Wednesday, October 21, 2020

Labour Code: Major changes

  In 2019, the Central government proposed to replace 29 existing labour laws with four Labour Codes on wages, social security, occupational safety and industrial relations. Since the issue of labour came under the Concurrent List of the Constitution, there were over 100 state and 40 central laws regulating the various aspects to it. Government wanted to club the laws to improve ease of compliance and ensure uniformity across the country. The Code on wages, which sets a national-level floor wage for all workers, was passed in 2019 and the other three codes were referred to Standing Committee on Labour, which later submitted its report. GoI incorporated 174 out of 233 recommendations (74%) of the standing committee on labour for the three codes. Some important changes, which have created unrest among labour unions, are discussed here.

Compounding of Offences: It states that for offences with fine, compounding is allowed for a sum of 50% of the maximum fine provided for the offence. For offences with imprisonment, compounding is allowed for a sum of 75%. Labour unions feel that the deterrence to break the law is reduced on account of compounding provisions and reduces security of the labour force.

Size of organisation: A key feature of the new code is that they provide size-based applicability of the laws to various organisations. The new laws raise the thresholds for workers from 20 to 40 under The Factories Act of 1948, which defined any manufacturing unit as a factory if it employed 10 workers while using electricity or 20 workers while working without.

The Industrial Disputes Act of 1947 requires any establishment employing over 100 workers to seek government permission before any retrenchment; the threshold has been raised to 300, with the government empowered to raise it further through notification. Labour unions are very upset with this threshold being raised and they argue that all MSMEs and bulk of the Industrial units get covered under the limit of 300. They feel that the limits can be further raised once the initial protests die down.

The Government’s argument is that existing laws have created an exit barrier for establishments and impacted their ability to adjust workforce in line with production demands. There can be little argument that any layoff should happen under very difficult circumstances where the existence of the Industry is in question and there should be no firing just to improve the bottom line of firms. Security of tenure of works is important for the well being of the country and we need to watch the path that this reform takes and make mid course corrections.

Changes in contract labour rules: The earlier Bill was applicable to establishments that employed at least 20 contract workers and to contractors who supplied at least 20 workers. These limits have been raised to 50 workers. Contract labour do not have the protection that regular workforce have and the increase in threshold number means that greater number of them would work under more difficult circumstances.

The new Code also prohibits employment of contract workers in any core activity but allows for their employment in a specified list of non-core activities such as canteen, security and sanitation services.

Fixed term Contracts: The Code has a provision allowing industries to employ workers on a fixed-term contract. This helps industries in hiring such workers for seasonal jobs or for short-term projects. Fixed-term contract workers will be entitled to all the benefits as regular employees in the establishment, except retrenchment compensation.

Currently, industries hire seasonal workers through contractors, which is both cumbersome and not usually in the best interests of workers. The benefits of contract workers are eaten away by contractors under the present system. This provision would help Industries hire seasonal workers directly rather than through intermediaries, thereby better protecting their rights.

Opponents of the reform say that the Industrial Relations Code, 2020, empowers the industries to convert existing workforce into fixed-term contract employees as the government removed a safeguard, which was there in its March 2018 notification that deterred companies from doing so. They say that the way in which fixed-term employment has been framed will lead to withering away of five kinds of securities: employment, occupational safety, income, social, and skill.

Whether industries would actually convert regular employees who are non-seasonal into fixed term workers needs to be seen. Since firing has also been made easier, it looks unlikely that employers would convert regular employees as fixed term contract employees. Firing is not easy for employers as they need to substitute fired workers and it is difficult to find trained, disciplines workers. It is true that employers would be able to fire undisciplined workers with low productivity.

No clarity on recognising unions, providing welfare schemes: The Code has no criteria to ‘recognise’ trade unions for formally negotiating with employers despite its registering them.

The Code on Social Security also creates enabling provisions to notify schemes for ‘gig’ and ‘platform’ workers, but there are no concrete measures propose presently.

Also, the Bills have not clearly specified norms pertaining to social security schemes, health and safety standards, and working conditions and these are largely delegated to the state governments.

Right to Protest/Strike: The Industrial Relations Code prohibits the right to strike and mandates that unions give a 60-day notice to strike. Further, its is illegal to strike during conciliation. Unions say that the Bill thus destroys the freedom of association guaranteed to Indian citizens under the Constitution.

Compliance: Codes seek to improve the ease of compliance and hiring and firing of workers while keeping labour welfare under consideration.

Little time allowed: The political Opposition has raised the issue of little time being given to MPs to consider the provisions of the Bills or to debate them. It has been pointed out that the Bills (Having 411 clauses and 13 schedules running into 350 pages) were only introduced on Saturday, September 19, and the Business Advisory Committee of the Lok Sabha allocated three hours for them to be discussed and passed this week.

