union budget 2012-13 25 legal decisions on banking 40 · 2012-05-07 · nhl review march 2012 sbi...

n hlreview

March 2012

SBI

THE BANKER TO EVERY INDIAN

Low-Carbon Growth in a Fragile Decade for the World Economy

Ensuring Food Security through the 'Right to Food'

Legal Decisions on Banking

Europe's Crisis can Hurt India

03131725Union Budget 2012-13

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Highlights of Previous Issues

February 2012


January 2012

Does Governance of the Banking and Financial Services Sector need a re-think?

Shri Diwakar Gupta Managing Director & Chief Financial Officer, State Bank of India

Channelling Financial Savings - To Put India on the Turnpike of Growth

Dr Brinda JagirdarGeneral Manager & Head, Economic Research State Bank of India, Mumbai

How to Improve Productivity ? Smt Rema JTrainee Officer, State Bank of India, Technopark, Trivandrum3rd prize winning essay in SBI Essay Competition - 2011 under Supervising Staff CategorySmt Vrushali Vinod PitreState Bank of India, Marketing Executive, MPST Dharwad (Karnataka), Bangalore Circle, 3rd prize winning essay in SBI Essay Competition - 2011 under Award Staff Category

Legal Decision on Banking Shri Shrikant Khisti Manager (Law), State Bank of India, Administrative Office, Ahmedabad

Macro Prudential Regulation, Systemic Risk Management and Financial Stability – The Basel III

Shri B. MahapatraExecutive Director Reserve Bank of India

Change of Mindset and Attitude is the need of the Day to Enable SBI to become the number One Bank in Every Aspect

December 2011

Economic Policies for Emerging Economies

Shri Ranjan MathaiForeign Secretary, Ministry of Economic Affairs Government of India

The Labyrinths of Employee Productivity Assessment

Shri Karthikeyan NairDGM (Vigilance), State Bank of India LHO Kerala

The Euro Zone Crisis:Its Dimensions and Implications

Dr. M.R. Anand

Shri G. L. Gupta

Shri Ranjan Dash

Economic Adviser, Dept of Economic Affairs (DEA), Ministry of Finance

Asst Director, Dept of Economic Affairs (DEA), Ministry of Finance

Fellow, ICRIER.

Legal Decision on Banking Shri M. Isaac Mohan DassDeputy Manager (Law) SBI, Stressed Assets Management Branch Secunderabad

Livestock Dairy Animal Sector - Retrospects and Prospects

Dr C. L. Dadhich

Shri P. C MeenaHon. Secretary, Indian Society of Agricultural Economics, Mumbai

Scientist, National Academy of Agricultural Research Management, Hyderabad

Litigation Managementin Banks Some Positive Thoughts

Shri Syamjith. PLaw OfficerSBI, SARB, Chennai

Book Review: Hacking Work (Breaking Simple Rules for Smart Results) by Bill Jensen and Josh Klein

Reviewed by Shri Sandeep BhardwajManager (Research) State Bank Academy, Gurgaon

Extent of Price and Production Risk in Crop Gross Revenue Risk

Shri Sumit JainResearch Associate (Finance)National Institute of Bank Management, Pune

State Bank of India Monthly Review March 2012

SBI Monthly Review Editorial Committee

Views expressed in the State Bank of India Monthly Review are not necessarily those of the State Bank of India or its Associates.

1. Dr.Brinda Jagirdar GM, ERD, SBI, CC, Mumbai

2. Shri S.D.Kelkar DGM, Law Dept, SBI, CC, Mumbai

3. Shri Atul Kumar DGM, Vigilance Dept, SBI, CC

4. Dr.A.R.Chansarkar AGM (Economist), ERD, SBI, CC, Mumbai

5. Shri V.S. Dikshit Chief Manager, ERD, SBI, CC, Mumbai

6. Shri Bharat B Sharma Chief Manager, ERD, SBI, CC, Mumbai

7. Shri M.Ramachandran Asst.Manager (Systems), ERD, SBI, CC, Mumbai

Low-Carbon Growth in a Fragile Decade for the World Economy

Prof. Nicholas SternIG Patel Professor & Director India Observatory, LSEChair of the Grantham Research Institute on Climate Change and the Environment London School of Economics and Political Science

Ensuring Food Security through the 'Right to Food'

Dr. Yogesh SuriAdviser (Development Policy), Planning Commission, Government of India

Legal Decisions on Banking Shri M.ManoharanManager (Law), Law Department, SBI, LHO, Chennai


03

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Dr. Brinda JagirdarGeneral Manager & Head Economic Research Dept, State Bank of India Mumbai


Union Budget 2012-13 Prepared by Economic Research DepartmentState Bank of India, Corporate Centre Mumbai

40

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Monthly Review I March 2012

03

A fragile decade for the world economy:

A decade of challenge and risk

Ÿ The global economy faces a decade of great challenges and risks. In this decade

we have to handle:

(I) major macroeconomic structural imbalances (some emerging market

economies exporting relatively 'safe' capital and importing relatively 'risky'

capital);

(ii) debts and deficits in rich countries;

(iii) unfinished financial sector reform;

(iv) fragile growth in many countries;

(v) radical changes in international division of labour and skills that go far beyond

the relocation of low-cost manufacturing that we have seen in the last few

decades;

(vi) beginnings of a new energy-industrial revolution: a much more attractive path

than trying to resuscitate business-as-usual.

I.

1Presentation given by Prof. Nicholas Stern at Reserve Bank of India Seminar, Mumbai on 14th February 2012

1Prof. Nicholas SternIG Patel Professor & Director India Observatory, LSEChair of the Grantham Research Institute on Climate Change and the Environment, London School of Economics and Political Science

Low-Carbon Growth

Fragile Decade in a for the

World Economy

Low-Carbon Growth

in a Fragile Decade for the

World Economy

State Bank of India

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Ÿ

Ÿ

Ÿ

Ÿ

We will do better if we address these great challenges and risks in a coherent and

integrated way (both as issues and as a world), rather than separately.

For example, without a resumption of economic growth in countries most

strongly affected by the financial and economic crises, the issues of deficit and

debt cannot be resolved.

But the path to a resumption of growth must be sustainable, low-carbon and

foster the new energy-industrial revolution.

If we do not move strongly now the flow-stock accumulation process of GHGs

and capital/infrastructure lock-in will likely lead to immense risks.

Changing economic landscape

II. Changing growth and structure

Source: G-24 calculations based on data from World Development Indicators, IMF.

From a presentation by Amar Bhattacharya, G24 Secretariat "Structural

Transformation in the Global Economy and Savings-Investment Trends" 2nd Annual

Sovereign Wealth Funds and Other Long-Term Investors Conference, Paris, France

October 17-18, 2011.

0

10

20

30

40

50

60

70

1980 1990 2000 2010 2015

Perc

ent

G7 EMDCs

0

10

20

30

40

50

60

70

1980 1990 2000 2010 2015

G7 EMDCs

Perc

ent

Share of GDP at Market Prices Share of GDP at PPP


05

Contributions to growth by decade

Rank Country 1980 Country 1990 Country 2000

to to to

1990* 2000 2009

1 USA 26.8% USA 36.0% China 25.5%

2 Japan 21.1% China 9.6% USA 21.5%

3 Germany 4.4% Japan 6.6% India 6.1%

4 UK 3.8% Germany 4.5% Korea, Rep. 3.2%

5 China 3.6% UK 4.2% Brazil 3.1%

6 France 3.2% Korea, Rep. 3.0% UK 3.1%

7 Italy 2.8% France 3.0% Japan 3.0%

8 Korea, Rep. 2.3% India 2.4% France 2.1%

9 Canada 1.8% Canada 2.3% Russian Fed. 2.0%

10 India 1.6% Mexico 2.1% Spain 2.0%

11 Spain 1.5% Italy 2.0% Australia 1.9%

12 Australia 1.2% Brazil 1.8% Canada 1.8%

13 Turkey 1.0% Spain 1.8% Argentina 1.7%

14 Brazil 1.0% Australia 1.5% Germany 1.4%

15 Mexico 0.9% Netherlands 1.3% Indonesia 1.4%

*Not included: Russian Federation nor FSU nor ECA former Communist states, for

1980 to 1990 period.

Source: J.Y. Lin (2011) calculations based on data from World Development

Indicators, World Bank. From a presentation by Amar Bhattacharya, G24

Secretariat "Structural Transformation in the Global Economy and Savings-

Investment Trends" 2nd Annual Sovereign Wealth Funds and Other Long-Term

Investors Conference, Paris, France October 17-18, 2011.

