Second Finance MinisterJohari Abdul Ghani.said GST is the super expressway can take us to become an economic superpower
Money makes the world go round;
should look into these issues to boost morale of Malaysian bonds
Foreign sales of Malaysian bonds accelerated since November last year, after the central bank had asked foreign banks to stop trading ringgit non-deliverable forwards (NDFs), offshore contracts they use to hedge their exposure to the currency.Foreigners were unable to hedge their risk in onshore markets because of lack of liquidity.On the other hand, foreigners net bought Indian and Indonesian bonds in March. There were inflows of US$3.9 billion and US$2.4 billion in Indian and Indonesian bonds respectively.
March inflows in Indian bonds was the biggest in at least 15 years as per government data
Foreign investors net sold about US$6 billion of Malaysian debt in March, their seventh consecutive and biggest sales since January 2011, according to the central bank data.
Foreign sales of Malaysian bonds accelerated since November last year, after the central bank had asked foreign banks to stop trading ringgit non-deliverable forwards (NDFs), offshore contracts they use to hedge their exposure to the currency.
Foreigners were unable to hedge their risk in onshore markets because of lack of liquidity.
On the other hand, foreigners net bought Indian and Indonesian bonds in March. There were inflows of US$3.9 billion and US$2.4 billion in Indian and Indonesian bonds respectively.
March inflows in Indian bonds was the biggest in at least 15 years as per government data.
The taper tantrum itself tapered off by mid-2014 and money flooded back into emerging markets. Why? Because, against expectations, the Fed raised its interest rate only once in the three years between 2013 and 2016 to 0.25-0.50 per cent. This is still ridiculously low. However, the Fed could decree a second raise by the end of 2016, and a third or fourth in 2017. Could that spark another financial tantrum? Alas, yes.
Henny Sender says in the Financial Times, “…it is disconcertingly easy to argue that the financial world is more vulnerable to a taper tantrum today than it was in the spring of 2013.” Cheap money in rich countries is the main factor driving up emerging markets. When this artificial cheapness ends — and that may be nigh in the US — a reverse flood of money could exit emerging markets, as in 2013.
What could go wrong? Another financial storm could tear through all emerging markets, including India. Three years ago, a ‘taper tantrum’ sent stock markets and the rupee crashing. At the time, the US Federal Reserve hinted that it might taper and end its ‘quantitative easing’ — printing money to buy bonds — and start raising interest rates that had been close to zero since 2008. Now, that zero interest rate had sent trillions of dollars into emerging markets like India in search of higher yields. When global investors in 2013 sensed a return to more normal yields in the US, billions flooded out of emerging markets into the US.
idea that Malaysia may be requiring a ‘bad bank’ in some shape and form,
has been presented with overarching debt resolution frameworks
To gain broader acceptance, any scheme relating to implementation of a ‘bad bank’ need to minimise the impact on government finances. The scheme also needs to address doubts pertaining to a) government or private ownership, b) the source of funding of the agency, c) the price at which the agency will buy bad debt.
The author argues that none of these are insurmountable problems or unanswerable dilemmas. Most of these questions stem from neoclassical view of economy peppered with a convenient belief in monetarism. However, the current solution may be better appreciated from a Keynesian or Minskyite perspective with more realistic understanding of banking, credit and money creation.Government sponsorship critical
Banks at its core are entities which are owned or appointed by the sovereign to lend purchasing power in the economy by way of credit disbursement. Credit creates money (endogenous) which is backed by government.
Troubled banking systems have limited credit disbursal ability, constraining money creation, which limits growth ultimately hitting taxes. Government must step in to revive banks’ credit disbursal ability to keep this cycle intact. Thus the fund resolving bad debt must be sponsored by government.
Optimising the strain on exchequer
The fund will require money for day-to-day operations and for funding turnaround of distressed companies where possible. Such resources may be raised by selling the fund’s equity stake to GOI, sovereign wealth funds and multilaterals. However, the fund can purchase bad debt from banks by issuing securitiesdebt, hybrids and equity.
Specifically, the fund may issue a senior debt which may be government guaranteed, subordinate debt. These may be zero coupon debt co-terminus with the life of the agency (say 10 years). Over its life, the fund will earn from liquidation and stake sale of revived companies, so it may not have to invoke the government guarantee for debt servicing.