Review: Since a good number of existing provisions have been diluted in favour of the employers, Governments, Unions and civil society needs to keep a close watch over the course that the implementations takes. I feel that some of the fears that workers have might not actually play out. It is not always possible to estimate the direction that laws will take over time. Government should, therefore, constantly evaluate the implementations and assess the change in balance between employers and employees. Course corrections would certainly be needed in time and we should not hesitate to reexamine issues.

Sunday, October 18, 2020

Woes of the Indian Economy

India has the third highest Gross Domestic Product (GDP) in the world in terms of its purchasing power parity. In absolute United States Dollar (USD) terms it is fifth in the world. Its journey to reach this place is certainly creditable. For some time now, smugness has crept into the country that we are no longer impoverished and are among the rich nations. Egged on by an International narrative that China and India are the countries to watch in future, we have started feeling that other than a few nudges here and there is very little that we need to do on the economic front.


But, is that all? Countries try to increase their wealth and GDP only to ensure that its citizens lead comfortable and happy lives, to ensure that they have access to the best education and healthcare and to ensure that they are able to live with dignity and head held high. If we drill down GDP to the citizens, the metric of relevance would be the per capita GDP. This measure assumes that the total GDP of the country is equally distributed among all its citizens. The fact that it is not equal equally distributed is a very major concern and would need much more space to discuss. India’s GDP (PPP) is 43% that of China and only 59% that of Indonesia. India is much behind France, U.K. or any other European Nation.


In reality, we are still a poor country where malnutrition is rife, where children continue to drop out of school in alarming numbers every year and where millions of untrained young people enter the workforce unfit for anything more than manual labour. All this is best captured in the UN’s Human Development Index (HDI) rankings where India is a lowly 129th out of 189 countries. China, by contrast, occupies the 85th spot and Sri Lanka an even better 71st position.


IMF has announced that India’s per capita gross domestic product may be lower for 2020 than in neighbouring Bangladesh. India, which had a lead of 25% five years ago, is now trailing.  More than numbers, Indians will find it very difficult to digest the fact that Bangladesh is better than us. It is a huge blow to our pride. The narrative that we have built over the past few years is that Bangladesh’s poverty drives it’s citizens to sneak into India in order to make a living. We have all believed that we are far superior to most countries in Asia and we feel that we need to compete only with Western Europe, USA and China. This sobering comparison with Bangladesh and being worse off than it is just unpalatable. This relative underperformance will dent the country’s self-confidence the capacity of its citizens in the international arena. Our influence in South Asia and the Indian Ocean and the world will wane.

Where have things gone wrong? The coronavirus pandemic is definitely to blame. But, it has been widely reported that India’s growth has been tapering for ten quarters prior to the covid-19 pandemic. The pandemic has only added to an already slowing growth. In their working paper, Chatterjee and Subramanian have concluded as follows:

A cautious conclusion is that the ability of India’s export growth to outpace that of the rest of the world as indeed it has done spectacularly for three decades—will be increasingly constrained. Both exports of manufacturing and services are skill intensive and becoming more so, and if the quality and quantity of skills available to the economy starts slowing (rising Lewis curve), exports will run into domestic supply constraints. India’s longstanding inability to export unskilled manufacturing products is an indictment but equally it is an opportunity, especially with China vacating export space in these products. An extraordinary policy effort will be required to exploit this opportunity. Equally, policies cannot afford to neglect the skill-intensive exports, which are still dynamic but are losing steam.


Chatterjee and Subramanian feel that the right way forward for India is to focus on export led growth. They feel that we have not paid attention to exports that do not need skilled labour and India’s exports have been primarily goods and services that require a skilled workforce. They feel that with passage of time, the quality and quantity of skills available will start slowing down and future exports would be would run into these supply constraints. Bangladesh is doing well because it’s following the path of previous Asian tigers. Its slice of low-skilled goods exports is in line with its share of poor-country working-age population. China held on to high GDP growth for decades by carving out for itself a far bigger dominance of low-skilled goods manufacturing than warranted by the size of its labor pool.

India, however, has gone the other way, choosing not to produce the things that could have absorbed its working-age population of 1 billion into factory jobs. India’s missing production in the key low-skill textiles and clothing sector amounts to $140 billion, which is about 5% of India’s GDP. These sectors have the potential to absorb a large population and pave the way fro bettering education and health standards for future generations, which would propel us on the next growth step. As we are unable to engage our huge unskilled population, they lose the opportunity to pull themselves out of the subsistence economy of they are part. The country too loses the opportunity of maintaining the steady growth rate required.

The government of India (GoI) does not engage adequately with states and industries in order to promote their growth as well as capacity to export outside the country. In most cases the government of India comes up with a reform measure/policy which is often intended to open up the sector and promote industries in the sector. These are decided upon with varying degrees of consultation and more often than not, fall short of the requirements. GoI does not focus much on the subsequent steps including assessing the effectiveness of the reform/policy in meeting the desired objectives. The task is entirely left to the state governments to compete against one another and attempt to promote industrialization. State governments find it very difficult, near impossible, to get the government of India to agree to any policy change that is required to make the policy/reform more effective.

