सूचकांक और मौद्रिक व राज कोषी  करक | 

जैसा कि देखा जा सकता है, यह मापदंडों का एक व्यापक  समूह है जिसपर आयोग न्यूनतम समर्थन मूल्य (MSP) की गणना के लिए निर्भर करता है। परन्तु  सवाल यह है की : आयोग को इस डेटा   कहाँ से मिलती है? डेटा आमतौर पर कृषि वैज्ञानिकों, किसान नेताओं, सामाजिक कार्यकर्ताओं, केंद्रीय मंत्रालयों, भारतीय खाद्य निगम (FCI), नेशनल एग्रीकल्चरल कोऑपरेटिव मार्केटिंग फेडरेशन ऑफ इंडिया (NAFED), कॉटन कॉर्पोरेशन ऑफ इंडिया (CCI), जूट कॉर्पोरेशन ऑफ इंडिया तथा व्यापारियों के संगठन और अनुसंधान संस्थानों से एकत्र किए जाते हैं। आयोग फिर MSP की गणना करता है और इसेके अनुमोदन के लिए केंद्र सरकार को भेजता है, जो फिर राज्यों को उनके सुझावों के लिए भेजता है। एक बार जब राज्य अपनी मंजूरी दे देता है,  आर्थिक मामलों की मंत्रिमंडलीय समिति इन आंकड़ों पर सहमति प्रदान करता है, जिन्हें फिर CACP पोर्टल पर जारी किया जाता है।

2004 में, केंद्र में शासित UPA-1 सरकार ने अपने प्रथम वर्ष के दौरान, एम.एस स्वामीनाथन  की अध्यक्षता में  राष्ट्रीय किसान आयोग (NCF) का गठन किया ।आयोग का प्रमुख उद्देश्य कृषि वस्तुओं को लागत-प्रतिस्पर्धी और  लाभदायक बनाना था। इस  उद्देश्य को प्राप्त करने हेतु, खेती की लागत की गणना के लिए एक तीन-स्तरीय संरचना तैयार की गई , जो इस प्रकार  है, A2, FL और C2। A2 वास्तविक भुगतान की जाने वाली लागत है, जबकि A2 + FL वास्तविक भुगतान की जाने वाली लागत और परिवार के श्रम का प्रतिशोधित मूल्य के बराबर है, जहाँ  मानसब्बद्ध किसी चीज़ का मूल्य निर्धारण करने में उत्पाद या उसके प्रोसेसिंग जिसमे  उसका योगदान  के  अनुमान के  तहत  किसी वस्तु    का मूल्य  निर्धारित किया जाता है | C2  एक  विस्तृत  है, जिसमें स्वामित्व वाली भूमि और पूंजी पर लगा  किराया और ब्याज शामिल  है। यह स्पष्ट है कि C2> A2 + FL> A2 |

कृषि लागत और मूल्य आयोग (CACP)  कीमतों की सिफारिश करते हुए उत्पादन की लागत, इनपुट कीमतों में बदलाव, इनपुट/आउटपुट मूल्यों का अनुपात, बाजार के कीमतों में रुझान, अंतर फसल मूल्य का अनुपात, मांग और आपूर्ति की स्थिति, किसानों द्वारा देय कीमतों और प्राप्त कीमतों के बीच समता आदि महत्वपूर्ण कारकों को ध्यान में रखता है। समर्थन मूल्य तय करने में, CACP लागत की अवधारणा पर निर्भर करता है जो खेती में खर्च होने वाले सभी मदों को शामिल करता है, जिसमें किसानों के स्वामित्व वाले इनपुट्स का मूल्य भी शामिल होता है, जैसे कि स्वामित्व वाली भूमि का किराया मूल्य और निश्चित पूंजी पर ब्याज। कुछ महत्वपूर्ण लागत अवधारणाएं C2 और C3 हैं:

C3: किसान को प्रबंधकीय पारिश्रमिक के लिए C2 + C2 का 10%

स्वामीनाथन आयोग की रिपोर्ट में स्पष्ट रूप से कहा गया है कि किसानों को उनके उत्पादन की सम्पूर्ण लागत से 50% अधिक की न्यूनतम समर्थन मूल्य मिलना चाहिए। यह लागत + 50% का सूत्र स्वामीनाथन आयोग से आया  और जिसमे स्पष्ट रूप से कहा गया  कि उत्पादन  लागत उत्पादन की व्यापक लागत है, जो  C2 है,  ना कि A2 + FL । C2 में वास्तविक मालिक द्वारा उत्पादन में पट्टे की भूमि के लिए किया गया किराया भुगतान  + परिवार के श्रम का प्रतिधारित मूल्य + स्वामित्व वाली पूंजीगत संपत्ति के मूल्य पर ब्याज (भूमि को छोड़कर) + स्वामित्व भूमि के किराये का मूल्य (भूमि राजस्व का  कुल मूल्य)  जैसे वास्तविक खर्च, जिसका भुगतान नकदी  व् अन्य प्रकार से किया गया हो, शामिल हैं|  उत्पादन की लागत की गणना प्रति क्विंटल और प्रति हेक्टेयर के आधार पर की जाती है। चूंकि राज्यों में लागत भिन्नता बहुत ज्यादा होने के कारण CACP अनुग्रह करता है की  न्यूनतम समर्थन मूल्य को C2 के आधार पर माना जाना चाहिए। हालाँकि, धान और गेहूं के मामले में न्यूनतम समर्थन मूल्य में बढ़ोत्तरी इतनी ज्यादा है कि अधिकांश राज्यों मे न्यूनतम समर्थन मूल्य न केवल C2, बल्कि C3 से भी ऊपर है।

रबी सीजन, 2017- 18  की  अनुमानित लागत और सिफारिश की गयी न्यूनतम समर्थन मूल्य (रु प्रति क्विंटल में)

Untitledस्रोत: कृषि लागत और मूल्य  आयोग और कृषि मंत्रालय

यहीं पर न्यूनतम समर्थन मूल्य की राजनीतिक अर्थव्यवस्था असहाय किसानों की समस्या को जटिल बनाती है । हालाँकि 23 फसलों  का  न्यूनतम समर्थन मूल्य  अधिसूचित किया  जाता है, लेकिन वास्तव में 3 से अधिक को सुनिश्चित नहीं किया  जाता  हैं। भारतीय कृषि क्षेत्र  छोटे आकार के कृषि स्वामित्व के चलते निम्न  स्तर के उत्पादन से त्रस्त है, प्रचलित प्रणाली के अंतर्गत लागत पर मुनाफा  किसानो के लिए कम आय पैदा करना सुनिश्चित करता है ।  इन्ही  महत्वपूर्ण बिन्दुओं पर जोर देते हुए  किसान  न्यूनतम समर्थन मूल्य को  प्रभावी लागतों की तुलना में 50% अधिक बढ़ाकर, न्यूनतम समर्थन मूल्य के प्रभावी क्रियान्वान की मांग  कर रहें हैं। किसान और किसान संगठनों ने मांग की है कि न्यूनतम समर्थन मूल्य को उत्पादन की लागत + 50% तक बढ़ाया जाए,  चूँकि  उनके लिए उत्पादन की लागत का मतलब C2 है और A2 + FL नहीं । वर्तमान में, CACP, A2 और FL को जोड़कर न्यूनतम समर्थन मूल्य निर्धारित  करता है। सरकार फिर A2 और FL को जोड़कर प्राप्त किये गए मूल्य का 50% जोड़कर न्यूनतम समर्थन मूल्य तय करती है, और इस प्रकार C2 को अनदेखा कर दिया जाता है। किसान व किसानों के संगठन  मांग है कि न्यूनतम समर्थन मूल्य में C2 का 50%  जोड़ा  जाये, जो  सरकारी घोषणाओं के मुख्यरूप   से गायब है।  न्यूनतम समर्थन मूल्य के संदर्भ में किसानों  की मांग  व सरकार क्या  दे रही है, इनका अंतर ही तनाव का मुख्य कारण है | 