State Bank of India

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Convergence - movement across income groups

0

20

40

60

80

100

120

Number of HIC countries Number of MICs Number of LICs

Source: G-24 calculations based on data from World Economic Outlook, IMF and

World Development Indicators, World Bank. From a presentation by Amar

Bhattacharya, G24 Secretariat "Structural Transformation in the Global Economy

and Savings-Investment Trends" 2nd Annual Sovereign Wealth Funds and Other

Long-Term Investors Conference, Paris, France October 17-18, 2011.

The new energy-industrial revolution and low-carbon growth

Ÿ Unless the world embarks now on a new energy and industrial revolution and a

transition to a low-carbon economy and society, it will be very difficult to

manage the huge risks of climate change.

Ÿ An attempt at high-carbon growth will kill itself as a result of the hostile

environment it will create - probably hundreds of millions displaced. Likely

consequences are extended, severe and global conflicts. It is not a credible

medium-term option for growth.

Ÿ India is particularly vulnerable to the impacts of climate change with its large

fraction of the population near the coast, its pressures on water supply, its

dependence on the Himalayan region as a water source and on the patterns of

monsoons, and the location of the many populous countries along its northern

borders.

III. A new energy-industrial revolution


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Ÿ Will require strong action in all regions of the world, including India, and in all

economic sectors.

Ÿ To achieve the 2ºC target (50-50), world emissions must be cut by a factor of

close to 2.5 (from nearly 50 billion tonnes in 2010 to around 44 billion tonnes in

2020, to around 30-35 billion tonnes in 2030, and to well below 20 in 2050).

Ÿ If world output grows by a factor of 3 over this same period, then emissions /

output must be cut by a factor of 7 or 8.

Ÿ Surely an industrial revolution by any definition.

Ÿ New industrial revolution and the transition to low-carbon growth constitute a

very attractive path.

Waves of innovation

Source: DONG Energy (2009); diagram based on Perez (2002) drawing on report

by Merrill Lynch (2008) (schematic not precise quantitative vertical axis).

Ÿ Likely to bring two or three decades of dynamic, innovative and creative growth,

and large and growing markets for the pioneers.

Ÿ Probably similar, or larger, growth effects, to railways, electricity, IT in earlier eras.

Ÿ When achieved, low-carbon growth will be more energy-efficient, more energy

secure, more equitable, safer, quieter, cleaner and more bio-diverse. Far more

attractive than what has gone before.

Ÿ Great potential to improve India's living standards and quality of life, especially

for local communities and the poorest in Indian society.

State Bank of India

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Ÿ Fortunate that will overlap with waves of technical change in ICT, e.g. TCS port

and railway management systems.

Ÿ At a local level, technological advances and rapid cost reductions in solar power,

and micro-finance initiatives, present a real opportunity to bring electricity to

people without power.

Ÿ Decentralised solar power, e.g. SELCO, avoids many of the costs and problems

around traditional high-carbon infrastructure such as grid connection and

exploitation.

Ÿ Decentralised renewable power provides both low-carbon electricity and

empowers local communities. It can enable both children and adults to study at

night. It can enable women to manage business and family.

Ÿ We should not pretend that such changes would be easy. There are many barriers,

including vested interests.

Ÿ However, none is insurmountable, and overcoming these obstacles is part and

parcel of the transition towards a more sustainable low-carbon development

path.

Ÿ Grameen Shakti, Chairman Muhammad Yunus, selling solar units strongly in

Bangladesh at $1/w. They say they could cover the country at $0.50/w.

Ÿ Suntech, CEO Zhengrong Shi, have divided capital cost by a factor of 5 or 6 in

last 5 years. Currently around $1/w. could fall to around $0.50/w in next few

years.

Ÿ Sustainable Energy for All plans to achieve universal access to modern energy

services, double the global rate of energy efficiency improvement, and double

the share of renewable energy in the global energy mix by 2030. Benefits for

development, mitigation and adaptation.

Ÿ Solar can empower the 1.3 billion without access to electricity. Around 290

million in India (IEA, 2011).

Source: IEA, World Energy Outlook 2011, IEA/OECD, Paris


09

Total world new investment in clean energy p.a. 2004-2011

Source: BNEF, Global Trends in Clean Energy Investment - Q4 2011 Fact Pack.

http://bnef.com/free-publications/presentations/ (Note: includes government R&D

- less than 2% of the total in any given year).

Ÿ Developing countries around 1/4 to 1/3 and rising rapidly.

Ÿ The current crises present a unique opportunity: now is the time to invest for

low-carbon growth in countries with unemployed resources. These periods

happen rarely.

Ÿ Government policy can "create viable new markets, boost private investment

and innovation, and stimulate the economy without requiring large public

expenditure" (Zenghelis, 2011).

Ÿ The private sector in developed countries is sitting on record levels of savings -

perceive a lack of profitable investment opportunities and lack of confidence in

government policy.

Ÿ Good (clear and credible) public policy to correct market failures can restore

confidence in developed countries and leverage large private investment

opportunities with little threat of crowding out.

IV. Low-carbon growth and the crises

State Bank of India

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Promoting low-carbon growth

Ÿ Will require government instruments that cover public-risk - clear role for a

Green Investment/Infrastructure Bank.

Ÿ Real risk-free short- and long-term interest rates are around zero for

governments (venture capitalists looking for 30%+).

Ÿ This is about correcting long-run market failures: GHGs, R&D, capital markets,

networks, information, co-benefits - this is improving markets by correcting

failures and fosters private sector investment.

Ÿ A low-carbon investment strategy will lay the foundations for more sustainable

and low-carbon growth.

Action: short-run v long-run

Ÿ Governments will spend if disaster imminent but not if catastrophe is some way off

Source: IDEAglobal; calculations

Ÿ 2% of world GDP (likely necessary investment) is around $1,200 billion. Vast

majority would be private sector and would have large co-benefits (energy

security, new technologies, cleaner, quieter, more bio-diverse…) beyond

reduced risks of climate change.

Opportunities for the developing world

Ÿ Developing world main source of emission flows and faces biggest risks of

climate change.


11

Ÿ Major moves in big developing countries are under way (China's 12th 5-year

plan, India's Solar Mission, Brazil's 75-80% cut in deforestation over last 7

years). Also in Africa.

Ÿ Low-carbon industries and skills building rapidly in developing world (Solar in

China e.g. Suntech; Biofuels in Brazil; wind-power in India e.g. Suzlon).

Ÿ Opportunities to promote south-south investment flows.

Ÿ Patterns of emissions strongly influenced by a changing world economy.

V. Where are we heading?

Source: UNEP, 2011, Bridging the Emissions Gap, Chapter 1 Annex; own

calculations.

Time to think more radically

Ÿ China and Korea in their reflationary packages of 2009 had the strongest green

elements of any of the packages.

Ÿ China heading to 12 billion tonnes CO e in 2020 and possibly 15 billion in 2030. 2

Ÿ For a 2 degree (50-50) path world emissions must come down from around 50

billion tonnes today to around 44 in 2020, to below 35 in 2030, and to well below

20 by 2050.

Ÿ Current plans look like shaded area, plateauing at 50 at best.

State Bank of India

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Ÿ Will China peak in early 2020s?

Ÿ India heading for 6 in 2020. Will India peak during 2020s?

Ÿ Will rich countries accelerate?

Risks

Ÿ Coming decade full of great opportunities but also great risks.

Ÿ Rich countries at risk of prolonged stagnation; may be protectionist.

Ÿ Emerging market countries growth may slow from reduced external

opportunities and internal tensions.

Ÿ Emerging market countries may fall out amongst themselves and fail to

collaborate.

Ÿ Challenges of management of urbanisation.

Ÿ Rapid population growth in Africa.

Ÿ May lock-in so much high-carbon capital and infrastructure that 2°C is out of reach.

Opportunities

Ÿ There is a different path if policies are sound and there is international

collaboration.

Ÿ Sensible growth policies in rich countries focused on low-carbon growth,

investment and sound path to fiscal responsibility.

Ÿ Structural transition in China towards consumption and low-carbon, strong

infrastructure investment in India and growth oriented - macro together with

better public service delivery.

Ÿ World leadership from China, India and emerging/developing nations on

international macro, trade and the new energy-industrial revolution.

Ÿ They have become powerful before becoming rich. Their leadership essential to

their own and world progress. But no substitute for rich countries taking their

responsibilities.

Ÿ Vital decade for the world - India must look outwards for collaboration as well as

inwards for reform to sustain growth and development.

VI. Conclusions


13



Dr. Brinda JagirdarGeneral Manager & Head Economic Research Dept,

2State Bank of India Mumbai

"There's a battle outside, and it is ragin'; It'll soon shake your windows and rattle

your walls for the times they are a-changin'."