Since fiscal deficit is calculated on the cash basis, there will be no immediate impact attributable to buying bad debt. However, government has to incur some expenses for replenishing the equity of its banks since some haircut of loan value may be required before selling it to the fund.
Pragmatic pricing
Banks will like to sell bad debt at book value since any write-off will erode equity. The fund will like to buy bad debt at discounted prices to improve return. The failure of banks and ARCs to agree on the price has been among the reasons for NPA build-up.
While banks may take some haircut, they may still seek a value higher than what the fund may pay. The fund’s price for the bad debt may be paid in terms of senior debt guaranteed by government, while excess amount demanded by banks (post haircut) may be paid in terms of sub-ordinate debt and equity in fund.
The fund’s success would depend on how it incentivises banks to come clean, check moral hazard issues without going for protracted pricing negotiations. The government should act post haste for creation of such a fund or wait till 2026 to bring down NPA levels. Recall India’s NPA rate touched 15.4% in 1997 and it took 9 years to fall to below 5%.
While fiscal discipline is critical, it must be appreciated that government funding of bank equity, fiscal deficit or overall government liability are accounting entries and per se not physical constraints or monetary constraints as faced by non-money creating entities such as households and corporates. What matters more is the creation of real, physical assets and constraining them by arguing blindly in favour of fiscal discipline or moral hazard will be detrimental to the economy.
(The writer is a financial services professional and visiting faculty at IIM Calcutta)
Image as a crusader against corruption.
High GDP growth, low inflation, better tax compliance expected after criminalise the system,
It face grave anti-incumbency due to a poor governance record and perceptions of heavy corruption,
Politics has this curious habit of corrupting language. And once words are corrupted, their meanings slowly corrupt themselves either through over use or misuse. Never has this been more obvious than in the case of the word “corruption” itself.
The OED describes corruption (on my Blackberry) as “dishonest or fraudulent conduct by those in power, typically involving bribery”. And most people in most parts of the world would endorse that. But in India we have chosen to enlarge the scope of this definition and blunt its edge. The important words are actually “those in power” and “bribery”.
The portion escaping tax scrutiny will be assimilated in the formal economy with impunity. If the parallel economy shrinks and further accumulation of black money is prevented, then revenue buoyancy will be immense. if the shadow economy is reduced, previously unaccounted income will become part of the formal economy. Hence, better GDP estimates may more than offset the short-run impact arising out of the cash shortage. Malaysia’s GDP may even spring a surprise on the upside in the short-run.
Going forward, the ease of doing business will improve, India’s sovereign rating could be revised upwards and there could be a surge in capital inflows, particularly FDI. The medium-term impact of eliminting has far reaching in terms of high GDP growth, low inflation, better tax compliance and low tax rate.
Moreover, implementation of GST will be smooth and the intended revenue outcome from GST may materialise without difficulty. Consequently, the tax rate could come down in the next couple of years.
To tackle this, the government will have to find ways to promote the use of cashless transactions through a slew of incentives, to make it far more attractive to pay for goods and services digitally.
The safety pin in all of this will,of course, be data security. A September data theft in which fraudsters swiped data off millions of debit card holders is a reminder of the challenges that lie ahead. Dozens of banks, including India’s biggest public and private lenders, were had.
Money makes the world go round;
should look into these issues to boost morale of Malaysian bonds
Foreign sales of Malaysian bonds accelerated since November last year, after the central bank had asked foreign banks to stop trading ringgit non-deliverable forwards (NDFs), offshore contracts they use to hedge their exposure to the currency.Foreigners were unable to hedge their risk in onshore markets because of lack of liquidity.On the other hand, foreigners net bought Indian and Indonesian bonds in March. There were inflows of US$3.9 billion and US$2.4 billion in Indian and Indonesian bonds respectively.
March inflows in Indian bonds was the biggest in at least 15 years as per government data
Foreign investors net sold about US$6 billion of Malaysian debt in March, their seventh consecutive and biggest sales since January 2011, according to the central bank data.
Foreign sales of Malaysian bonds accelerated since November last year, after the central bank had asked foreign banks to stop trading ringgit non-deliverable forwards (NDFs), offshore contracts they use to hedge their exposure to the currency.
Foreigners were unable to hedge their risk in onshore markets because of lack of liquidity.