रमेश चंद, जो वर्तमान में निति आयोग  में  सेवारत  होने के बावजूद भी,  सरकार के द्वारा दिए जा रहे सहुलियातोँ के तार्किक विश्लेषण पर जोर देते हैं|   उनका यह भी सिफारिश है कि कार्यशील पूंजी पर ब्याज मौजूदा आधे सीजन के  बजाय  पूरे सीजन के लिए  दिया जाना चाहिए, और गाँव में प्रचलित वास्तविक किराये के मूल्य को किराए पर बिना किसी उच्चतम सीमा  के माना जाना चाहिए। इसके अलावा, कटाई के बाद की लागत, सफाई, ग्रेडिंग, सुखाने, पैकेजिंग, विपणन और परिवहन को शामिल किया जाना चाहिए।  जोखिम प्रीमियम और प्रबंधकीय शुल्कों को ध्यान में रखते हुए C2   को 10% तक बढ़ाया जाना चाहिए।

 रमेश चंद के अनुसार, न्यूनतम समर्थन मूल्य की सिफारिश करते समय  बाजार निकासी कीमत को ध्यान में रखना आवश्यक है। यह, मांग और आपूर्ति,  पक्षों को प्रतिबिंबित करेगा । जब मांग-पक्ष के कारकों के आधार पर न्यूनतम समर्थन मूल्य तय किया जाता है,  तब न्यूनतम समर्थन मूल्य को लागू करने के लिए सरकारी हस्तक्षेप की आवश्यकता केवल बाज़ार प्रतिस्पर्धा की गैर-मौजूदगी व् निजी व्यापार के शोषक रूप लेने तक ही सिमित हो जाता है  । हालाँकि, अगर कोई न्यूनतम मूल्य भुगतान तंत्र या फसलें हैं  जिनपर न्यूनतम समर्थन मूल्य  घोषित किया गया हैं, लेकिन खरीददारी ना होने पर  सरकार को न्यूनतम समर्थन मूल्य और बाज़ार के निचले मूल्य के अंतर के बीच के आधार पर किसानों को मुआवजा देना चाहिए। ऐसा ही एक तंत्र, भावान्तर भुगतान योजना के नाम से मध्य प्रदेश में लागू किया गया , जहाँ पर सरकार ने किसानों से सीधे खरीद में अपने पुराने ख़राब रिकॉर्ड को स्वीकार करने के  बजाय,  बाजार मूल्य न्यूनतम समर्थन मूल्य से  कम होने पर  किसानों को सीधे नकद हस्तांतरण के माध्यम से मुआवजा देने का व्यवस्था किया गया है . भुगतान में देरी और भारी लेनदेन लागतें  इस योजना  की   नकारात्मक पक्ष हैं। बाजार में कम गुणवत्ता वाले अनाज के आधिक्य आपूर्ति जो  पहले से ही कम फसल की कीमतों पर  दबाव बनाती है। जब तक, इनकी और एम.एस स्वामीनाथन की सिफारिशों को गंभीरता से नहीं लिया जाता है, कृषि संकट का समाधान पूंजीवादी तबाही में छिपा है। और कोई ऐसा क्यों कहता है?

मूल्य की कमी वाले तंत्र पर बातचीत करने और संकल्प की ओर बढ़ने के लिए, सरकार के पास को  खरीद के रूप में एक  विकल्प  बच जाता है। लेकिन, इसमें एक विरोधाभास है। जिन फसलों लिए न्यूनतम समर्थन मूल्य की घोषणा की गई है, जिसकी संख्या 20 है, उनके लिए सरकार के पास स्पष्ट रूप से पहले एक प्रणाली बनाने और फिर उन फसलों की खरीद का प्रबंधन करने का बैंडविड्थ (bandwidth) नहीं है। यदि यह  स्थिति गतिरोध तक पहुँच गयी है, तो सरकार की निजी बाजारों की ओर रुख करने की संभावना से इनकार नहीं किया जा सकता है।  यदि ऐसा होता है तोह  बाजार स्थानीय राजनेताओं की मनमानेपन और पसंद की चपेट में  आ जायेगा, जो आमतौर पर अपने क्रिया-कलाप में सत्ता के केन्द्रों को प्रभावित करते हहुये  सिस्टम को  अपने सुविधानुसार चलातें हैं ।

स्पष्ट रूप से कुछ ऐसे सवाल हैं जो  उत्तर की मांग करतें हैं  और ये सभी सवाल नीति बनाने के दायरे में आते हैं। उदाहरण के लिए, क्या बजट में न्यूनतम समर्थन मूल्य के दायरे में आने वालेसभी किसानों के  सीमा को बढ़ाने का प्रावधान है?  दूसरा, न्यूनतम समर्थन मूल्य की गणना में निजी लागत और लाभ शामिल होते हैं, और इस  प्रकार केवल  एक पक्ष प्रदर्शित   होताहै। संपूर्ण समझ के लिए, सामाजिक लागत और लाभों को भी शामिल किया जाना चाहिए। मुख्य रूप से निजी लागतों और लाभों पर ध्यान केंद्रित करने के साथ, सामाजिक रूप से बेकार उत्पादन और विशेषज्ञता को प्रोत्साहित किया जाता है, जैसे उत्तर भारत में धान के उत्पादन में होने वाले परिणाम जिसके  गवाह  हैं। क्या इस दोहरे बंधन को दूर किया जा सकता है, यह एक नीतिगत मामला है, और फिलहाल जो देखा जा रहा है यह एक नीतिगत पक्षाघात है और राजनीतिक इच्छा की कमी केवल वोट बैंक को बनाने के लिए की जाएगी। यह बेहद अफसोसजनक है! 

The Banking Business…Note Quote

retailandcommercialbanking

Why is lending indispensable to banking? This not-so new question has garnered a lot of steam, especially in the wake of 2007-08 crisis. In India, however, this question has become quite a staple of CSOs purportedly carrying out research and analysis in what has, albeit wrongly, begun to be considered offshoots of neoliberal policies of capitalism favoring cronyism on one hand, and marginalizing priority sector focus by nationalized banks on the other. Though, it is a bit far-fetched to call this analysis mushrooming on artificially-tilled grounds, it nevertheless isn’t justified for the leaps such analyses assume don’t exist. The purpose of this piece is precisely to demystify and be a correctional to such erroneous thoughts feeding activism. 