- Bob Dylan

ften, difficult times throw up innovative solutions, which at first may not

be obvious and could even appear to be contradictory. For instance, in the

context of fixing the complex Euro Zone problem, given excessive

government debt, one phrase that has cropped up is 'expansionary austerity' or

'expansionary contraction'. Doesn't the call for fiscal tightening fly in the face of

economic logic if the European governments are, at the same time, trying to

stimulate the economy and create more jobs as well?

Fiscal consolidation

This issue was also discussed at the RBI's Second International Research

Conference at Mumbai recently. Fiscal consolidation is widely seen as a necessary

condition for long-term growth, but is it also a sufficient condition? While there is

enough theoretical and empirical evidence to show the positive effects of fiscal

consolidation on long-term growth, the present situation also demands some fiscal

leeway to support the fragile recovery.

It was pointed out by some speakers at the conference that focusing on fiscal

consolidation by cutting unnecessary expenditure and improving efficiencies in 2This article was published in The Hindu-Business Line Newspaper on February 16, 2012.

O

State Bank of India

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spending with better targeted spends on, say education, transfers, and healthcare,

along with selectively cutting taxes to stimulate demand, could achieve the same

objective. Ultimately, the problem of debt overhang can only be resolved through

growth which can be achieved by improving efficiencies and eliminating flab, but

not clamping down on government spending altogether. So fiscal consolidation in

this sense is seen as supporting austerity while remaining kind-of expansionary.

ECB's intervention

Another unorthodox development has been the swift and aggressive intervention by

the European Central Bank through its three-year LTROs (long term refinancing

operations) in December 2011 and proposed second tranche later this month, to

prevent immediate and sharp deleveraging by European banks.

The ECB awarded €489 billion ($643 billion) in 1134-day loans on December 21,

2011 (maturing on January 29, 2015) to prevent credit markets from freezing up as

Europe's debt crisis made banks wary of lending to one another and drove up

borrowing costs. Takers included 523 banks (but not Deutsche Bank), whose

wholesale funding needs were met with their LTRO cash at ECB's benchmark

interest rate (currently 1 per cent) over the period of the loans.

European banks are borrowing to meet their maturing obligations rather than for

releasing funds into the economy. This could hurt India's exports to Europe. Capital

flows into India may be affected as well.

Europe accounts for a fifth of India's exports. A setback in demand can cause BoP

problems.


15

The ECB's latest monthly bulletin shows that refinancing needs was the main

motive for banks taking the funds, and the amount a bank borrowed under the

December LTRO was found to be positively co-related to the amount it has to pay its

own creditors in the next few years.

Some estimates suggest that around €1,700 billion of bank debt will be maturing

from 2012 to 2014; so European banks are borrowing to refinance these loans rather

than taking in new investments that have to be funded.

Moreover, as regulators tighten capital requirements, some estimates suggest

European banks may have to offload assets worth $1.3-6.6 trillion for maintaining

their capital adequacy levels, affecting their capacity to grow their loan book.

The second tranche of LTROs for 1092 days is to be allotted on 29 February 2012

(maturing on February 26, 2015) and is expected to be around the same size (at least)

as LTRO-1.

So, despite this flood of money being released by the ECB, there is every possibility

that European banks could turn off their credit taps in Asia. Quite likely too, if one

goes by the ECB's latest bank lending survey published on February 1, 2012.

The survey finds that banks across the euro area see improvement in access to

wholesale market funding, reflecting the effectiveness of ECB's LTRO. However,

notwithstanding this, European banks in the survey have reported tightening their

loans to companies as well as households.

This increases the risk of further cut in credit lines to Asia. BIS data also show that

European bank claims on Asia (ex-Japan), which stood at 54 per cent of total foreign

bank claims on the region, fell 4.2 per cent in Q3 2011, against a 4.2 per cent rise in

Q2 2011.

Weak exports

What do these developments imply for India? Overall, exports from Asia are

showing considerable weakness while those from Latin America and Eastern

Europe appear to be holding up. One reason could be that most lending by European

banks to Asia is direct bank-to-bank lending in the form of trade finance and is thus

closely related to the region's exports.

Deleveraging by these banks in tandem with a slowing economy in Europe may be

showing up in weak export performance in Asia.

EU is India's largest trading partner accounting for around one-fifth of India's total

exports. With exports set to moderate on the back of slowing demand from EU,

aggravated by government budget cuts and bank deleveraging, our current account

deficit could widen.

State Bank of India

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As over three quarters of India's exports to EU emanates from the manufacturing

sector, this likely dip in export demand could put pressures on domestic industrial

production.

Markets world-wide remain edgy and future trade and investment flows will depend

on how the Euro Zone debt crisis gets resolved. Capital inflows into India could be

affected as European banks continue to borrow to meet their maturing obligations

rather than expand lending for fresh investment.

Therefore, the fear that India could be swamped by global liquidity as central banks

in advanced economies eye the quantitative easing route, may not materialise, but

we still need to be alert to hot money flows and their propensity to create asset

bubbles.


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EnsuringFood Security through the 'Right to Food'

EnsuringFood Security through the 'Right to Food'

Dr. Yogesh Suri

Adviser (Development Policy), Planning Commission,

3Government of India

3 The views expressed are personal

Introduction

Article 47 of the Indian Constitution

provides that the State shall regard

raising the level of nutrition and the

standard of living of its people and the

improvement of public health as among

its primary duties. The Universal

Declaration of Human Rights and

International Covenant of Economic,

Social and Cultural Rights, to which

India is a signatory, also cast

responsibilities on all State parties to

recognize the right of everyone to

adequate food. Eradicating poverty and

hunger is also one of the goals under

the Millennium Development goals of

the United Nations.

State Bank of India

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nsuring food security for a vast majority of the population has been one of

the thrust areas of the Government ever since Independence. Over the last

six decades, policies and programmes have been designed to ensure

adequate availability of foodgrains for all segments of society, particularly the

vulnerable sections. The main constituents of India's food security policy have been

(a) Enhancement of agricultural production; (b) Ensuring Minimum Support Prices

for farmers and procurement & management of foodgrains; (c) Distribution of

foodgrains to targeted population at subsidised prices; and (d) maintaining buffer

stocks and strategic reserves to meet contingencies. All these measures have

collectively endeavoured to ensure food security for the vast population besides

contributing to containment of rise in food prices over these decades.

Despite a number of measures taken towards the food and nutritional security, the

problem of poverty and hunger continue to be a cause of serious concern for the

Government. In the recent Global Hunger Index (GHI) 2011 Report released by the

International Food Policy Research Institute (IFPRI), India has been ranked at 67th

Position among 122 countries. Thus, there is an utmost need to improve the

nutritional status of the population, especially women and children, through

concerted intervention by the Government so as to enhance the quality of human

resources and reap the demographic dividend.

Public Distribution System (PDS) of essential commodities has been in existence in

India since the inter-war period. PDS with focus of distribution of foodgrains in

urban scarcity areas had emanated from the critical food shortages of the 1960s. In

the aftermath of Green Revolution, its outreach was extended to other areas with

high incidence of poverty. Till 1992, PDS was a general entitlement scheme without

any specific targeting. It was replaced by revamped PDS in 1992 in select blocks and

further replaced by Targeted Public Distribution System (TPDS) in 1997. The major

reasons for switching over to TPDS were (i) ensure greater availability of foodgrains

for people living below the poverty line, (ii) reduce urban bias and enhance coverage

in States with high concentration of rural poor, (iii) induce greater transparency and

accountability in delivery mechanism, and (iv) rationalise food subsidy.

The objective of the TPDS is to allocate higher quantum of foodgrains for the poor

and vulnerable sections at highly subsidized rate. Under TPDS, population is

divided into two categories viz. Below Poverty Line (BPL) and Above Poverty Line

(APL). Within BPL, there is a sub-category called Antyodaya Anna Yojana, deemed

to be highly vulnerable section or poorest of the poor. BPL families, including AAY

category are presently provided with 35 Kg of foodgrains per family per month

while allocations for APL families are made between 10-35 Kg per family per month

Public Distribution System in India

E


19

depending upon availability of foodgrains in the central pool and the past off-take.

Central Issue Prices (CIPs) for AAY families is Rs.2 per Kg for wheat and Rs.3 per

Kg for rice; for BPL families, it is Rs.4.15/ Rs.5.65 per Kg for wheat/ rice; while for

APL families, issue prices are Rs.6.10/ 8.30 per Kg for wheat/ rice. These prices are

significantly lower than the economic costs of Rs.15.81 per Kg for wheat and

Rs.20.69 for rice (Budget Estimates for 2011-12) and the amount in excess of issue

prices is borne as food subsidy by the Government. These CIPs have remained

unchanged since July 2000 for AAY/ BPL families and since July 2002 for APL

families. The retail issue prices (except for AAY category) are, however, fixed by the

States/UTs after taking into account margins for wholesalers/retailers,

transportations charges, levies, local taxes, etc. Under TPDS, allocations are

presently made for 6.5 crore BPL families including 2.5 crore AAY families and

about 11.5 crore APL families. Inter-state distribution of foodgrains is made by the

Central Government based on the poverty estimates of the Planning Commission.