On the other hand, foreigners net bought Indian and Indonesian bonds in March. There were inflows of US$3.9 billion and US$2.4 billion in Indian and Indonesian bonds respectively.
March inflows in Indian bonds was the biggest in at least 15 years as per government data.
The taper tantrum itself tapered off by mid-2014 and money flooded back into emerging markets. Why? Because, against expectations, the Fed raised its interest rate only once in the three years between 2013 and 2016 to 0.25-0.50 per cent. This is still ridiculously low. However, the Fed could decree a second raise by the end of 2016, and a third or fourth in 2017. Could that spark another financial tantrum? Alas, yes.
Henny Sender says in the Financial Times, “…it is disconcertingly easy to argue that the financial world is more vulnerable to a taper tantrum today than it was in the spring of 2013.” Cheap money in rich countries is the main factor driving up emerging markets. When this artificial cheapness ends — and that may be nigh in the US — a reverse flood of money could exit emerging markets, as in 2013.
What could go wrong? Another financial storm could tear through all emerging markets, including India. Three years ago, a ‘taper tantrum’ sent stock markets and the rupee crashing. At the time, the US Federal Reserve hinted that it might taper and end its ‘quantitative easing’ — printing money to buy bonds — and start raising interest rates that had been close to zero since 2008. Now, that zero interest rate had sent trillions of dollars into emerging markets like India in search of higher yields. When global investors in 2013 sensed a return to more normal yields in the US, billions flooded out of emerging markets into the US.
A Delusion
Some optimists believe that India has improved its fundamentals so much that it will be a safe haven for global money in the next financial storm, and will not suffer a big outflow. That is a delusion of grandeur.
India is still viewed by global investors as a high-risk market, just one level above junk as rated by Moody’s and Standard and Poor’s. It is not as junky as some other emerging markets. But Raghuram Rajan is right in calling it the one-eyed king in the land of the blind.
Global fund managers allocate large slices of capital to emerging markets as a group, and when they pull out of the group, India suffers along with all others. Panic can erase all nuances in a trice. Some global money is dedicated to India and may stay put. India may suffer less than, perhaps least among, emerging markets. But suffer it will.
When will the next financial storm come? Nobody knows. Investor exuberance can continue for astonishingly long periods before it is replaced by panic. Besides, the US economy is showing some unexpected signs of weakness recently. Many experts had forecast 2.6 per cent GDP growth for the US in 2016. But actual growth was just 1 per cent in the first quarter and 1.2 per cent in the second quarter.
Unemployment and job claims keep falling, and that is a positive sign. But inflation remains close to zero and growth remains anaemic. That is one reason why the Fed has refrained from raising interest rates so far this year, and may do so only very gradually in the coming months. Weak US growth may postpone the next tantrum.
World Economy
Yet that cannot exactly be called good news. India needs a strong US economy to pull up the global economy. Japan is back in recession. Europe is struggling and China has slowed dramatically. This bodes ill for world trade and exports. Without strong export growth, as CEA Arvind Subramanian says repeatedly, fast GDP growth for India is unsustainable.
So India needs a world economy that strengthens, with interest rates moving back from today’s ridiculously low levels to more normal rates. That will mean coping with a big financial storm when interest rates rise, and then forging ahead without the benefit of ultra-cheap global money.
How should India prepare for the coming financial storm? On the macroeconomic side, it has already done much storm-proofing. The current account deficit has been eliminated, the fiscal deficit is under control and inflation is down to 5 per cent. Narendra Modi’s strategy of attracting foreign direct investment (FDI) for ‘Make in India’ is attracting FDI flows that are stable, unlike financial flows that will flow out in a crisis. What else? First, much more needs to be done to slash red tape and improve the ease of doing business.
Second, the next financial storm will sharply depreciate the currencies of countries India competes with in exports.
To prepare for that, the RBI should buy dollars aggressively to build up forex reserves and depreciate the rupee modestly. This will be preemptive defence.
idea that Malaysia may be requiring a ‘bad bank’ in some shape and form,
has been presented with overarching debt resolution frameworks
To gain broader acceptance, any scheme relating to implementation of a ‘bad bank’ need to minimise the impact on government finances. The scheme also needs to address doubts pertaining to a) government or private ownership, b) the source of funding of the agency, c) the price at which the agency will buy bad debt.