In an interview with ‘The Print’, Raghuram Rajan opines that the growth trajectory of 8% and above will be possible to maintain only if there is an environment of continuous reform. In recent times, GoI has initiated some reforms including the Insolvency and Bankruptcy Code, agricultural marketing reforms, labour reforms etc. Rajan feels that these reforms are sporadic in nature and the environment of continuous reform is absent in the country. This lack of the right environment, he feels, will pull down growth in any country and we have already witnessed the same over the past several quarters.

The reform measures introduced also need to be deepened and more effective at the ground level. The issue of whether business is now easy to carry out, needs to be assessed regularly with feedback from the trade and industry.

A bigger danger is that the policy of ‘Atmanirbhar’ should us take us back to the pre-1991 closed economy days. If this policy means making our products competitive and of better quality, they would then meet the needs of the country and could export as well. Most economists feel if ‘Atmanirbhar’ means protectionism reintroduced, it would damage the country more and slow down the effort to pull out our millions from impoverishment. Firstly, it would mean that citizens of the country would have to pay more for goods of lesser quality. Secondly, it would reintroduce a system of rents where incompetent goods and services would attempt to raise barriers for outside goods that are cheaper and of better quality. Thirdly, Investors will fear that tariff and non-tariff barriers will be introduced at the behest of anyone who feels that their Trade/Business would be affected due to global factors. This takes the country back to a system of favours being doled to protect some players. Classical trade theory tells us that it would lead to inefficient allocation of resources. We would be treading on very thin ice on this route.

Saturday, September 26, 2020

Stake sale by Reliance Jio and Capital Gains

Between April 22 and July 15 this year, Reliance industries Ltd raised more than INR 1.5 Lakh crores through a stake sale of about 33% in its subsidiary Jio platforms to 13 marquee foreign investors. Neither RIL nor Jio platforms may be paying any tax on the stake sales due to the structure adopted for the deal.


The equity of Jio platforms as on March 2020 was equity share capital of INR 4961 crores plus other equity of INR 1,77,064 crores (Optionally convertible preference shares (OCPS) issued to RIL). Converting the OCPS and selling them to investors would have made RIL liable to pay capital gains tax as it would have sold equity shares converted from OCPS at a premium. The gains on such transfer would have attracted short-term capital gains, which would have been taxed at a rate in excess of 30%. This would have jeopardized its plan of becoming net debt free.


The potential tax pain seems to have been sidestepped by a simple method a fresh issue of shares by Jio platforms to the various investors. To Facebook and Google, Jio platforms issued fresh equity shares at INR 488.34 per share. All other investors were issued equity shares at a higher price – INR 549.31 a share. With this total share proceeds of INR 1.5 Lakh crores, Jio platforms redeemed OCBS worth INR 129046 crores held by RIL and retained INR 23272 crores with itself.


This fresh issue of shares by Jio Platforms helped RIL as it got repaid a chunk of its OCPS, thus reducing its own net-debt position significantly. Since redemption of OCPS held by RIL is essentially repayment of funds earlier infused by RIL into Jio Platforms, it will not attract any tax. Since RIL did not transfer any shares, it is not liable to any capital gains Tax. Jio Platforms, too, would not have to pay tax though it issued shares at a tidy premium —because the pricing of the shares took into account their fair value based on the report of an independent valuer. Even if the shares’ sale price was higher than the fair value, the tax law provides concessions if the buyer is a non-resident investor.  As such, when shares are issued by the company to non-residents investors, there is no tax liability for the issuing company on this account.


But when fresh shares were issued to new investors, how did the shareholding of the earlier investors not get diluted? This is where a specific provision in Jio Platform’s altered Articles of Association (AOA) comes in: “No dilution of any shareholder shall occur as a result of any permitted share transaction (after taking into account the redemption and/or conversion of any OCPS in connection with such permitted share transaction).” In the amended AOA, permitted share transactions comprise fresh issue of shares to new investors and issue of shares by conversion of OCPS held by RIL. Jio Platforms used the incremental equity-financing route.


Jio/RIL may have avoided paying Income Tax due to a loophole in the Income Tax act. Anyone can see that premium has been charged for sale of shares. It looks like appropriate artifices of law have been used to deny Taxes. The original equity shareholders purchased the shares at probably INR 10 per share. Google and Facebook have been sold shares @ INR 483, clearly at a price that is 48.3 times what the first shareholders paid. De facto, this is capital gains. De jure, it is being said that there is no capital gains in this transaction. Is the country going to let go the spirit of the law for the minutiae of the law? Will we put aside truth and move on? A recent arbitration judgement in The Hague reminds us of the Vodafone retrospective Act that was passed after the Supreme Court held that purchase of Hutchinson shares by Vodafone did not attract capital gains Tax. Are we going to plug the loophole and collect the Tax?