TPDS operates through the vast network of about 5.06 lakh Fair Price Shops (FPS),

which is the largest network of this kind in the world. During 2011-12, the total

allocation of wheat and rice, including for other welfare scheme is estimated at

around 55 million tonnes. Another important feature is that the implementation of

TPDS is a joint responsibility of Central Government and State Governments/ UT

Administrations. The Central Government assumes the responsibility of

procurement and supply of essential commodities, viz., wheat, rice, levy sugar and

kerosene to States/UTs. The responsibility for lifting of allocated foodgrains,

distribution to consumers through FPS and administration of TPDS including

identification of beneficiaries, issue of ration cards, etc., vests with the State

Governments/ UT Administrations.

Nevertheless, the TPDS in its existing form is afflicted by many problems such as

the inclusion/exclusion errors in identification of beneficiaries, deemed caps on the

number of beneficiaries on account of linkages to poverty estimates, leakages/

diversions of foodgrains, less commodity coverage, non-viability of FPS, and so on.

In order to address these issues, a number of measures have been taken by the

Government for streamlining and undertaking reforms in the TPDS. A 9-point

Action Plan was also evolved in 2006 which is under implementation and the results

have been quite encouraging. Some of the focus areas for strengthening the

functioning of TPDS include better monitoring mechanism and vigilance, increased

transparency in functioning of TPDS, adoption of revised Model Citizen's Charter,

use of Information and Communication Technology (ICT) tools, improving the

efficiency of Fair Price Shop operations, etc.

State Bank of India

20

National Food Security Bill, 2011

The President of India, in her address to the Joint Session of Parliament in June 2009,

inter alia, announced that a new Act, the National Food Security Act will be enacted

to provide a statutory basis for the framework which assures food security for all.

Enacting a separate Legislation for this purpose is in continuation with

Government's policy of providing rights-based approach which had made good

progress in empowering people in areas such as Right to Work through Mahatma

Gandhi National Rural Employment Guarantee Scheme, Right to Information and

Right to Education. The National Food Security Bill has been introduced in the

Parliament in December 2011 and is currently under examination by the

Parliamentary Standing Committee on Food, Consumer Affairs and Public

Distribution.

The Bill seeks to provide food and nutritional security, in human life cycle approach,

by ensuring access to adequate quantity of quality food at affordable prices, to

people to live a life with dignity. The Bill provides legal entitlements for subsidized

foodgrains for upto 75% of the rural population (with at least 46% belonging to the

priority households) and upto 50% of the urban population (with at least 28%

belonging to the priority category). As per the Bill, it is proposed to provide 7 kg of


21

food grain per person per month for priority households at prices not exceeding

Rs.3/2/1 per kg for rice/wheat/coarse grains, respectively; and not less than 3 kg of

foodgrains per person per month for general households at prices not exceeding

50% of the Minimum Support Prices (MSP) (derive price for rice, since MSP is

fixed for paddy). The Bill contains measures for providing food and nutritional

support to women and children, besides providing meals for special groups such as

destitute, homeless persons, emergency/ disaster affected persons and persons

living in starvation. There is also a provision for providing maternity benefit

allowance of Rs.1000 per month for a period of six months. The provisions for

reforms in the Public Distribution System and grievances redressal are also the part

of the Bill. Enabling provisions have been made for revitalizing agriculture, broad

basing/ decentralised procurement, augmenting storage capacity, access to safe

drinking water, sanitation, healthcare, nutritional and educational support for

adolescent girls, pensions for senior citizens/ persons with disability/ single women,

etc. In case of non-supply of foodgrains or meals, entitled persons can also be

provided food security allowance by the concerned States/UT Governments. For

better service delivery, provisions have been made for transparency and

accountability through disclosures of records, social audits, vigilance committees

and penalties for public servants.

In several ways, the Bill can be termed as a historical legislation as it provides the

legal entitlement or the 'Right to Food' for nearly 67% of the population, thus

signifying a paradigm shift in addressing the problems of food security from the

welfare approach to a rights based approach. Though, the TPDS is already in place,

in the food security legislation, deprived persons can claim their share of foodgrains

as a matter of legal right, enforceable through Government agencies and the Civil

Courts. In no part of the world, though there have been some efforts in Brazil, has

such a right been conferred by the State on its citizens through a formal legislation.

Besides, the Bill will play an important role towards women empowerment as it

provides for eldest woman of 18 years of age or above to be the deemed head of the

household for issuance of the ration card. Only if such woman is not available, eldest

male member would be considered.

One of the major problems faced in the existing TPDS is the right identification of

beneficiaries. The National Food Security Bill provides that within the state-wise

number of persons belonging to priority and general households, identification of

priority and general households is to be done by the State Government or any such

agency as may be decided by the Central Government, provided that no households

meeting the exclusion criteria will be included either in the priority or in the general

Proper Identification of Beneficiaries

State Bank of India

22

category. Further, as per the joint statement issued by the Minister of Rural

Development and Deputy Chairman, Planning Commission in October, 2011,

Government proposes to decide on coverage and entitlements under different

schemes/programmes including the TPDS, based on the results of the ongoing

Socio-Economic and Cast Census (SECC), 2011. The coverage is, therefore,

proposed to be delinked from the poverty estimates of the Planning Commission.

Further, Ministry of Rural Development and Planning Commission will consult

State experts and Civil Society to arrive at a consensus on the methodology to ensure

that no poor or deprived household is excluded from the coverage under different

Government programmes including the proposed National Food Security Bill.

Once identified, the lists of such eligible persons are expected to be put in the public

domain for wider information and cross verification.

Addressing food security concern for nearly two-thirds of the country's population

by providing foodgrains at highly subsidized prices would necessarily require large

amount of food subsidy. The report of the Working Group on Reforms in PDS and

Better Targeting of Food Subsidies during the 12th Plan period, has estimated that

the total food subsidy under TPDS and other welfare schemes of the Government can

increase from about Rs.65,000 crore in 2010-11 to about Rs.1.8 lakh crore by the end

of the Twelfth Plan assuming 10% increases in MSPs, no increase in Central issue

prices for priority households and 100% offtake. Besides, there would be attendant

costs of other entitlements under the Bill such as the maternity benefits, new

schemes of special groups, expenditure on transport/ storage/ handling foodgrains,

enhanced investment in agriculture, restructuring Integrated Child Development

Scheme (ICDS), etc. Of-course, actual requirement of food subsidy would be lower

since off-take can rarely be 100% and with the help of advance technology, proper

targeting and de-duplicating of beneficiaries, significant amount of subsidies can be

saved. Further, Government retains the right to revise issue prices, if deemed

necessary, even after the Bill is enacted. Every Re.1 per Kg revision in issue prices of

wheat/ rice for priority and general category can save subsidy to the tune of Rs.6,000

crore, which can be resorted to under extreme conditions.

There would be a lot of challenges that will need to be overcome while implementing

the National Food Security Bill. The first and the foremost challenge will be to

enhance foodgrain production so that the procurement, while not exceeding 30% of

production, increases from the present levels of 55-60 million tonnes to about 65-70

million tonnes, including for requirement under other welfare schemes. Secondly,

since the Government intends to switch over to identification of beneficiaries based

Financial Implications

Roadmap for the future


23

on Socio-Economic and Caste Census, 2011, the entire exercise would need to be

done in a foolproof and transparent manner so as to ensure that no deserving person

is left out of the food security net. Thirdly, the reforms would have to be undertaken

under TPDS in a comprehensive manner by adopting measures such as door-step

delivery of foodgrains, use of Information and Communication Technology (ICT)

including end-to-end computerization of PDS, leverage 'Aadhaar' for Unique

Identification of beneficiaries, ensuring transparency of records, making

information to public, diversification of commodities distributed under PDS,

putting in place effective machinery for social audit and grievance redressal, and so

on. In other words, one can say that a massive Business Process Re-engineering

exercise may have to be conducted so as to make the entire PDS system more

efficient.