The idea is to launch from the importance of lending practices to banking, and why if such practices weren’t the norm, banking as a business would falter. Monetary and financial systems are creations of double entry-accounting, in that, when banks lend, the process is a creation of a matrix/(ces) of new assets and new liabilities. Monetary system is a counterfactual, which is a bookkeeping mechanism for the intermediation of real economic activity giving a semblance of reality to finance capitalism in substance and form. Let us say, a bank A lends to a borrower. By this process, a new asset and a new liability is created for A, in that, there is a debit under bank assets, and a simultaneous credit on the borrower’s account. These accounting entries enhance bank’s and borrower’s  respective categories, making it operationally different from opening bank accounts marked by deposits. The bank now has an asset equal to the amount of the loan and a liability equal to the deposit. Put a bit more differently, bank A writes a cheque or draft for the borrower, thus debiting the borrower’s loan account and crediting a payment liability account. Now, this borrower decides to deposit this cheque/draft at a different bank B, which sees the balance sheet of B grow by the same amount, with a payment due asset and a deposit liability. This is what is a bit complicated and referred to as matrix/(ces) at the beginning of this paragraph. The obvious complication is due to a duplication of balance sheet across the banks A and B, which clearly stands in need of urgent resolution. This duplication is categorized under the accounting principle of ‘Float’, and is the primary requisite for resolving duplicity. Float is the amount of time it takes for money to move from one account to another. The time period is significant because it’s as if the funds are in two places at once. The money is still in the cheque writer’s account, and the cheque recipient may have deposited funds to their bank as well. The resolution is reached when the bank B clears the cheque/draft and receives a reserve balance credit in exchange, at which point the bank A sheds both reserve balances and its payment liability. Now, what has happened is that the systemic balance sheet has grown by the amount of the original loan and deposit, even if these are domiciles in two different banks A and B. In other words, B’s balance sheet has an increased deposits and reserves, while A’s balance sheet temporarily unchanged due to loan issued offset reserves decline. It needs to be noted that here a reserve requirement is created in addition to a capital requirement, the former with the creation of a deposit, while the latter with the creation of a loan, implying that loans create capital requirement, whereas deposits create reserve requirement.  Pari Passu, bank A will seek to borrow new funding from money markets and bank B could lend funds into these markets. This is a natural reaction to the fluctuating reserve distribution created at banks A and B. This course of normalization of reserve fluctuations is a basic function of commercial bank reserve management. Though, this is a typical case involving just two banks, a meshwork of different banks, their counterparties, are involved in such transactions that define present-day banking scenario, thus highlighting complexity referred to earlier. 

Now, there is something called the Cash Reserve Ratio (CRR), whereby banks in India (and elsewhere as well) are required to hold a certain proportion of their deposits in the form of cash. However, these banks don’t hold these as cash with themselves for they deposit such cash (also known as currency chests) with the Reserve Bank of India (RBI). For example, if the bank’s deposits increase by Rs. 100, and if the CRR is 4% (this is the present CRR stipulated by the RBI), then the banks will have to hold Rs. 4 with the RBI, and the bank will be able to use only Rs. 96 for investments and lending, or credit purpose. Therefore, higher the CRR, lower is the amount that banks will be able to use for lending and investment. CRR is a tool used by the RBI to control liquidity in the banking system. Now, if the bank A lends out Rs. 100, it incurs a reserve requirement of Rs. 4, or in other words, for every Rs. 100 loan, there is a simultaneous reserve requirement of Rs. 4 created in the form of reserve liability. But, there is a further ingredient to this banking complexity in the form of Tier-1 and Tier-2 capital as laid down by BASEL Accords, to which India is a signatory. Under the accord, bank’s capital consists of tier-1 and tier-2 capital, where tier-1 is bank’s core capital, while tier-2 is supplementary, and the sum of these two is bank’s total capital. This is a crucial component and is considered highly significant by regulators (like the RBI, for instance), for the capital ratio is used to determine and rank bank’s capital adequacy. tier-1 capital consists of shareholders’ equity and retained earnings, and gives a measure of when the bank must absorb losses without ceasing business operations. BASEL-3 has capped the minimum tier-1 capital ratio at 6%, which is calculated by dividing bank’s tier-1 capital by its total risk-based assets. Tier-2 capital includes revaluation reserves, hybrid capital instruments and subordinated term debt, general loan-loss revenues, and undisclosed reserves. tier-2 capital is supplementary since it is less reliable than tier-1 capital. According to BASEL-3, the minimum total capital ratio is 8%, which indicates the minimum tier-2 capital ratio at 2%, as opposed to 6% for the tier-1 capital ratio. Going by these norms, a well capitalized bank in India must have a 8% combined tier-1 and tier-2 capital ratio, meaning that for every Rs. 100 bank loan, a simultaneous regulatory capital liability of Rs. 8 of tier-1/tier-2 is generated. Further, if a Rs. 100 loan has created a Rs. 100 deposit, it has actually created an asset of Rs. 100 for the bank, while at the same time a liability of Rs. 112, which is the sum of deposits and required reserves and capital. On the face of it, this looks like a losing deal for the bank. But, there is more than meets the eye here. 

Assume bank A lends Mr. Amit Modi Rs. 100, by crediting Mr. Modi’s deposit account held at A with Rs. 100. Two new liabilities are immediately created that need urgent addressing, viz. reserve and capital requirement. One way to raise Rs. 8 of required capital, bank A sells shares, or raise equity-like debt or retain earnings. The other way is to attach an origination fee of 10% (sorry for the excessively high figure here, but for sake of brevity, let’s keep it at 10%). This 10% origination fee helps maintain retained earnings and assist satisfying capital requirements. Now, what is happening here might look unique, but is the key to any banking business of lending, i.e. the bank A is meeting its capital requirement by discounting a deposit it created of its own loan, and thereby reducing its liability without actually reducing its asset. To put it differently, bank A extracts a 10% fee from Rs. 100 it loans, thus depositing an actual sum of only Rs. 90. With this, A’s reserve requirement decrease by Rs. 3.6 (remember 4% is the CRR). This in turn means that the loan of Rs. 100 made by A actually creates liabilities worth Rs. Rs. 108.4 (4-3.6 = 0.4 + 8). The RBI, which imposes the reserve requirement will follow up new deposit creation with a systemic injection sufficient to accommodate the requirement of bank B that has issued the deposit. And this new requirement is what is termed the targeted asset for the bank. It will fund this asset in the normal course of its asset-liability management process, just as it would any other asset. At the margin, the bank actually has to compete for funding that will draw new reserve balances into its position with the RBI. This action of course is commingled with numerous other such transactions that occur in the normal course of reserve management. The sequence includes a time lag between the creation of the deposit and the activation of the corresponding reserve requirement against that deposit. A bank in theory can temporarily be at rest in terms of balance sheet growth, and still be experiencing continuous shifting in the mix of asset and liability types, including shifting of deposits. Part of this deposit shifting is inherent in a private sector banking system that fosters competition for deposit funding. The birth of a demand deposit in particular is separate from retaining it through competition. Moreover, the fork in the road that was taken in order to construct a private sector banking system implies that the RBI is not a mere slush fund that provides unlimited funding to the banking system.  

The originating accounting entries in the above case are simple, a loan asset and a deposit liability. But this is only the start of the story. Commercial bank ‘asset-liability management’ functions oversee the comprehensive flow of funds in and out of individual banks. They control exposure to the basic banking risks of liquidity and interest rate sensitivity. Somewhat separately, but still connected within an overarching risk management framework, banks manage credit risk by linking line lending functions directly to the process of internal risk assessment and capital allocation. Banks require capital, especially equity capital, to take risk, and to take credit risk in particular. Interest rate risk and interest margin management are critical aspects of bank asset-liability management. The asset-liability management function provides pricing guidance for deposit products and related funding costs for lending operations. This function helps coordinate the operations of the left and the right hand sides of the balance sheet. For example, a central bank interest rate change becomes a cost of funds signal that transmits to commercial bank balance sheets as a marginal pricing influence. The asset-liability management function is the commercial bank coordination function for this transmission process, as the pricing signal ripples out to various balance sheet categories. Loan and deposit pricing is directly affected because the cost of funds that anchors all pricing in finance has been changed. In other cases, a change in the term structure of market interest rates requires similar coordination of commercial bank pricing implications. And this reset in pricing has implications for commercial bank approaches to strategies and targets for the compositional mix of assets and liabilities. The life of deposits is more dynamic than their birth or death. Deposits move around the banking system as banks compete to retain or attract them. Deposits also change form. Demand deposits can convert to term deposits, as banks seek a supply of longer duration funding for asset-liability matching purposes. And they can convert to new debt or equity securities issued by a particular bank, as buyers of these instruments draw down their deposits to pay for them. All of these changes happen across different banks, which can lead to temporary imbalances in the nominal matching of assets and liabilities, which in turn requires active management of the reserve account level, with appropriate liquidity management responses through money market operations in the short term, or longer term strategic adjustment in approaches to loan and deposit market share. The key idea here is that banks compete for deposits that currently exist in the system, including deposits that can be withdrawn on demand, or at maturity in the case of term deposits. And this competition extends more comprehensively to other liability forms such as debt, as well as to the asset side of the balance sheet through market share strategies for various lending categories. All of this balance sheet flux occurs across different banks, and requires that individual banks actively manage their balance sheets to ensure that assets are appropriately and efficiently funded with liabilities and equity. The ultimate purpose of reserve management is not reserve positioning per se. The end goal is balance sheets are in balance. The reserve system records the effect of this balance sheet activity. And even if loan books remain temporarily unchanged, all manner of other banking system assets and liabilities may be in motion. This includes securities portfolios, deposits, debt liabilities, and the status of the common equity and retained earnings account. And of course, loan books don’t remain unchanged for very long, in which case the loan/deposit growth dynamic comes directly into play on a recurring basis. 