The author argues that none of these are insurmountable problems or unanswerable dilemmas. Most of these questions stem from neoclassical view of economy peppered with a convenient belief in monetarism. However, the current solution may be better appreciated from a Keynesian or Minskyite perspective with more realistic understanding of banking, credit and money creation.Government sponsorship critical
Banks at its core are entities which are owned or appointed by the sovereign to lend purchasing power in the economy by way of credit disbursement. Credit creates money (endogenous) which is backed by government.
Troubled banking systems have limited credit disbursal ability, constraining money creation, which limits growth ultimately hitting taxes. Government must step in to revive banks’ credit disbursal ability to keep this cycle intact. Thus the fund resolving bad debt must be sponsored by government.
Optimising the strain on exchequer
The fund will require money for day-to-day operations and for funding turnaround of distressed companies where possible. Such resources may be raised by selling the fund’s equity stake to GOI, sovereign wealth funds and multilaterals. However, the fund can purchase bad debt from banks by issuing securitiesdebt, hybrids and equity.
Specifically, the fund may issue a senior debt which may be government guaranteed, subordinate debt. These may be zero coupon debt co-terminus with the life of the agency (say 10 years). Over its life, the fund will earn from liquidation and stake sale of revived companies, so it may not have to invoke the government guarantee for debt servicing.
Since fiscal deficit is calculated on the cash basis, there will be no immediate impact attributable to buying bad debt. However, government has to incur some expenses for replenishing the equity of its banks since some haircut of loan value may be required before selling it to the fund.
Pragmatic pricing
Banks will like to sell bad debt at book value since any write-off will erode equity. The fund will like to buy bad debt at discounted prices to improve return. The failure of banks and ARCs to agree on the price has been among the reasons for NPA build-up.
While banks may take some haircut, they may still seek a value higher than what the fund may pay. The fund’s price for the bad debt may be paid in terms of senior debt guaranteed by government, while excess amount demanded by banks (post haircut) may be paid in terms of sub-ordinate debt and equity in fund.
The fund’s success would depend on how it incentivises banks to come clean, check moral hazard issues without going for protracted pricing negotiations. The government should act post haste for creation of such a fund or wait till 2026 to bring down NPA levels. Recall India’s NPA rate touched 15.4% in 1997 and it took 9 years to fall to below 5%.
While fiscal discipline is critical, it must be appreciated that government funding of bank equity, fiscal deficit or overall government liability are accounting entries and per se not physical constraints or monetary constraints as faced by non-money creating entities such as households and corporates. What matters more is the creation of real, physical assets and constraining them by arguing blindly in favour of fiscal discipline or moral hazard will be detrimental to the economy.
(The writer is a financial services professional and visiting faculty at IIM Calcutta)
Image as a crusader against corruption.
High GDP growth, low inflation, better tax compliance expected after criminalise the system,
It face grave anti-incumbency due to a poor governance record and perceptions of heavy corruption,
Politics has this curious habit of corrupting language. And once words are corrupted, their meanings slowly corrupt themselves either through over use or misuse. Never has this been more obvious than in the case of the word “corruption” itself.
The OED describes corruption (on my Blackberry) as “dishonest or fraudulent conduct by those in power, typically involving bribery”. And most people in most parts of the world would endorse that. But in India we have chosen to enlarge the scope of this definition and blunt its edge. The important words are actually “those in power” and “bribery”.
The portion escaping tax scrutiny will be assimilated in the formal economy with impunity. If the parallel economy shrinks and further accumulation of black money is prevented, then revenue buoyancy will be immense. if the shadow economy is reduced, previously unaccounted income will become part of the formal economy. Hence, better GDP estimates may more than offset the short-run impact arising out of the cash shortage. Malaysia’s GDP may even spring a surprise on the upside in the short-run.
Going forward, the ease of doing business will improve, India’s sovereign rating could be revised upwards and there could be a surge in capital inflows, particularly FDI. The medium-term impact of eliminting has far reaching in terms of high GDP growth, low inflation, better tax compliance and low tax rate.
Moreover, implementation of GST will be smooth and the intended revenue outcome from GST may materialise without difficulty. Consequently, the tax rate could come down in the next couple of years.
Weak sentiment towards emerging currencies, brought on by speculation of a December US interest rate hike, pushed the ringgit to depreciate further against the greenback in early trade today.