It is important to note that Government's efforts towards computerization of PDS

have already brought about remarkable results with 2.1 crore bogus cards having

been cancelled during 2006-11, saving subsidy to the tune of Rs.8,200 crore per

year. These steps would need to be carried forward with greater vigour in future. An

important strategy for curbing leakages in the distribution chain can be by supplying

foodgrains under TPDS at near market prices and crediting the differential between

these transfer prices and actual intended prices, directly as cash subsidy into the

bank accounts of the beneficiaries. Today technology has reached a stage where

these measures can be effectively tried. In fact, States like Chhatisgarh, Gujarat and

Andhra Pradesh have done commendable work towards computerization of their

PDS and the results have been very encouraging. Applications of ICT have been

across the supply chain covering measures such as capturing biometric information,

creation of centralized database of beneficiaries, online authentication, issuing bar

coded coupons, use of smart cards, SMS alerts, tracking vehicle movements through

GPS, updated stock position, etc. There is a need to upscale these efforts to the

national level during the Twelfth Plan period.

Government of India has recently given a go ahead to Unique Identification

Authority of India to increase the number of enrolments under 'Aadhaar' to 600

million. Already, the biometric database of UIDAI has crossed 133 million, thus

being the largest biometric database in the world. The Authority is currently

enrolling 1 million persons per day. In February 2012, 'Aadhar' authentication

infrastructure has also been rolled out. Once the utilization of this infrastructure is

implemented in the PDS system, it can make a sea change in the way PDS is

implemented. Broadly speaking, the benefits of 'Aadhaar' for PDS (or any other

programme delivery) can be three fold - first by way of de-duplication of

beneficiaries to ensure that every person has just one entitlement; secondly by

enabling tracking of entitlements and usage through a central system just like bank

State Bank of India

24

accounts; and thirdly by facilitating on-line authentication to ensure that only

genuine beneficiaries are able to draw the ration or other intended benefits. In a

recent report of the Task Force on IT Strategy for PDS, under the chairmanship of

Shri Nandan Nilekani, Chairman UIDAI, it has been proposed to set up of a National

Information Utility called the Public Distribution System Network (PDSN), which

would operate as a technology back-office and central system for Ministry of

Consumer Affairs, Food & Public Distribution; Ministry of Petroleum and the State

Governments. It will provide support in IT-intensive areas such as development,

operation and maintenance of technology, supply chain management, transparency

portal, and electronic payments. The Report is currently under examination by

Government of India.

Last, but not the least, mobilising and managing resources to meet food subsidy and

other financial requirements and ensuring its effective utilization would be of

paramount importance while implementing the National Food Security Bill.

Central and State Governments would have to ensure that FPS operations are viable

so that the incentive for diversions are minimal. Community based organisations

may have to play a larger role in operating the ration shops and all information right

from procurement to final distribution to consumers should be in the public domain.

In case of grievances, efficient three tier grievance redressal mechanism at district,

state and national levels would have to ensure its speedy and satisfactory redressal.

Addressing food security concerns for 12% of the world population through 2.3% of

global land resource and 4.2% of global water resources is, by no means, a small

task. There are a lot of challenges in the process of implementing this largest food

security programme in the world, and the Twelfth Plan period would be the critical

during which all the systems would have to be put in place. This would require

concerted action from all stakeholders be it Central Government or State

Governments / UT Administrations, civil society, technology and other service

providers or the general public. However, once implemented in letter and spirit, the

National Food Security Bill can go a long way in addressing the problems of hunger/

malnutrition and insulating a major section of the society from the vagaries of rising

food prices in the years to come.


25

4Commentary Green Shoots of Pragmatism

The Union Budget 2012-13 was presented against the backdrop of a fragile global

economy, slowing domestic GDP growth (projected at 6.9-7% in FY12) and

inflation (likely 6.5-7% by end-March 2012). The weakness in growth was leading

to supply side constraints, keeping inflation elevated. Structurally, India's high

savings rates have supported investment activity in the country, but, as pointed out

by the Economic Survey presented a day earlier, both savings and investment have

been falling over the last few years.

The overall savings rate has fallen to 32% in FY'11 from 37% in FY'08. Household

savings, which accounts for around four-fifths of the total domestic savings slowed

to 22.8% of GDP in FY'11 from 25% in FY'10, but equally worrying, is the fact that

corporate savings fell to 7.9% from 8.2%. Some mild improvement was, however,

seen in Public sector savings which rose to 1.7% from 0.2%. Equally serious is the

fact that domestic investment rate came down to 35.1% in FY'11 from 36.6% in

FY'10. In this scenario, the Budget was widely expected to give an impetus to growth

while emphasising fiscal consolidation.

The Budget appears more grounded in reality this time with credible fiscal numbers

driven by increase in taxes as well as rationalisation in subsidy, plugging leakages by

Union Budget 2012-13

Union Budget 2012-13

Prepared by Economic Research Department, State Bank of India, Corporate Centre

Mumbai, 21 March 2012

4 Dr Brinda Jagirdar, GM & Head, Economic Research Department, State Bank of India, Corporate

Centre, Mumbai 400021)

State Bank of India

26

expanding direct cash transfers and putting a Medium Term Expenditure Framework

Statement on the table. On the tax front, the proposals will be welcomed: there is no

change in corporate tax, the exemptions in the personal tax area will help

consumption, and long standing demand for reducing STT has been accepted. The

increase in service tax, widening the service tax net through the negative list and

raising excise duty was widely expected and is a realistic step in realigning the

service tax with the share of services in GDP.

The Government is estimated to borrow ` 4.79 lakh crore from the market (net

borrowings) in FY'13, 10% higher than the net market borrowing of ̀ 4.40 lakh crore

in FY'12. The Government will finance about 93% of its fiscal deficit through

market borrowings against 84% in FY'12. Keeping the fiscal deficit down in FY'13

to 5.1 per cent and further to 4.1 per cent in FY14, and 3.9 per cent in FY15, against

5.9 per cent in FY'12, appears to be quite realistic. What adds to the credibility of the

entire exercise is that the lower deficit target is backed by actions to raise revenues,

particularly through tax measures, while rationalising expenditure on subsidy,

though of course we will have to wait to see exactly how the expenditure on subsidies

is brought down to 2 per cent of GDP from 2.4 per cent in FY12.

The steps to kick start the infrastructure sector, which has strong backward and

forward linkages, will have a favourable effect across the economy. Specifically,

doubling the amount that can be raised through tax free infrastructure bonds from

` 30,000 to ̀ 60,000, customs duty relief for import of fuels, addition of more sectors

(e.g. irrigation, terminal markets, LNG storage facilities, soil testing labs, telecom

towers, etc), under the viability gap scheme will give a fillip to infrastructure sector

and support PPP in infrastructure. Allowing joint venture with private companies in

defence production, harmonising the list of industries under the definition of

infrastructure, structure for credit enhancement and take-out financing put in place

by IIFCL are steps that will ease the access of credit to infrastructure projects.

The steps to increase supply in the economy and ease access to funding especially

through the ECB route will give a fillip to industry. The addition of more sectors

under the viability gap scheme is welcome as it will encourage private sector

participation in infrastructure. The steps to expand the access to funding include:

lowering the withholding tax on external commercial borrowings, allowing airlines

and low cost housing companies to access cheaper credit abroad through external

commercial borrowing for rupee expenditure, removing restrictions on where

venture capital firms can invest, doubling the amount that can be raised through tax

free infrastructure bonds and allowing Qualified Foreign Institutional Investors

(QFIIs) into the domestic corporate bond market.

The Budget has proposed several measures to revitalise the capital markets


27

including cut in Securities Transactions Tax which will reduce transaction cost for

mutual funds, making electronic format mandatory for 10% of IPOs worth over 10

crore and allowing 50% income tax deduction for new retail investors with annual

income below 10 lakh investing 50,000 directly in the equity market for a period

of three years to encourage retail participation in the equity market.

The innovative step to create a financial holding company to meet the capital

requirement of PSU banks is welcome, particularly as the allocation of 15,888

crore for recapitalisation of PSBs and RRBs may not be sufficient to support banks'

loan books. The Government's own estimates have indicated a requirement of

35,000 crore every year towards capitalisation of PSBs. Moreover, Basel III

guidelines are expected to come into effect from January 2013, requiring banks to

augment their capital further.

A new feature is the announcement of deduction in respect of annual interest income

up to 10,000 earned from savings bank deposits kept with banks, post offices or co-

operative societies. Savings bank accounts provide a low cost and stable source of

funds for banks, so we can see banks competing to make this product more attractive

by offering higher rates or a range of add-on services. As it is, to earn interest income

of 10,000, customers will have to keep a balance of around 2.5-3 lakh in their

savings bank accounts at the present rate of 4%.

There appears to be a realisation that key sectors need to be supported in order to

incentivise bank lending. Accordingly, an education guarantee fund to ensure

enhanced credit flow for students, a skill guarantee fund to improve the flow of

funds for skill development, a credit guarantee trust fund for affordable housing, and

a 5,000 crore venture fund for micro, small and medium enterprises have been

announced in the Budget.