Commercial banks’ ability to create money is constrained by capital. When a bank creates a new loan, with an associated new deposit, the bank’s balance sheet size increases, and the proportion of the balance sheet that is made up of equity (shareholders’ funds, as opposed to customer deposits, which are debt, not equity) decreases. If the bank lends so much that its equity slice approaches zero, as happened in some banks prior to the financial crisis, even a very small fall in asset prices is enough to render it insolvent. Regulatory capital requirements are intended to ensure that banks never reach such a fragile position. In contrast, central banks’ ability to create money is constrained by the willingness of their government to back them, and the ability of that government to tax the population. In practice, most central bank money these days is asset-backed, since central banks create new money when they buy assets in open market operations or Quantitative Easing, and when they lend to banks. However, in theory a central bank could literally spirit money from thin air without asset purchases or lending to banks. This is Milton Friedman’s famous helicopter drop. The central bank would become technically insolvent as a result, but provided the government is able to tax the population, that wouldn’t matter. The ability of the government to tax the population depends on the credibility of the government and the productive capacity of the economy. Hyperinflation can occur when the supply side of the economy collapses, rendering the population unable and/or unwilling to pay taxes. It can also occur when people distrust a government and its central bank so much that they refuse to use the currency that the central bank creates. Distrust can come about because people think the government is corrupt and/or irresponsible, or because they think that the government is going to fall and the money it creates will become worthless. But nowhere in the genesis of hyperinflation does central bank insolvency feature….

 

“The Scam” – Debashis Basu and Sucheta Dalal – Was it the Beginning of the End?

harshad-mehta-pti

“India is a turnaround scrip in the world market.”

“Either you kill, or you get killed” 

— Harshad Mehta

“Though normally quite reasonable and courteous, there was one breed of brokers he truly detested. to him and other kids in the money markets, brokers were meant to be treated like loyal dogs.”

— Broker

The first two claims by Harshad Mehta could be said to form the central theme of the book, The Scam, while the third statement is testimony to the fact of how compartmentalization within the camaraderie proved efficacious to the broker-trader nexus getting nixed, albeit briefly. The authors Debasish Basu and Sucheta Dalal have put a rigorous investigation into unraveling the complexity of what in popular culture has come to be known as the first big securities scam in India in the early 90s. That was only the beginning, for securities scams, banking frauds and financial crimes have since become a recurrent feature, thanks to increasing mathematization and financialization of market practices, stark mismatches on regulatory scales of The Reserve Bank of India (RBI), Public Sector Banks and foreign banks, and stock-market-oriented economization. The last in particular has severed the myth that stock markets are speculative and had no truck with the banking system, by capitalizing and furthering the only link between the two, and that being banks providing loans against shares subject to high margins.  

The scam which took the country by storm in 1992 had a central figure in Harshad Mehta, though the book does a most amazing archaeology into unearthing other equally, if not more important figures that formed a collusive network of deceit and bilk. The almost spider-like weave, not anywhere near in comparison to a similar network that emanated from London and spread out from Tokyo and billed as the largest financial scandal of manipulating LIBOR, thanks to Thomas Hayes by the turn of the century, nevertheless magnified the crevices existing within the banking system and bridging it with the once-closed secretive and closed bond market. So, what exactly was the scam and why did it rock India’s economic boat, especially when the country was opening up to liberal policies and amalgamating itself with globalization? 

As Basu and Dalal say, simply put, the first traces of the scam were observed when the State Bank of India (SBI), Main Branch, Mumbai discovered that it was short by Rs. 574 crore in securities. In other words, the antiquated manually written books kept at the Office of Public Debt at the RBI showed that Rs. 1170.95 crore of an 11.5% of central government loan of 2010 maturity was standing against SBI’s name on the 29th February 1992 figure of Rs. 1744.95 crore in SBI’s books, a clear gap of Rs. 574 crore, with the discrepancy apparently held in Securities General Ledger (SGL). Of the Rs. 574 crore missing, Rs. 500 crore were transferred to Harshad Mehta’s account. Now, an SGL contains the details to support the general ledger control account. For instance, the subsidiary ledger for accounts receivable contains all the information on each of the credit sales to customers, each customer’s remittance, return of merchandise, discounts and so on. Now, SGLs were a prime culprit when it came to conceiving the illegalities that followed. SGLs were issued as substitutes for actual securities by a cleverly worked out machination. Bank Receipts (BRs) were invoked as replacement for SGLs, which on the one hand confirmed that the bank had sold the securities at the rates mentioned therein, while on the other prevented the SGLs from bouncing. BRs is a shrewd plot line whereby the bank could put a deal through, even if their Public Debt Office (PDO) was in the negative. Why was this circumvention clever was precisely because had the transactions taken place through SGLs, they would have simply bounced, and BRs acted as a convenient run-around, and also because BRs were unsupported by securities. In order to derive the most from BRs, a Ready Forward Deal (RFD) was introduced that prevented the securities from moving back and forth in actuality. Sucheta Dalal had already exposed the use of this instrument by Harshad Mehta way back in 1992 while writing for the Times of India. The RFD was essentially a secured short-term (generally 15 day) loan from open bank to another, where the banks would lend against Government securities. The borrowing bank sells the securities to the lending bank and buys them back at the end of the period of the loan, typically at a slightly higher price. Harshad Mehta roped in two relatively obscure and unknown little banks in Bank of Karad and Mumbai Mercantile Cooperative Bank (MMCB) to issue fake BRs, or BRs not backed by Government securities. It were these fake BRs that were eventually exchanged with other banks that paid Mehta unbeknownst of the fact that they were in fact dealing with fake BRs. 