Friday, September 25, 2020

Impact of Farm Bills in Andhra Pradesh

Why are farmers in AP not affected by the New Farm Bills?

For a long time, Andhra Pradesh and Telangana have not enforced any requirement that farmers should sell their produce in Agriculture Produce Market Yards (APMC or Mandi) only or that any trader must purchase agricultural commodities in Mandis and nowhere else. Hence, even though the market yard Act was in place and is still in place, in practice, it is as if there is no such Act in place. Farmers in the two states are free to sell their produce to traders at any place. They are also free to transport their produce and would be asked for their Pattadar passbooks during transit, at the worst.

Would Market Yards in AP be affected?

The entire geography of the state has been fully covered under the area of operation of one market Yard or other. Since farmers choose not to bring their produce to the Mandis, staff of Mandis collects market cess by establishing check posts at strategic locations.

Out of a total of revenue of 540 crores (FY 1920) of all 216 Mandis in AP, only about INR 100 crores is collected from produce actually brought to the Mandi. The rest of the amount of INR 440 crores came by way of cess collection at check posts. The figures indicate that the services provided by Mandis are not attractive enough for farmers to bring their produce to yards. Market yards have been reduced to collecting cess for their survival.

The present annual salary bill of staff of all Mandis in AP is about INR 250 crores. The new central Act does not allow an entire geography to be notified as area of operation of the Mandi. All business premises have to be notified specifically. Hence, mandis will no longer be allowed to set up check posts to collect market cess. In AP, this means that INR 440 crores of cess revenue vanishes into thin air. The revenue collection of Mandis will be sufficient to pay only 40% of their salaries.

Another point of note is that this INR 100 crores comes from the operations of about 10 of the 216 market yards in the state. So with the new bills, at least 200 market yards would straight off be unviable and would need to close operations (at least). Whether Government would choose to physically close them or reinvent them with a different mandate remains to be seen. In any case, they were already functionally irrelevant for more than two decades.

The scenario in Andhra Pradesh was previously also as if the two new farm bills (other than Essential commodities Act) were already under implementation. Going forward, functionally, it means that out of 216 market yards only about 10 or 12 would be functional. With the Central Acts being passed, the condition of even these 10-12 market yards would deteriorate over time on account of competition. The time lines are difficult to guess, as the market yards might reinvent themselves and provide value addition to farmers.

What would happen to Mandis in other states?

In states like Punjab, Haryana, Chhattisgarh and Madhya Pradesh where the Mandi system is much more stringently operated, the situation that is presently seen in Andhra Pradesh would be seen quickly in these states. It is a matter of time before mandis become unviable. However, some mandis might reinvent themselves under dynamic leadership. The state governments might also step in to provide additional responsibilities and value addition duties to the Mandis.

What would make farmers happy?

What would farmers need under such circumstances when the Mandis as regulatory entities are going to gradually fade away? Farmers are always worried about getting remunerative prices for their produce. They would desire a foolproof mechanism to ensure that they are able to realise minimum support price for their produce. They will like that MSP is announced in time every years and is reasonable and that they are actively consulted in the process of setting MSP. They would also like that MSP operations are taken up as and when ruling market prices get suppressed and that they don’t have to take up an agitational path in order to get Governments to initiate MSP operations.

They would like that the Government of India take up greater financial responsibility of carrying out purchases. In all cases in recent times we have seen that GoI unilaterally decides the quantity that they are willing to buy. GoI assumes that such limited purchases are enough to spur demand and boost prices. In some cases the quantity that GoI is willing to buy is a function of the amount that they have budgeted for the process.

In many cases we have seen that burden of MSP operations is being thrust on state governments who are perennially cash starved. State governments also end up buying only part of the quantity under offer from farmers in many cases.

It is a different matter that the MSP system creates perverse incentives to take up crops whose MSP is remunerative, but which have little demand in the market. A typical example is sugarcane where farmers keep growing sugarcane due to better than reasonable MSP. Sugar mills are forced to buy this sugarcane at MSP even though their cost of production thereafter rises above ruling market prices. Sugar mills are left with unsold stocks and farmers are not paid their dues. Governments are forced to intervene every now and then, in order to mitigate immediate difficulties. These steps, however, cannot change the underlying situation which requires governments to intervene again later. Farmers need to be provided clear signals as to what they can expect before they decide on crops to grow in the next season.

I feel that governments would need to convince farmers that there is no intention to do away with MSP operations and it would only be improved. They would also like assurance that governments would ensure that private traders and corporates also pay MSP to farmers. 

Thursday, September 24, 2020

The Farm Bills and the Fear of Farmers

  Parliament passed three bills, ‘the farm bills’, in its just concluded session. They are The Farmers' Produce Trade and Commerce (Promotion and Facilitation) Bill, 2020, The Farmers (Empowerment and Protection) Agreement of Price Assurance and Farm Services Bill, 2020 and The Essential Commodities (Amendment) Bill, 2020.