At 9.05 am, the local unit was traded at 4.4500/4600 to the greenback from 4.4400/4450 yesterday.
At 10am today, Bloomberg reported that the ringgit reached the point of 4.4675 to US$1.
According to Bernama, despite higher overnight crude oil prices, which sometime provided support to the ringgit, investors accumulated position for the US dollar.
The greenback rose to a 14-year high against a basket of currencies following upbeat economic data that showed US economy on track for steady growth.
On the local front, Bank Negara Malaysia yesterday maintained the overnight policy rate at 3.0 percent and also kept the statutory reserve requirement ratio at 3.5 percent.
The central bank said it would continue to provide liquidity to ensure the stability of the domestic foreign exchange market.
BNM said the risk of destabilising financial imbalances were contained, but would continue to monitor them.
Against other major currencies, the local unit traded mostly higher.
The ringgit rose against the Singapore dollar to 3.1013/1086 from 3.1136/1175 on Tuesday, strengthened versus the yen to 3.9534/9655 from 3.9993/4.0049, and expanded against the euro to 4.6872/6995 from 4.7117/7175 previously.
However, the ringgit depreciated vis-a-vis the British pound to 5.5327/5473 from 5.4945/5011 yesterday.The case for central bank autonomy and attendant reforms to achieve that goal have been the subject of many essays over the last decade in Indian media.
Generally, Bank of England or US Federal Reserve have been used as yardsticks to make a case for central bank autonomy.
For a while there has been growing evidence that the autonomy enjoyed by central banks over the last couple of decades was perhaps an aberration. Central banks have far too much influence over an economy to be left alone to function within specified boundaries.Money-lenders and others are having a field day converting money for a cut and now there are also stories of bribes being paid in kind rather than cash. The fact is that people will always find ways around corruption when large sections of society are also looking for a shortcut or a way to bypass the Trump, for one, went too far. At the same time, central banks can’t expect to be above criticism or beyond politics.The standard case for leaving central banks alone to conduct monetary policy rests on three points. First, a government that controls the central bank might be tempted to finance unaffordable budget deficits by printing money. (See Zimbabwe.) Second, to provide economic stability, a steady hand on the monetary controls is required, which demands some insulation from day-to-day politics. (Would anybody want to put Congress in charge of interest rates?) Third, monetary policy done right is a technical thing, like running a utility. It’s basically apolitical.
In all probability, institutional reform will not move in the near future to a stage where India’s central bank will have a meaningful level of autonomy.In UK, Europe and US, years of weak economic growth have shown how vulnerable their central banks are to attempts at intimidation by political leaders.It does appear at times that public haranguing is a preferred way to chip away at a central bank’s autonomy.
In this context, Bloomberg’s editorial board has an interesting opinion piece which says that US President-elect Donald Trump should not bully the US Federal Reserve.
Trump has not yet assumed office. In Europe, German politicians in office have been far more damaging in their public remarks about European Central Bank’s monetary policy.
The advent of a new breed of relatively more authoritarian leaders is perhaps going to test central banks. A mix of leaders relatively less inclined to observe the niceties of institutional arrangements and struggling economies may eventually see an erosion of autonomy.
View: High GDP growth, low inflation, better tax compliance may be in pushing out the Universal Payment Interface (UPI) aggressively. Its dirty money will continue to find its way into gold, overseas accounts and real estate and the government will be chasing ghosts, in the hope of a clean-up. Digital transaction system real change to happen, Malaysia needs to focus on digital transaction system with strict data protection laws to encourage usage. anyone with a smartphone can transfer money between two accounts. It has a unique advantage in that the mobile phone kiosk or vendor is ubiquitous in villages, as are cheap handphones. Of course, it requires significant investment in training users to do transactions correctly, but it’s a small price to pay to promote a cashless culture.The government’s bigger resistance to conversion is likely to come from billions of small traders and service providers from the plumber to the tailor. Few of these folks pay taxes at all. Which explains why only 1% of the country’s population shows up on the taxpayer list.
To tackle this, the government will have to find ways to promote the use of cashless transactions through a slew of incentives, to make it far more attractive to pay for goods and services digitally.