By a cunning turn of reason, and not to rest till such payments were made to reflect on the stock market, Harshad Mehta began to artificially enhance share prices by going on a buying spree. To maximize profits on such investments, the broker, now the darling of the stock market and referred to as the Big Bull decided to sell off the shares and in the process retiring the BRs. Little did anyone know then, that the day shares were sold, the market would crash, and crash it did. Mehta’s maneuvers lent a feel-good factor to the stock market until the scam erupted, and when it did erupt, many banks were swindled to a massive loss of Rs. 4000 crore, for they held on to BRs that had no value attached to them. The one that took the most stinging loss was the State Bank of India and it was payback time. The mechanism by which the money was paid back cannot be understood unless one gets to the root of an RBI subsidiary, National Housing Bank (NHB). When the State Bank of India directed Harshad Mehta to produce either the securities or return the money, Mehta approached the NHB seeking help, for the thaw between the broker and RBI’s subsidiary had grown over the years, the discovery of which had appalled officials at the Reserve Bank. This only lends credibility to the broker-banker collusion, the likes of which only got murkier as the scam was getting unravelled. NHB did come to rescue Harshad Mehta by issuing a cheque in favor of ANZ Grindlays Bank. The deal again proved to be one-handed as NHB did not get securities in return from Harshad Mehta, and eventually the cheque found its way into Mehta’s ANZ account, which helped clear the dues due to the SBI. The most pertinent question here was why did RBI’s subsidiary act so collusively? This could only make sense, once one is in the clear that Harshad Mehta delivered considerable profits to the NHB by way of ready forward deals (RFDs). If this has been the flow chart of payment routes to SBI, the authors of The Scam point out to how the SBI once again debited Harshad Mehta’s account, which had by then exhausted its balance. This was done by releasing a massive overdraft of Rs. 707 crore, which is essentially an extension of a credit by a lending institution when the account gets exhausted. Then the incredulous happened! This overdraft was released against no security!, and the deal was acquiesced to since there was a widespread belief within the director-fold of the SBI that most of what was paid to the NHB would have come back to SBI subsidies from where SBI had got its money in the first place. 

The Scam is neatly divided into two books comprising 23 chapters, with the first part delineating the rise of Harshad Mehta as a broker superstar, The Big Bull. He is not the only character to be pilloried as the nexus meshed all the way from Mumbai (then Bombay) to Kolkata (then Calcutta) to Bengaluru (then Bangalore) to Delhi and Chennai (then Madras) with a host of jobbers, market makers, brokers and traders who were embezzling funds off the banks, colluded by the banks on overheating the stock market in a country that was only officially trying to jettison the tag of Nehruvian socialism. But, it wasn’t merely individuated, but the range of complicitous relations also grabbed governmental and private institutions and firms. Be it the Standard Chartered, or the Citibank, or monetizing the not-even in possession of assets bought; forward selling the transaction to make it appear cash-neutral; or lending money to the corporate sector as clean credit implying banks taking risks on the borrowers unapproved by the banks because it did not fall under the mainline corporate lending, rules and regulations of the RBI were flouted and breached with increasing alacrity and in clear violations of guidelines. But credit is definitely due to S Venkitaraman, the Governor of the RBI, who in his two-year at the helm of affairs exposed the scam, but was meted out a disturbing treatment at the hands of some of members of the Joint Parliamentary Committee. Harshad Mehta had grown increasingly confident of his means and mechanisms to siphon-off money using inter-bank transactions, and when he was finally apprehended, he was charged with 72 criminal offenses and more than 600 civil action suits were filed against him leading to his arrest by the CBI in the November of 1992. Banished from the stock market, he did make a comeback as a market guru before the Bombay High Court convicted him to prison. But, the seamster that he was projected to be, he wouldn’t rest without creating chaos and commotion, and one such bomb was dropped by him claiming to have paid the Congress Prime minister PV Narsimha Rao a hefty sum to knock him off the scandal. Harshad Mehta passed away from a cardiac arrest while in prison in Thane, but his legacy continued within the folds he had inspired and spread far and wide. 

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Ketan Parekh forms a substantial character of Book 2 of The Scam. Often referred to as Midas in privy for his ability to turn whatever he touched into gold on Dalal Street by his financial trickery, he decided to take the unfinished project of Harshad Mehta to fruition. Known for his timid demeanor, Parekh from a brokers family and with his training as a Chartered Accountant, he was able to devise a trading ring that helped him rig stock prices keeping his vested interests at the forefront. He was a bull on the wild run, whose match was found in a bear cartel that hammered prices of K-10 stocks precipitating payment crisis. K-10 stocks were colloquially named for these driven in sets of 10, and the promotion of these was done through creating bellwethers and seeking support fro Foreign Institutional Investors (FIIs). India was already seven years old into the LPG regime, but still sailing the rough seas of economic transitioning into smooth sailing. This wasn’t the most conducive of timing to appropriate profits, but a prodigy that he was, his ingenuity lay in instrumentalizing the jacking up of shares prices to translate it into the much needed liquidity. this way, he was able to keep FIIs and promoters satisfied and multiply money on his own end. This, in financial jargon goes by the name circular trading, but his brilliance was epitomized by his timing of dumping devalued shares with institutions like the Life Insurance Corporation of India (LIC) and Unit Trust of India (UTI). But, what differentiated him from Harshad Mehta was his staying off public money or expropriating public institutions. such was his prowess that share markets would tend to catch cold when he sneezed and his modus operandi was invest into small companies through private placements, manipulate the markets to rig shares and sell them to devalue the same. But lady luck wouldn’t continue to shine on him as with the turn of the century, Parekh, who had invested heavily into information stocks was hit large by the collapse of the dotcom bubble. Add to that when NDA government headed by Atal Bihari Vajpayee presented the Union Budget in 2001, the Bombay Stock Exchange (BSE) Sensex crashed prompting the Government to dig deep into such a market reaction. SEBI’s (Securities and Exchange Board of India) investigation revealed the rogue nature of Ketan Parekh as a trader, who was charged with shaking the very foundations of Indian financial markets. Ketan Parekh has been banned from trading until 2017, but SEBI isn’t too comfortable with the fact that his proteges are carrying forward the master’s legacy. Though such allegations are yet to be put to rest. 

The legacy of Harshad Mehta and Ketan Parekh continue to haunt financial markets in the country to date, and were only signatures of what was to follow in the form of plaguing banking crisis, public sector banks are faced with. As Basu and Dalal write, “in money markets the first signs of rot began to appear in the mid-1980s. After more than a decade of so-called social banking, banks found themselves groaning under a load of investments they were forced to make to maintain the Statutory Liquidity Ratio. The investments were in low-interest bearing loans issued by the central and state governments that financed the government’s ever-increasing appetite for cash. Banks intended to hold these low-interest government bonds till maturity. But each time a new set of loans came with a slightly higher interest rate called the coupon rate, the market price of older securities fell, and thereafter banks began to book losses, which eroded their profitability,” the situation is a lot more grim today. RBI’s autonomy has come under increased threat, and the question that requires the most incision is to find a resolution to what one Citibank executive said, “RBI guidelines are just that, guidelines. Not the law of the land.” 

The Scam, as much as a personal element of deceit faced during the tumultuous times, is a brisk read, with some minor hurdles in the form of technicalities that intersperse the volume and tend to disrupt the plot lines. Such technical details are in the realm of share markets and unless negotiated well with either a prior knowledge, or hyperlinking tends to derail the speed, but in no should be considered as a book not worth looking at. As a matter of fact, the third edition with its fifth reprint is testimony to the fact that the book’s market is alive and ever-growing. One only wonders at the end of it as to where have all such journalists disappeared from this country. That Debashis Basu and Sucheta Dalal, partners in real life are indeed partners in crime if they aim at exposing financial crimes of such magnitudes for the multitude in this country who would otherwise be bereft of such understandings had it not been for them. 

Infrastructure and Asian Infrastructure and Investment Bank. Some Scattered Thoughts.

What is Infrastructure?

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Infrastructure, though definitionally an elusive term, encompasses an economic standpoint consisting of large capital intensive natural monopolies. The term attains it heterogeneity by including physical structures of various types used by many industries as inputs to the production of goods and services. By this, it has come to mean either social, or economic infrastructure, wherein, in the former, are schools, hospitals etc, while in the latter are energy, water, transport, and digital communications, often considered essential ingredients in the success of the modern economy. Conceptually, infrastructure may affect aggregate output in two main ways: (i) directly, considering the sector contribution to GDP formation and as an additional input in the production process of other sectors; and (ii) indirectly, raising total factor productivity by reducing transaction and other costs thus allowing a more efficient use of conventional productive inputs. Infrastructure can be considered as a complementary factor for economic growth. How big is the contribution of infrastructure to aggregate economic performance? The answer is critical for many policy decisions – for example, to gauge the growth effects of fiscal interventions in the form of public investment changes, or to assess if public infrastructure investments can be self-financing.