The increased thrust to agriculture and rural development especially the increase in

subvention for bank lending, as well as focus on infrastructure, housing, education

and financial inclusion, will help revitalise bank credit for these key sectors. In

particular, the subvention for agriculture will incentivise bank lending though

extending the subvention scheme to cover term loans may have been considered.

Banking services in under-banked areas is proposed to be increased further, which

will expand bank lending for agriculture, MSMEs and rural development. The

several lakh Women's Self Help Groups linked with banks will receive a fillip and

particularly benefit rural women in India. Along with agriculture and rural

development, the Budget has focused on infrastructure, manufacturing, housing,

education and financial inclusion, which will help the flow of bank credit for these

key sectors. The Finance Minister's thrust on investment, expanding infrastructure

and skill development, along with efforts to raise agricultural production, will help

`

` `

`

`

`

` `

`

State Bank of India

28

support higher GDP growth and employment, which the Budget is aiming to

achieve.

The market may be disappointed by lack of movement on DTC and GST this time

round, but the tax reforms have not fallen off the radar. The increase in tax

exemption, rationalising tax slabs, tax exemption for small retail investment in

shares, bringing forward the advanced pricing agreement in the Finance Bill, are all

in sync with the wider agenda of tax reforms.

The current account deficit which stood at 2.9% in FY11 is expected to widen to

3.6% in FY12 due to sharp increase in gold imports, which is placed at $58 billion in

FY13 against $33 billion a year ago. Therefore, the Budget has increased import duty

on gold to 4% and with education cess, the figure comes to 4.12%. However, this will

push up the cost of gold jewellery for consumers. According to traders, there is a

possibility of flood of import of gold jewellery from Thailand as the Free Trade

Agreement between India and Thailand allows for import of gold jewellery with

duty under 1%.

Despite these measures, there is some disappointment as we are yet to see a move

towards greater deregulation of fuel subsidies. Overall, while the Budget has not been

populist, it has perhaps missed an opportunity to push for bold economic reforms.

Measures and Implications

Macroeconomic Framework:

Ÿ GDP is estimated to grow by 6.9% in 2011-12, after having grown at 8.4% in

preceding two years.

Ÿ Recovery in the Indian economy was interrupted due to global factors like

intensification of debt crisis in Euro-zone, political turmoil in Middle East, rise

in crude oil price and earthquake in Japan.

Ÿ Monetary and fiscal policy response for better part of past two years aimed at

taming domestic inflationary pressure.

Ÿ Indicators suggest that economy is turning around as core sectors and

manufacturing show signs of recovery.

Ÿ Growth moderated and fiscal balance deteriorated due to tight monetary policy

and expanded outlays.

Ÿ Twelfth Five Year Plan to be launched with the aim of faster, sustainable and

more inclusive growth.


29

2`10,000 crore for NHAI, `10,000 crore for IRFC, `10,000 crore for IIFCL, `5,000 crore for HUDCO,

`5,000 crore NHB, ̀ 5,000 crore for SIDBI,`5,000 crore for ports and ̀ 10,000 crore for power sector

Challenges

Ÿ High inflation rate

Ÿ Rising current account deficit

Ÿ Fiscal consolidation

Ÿ Infrastructure bottlenecks

Ÿ Lower agricultural production leading to food inflation

Ÿ Corruption and black money

Budget at a Glance

Ÿ Total expenditure for 2012-13 budgeted at ̀ 14,90,925 crore

Ÿ Gross Tax receipts estimated at ̀ 10,77,612 crore

Ÿ Net Tax to Centre estimated at ̀ 7,71,071 crore

Ÿ Non-Tax Revenue Receipts estimated at ̀ 1,64,614 crore

Ÿ Plan expenditure for 2012-13 at ̀ 5,21,025 crore is 18% higher than BE 2011-12

Ÿ Non plan expenditure estimated ̀ 9.69,900 crore

Ÿ Fiscal deficit at 5.9% of GDP in RE 2011-12 and 5.1% of GDP in BE 2012-13

Ÿ Net market borrowing ̀ 4,79,000 cr in FY'13 against ̀ 4,36,414 cr in FY'12

Ÿ Divestment target ̀ 30,000 cr for FY'13 vs ̀ 40,000 target; actual ̀ 15500 cr

Ÿ Central Government debt at 45.5% of GDP in 2012-13 as compared to Thirteenth

Finance Commission target of 50.5%

Ÿ Direct transfer of subsidy to retailers and farmers

Measures and their Impact

Measure

For 2012-13 the Budget

has provided `15,888

c r o r e t o w a r d s

capitalization of public

sector banks, regional

rural banks and other

financial institutions,

including Nabard.

Sector

Banking Sector

(I)

Impact

For FY11 the Government had provided

`6,000 crore for public sector banks and

has decided to recapitalize SBI and six

other banks in 2011-12 for a total of

`12,000 crore. Apart from SBI (`7,800

cr), IOB (`1,441 cr), PNB (`700 cr),

CBI (`676 cr), BoM (`470 cr), IDBI

Bank and UCO Bank will receive

capital.

State Bank of India

30

(ii)

(iii)

(iv)

(v)

(vi)

The Government is

committed to protect

the financial health of

public sector banks

a n d f i n a n c i a l

institutions.

Creation of financial

holding company to

raise resources to meet

the capital requirement

of PSU Banks

A central "Know Your

Customer" depository to

be developed in 2012-13

to avoid multiplicity of

registration and date

upkeep.

Individuals allowed

deduction of up to

10,000 in interest `from savings bank

accounts

Scheme of capitali-

zation of weak RRBs

extended by another 2

years to enable States

to contribute their

This, however, may not be sufficient to

meet capital requirement of banks

under Basel-III, which will be

implemented from January 2013. A

Committee headed by the Finance

Secretary has estimated that PSBs

would need 35,000 crore every year

from the Government for the next ten

years to meet capital requirement.

The holding company structure is in

line with the Government's plan to

maintain a minimum stake of 58% in

public sector banks as it may be

difficult to infuse large sums of money

given the fiscal position. While details

are awaited, it appears the Government

would continue to have control of the

bank management, while inducting

external capital into the holding

company.

After money laundering problems, the

move to know your customer has

gathered momentum. The step

indicated in the Budget is a positive

move. The depository will help reduce

the incidence of frauds in banks.

Banks are striving to increase CASA

deposits and bring down the cost of

funds. Positive impact as interest income

up to ̀ 10,000 would be tax-fee.

This will give some more time to States

to arrange for their stake in RRBs. The

move to strengthen RRBs is welcome

as they are engaged in rural finance. A

positive step for financial inclusion.

ImpactMeasureSector


31

ImpactMeasureSector

(vii)

(viii)

(ix)

(xi)

Financial

Sector

(I)

share. ` 100 bn will be

allotted to Nabard for

refinancing Regional

rural banks.

CBS implementation in

RRBs to be speeded up: Out

of 82 RRBs in India, 81 have

successfully migrated to

Core Banking Solutions and

have also jointed the NEFTS.

Credit support to farmers

has been increased:

Target at ` 5,75,000 cr in

F Y ' 1 3 , u p f r o m

` 4,75,000 in FY'12.

Revised guidelines on

priority sector lending to

be issued

Financial Inclusion: Out of

` 7 3 , 0 0 0 i d e n t i f i e d

habitations that were to be

c o v e r e d u n d e r

Swabhimaan campaign by

March 2012, about 70,000

habitations have been

covered. Rest likely to be

covered by March 31, 2012

F i n a n c i a l S e c t o r

Legislation: Amendment

t o P e n s i o n F u n d

R e g u l a t o r y a n d

Development Authority

Bill, 2011, Banking Law

A welcome development as it will

speed up payment system in the

country through electronic mode and

streamline operations.

Banks will be required to lend more

to agriculture. This needs to be

balanced against rising NPAs in

agriculture sector.

It will be beneficial to banks as sub-

target for lending to direct

agriculture lending is likely to be

abolished under revised guidelines.

Financial inclusion is a national

priority. As the next step, banks are

required to open ultra small branches

at these habitations. For 2012-13

Swabhimaan campaign will be

extended to more habitations. Banks

will rely on BC or BF model and

open ultra small branches.

These Bills have been pending for

several years and if these could be

passed by Parliament in the current

session, it will speed up financial

sector reforms and send a positive

sector to the markets.

State Bank of India

32

ImpactMeasureSector

(ii)

(iii)

(iv)

Health

(Amendment) Bill ,

2011 and The Insurance

Law (Amendment) Bill

2008 to be moved in

this session.