The Farmers' Produce Trade and Commerce (Promotion and Facilitation) Bill, 2020 seeks to give freedom to farmers to sell their produce outside the notified APMC market yards (mandis). The objective of the Government of India is that the additional channels of sale provided by the new Act would help the farmer get better prices due to the increased demand from alternative channels (The well know demand-supply curve: When demand increases without a corresponding increase in supply, prices increase). Farmers will also be allowed to transport their produce to other Districts/States in order to take advantage of better prices due to shortages over there (Most farmers are unlikely to do this). Further, farmers need not pay any cess for sales outside the Mandi. All said, the proposed framework is good.


Obvious losers due to this are State Governments (especially Punjab, Haryana and Madhya Pradesh) who will lose revenue they previously collected as 'mandi fees’. It is reported that Punjab stands to lose about INR 5000 Crores and Haryana more than INR 1000 Crores. Commission agents (Called Arhatiyas in those states) could lose substantial volume of business and hence income by way of commission fees. Arhatiyas commonly finance the agricultural operations of farmers thereby getting a hold over sales of the produce. When corporate buyers enter the situation, they would end up taking away the financing business of Arhatiyas as well as other locals, who in most cases are politically affiliated.

The Union government has sought to project the legislation as “creating an ecosystem” where farmers will enjoy the “freedom of choice” to sell to anyone, anywhere in the country as none are forced to sell or buy on the physical premises of APMC mandis. Laudable, provided some of the fears of farmers are addressed.


Farmers, at least from the above states, perceive a threat to the existing system, which, with all its limitations, has worked reasonably well for them. In 2019-20, government agencies procured 201.14 lakh tonnes (LT) of wheat and 226.56 LT of paddy from Punjab and Haryana. That, at their respective MSPs of Rs 1,925 and Rs 1,835 per quintal, would have been worth INR 80,293.21 Crores, and all these purchases were done in the mandis and at Minimum support price (MSP) or higher.


For farmers, arhatiyas and labourers in the mandis, freedom is a theoretical concept, but potential loss from APMCs being rendered unviable is real. Mandis could very well be unviable in a few years if trade moves outside them and the government gradually stops buying. When the element of compulsion is removed, some mandis would certainly become unviable and would not be able to sustain themselves (Similar to BSNL versus Jio/Airtel/Idea). The bigger, well established mandis are likely to survive longer. Even though Bihar repealed its APMC Act in 2006, the Gulab Bagh mandi in Purnea district handles an estimated 5-6 LT of maize arrivals annually. Similarly, Unjha Mandi in Gujarat for jeera, Guntur Mandi in Andhra for chilli, Lasalgaon and Narayangaon for onions and tomatoes in Maharashtra are unlikely to face any existential threat in the near future. But, weaker mandis would in all likelihood collapse under their own weight.  


Many Corporates, on the other hand, have deep pockets and would willingly suffer losses initially in order to capture market share. In time, they would aggressively compete against the mandis, and given the inherent inefficiencies in Government systems, the weaker mandis would collapse.


Mandis are political bodies and farmers do have some say in the way things are done and even on the entire transaction process. Death of mandis would deleverage farmers greatly. They would have very little say in the market as they are bit players and their opportunity for political intervention would have been eliminated with the death of the Mandi. Their capacity to organize economically might happen in a one off case, but, they simply do not have the economic muscle to organize and get a better bargain for themselves.


 Would corporates establish direct relations with farmers and eliminate intermediaries? In general, corporates prefer to operate through local intermediaries rather than deal with all farmers by themselves. Their cost of operation would be much less if they did not deal with farmers on their own and outsourcing procurement would be their preferred option. Intermediaries are unlikely to die out anytime soon.


Farmers fear that with Mandis dying away, Governments may slowly do away with MSP operations (cannot be ruled out at some point of time). Farmers fear that when MSP based procurement is off the table (Whatever little of it), it may eventually lead to exploitation by Corporates. Thought the Mandi system is beset with problems, it still provides a Price discovery/Price assurance Mechanism. Presently, farmers will not sell their produce for a price that is very much off the Mandi price, even when they decide to make an off-market sale. The presence of the mandi also keeps profiteering attitudes of traders in check.


Farmers feel that the Union Government should protect the MSP mechanism by including the same in the new Acts. The Union Government has not agreed with this saying that it was never part of any law. However, they have reiterated that they are committed to ensuring MSP for farmers.

Farmers fear that in a fiscal crunch, MSP will be rolled back or procurement curtailed. Such curtailed procurement has been witnessed in scores of instances over years. The Union Government imposes quotas on states when MSP operations are taken up for commodities. They procure a small quantity and direct state governments to bear the financial burden for the balance quantity. Most state governments do not have the fiscal space to foot the bill for MSP operations and hence survive on mere rhetoric. The demands and attention span of farmers are not drawn out long enough to exert required political pressure on governments to protect their interests.