Let us ponder on this a bit and begin with the question. Why is infrastructure even important? Extensive and efficient infrastructure is critical for ensuring the effective functioning of the economy, as it is an important factor determining the location of economic activity and the kinds of activities or sectors that can develop in a particular economy. Well-developed infrastructure reduces the effect of distance between regions, integrating the national market and connecting it at low cost to markets in other countries and regions. In addition, the quality and extensiveness of infrastructure networks significantly impact economic growth and affect income inequalities and poverty in a variety of ways. A well-developed transport and communications infrastructure network is a prerequisite for the access of less-developed communities to core economic activities and services. Effective modes of transport, including quality roads, railroads, ports, and air transport, enable entrepreneurs to get their goods and services to market in a secure and timely manner and facilitate the movement of workers to the most suitable jobs. Economies also depend on electricity supplies that are free of interruptions and shortages so that businesses and factories can work unimpeded. Finally, a solid and extensive communications network allows for a rapid and free flow of information, which increases overall economic efficiency by helping to ensure that businesses can communicate and decisions are made by economic actors taking into account all available relevant information. There is an existing correlation between infrastructure and economic activity through which the economic effects originate in the construction phase and rise during the usage phase. The construction phase is associated with the short-term effects and are a consequence of the decisions in the public sector that could affect macroeconomic variables: GDP, employment, public deficit, inflation, among others. The public investment expands the aggregate demand, yielding a boost to the employment, production and income. The macroeconomic effects at a medium and long term, associated with the utilization phase are related to the increase of productivity in the private sector and its effects over the territory. Both influence significantly in the competitiveness degree of the economy. In conclusion, investing in infrastructure constitutes one of the main mechanisms to increase income, employment, productivity and consequently, the competitiveness of an economy. Is this so? Well, thats what the economics textbook teaches us, and thus governments all over the world turn to infrastructure development as a lubricant to maintain current economic output at best and it can also be the basis for better industry which contributes to better economic output. Governments, thus necessitate realignment of countries’ infrastructure in tune with the changing nature of global political economy. Infrastructure security and stability concerns the quantity of spare capacity (or security of supply). Instead of acting on the efficiency frontier, infrastructure projects must operate with spare capacity to contribute to economic growth through ensuring reliable service provisions. Spare capacity is a necessary condition for a properly functioning system. To assure the level of spare capacity in the absence of storage and demand, the system needs to have excess supply. However, no rational profit-seeker will deliberately create conditions of excess supply, since it would produce a marginal cost lower than the average cost, and to circumnavigate this market failure, governments are invested with the responsibility of creating incentives ensuring securities of supply. This is seeding the substitutability of economics with financialization. 

So far, so good, but then, so what? This is where social analysts need to be incisive in unearthing facts from fiction and this faction is what constitutes the critique of development, a critique that is engineered against a foci on GDP-led growth model. This is to be done by asking uncomfortable questions to policy-makers, such as: What is the most efficient way to finance infrastructure spending? What are optimal infrastructure pricing, maintenance and investment policies? What have proven to be the respective strengths and weaknesses of the public and private sectors in infrastructure provision and management, and what shapes those strengths and weaknesses? What are the distributional consequences of infrastructure policies? How do political forces impact the efficiency of public sector provision? What framework deals best with monopoly providers of infrastructure? For developing countries, which have hitherto been plagued by weaker legal systems making regulation and enforcement more complicated, the fiscally weak position leads to higher borrowing costs. A most natural outcome is a systemic increase in financial speculation driven by deregulation transforming into financial assets. Contrary to common sense and what civil society assumes, financial markets are going deeper and deeper into the real economy as a response to the financial crisis, so that speculative capital is structurally being intertwined with productive capital changing the whole dynamics of infrastructure investment. The question then is, how far viable or sustainable are these financial interventions? Financialization produces effects which can create long-term trends (such as those on functional income distribution) but can also change across different periods of economic growth, slowdown and recession. Interpreting the implications of financialization for sustainability, therefore, requires a methodological diverse and empirical dual-track approach which combines different methods of investigations. Even times of prosperity, despite their fragile and vulnerable nature, can endure for several years before collapsing due to high levels of indebtedness, which in turn amplify the real effects of a financial crisis and hinder the economic growth. 

Role of Development Banks and AIIB

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Where do development banks fit into the schema as regards infrastructure investment? This question is a useful gamble in order to tackle AIIB, the new kid on the bloc. As the world struggles to find funds to meet the Sustainable Development Goals (SDGs), development banks could be instrumental in narrowing the gap. So, goes the logic promulgated by these banks. They can help to crowd-in the private sector and anchor private-public sector partnerships, particularly for infrastructure financing. However, misusing development banks can lead to fiscal risks and credit market distortions. To avoid these potential pitfalls, development banks need a well-defined mandate, operate without political influence, focus on addressing significant market failures, concentrate on areas where the private sector is not present, monitor and evaluate interventions and adjust as necessary to ensure impact, and, finally, be transparent and accountable. All of these are the ideals, which more often than not go the other way. China-led Asian Infrastructure Investment Bank (AIIB), despite having no track record still enjoys the highest ratings on par with the World Bank. This has fueled debates ranging from adding much-needed capital augmenting infrastructure to leniency in observing high standards of governance, and possibly ignoring environmental and societal impacts.

The AIIB was officially launched in Beijing on January 16th, 2016, with 57 founding members, including 37 in Asia and 20 non-regional countries. Being the largest shareholder of the AIIB, China has an initial subscription of $29.78 billion in authorized capital stock in the AIIB out of a total of $100 billion, and made a grant contribution of another $50 million to the AIIB Project Preparation Special Fund on January 16th, 2017. India is the second-largest shareholder, contributing $8.4 billion. Russia is the third-largest shareholder, contributing $6.5 billion, and Germany is the largest non-regional shareholder (also the fourth largest shareholder), contributing $4.5 billion. While being open to the participation of non-regional members, the AIIB is committed to and prioritizes the ownership of Asian members. This is reflected in the capital structure requirement and the requirements for the composition of Board of Governors in the AIIB’s Article of Agreement (AOA), which requires no less than 75 percent of the total subscribed capital stock to be held by regional members unless otherwise agreed by the Board of Governors by a Super Majority vote. The AOA also requires that 9 out of the AIIB’s 12 members be elected by the Governors representing regional members, and 3 representing non-regional members. The prioritization of Asian-members’ ownership of the AIIB does not necessarily mean that the AIIB’s investment is restricted only to Asia. According to its AOA, the AIIB aims to “improve infrastructure connectivity in Asia,” and it will invest in Asia and beyond as long as the investment is “concerned with economic development of the region.” The bank currently has 64 member states while another 20 are prospective members for a total of 84 approved members. 

The AIIB’s EU/OECD members potentially could have some positive influence over the institutional building and standard setting of the young institution. The European Commission has recognized that an EU presence in China-driven institutions would contribute to the adoption of best practices and fair, global standards. Adherence to such standards will be promoted by the AIIB entering into partnership with existing Multilateral Development Banks. It has also been argued that joining the AIIB would give the European countries access to the decision-making process within the AIIB, and may even allow the European countries to play a role in shaping the AIIB’s organizational structure. As an example of EU/OECD members’ activism in monitoring the AIIB’s funds allocation, both Denmark and the UK, who are AIIB’s OECD members, proposed that contributions to the AIIB would qualify as official development aid (ODA). After a thorough review of AIIB’s AOA, mandate, work plan and other available materials, the OECD’s Secretariat of the Development Assistance Committee (DAC) recommended including AIIB on the List under the category of “Regional development banks,” which means the OECD would recognize the AIIB as one of the ODA-eligible international organizations. Once approved, the Secretariat of DAC will be able to “monitor the future recipient breakdown of the AIIB’s borrowers through AIIB’s future Creditor Reporting System and thereby confirm that the actual share of funds going to countries on the DAC List of ODA Recipients is over 90%.” That is to say, if approved, there would be additional external monitor to make sure that the funds channeled through the AIIB to recipient countries are used properly. 