Capi ta l and Bond

Market:

(a) Qualified foreign

investors allowed to

invest in corporate bond

market

(b) IPO of `10 crore

and above will only be

in electronic form

Reduction of Security

Transactions Tax on

delivery-based sale and

purchase of shares from

0.125% to 0.1%

Mutual Funds: Rajiv

Gandhi Equity Savings

Scheme to allow for

income tax deduction of

50% to new retail

investors, who invest

up to ` 50,000 directly

in equities and whose

annual income is below

`10 lakh. The scheme

will have lock-in period

of 3 years.

Income tax deduction

of up to ` 5,000 for

p r e v e n t i v e h e a l t h

check-up allowed.

Structural reforms in the domestic stock

market will strengthen primary and

secondary market in India. Development

of strong Bond market will feed long

term requirement of funds for

infrastructure. The measures will help

deepen the corporate bond market

There was a strong demand to abolish STT. This will bring down transaction cost as cost of issuing shares will come

down.

Opens door for more retail investors

from Tier 2 and Ties 3 towns.

Deepening of equity market with

higher retail participation. A positive

move to boost savings rate, which has

fallen below 30% in FY'12. Since banks

are offering demat services, it is

expected that more demat accounts will

be opened during this year which will

increase their fee income.

Positive for health care industry. Will

increase preventive health awareness.


33

ImpactMeasureSector

Education

Tax proposals

Personal

Income Tax

Corporate Tax

Service tax

National Urban Health

Mission is being launched.

C o n c e s s i o n a l b a s i c

customs duty of 5% with

full exemption from excise

duty / CVD to 6 specified

lifesaving drugs / vaccines.

A Credit Guarantee Fund

for education to be set up.

25,555 crore provided `for Right to Education -

Sarva Shiksha Abhiyan

(SSA) representing an

increase of 21.7% over

2011-12.

Exemption limit has been

raised from ` 1,80,000 to

` 2,00,000

New Tax slabs:

Up to 2 lacs Nil` 2 to 5 lacs 10%` 5 to 10 lacs 20%`

Above 20 lacs 30%`

No change in corporate

tax rates.

Tax base widened: all

s e r v i c e s e x c e p t i n

negative list to be taxed;

rate raised from 10% to

12%

This will cover the primary healthcare

needs of people in the urban areas.

Helpful in the treatment or

prevention of ailments such as HIV-

AIDS, renal cancer, etc.

This will ensure better flow of credit

to deserving students and incentivize

education loans being disbursed by

banks.

Over 70% of Indians will be of

working age in 2025. More schools

and education will help to boost skill

based education in the country.

Education is an effective tool of

empowerment for removing social

imbalances.

(I) Upper limit of 20% tax slab

raised from 8 lakh to 10 lakh. ` ` Individual tax payers in the income

bracket of 5-10 lakh are estimated ` to save 12,360 to 22,660 p.a. A ` ` step towards DTC and positive for

middle income group bracket.

Although, there is no change in

corporate tax structure, corporates

will be impacted by 2% increase in

service tax and excise duty.

Will bring most services under the

gambit of Service Tax. Will push up

costs of various services in the

country.

State Bank of India

34

ImpactMeasureSector

Industry

Iron and Steel

Automobile

Cement

Media and

Entertainment

Oil and Gas

Excise duty raised to

12% from 10%

Customs duty cut on

plant and machinery

imported for setting up

or expansion of iron ore

pellet plants from 7.5%

to 2.5%

Full exemption from

basic customs duty.

Excise duty raised from

22% to 27% on large cars.

Deduction of 200% for

R&D extended beyond

March 2012 for further

period of five years

Lower cost of imported

coal to offset increase in

excise duty

Service tax increased

from 10% to 12%

Film industry exempted

from service tax on

copyrights relating to

r e c o r d i n g o f

cinematographic films.

Performing artists in

folk and classical arts

exempted

Increase in cess on

Steel companies are likely to pass on

the increase n excise duty, which will

increase the price of steel by `700 to

`1,000 per tonne. The increase in

customs duty on flat steel will provide

Indian flat steel players the flexibility to

increase prices further by `500 to

`1000 per tonne. Cut in duty on

imported machinery will help capacity

expansion.

The increase in the excise duty on cars,

commercial vehicles and two wheelers

will be passed on to consumers. Excise

hikes for small cars and two wheelers

will be partially offset by the relief in

individual income-tax slabs. Demand for

sedans and luxury cars likely to be hit.

Help promote investment in research

and development in automobile sector

The Budget measures have neutral

impact on cement industry.

Cable operators to pass this on to

consumers.

Positive impact on entertainment sector

Expected to increase the cost of domestic


35

ImpactMeasureSector

Gems and

Jewellery

Textiles

Paper

IT

production of crude oil to

`4500/tonne from `2500

/ tonne

Oil & gas/liquefied

natural gas s torage

facilities and oil & gas

pipelines included under

e l igible sectors for

viability gap funding.

Basic customs duty on

standard gold bars, gold

coins and platinum raised

from 2% to 4% and on

non-standard gold from

5% to 10%

Excise duty on refined

g o l d i n c r e a s e d i n

from1.5% to 3%.

Fully exempted branded

silver jewellery from

excise duty.

Financial package of

`3,884 crore for waiver of

l oans o f hand loom

w e a v e r s a n d t h e i r

cooperative societies.

Excise duty on paper and

paper board and pulp

increased by 1%. Excise

duty of 6% on wastepaper

imposed.

Service tax increase from

10 to 12%

oil production by $5-6 per barrel.

This is a positive for the industry as it

will improve the availability of funding

especially through the PPP route.

The step is aimed at curbing gold

imports. The current account deficit

which stood at 2.9% in FY'11 is

expected to widen to 3,6% in FY'12

due to sharp increase in gold imports,

which is placed at $58 billion in

FY'13 against $33 billion a year ago.

Likely increase of 3-4% in the prices

of gold and gold jewellery.

This will help local artisans and

improve economic condition of

distressed weavers in affected areas.

Due to weak domestic demand paper

industry will be unable to pass on the

entire increase in duties which may

pull down margins.

Unlikely to impact the profitability

of Indian IT industry, as companies

will pass on the same to clients.

State Bank of India

36

ImpactMeasureSector

Pharmaceutical

s

Hotels

Household

appliances

Housing

Excise duty hike to 6%

from 5%. Excise duty on

bulk drugs hiked from

10 to 12%

Service tax hiked from

1 0 t o 1 2 % T h e

abatement provided for

hotel accommodation

has been reduced from

50% to 40%

5 % c u s t o m s d u t y

exemption on LCD /

LED panels.

Excise duty hiked by 2

percentage points.

ECBs al lowed for

affordable housing

projects. Withholding

tax on interest payments

of these ECBs cut to 5%

from 20%.

T h e i n t e r e s t r a t e

subvention of 1% for

housing loans up to ̀ 1.5

million (for housing

c o s t b e l o w ` 2 . 5

mi l l ion ) has been

extended for another year.

A credit guarantee fund

to be set up to improve

Pharma companies are likely to pass on

these hikes to consumers.

The increase in service tax will be

mildly offset by the tax credits allowed

on the input services received by hotels.

Given the intense competition in the

industry, the players will have limited

ability to pass on the increase in service

tax through higher room rates.

This will lower panel TV prices thereby

driving demand, also helped by an

increase in income tax exemption limit

and change in slabs which will raise the

disposable income of the salaried class.

These factors will more than offset the 2

percentage point increase in excise

duty, thus impact will be positive on

household appliance sector.

While the proposal has opened up

another funding option for real estate

companies, given weak balance sheets,

many real estate developers may find it

difficult to raise ECBs.

Measures announced will support

affordable housing projects. However,

these projects form only a small

proportion of the industry currently.

The service tax hike will push up prices

of under-construction properties.


37

ImpactMeasureSector

Infrastructure

Power

Roads &

highways

h o u s i n g l o a n

disbursements to the low-

income category.

“The limit for tax free

bonds for infrastructure

doubled from 30,000 `

crore in FY'12 to 60,000 `5crore in FY'13 . within the

overall exemption ceiling

of ̀ 1 lakh.

E x e m p t i o n o f 5 %

customs duty on thermal

coal, natural gas and

liquified natural gas.

ECB to part finance the

rupee debt of existing

power projects

Reduction of withholding

tax on interest payments

on ECBs from 20% to

5%. 10 year Tax holiday

Full exemption from

import duty on specified

equipment imported for

r o a d c o n s t r u c t i o n

extended to contracts

awarded by Metropolitan

Development Authorities

Target of covering 8,800

kms under NHDP in

FY13. Allocation for

roads enhanced by 14%

to ̀ 25,360 crore in 2012-

13.

The measures will improve funds

availability. The additional funding

will result in more projects being

awarded and quicker financial

closure.

Will provide relief to power

generators reeling under high fuel

costs.

Measures announced in the Budget

will have positive impact on power

sector.

The Budget has announced several

measures to improve availability of

funds for the infrastructure sector.