The Farmers (Empowerment and Protection) Agreement of Price Assurance and Farm Services Bill, 2020 seeks to give farmers the right to enter into a contract with agri-business firms, processors, wholesalers, exporters, or large retailers for the sale of future farming produce at a pre-agreed price, thereby potentially reducing price risk for themselves. It has the potential of increasing access of farmers to new technology and inputs. Farmers’ bodies say the law would increase the monopoly of corporates as their share in the market gradually increases. It would also weaken the negotiating power of farmers.

This law does not mandate a written contract between farmers and companies. It also does not have any provision to penalize companies that do not register their contracts. This makes enforcement of contracts difficult given that the legal and financial muscle of companies is more than that of farmers.

The law also does not prescribe or specify that the contract price of the crop should be at least equivalent or above the MSP. Under such circumstances, farmers would prefer to sell their produce in the Mandi, if it were alive and kicking.

The Essential Commodities (Amendment) Bill, 2020 seeks to remove commodities like cereals, pulses, oilseeds, onion, and potatoes from the list of essential commodities and will do away with the imposition of stock holding limits on such items except under 'extraordinary circumstances' like war, famine, extraordinary price rise and natural calamity. Stock limits can be imposed only in case of extra ordinary situations i.e. in case of 100% increase in horticultural produce prices and 50% increase in non-perishable commodities. It aims to deregulate the market in agri-commodities and make prices market oriented.


Some sections of society fear that this would give corporates the freedom to stock commodities and unduly influence the market and pricing of agri-commodities. This is more likely to be opposed by urban citizens who could see price fluctuations that were previously evened out by Governments through appropriate regulatory action. Farmers are less likely to oppose this Act and in fact, farmers have been asking for repealing EC Act for many years as it will benefit them.



On the face of it, the bills are good. The difficulty is that farmers do not trust them. A dialogue with farmers is necessary and their concerns ought to be addressed by necessary changes. That would bring greater acceptance.

Wednesday, September 23, 2020

Does low-skilled immigration depress wages for natives

  “Good Economic for Hard Times”, a new publication by Abhijit Banerjee and Esther Dufflo discusses the evidence in regard to immigration after separating the emotions and politics involved in the matter.


The US National Academy of Sciences, from time to time, appoints panels to summarise the scientific consensus on an issue. One such panel was appointed to summarise the consensus on impact of immigration on wages in the US. Their finding is :


“Empirical research in recent decades suggests that findings remain by and large consistent with those in The New Americans National Research Council (1997) in that, when measured over a period of more than 10 years, the impact of immigration of the wages of natives overall is very small.”


Banerjee and Dufflo argue that the classic supply-demand theory not apply to immigration as the issue is multidimensional and we would not be able to isolate all relevant factors to enable study of impact of one factor on wage variation due to immigrations. They have discussed several such factors which are relevant, , which the basic supply-demand framework overlooks.


Firstly, immigrant workers increase demand for goods and services, which creates jobs, mostly for other low-skilled people. This tends to increase their wages for low-skilled jobs and thus compensate for increased labor supply that would otherwise suppress wages. They are quick to point out that this positive impact on wages would not be seen if the workers keep their spending minimal and try to take back the money earned back to their home countries. This is likely to happen in the case of guest workers that are in the country for a short while and go back to their countries to spend. Such effects are seen in border towns of EU countries where workers travel across the border for work in the morning and get back the same night. In such cases the supply of extra labour force would have the effect of suppressing wages.


 Secondly, the availability of low-skilled migrant workers might slow down the process of mechanization, as the availability of low-wage workers makes it less attractive to make the required investment to mechanize. Banerjee and Dufflo give the following example to illustrate their argument:


In December 1964, Mexican immigrant farm laborers were kicked out of California, on the grounds that they were depressing wages for native Californians. Their exit did nothing for the natives: their wages and employment did not go up.” The reason is that as soon as the Mexicans were thrown out, farms in places that used to rely heavily on them did two things, First, they mechanized production and Second, they switched out of crops for which mechanization was not available. A similar trend can be observed in the farms of India. On account of the National Rural Employment Guarantee program (NREGA), a wider variety of wage employment is available to rural workers. Rather than wait for the workers and pay them higher wages, farmers are moving more and more towards crops for which mechanization is available and they are also mechanizing all possible operations in existing crops.


Thirdly, employers may want to reorganize production to make effective use of the mew workers, which can create new roles for the native low-skilled population. Where there were more migrants, more native low-skilled workers upgraded from manual jobs to jobs with more complex tasks and that required more communication. Such operational upgradation is consistently observed across geographies.