The AIIB’s initial total capital is $100 billion, equivalent to about 61 percent of the ADB’s initial total capital, 43 percent of the World Bank’s, 30 percent of the European Investment Bank’s (EIB), and more than twice of the European Bank for Reconstruction and Development’s (EBRD). Of this $100 billion initial capital, 20 percent is to be largely paid-in by 2019 and fully paid-in by 2024, and the remaining 80 percent is in callable capital. It needs to be noted that according to the AOA, payments for paid-in capital are due in five installments, with the exception of members designated as less developed countries, who may pay in ten installments. As of any moment, the snapshot of AIIB’s financial sheet includes total assets, members’ equities and liabilities, the last of which has negligible debt at the current stage since the AIIB has not issued any debenture or borrowed money from outside. However, to reduce the funding costs and to gain access to wider source of capital, the AIIB cannot rely solely on equity and has to issue debenture and take some leverage, particularly given that the AIIB intends to be a for-profit institution. In February 2017, the AIIB signed an International Swaps and Derivatives Association (ISDA) Master Agreement with the International Finance Corporation (IFC), which would facilitate local currency bond issuance in client countries. Moreover, AIIB intends to actively originate and lead transactions that mobilize private capital and make it a trusted partner for all parties involved in the transactions that the Bank leads. In the long term, the AIIB aims to be the repository of know-how and best practices in infrastructure finance. 

It is widely perceived that the AIIB is a tool of Chinese foreign policy, and that it is a vehicle for the implementation of the Belt and Road (One Belt, One Road) Initiative. During a meeting with global executives in June 2016, the AIIB President Jin Liqun clarified China’s position, saying the AIIB “was not created exclusively for this initiative,” and that the AIIB would “finance infrastructure projects in all emerging market economies even though they don’t belong to the Belt and Road Initiative.” It is worth pointing out that despite the efforts on trying to put some distance between the AIIB and the Belt and Road Initiative, there is still a broad perception that these two are closely related. Moreover, China has differentiated AIIB projects from its other foreign assistance projects by co-financing its initial projects with the preexisting MDBs. Co-financing, combined with European membership, will make it more likely this institution largely conforms to the international standards” and potentially will steer the AIIB away from becoming solely a tool of Chinese foreign policy. This supports China’s stated intention to complement existing MDBs rather than compete with them. It also means that the AIIB can depend on its partners, if they would allow so, for expertise on a wide range of policy and procedural issues as it develops its lending portfolio.

Although AIIB has attracted a great number of developing and developed countries to join as members and it has co-financed several projects with other MDBs, there is no guarantee for any easy success in the future. There are several formidable challenges for the young multilateral institution down the road. Not all the infrastructure investment needs in Asia is immediately bankable and ready for investors’ money. Capital, regardless it’s sovereign or private, will not flow in to any project without any proper preparation. Although Asia faces a huge infrastructure financing gap, there is a shortage of ‘shovel-ready’ bankable projects owing to the capacity limitations. The young AIIB lacks the talent and expertise to create investor-ready bankable projects, despite that it has created a Project Preparation Special Fund thanks to $50 million by China. The AIIB aims to raise money in global capital markets to invest in the improvement of trans-regional connectivity. However, infrastructure projects are not naturally attractive investment due to huge uncertainties throughout the entire life cycle as well as unjustified risk-profit balance. Getting a top-notch credit rating is just a start. The AIIB has to find innovative ways to improve the risk-adjusted profitability of its projects. This issue itself has been a big challenge for many MDBs who engage in infrastructure financing for a long time. It is uncertain if the AIIB could outperform the other much more matured MDBs to find a solution to tackle the profitability problem in infrastructure financing. The highest rating it has received from ratings agencies could pose a challenge in itself. The high rating not only endorses the bank’s high capital adequacy and robust liquidity position, but also validates the strong political will of AIIB’s members and the bank’s governance frameworks. A good rating will help the AIIB issue bonds at favorable rate and utilize capital markets to reduce its funding costs. This certainly will contribute to AIIB’s efforts to define itself as a for-profit infrastructure investment bank. However, there is no guarantee that the rating will hold forever. Many factors may impact the rating in the future, including but not limited to AIIB’s self-capital ratio, liquidity, management, yieldability, risk management ability, and its autonomy and independency from China’s influence. 

Global Significance of Chinese Investments. My Deliberations in Mumbai (04/03/2018)

Legends:

What are fitted values in statistics?

The values for an output variable that have been predicted by a model fitted to a set of data. a statistical is generally an equation, the graph of which includes or approximates a majority of data points in a given data set. Fitted values are generated by extending the model of past known data points in order to predict unknown values. These are also called predicted values.

What are outliers in statistics?

These are observation points that are distant from other observations and may arise due to variability in the measurement  or it may indicate experimental errors. These may also arise due to heavy tailed distribution.

What is LBS (Locational Banking statistics)?

The locational banking statistics gather quarterly data on international financial claims and liabilities of bank offices in the reporting countries. Total positions are broken down by currency, by sector (bank and non-bank), by country of residence of the counterparty, and by nationality of reporting banks. Both domestically-owned and foreign-owned banking offices in the reporting countries record their positions on a gross (unconsolidated) basis, including those vis-à-vis own affiliates in other countries. This is consistent with the residency principle of national accounts, balance of payments and external debt statistics.

What is CEIC?

Census and Economic Information Centre

What are spillover effects?

These refer to the impact that seemingly unrelated events in one nation can have on the economies of other nations. since 2009, China has emerged a major source of spillover effects. This is because Chinese manufacturers have driven much of the global commodity demand growth since 2000. With China now being the second largest economy in the world, the number of countries that experience spillover effects from a Chinese slowdown is significant. China slowing down has a palpable impact on worldwide trade in metals, energy, grains and other commodities.

How does China deal with its Non-Performing Assets?

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China adopted a four-point strategy to address the problems. The first was to reduce risks by strengthening banks and spearheading reforms of the state-owned enterprises (SOEs) by reducing their level of debt. The Chinese ensured that the nationalized banks were strengthened by raising disclosure standards across the board.

The second important measure was enacting laws that allowed the creation of asset management companies, equity participation and most importantly, asset-based securitization. The “securitization” approach is being taken by the Chinese to handle even their current NPA issue and is reportedly being piloted by a handful of large banks with specific emphasis on domestic investors. According to the International Monetary Fund (IMF), this is a prudent and preferred strategy since it gets assets off the balance sheets quickly and allows banks to receive cash which could be used for lending.

The third key measure that the Chinese took was to ensure that the government had the financial loss of debt “discounted” and debt equity swaps were allowed in case a growth opportunity existed. The term “debt-equity swap” (or “debt-equity conversion”) means the conversion of a heavily indebted or financially distressed company’s debt into equity or the acquisition by a company’s creditors of shares in that company paid for by the value of their loans to the company. Or, to put it more simply, debt-equity swaps transfer bank loans from the liabilities section of company balance sheets to common stock or additional paid-in capital in the shareholders’ equity section.