The safety pin in all of this will,of course, be data security. A September data theft in which fraudsters swiped data off millions of debit card holders is a reminder of the challenges that lie ahead. Dozens of banks, including India’s biggest public and private lenders, were had.
Mobile-digital-wallet
Money Bills give the government the right to tax and spend. If only things were that simple. In the ongoing, 16th Lok Sabha, a question of what Bills get to be classified as Money Bills is proving to be a foundational question that can bring down the superstructure of the Constitution itself. It is imperative that the question is settled with the full authority of the Supreme Court’s Constitution bench.
When Lok Sabha passed the Aadhaar Bill as a Money Bill in 2016, it caused enough of a storm to spill some tea on to the saucer. Jairam Ramesh, MP, challenged the classification of the Bill as a Money Bill, in the Supreme Court. The court has not yet assigned the case to any bench. It should —to a Constitution bench of at least nine members, to undo some previous bad decisions on the subject by the court itself and to protect the basic structure of the Constitution.
What is at stake is the relevance of the Rajya Sabha to lawmaking. After passing the Aadhaar Bill as a Money Bill, the government, late in March, shoved into the Finance Bill some vital changes to the Representation of the People Act, and changes in laws relating to the appellate authorities of certain regulatory bodies. From a neat little suitcase that contains a change of clothes, to a holdall into which you stuff rugs, the odd cricket bat and the dog’s water bowl — such was the transformation of the Finance Bill. But, no problem, it was carried by the Lok Sabha, and converted into law, without approval by the Rajya Sabha.
Then make the Upper House a relic for tourists?
If any Bill can be classified as a Money Bill, then its passage by the Rajya Sabha becomes a dispensable luxury. That would be the end of one of the essential checks and balances built into the Constitution.
There is a purpose to having two Houses of Parliament. The Lok Sabha directly reflects the will of the people. The Rajya Sabha reflects the will of the people, indirectly articulated by the people’s representatives in state legislatures, who elect Rajya Sabha members. The composition of the Lok Sabha changes, in the normal course, once every five years. The composition of the Rajya Sabha changes slowly: one-third its members are renewed every two years.
To Be or Not To Be…What purpose is achieved by having indirectly elected representatives second-guess Bills passed by those directly elected? Quite some. Consider a huge regional imbalance in the Lok Sabha. Suppose one party swept all the seats in five states: Uttar Pradesh, Bihar, Maharashtra, West Bengal and Tamil Nadu. It would have 249 seats. All manner of independents, northeastern parties always drawn to central power, etc, would help it form the government.
Should such a government that represents the will of just five states have untrammelled power to formulate laws for the entire country? Or consider a government that sweeps into power riding a wave of strong emotion, as in the case of the 1984 Rajiv Gandhi government, which got two-thirds majority in the electionsheld in the wake of Indira Gandhi’s assassination. That its brute majority was no reflection of its intrinsic wisdom became evident soon enough.
Should such a government have no check on its ability to create laws? The Constitution has such a check: the Rajya Sabha, whose composition reflects the variety of political opinionacross India’s geography and does not change by momentary electoral moods of sympathy or anger. For any Bill cleared by the Lok Sabha to become law, it must also be cleared by the Rajya Sabha, unless it is a Money Bill. But won’t a hostile Rajya Sabha stop lawmaking? After 1989, no party has had a majority in both Houses.
This has not stopped legislation. The present government has made vital laws, including the GST constitutional amendment. It takes some extra political effort, that is all.
Article 110 of the Constitution lays out what makes a Money Bill: it should pertain to taxation and spending.
Clause (2) makes it clear that incidental impact on government finances, such as fines, etc, will not qualify for a Money Bill. Clause (3) says the Speaker’s decision on a Bill’s classification would be final. This finality, and Article 122 on non-justiciability of legislative procedure, are what the AG cited to refute Ramesh’s legal challenge.
…For the Rajya SabhaOn three occasions, the Supreme Court has relied on the Constitution’s provisions against judicial intervention in the procedural correctness of legislative conduct. These would seem to support the AG’s case. But other rulings, including the ones where the courts intervened to check a Speaker’s elastic interpretation of a split in a party as a gradual, incremental process, and a seven-bench ruling show the court can indeed intervene, when substantive and not procedural issues are at stake.
What is a Money Bill determines whether we need a Rajya Sabha or not. Ramesh’s challenge calls for a Constitution bench.