Fourthly, immigrants are willing to perform tasks natives are reluctant to carry out. When you look at any restaurant in Telangana and Andhra Pradesh you will find that most of the service staff are from Orissa. I have had occasion to speak to managers and Owners of some of these restaurants and they all tell me that they are willing to hire locals too, but that none of the locals are willing to do the job. So when there are more migrants, the price of those services tends to go down, which helps businesses be more profitable. Since locals are, in any case, unwilling to take up those jobs, their wages are not suppressed in any case.


It is clear that the supply-demand theory is just good enough to describe the labour market. Labour markets are much more complicated. Even though there is enough evidence for this, politicians and citizenry do not accept this understanding, as this evidence-based understanding is contra intuitive to the simplistic model that most people have already internalized.

Thursday, September 17, 2020

NPAs in FIs and the Kamath Committee report

The governor of the Reserve bank of India (RBI), today, in response to requests from the industry, has said that protecting depositors’ interests and preserving financial stability of the Banking sector would be RBI’s prime concern as it is the depositors money that is being lent out. He also said that depositors run into crores in numbers, whereas borrowers are in lakhs.


There are small depositors, middle-class depositors, there are retired people who depend on bank deposits. So, the interests of the depositors have to be protected.


The governor has tried to strike a balance between spurring economic development through prudent lending and a situation where Bank NPAs would go up, thereby negatively impacting stability as well as interests iof Depositors.


He agreed that that Covid- 19 had adversely affected a large number of businesses and those Businesses that are otherwise viable but have genuine cash-flow problems because of temporary disruptions in activity need to be assisted. The Governor has also said, “Both the sides have to be matched and, in fact, the revival of such businesses will also ensure NPA levels are kept low and swift economic recovery takes place”. This calls for a scrupulously thorough and professional exercise in assessing all such businesses facing cash crunch.


The banking system and its leadership team are currently the best placed in the country to make such assessments. The difficulty that depositors face is that, the judgement of banking leadership as well as governments was previously inadequate to prevent the situation of huge NPAs sitting on the balance sheet of Banks. Depositors and citizens of the country would naturally wonder about how things are going to be done differently this time so that such buildup of NPAs does not happen. Resolution under this Framework extended only to borrowers having stress on account of Covid-19 and those borrowers classified as standard and with arrears less than 30 days as at March 1, 2020 are eligible under the Framework. If all firms eligible under these criteria were provided assistance, some firms with little or no business future would creep in. Hence the discretionary call, which still needs to be made by the creditors, is all-important. The question that needs to be satisfactorily answered is the improvement in capacity to assess business that has been added to Banks since the last episode of huge NPAs.


The Kamath report does not delve into this and only speaks of objective criteria to set the threshold below which firms would not be eligible for any assistance. Once firms qualify under the Kamath committee guidelines, we still have to deal with the same skillsets that have caused the NPA problem to go out of control. I feel that steps taken without addressing the capacity issue would result in temporary fixes and the problem would recur again and again.


At present employees with limited business sense take all lending calls. They naturally do not have the entrepreneurial talent in adequacy. Hence they are inherently limited in their capacity to take such calls. This system, if perpetuated, would not be able to help in arriving at a long-term solution to the problem of NPAs. We need a larger, deeper debate about it to change the system substantially to achieve the desired state.


Tuesday, September 8, 2020

OFS of BDL shares by Govt of India

 Bharat Dynamics slipped 14 per cent to Rs 333 on the BSE on Tuesday as the government's 15 per cent stake sale in the company via offer for sale (OFS) route opened for non-retail investors today. 


The government of India (GoI) is planning to sell 15 per cent stake in the defence company today (September 8), and tomorrow. The Centre, through President of India, owns 87.75 per cent stake in the company and is looking to offload 27.1 million shares.

The floor price for the OFS has been fixed at Rs 330 per share, a 14 per cent discount to Monday’s closing price of Rs 385. The market has corrected to the floor price set by the Government. The price has further fallen to 316 today. Hence, even the buyers of the discounted shares have suffered a loss within a few days of OFS.


Why did GoI choose to set the floor price so low? It stood to make a huge loss (more than INR 100 Crores) on that count.


One possible reason could be the lack of confidence in the market price of the share. If the market price ruled below the floor price before the OFS date, the sale would fail. GoI might have decided to avoid failure at any cost and hence minimized all risk. Hence the resultant loss of more than INR 100 Crores.


Another assumption can be that GoI wanted to leave something on the table for the investors. Given the fact the share price has further corrected to INR 316, even investors at low price stood to lose.


Since both, GoI and the Investor, lost in the process, it appears that the OFS was handled poorly.

Monday, September 7, 2020

Civil Services Reforms: Mission Karmayogi

On 2 Sept 2020 the union cabinet approved a mega reform for the government employees based on the three pillars of governance, performance and accountability, entitled ‘Mission Karmayogi’. The reform seeks a shift from rules to roles, silos to coordination; inter disciplinary movements and continuous capacity building of the public servants. It hopes to transform the Civil Services to be citizen centric and capable of creating and delivering services conducive to economic growth and public welfare.