Let us imagine a company, as on the left-hand side of the below figure, with assets of 500, bank loans of 300, miscellaneous debt of 200, common stock of 50 and a carry-forward loss of 50. By converting 100 of its debt into equity (transferring 50 to common stock and 50 to additional paid-in capital), thereby improving the balance sheet position and depleting additional paid-in capital (or using the net income from the following year), as on the right-hand side of the figure, the company escapes insolvency. The former creditors become shareholders, suddenly acquiring 50% of the voting shares and control of the company.

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The first benefit that results from this is the improvement in the company’s finances produced by the reduction in debt. The second benefit (from the change in control) is that the creditors become committed to reorganizing the company, and the scope for moral hazard by the management is limited. Another benefit is one peculiar to equity: a return (i.e., repayment) in the form of an increase in enterprise value in the future. In other words, the fact that the creditors stand to make a return on their original investment if the reorganization is successful and the value of the business rises means that, like the debtor company, they have more to gain from this than from simply writing off their loans. If the reorganization is not successful, the equity may, of course, prove worthless.

The fourth measure they took was producing incentives like tax breaks, exemption from administrative fees and transparent evaluations norms. These strategic measures ensured the Chinese were on top of the NPA issue in the early 2000s, when it was far larger than it is today. The noteworthy thing is that they were indeed successful in reducing NPAs. How is this relevant to India and how can we address the NPA issue more effectively?

For now, capital controls and the paying down of foreign currency loans imply that there are few channels through which a foreign-induced debt sell-off could trigger a collapse in asset prices. Despite concerns in 2016 over capital outflow, China’s foreign exchange reserves have stabilised.

But there is a long-term cost. China is now more vulnerable to capital outflow. Errors and omissions on its national accounts remain large, suggesting persistent unrecorded capital outflows. This loss of capital should act as a salutary reminder to those who believe that China can take the lead on globalisation or provide the investment or currency business to fuel things like a post-Brexit economy.

The Chinese government’s focus on debt management will mean tighter controls on speculative international investments. It will also provide a stern test of China’s centrally planned financial system for the foreseeable future.

Global Significance of Chinese investments

Conjuncted: Balance of Payments in a Dirty Float System, or Why Central Banks Find It Ineligible to Conduct Independent Monetary Policies? Thought of the Day

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If the rate of interest is partly a monetary phenomenon, money will have real effects working through variations in investment expenditure and the capital stock. Secondly, if there are unemployed resources, the impact of increases in the money supply will first be on output, and not on prices. It was, indeed, Keynes’s view expressed in his General Theory that throughout history the propensity to save has been greater than the propensity to invest, and that pervasive uncertainty and the desire for liquidity has in general kept the rate of interest too high. Given the prevailing economic conditions of the 1930s when Keynes was writing, it was no accident that he should have devoted part of the General Theory to a defence of mercantilism as containing important germs of truth:

What I want is to do justice to schools of thought which the classicals have treated as imbeciles for the last hundred years and, above all, to show that I am not really being so great an innovator, except as against the classical school, but have important predecessors, and am returning to an age-long tradition of common sense.

The mercantilists recognised, like Keynes, that the rate of interest is determined by monetary conditions, and that it could be too high to secure full employment, and in relation to the needs of growth. As Keynes put it in the General Theory:

mercantilist thought never supposed as later economists did [for example, Ricardo, and even Alfred Marshall] that there was a self-adjusting tendency by which the rate of interest would be established at the appropriate level [for full employment].

It was David Ricardo, in his The Principles of Political Economy and Taxation, who accepted and developed Say’s law of markets that supply creates its own demand, and who for the first time expounded the theory of comparative advantage, which laid the early foundations for orthodox trade and growth theory that has prevailed ever since. Ricardian trade theory, however, is real theory relating to the reallocation of real resources through trade which ignores the monetary aspects of trade; that is, the balance between exports and imports as trade takes place. In other words, it ignores the balance of payments effects of trade that arises as a result of trade specialization, and the feedback effects that the balance of payments can have on the real economy. Moreover, continuous full employment is assumed because supply creates its own demand through variations in the real rate of interest. These aspects question the prevalence of Ricardian theory in orthodox trade and growth theory to a large extent in today’s scenario. But in relation to trade, as Keynes put it:

free trade assumes that if you throw men out of work in one direction you re-employ them in another. As soon as that link in the chain is broken the whole of the free trade argument breaks down.

In other words, the real income gains from specialization may be offset by the real income losses from unemployment. Now, suppose that payments deficits arise in the process of international specialization and the freeing of trade, and the rate of interest has to be raised to attract foreign capital inflows to finance them. Or suppose deficits cannot be financed and income has to be deflated to reduce imports. The balance of payments consequences of trade may offset the real income gains from trade.

This raises the question of why the orthodoxy ignores the balance of payments? There are several reasons, both old and new, that all relate to the balance of payments as a self-adjusting process, or simply as a mirror image of autonomous capital flows, with no income adjustment implied. Until the First World War, the mechanism was the gold standard. The balance of payments was supposed to be self-equilibrating because countries in surplus, accumulating gold, would lose competitiveness through rising prices (Hume’s quantity theory of money), and countries in deficit losing gold would gain competitiveness through falling prices. The balance of payments was assumed effectively to look after itself through relative price adjustments without any change in income or output. After the external gold standard collapsed in 1931, the theory of flexible exchange rates was developed, and it was shown that if the real exchange rate is flexible, and the so-called Marshall–Lerner condition is satisfied (i.e. the sum of the price elasticities of demand for exports and imports is greater than unity), the balance of payments will equilibrate; again, without income adjustment.

In modern theory, balance of payments deficits are assumed to be inherently temporary as the outcome of inter-temporal decisions by private agents concerning consumption. Deficits are the outcome of rational decisions to consume now and pay later. Deficits are merely a form of consumption smoothing, and present no difficulty for countries. And then there is the Panglossian view that the current account of the balance of payments is of no consequence at all because it simply reflects the desire of foreigners to invest in a country. Current account deficits should be seen as a sign of economic success, not as a weakness.

It is not difficult to question how balance of payments looks after itself, or does not have consequences for long-run growth. As far as the old gold standard mechanism is concerned, instead of the price levels of deficit and surplus countries moving in opposite directions, there was a tendency in the nineteenth century for the price levels of countries to move together in the same direction. In practice, it was not movements in relative prices that equilibrated the balance of payments but expenditure and output changes associated with interest rate differentials. Interest rates rose in deficit countries which deflated demand and output, and fell in surplus countries stimulating demand.

On the question of flexible exchange rates as an equilibrating device, a distinction first needs to be made between the nominal exchange rate and the real exchange rate. It is easy for countries to adjust the nominal rate, but not so easy to adjust the real rate because competitors may “price to market” or retaliate, and domestic prices may rise with a nominal devaluation. Secondly, the Marshall–Lerner condition then has to be satisfied for the balance of payments to equilibrate. This may not be the case in the short run, or because of the nature of goods exported and imported by a particular country. The international evidence over the past almost half a century years since the breakdown of the Bretton Woods fixed exchange rate system suggests that exchange rate changes are not an efficient balance of payments adjustment weapon. Currencies appreciate and depreciate and still massive global imbalances of payments remain.

On the inter-temporal substitution effect, it is wrong to give the impression that inter-temporal shifts in consumption behaviour do not have real effects, particularly if interest rates have to rise to finance deficits caused by more consumption in the present if countries do not want their exchange rate to depreciate. On the view that deficits are a sign of success, an important distinction needs to be made between types of capital inflows. If the capital flows are autonomous, such as foreign direct investment, the argument is plausible, but if they are “accommodating” in the form of loans from the banking system or the sale of securities to foreign governments and international organizations, the probable need to raise interest rates will again have real effects by reducing investment and output domestically.