A large portion of these funds are

expected to flow into the roads

sector.

The NHAI has again been allowed

to issue tax-free bonds totaling of

10,000 crore after the success of `

its fully-subscribed 10,000 crore `

last year; will aid NHAI in

implementing national highway

projects.

State Bank of India

38

ImpactMeasureSector

Solar Energy

Ports

SME

Rural

Employment

Al lowed ECB for

capital expenditure on

the maintenance and

opera t ions of to l l

systems for roads and

highways.

Fully exempt plant and

equipment from special

CVD for setting up of

solar energy, solar

thermal projects.

Allocation of funds in

the form of tax- free

infra bonds for the ports

sector remains at ̀ 5000

crore.

`5,000 crore India

Opportunities Venture

Fund to be set up with

SIDBI.

Ministries and CPSEs

to make minimum 20%

o f t h e i r a n n u a l

purchases from MSEs.

O f t h i s , 4 % f o r

p rocuremen t f rom

MSEs owned by SC/ST

entrepreneurs.

Outlay under Mahatma

Gandhi National Rural

E m p l o y m e n t

Guarantee Scheme

(MNREGS) cut to

`33,000 crore from

`40,000 in FY12.

The reduction in withholding tax on

interest payments of ECBs for the roads

sector to 5% from 20% will, however,

only marginally aid road developers as

their exposure to ECBs is limited.

Development in solar energy will help

promote renewable energy and

complement other energy sources.

Will facilitate funds availability for the

development of port projects, though it

will not have a major impact on the

sector since the same amount was

available last year and yet the ports

sector was not able to issue any bonds.

This will incentivise SME financing.

Expected to provide huge employment

opportunities for skilled and un-skilled

workers across the country.

Will lead to better utilization as last year

the funds allocated under the scheme

were underutilized.


39

ImpactMeasureSector

Agriculture P l a n o u t l a y f o r

Agriculture increased by

18% from `17,123 cr in

FY'12 to ` 20,208 cr in

FY13.

Allocation for Bringing

Green Revolution to

Eastern India (BGREI)

up from ` 400 cr in 2011-

12 to ` 1000 cr in 2012-

13.

Traget for agricultural

credit by banks raised by

`1 ,00 ,000 c ro re to

` 5,75,000 crore in FY13.

Interest subvention for

short term crop loans at

7% to be continued in

2012-13. Addit ional

subvention of 3% to

prompt paying farmers.

KCC scheme to be

modified to make KCC a

smart card which could

be used at ATMs.

` 2 0 0 c r o r e f o r

incentivising research

with rewards.

A l l o c a t i o n f o r

Accelerated Irrigation

Benef i t P rogramme

(AIBP) up by 13% to

`14,242 crore.

Will increase farm production and

integrated development of major

f o o d c r o p s , a g r i c u l t u r e

mechanization, soil health, rainfed

farming, horticulture, animal

husbandry and fisheries.

Significant increase in farm

production and productivity of paddy

in Eastern region. Paddy production

in Eastern States increased by 7

million tonnes in FY12.

Will help in improving agricultural

production and productivity. More

farmers to get access to bank credit.

Bank credit for agriculture will rise.

Step to encourage farmers paying

their loans promptly will help reduce

defaults and check NPAs in

agriculture sector.

Will provide instant credit to ATM card

holders (farmers) without approaching

branch counter. KCC is an effective

instrument for making agricultural

credit available to farmers.

Help raise farm productivity by

developing HYV plant and seed

varieties that can also resist climate.

Help dovetail micro irrigation

schemes with water harvesting to

maximize the benefi ts from

investment in irrigation projects.

State Bank of India

LEGAL DECISIONS ON BANKINGLEGAL DECISIONS ON BANKINGShri M.ManoharanManager (Law), Law Department, SBI, LHO, Chennai

hether the Debt Recovery Appellate Tribunal is empowered to

reduce the pre deposit amount to 25% of the debt amount.

I (2012) BC 97 (DB)

Bombay High Court

Dr. D.Y. Chandrachud and Anoop V.Mohta, JJ.

NATIONAL POLYMERS & Ors.-Petitioners

Versus

UNION OF INDIA 7 ORS.-RESPONDENTS

Writ Petition No.4231 of 2011-Decided on 1.7.2011

M/s National Polymers & Ors., the petitioners, have challenged the constitutional

validity of the provisions of the first and second provisos of Section 18 of the Act on

the ground that they are discriminatory in the captioned writ petition. They

submitted that the Recovery of Debts Due to banks and Financial Institutions Act,

1993 confer discretion upon the Appellate Tribunal to allow a complete waiver of the

pre-deposit, but the discretion of Appellate Tribunal is curtailed while entertaining

the appeal under Section 18 of the SARFAESI Act 2002. The petitioners further

submitted that the object of the both the Acts is same to ensure the speedy recovery of

Facts of the case

W

40


the Debt Due to the Bank. Hence it was urged that it would be plainly discriminatory

and violation of Article 14 of Constitution.

The Additional Solicitor General of India who represented Union of India submitted

that the second and third provisos to Sub-section (1) of Section 18 were inserted by

Amending Act 30 of 2004. The reasons for the amendment are explained in the

statement of objects and reasons. The statement adverts to the judgment of the

Supreme Court in Mardia Chemicals Ltd. v. Union of India, 110(2004) DLT 665

(SC)=II(2004) BC 397 (SC)=II (2004), 4 SCC 311, which had declared as ultra vires

a provision under which a deposit of 75% of the amount claimed was necessary

before an appeal could be entertained. The amendment was brought about in view of

the judgment of the Supreme Court and with a view to discourage borrowers from

postponing the repayment of their dues and with a view to discourage borrowers

from postponing the repayment of their dues and to enable secured creditors to

speedily recover their debts, if required by enforcement of security or other

measures specified in Sub-section (4) of Section 13 of the Act.

In the recent judgment of Supreme Court, the rationale for the provisions of Section

18 has been considered and determined in Narayan Chandra Ghosh v. UCO Bank, IV

(2011) SLT229=II(2011)CLT355 (SC)=(2011)4 SCC 48. A branch of two learned

judges of the Supreme Court while construing the provisions of the second and third

provisos noted that the Appellate Tribunal has the power to reduce the amount, for

reasons to be recorded in writing, to not less than 25% of the debt, referred to in the

second proviso. The judgment of the Supreme Court lays down that the right of

appeal being a creation of statute; it was open to Parliament to condition that right

subject to an order of deposit and to restrict the discretion of Appellate Tribunal in

the matter of granting a waiver. The Supreme Court held as follows:

"The language of the said proviso is clear and admits of no ambiguity. It is well

settled that when a Statute confers a right of appeal, while granting the right, the

Legislature can impose conditions for the exercise of such right, so long as the

conditions are not so onerous as to amount to unreasonable restrictions, rendering

the right almost illusory. Bearing in mind the object of the Act, the conditions hedged

in the said proviso cannot be said to be onerous."

The Hon'ble Division Bench of Bombay High Court held as follows:

“… Parliament conferred upon the Appellate Tribunal discretion to reduce the

amount required to be deposited, but while conferring that discretion on the

Appellate Tribunal restricted it by stipulating that the Appellate Tribunal may reduce

the amount to not less than 25% of the debt referred to in the second proviso. This is

consistent with the parliamentary intent of ensuring that basically the Securitisation

Act must follow an efficacious non-adjudicatory function in the Securitisation Act

41

State Bank of India

must, therefore, be confined to those areas as legislated upon by Parliament and

subject to the restrictions imposed by the parliament while so legislating.

Therefore, we find that there were valid reasons why Parliament made a different

provision in the Securitisation Act in the matter of the discretion of the Appellate

Tribunal under Section 18(1) in dispensing with the requirement of pre-deposit. It

was open to Parliament, while conferring discretion on the Appellate Tribunal to

restrict the exercise of the discretion to reduce the quantum of deposit to not less than

25% of the debt due under the second proviso to Section 18(1).

The Division Bench further concluded in the present case, the amount which was

claimed in the notice under Section 13(2) was Rs. 2.72 crores while as on the date of

the order of the Appellate Tribunal has duly considered the submissions which were

urged on behalf of the petitioners and having regard to the discipline mandated by

the second and third proviso to Section 18(1) directed the petitioner to deposit an

amount of Rs.7 crores. The exercise of that discretion does not require any

interference under Article 226 of the Constitution and in any event neither the

Appellate Tribunal nor this Court would be justified in granting a waiver in excess of

the amount as mandated by the third proviso to Section 18(1). For these reasons, we

see no merit in the petition. The petition is accordingly dismissed."

42

02

Monthly Review December 2011

02

SBI Monthly Review is brought out by the State Bank of India, Economic

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