DoPT hopes to equip the civil servant, with domain and functional competencies, and also build behavioural competencies necessary to meet the challenges of the society. The reform hopes to align work allocation of civil servants by matching their competencies to the requirements of the post. DoPT hopes to put an appropriate monitoring and evaluation framework in place for performance evaluation.


A structure to implement the reform has also been envisaged. A committee headed by the Hon Prime Minister would be the advisory committee, a Capacity Building Commission, a Cabinet secretary Coordination Unit to monitor progress and a special purpose vehicle (SPV), a company, which will manage all the digital resources, and also create a marketplace for content for effective training of government employees.


Naresh Chandra Saxena says here:

Though India has done well where contractors are involved, such as road transport and power supply, India does poorly in all programmes that require active involvement of grassroots bureaucracy without contractors; whether it is the quality of education, immunisation, health care, maintenance of land records, supplementary nutrition through Anganwadi centres, groundwater management, crime control, and so on. Inclusive development must aim at economic growth with elimination of poverty, improvement in social indicators, and reduction in inequality as equally important goals, while ensuring at the same time that there is no damage to environment.


Only a robust governance mechanism would be able to ensure translating such policies into desired results. Many of our policies have looked good on paper and have remained on paper only. There is little doubt that this is on accounting of lacunae in governance. What are the lacunae? Does the administrative structure lack knowledge of the policy? Are they not trained in the mechanism of implementation? Is it lack of necessary infrastructure? Saxena has felt as here:


Unfortunately, governance in India at the state and district levels is quite weak, manifesting itself in poor service delivery, uncaring administration, corruption, and uncoordinated and wasteful public expenditure.


He has spoken of uncaring administration, corruption and uncoordinated and wasteful public expenditure. Can the Karmayogi program address these issues? Can it train officers to be more honest? Can it train officers to be sensitive? Can it do away with empire building attitudes of the Government machinery? To say the least, bringing such change in the system is a tall order. I feel that changing attitudes in a system that is hard and guided by rules is going to be very difficult. 

Will the Karmayogi program inculcate the right values? Take the example of getting vigilance clearance for officers who have been selected for a given job. We see a flood of complaints about the officer before and after the selection process. Clearances are delayed and the officers are made to undergo suffering by having to answer the same issue repeatedly. All officers tend to develop an attitude of dodging responsibility. Since their progress is not evaluated based on outcomes of programs or their work, they tend to shirk from responsibilities and try to shift the issue in different directions. The incentive system promotes escapism, which I feel, cannot be corrected by training alone. The reform effort needs to be more comprehensive and should include reward for performance.


Gulzar has blogged about bureaucratic incentives and corruption here. The limited point I want to draw from his blog is:

There are two aspects of performance that are of relevance. One, performance in the Chinese case is measured in terms of positive contribution to regional economic growth. The metrics used to measure performance were reasonably credible measures of aggregate progress. This is important because there is a difference between cronyism that confers disproportionate privately shared benefits while inflicting significant net long-term social costs and one which shares around both private and social benefits. The later is net welfare enhancing.


I am not making a case for the Chinese system of incentives. I am making a case for a system where performance in terms of aggregate increase in welfare (Economic and Social) is rewarded in terms of upward mobility and higher responsibility.

In the India bureaucracy, promotion is based on seniority and ensuring that there is nothing adverse that can be said about the officer. Most officers find it easier to achieve by dodging difficult decisions and protecting themselves from criticism of any sort. Further, proximity to the Government in power ensures ‘good’ postings. This might appear cynical, but it contains a good bit of truth. I would go so far as to say that, there are many officers who are placed in important positions on account of their capacity to deliver. Such instances are however, not very common and getting rarer.


Saxena says:


Lant Pritchett has an interesting explanation for why things go so shockingly awry in India. He calls this the flailing state syndrome, 'a nation-state in which the head, that is elite institutions at the national (and in some states) level, remains sound and functional but that this head is no longer reliably connected via nerves and sinews to its own limbs.’


As Chidambaram put it, 'Civil servants design the projects and programmes, they make cost and time estimates, and they are directly responsible for implementation; yet, many programmes have failed completely and many others have yielded unsatisfactory results'. If the administrative processes can be streamlined, even routine administration with average leadership should suffice to produce results.


Saxena speaks of the political system also being responsible for failing administration.

Such backseat driving affords legislators informal control over the bureaucracy that promotes irresponsible decision-making and encourages corruption. The constitutional separation between the executive and the legislature has disappeared in India. This has resulted in erosion of internal discipline among civil servants.


I have no question about the inability of the administration to meet the needs of the nation and in its ability to promote welfare of the people. But, I feel that any correction needs to be multi-pronged and attacking the problem from all required angles. I hope that the ‘Karmayogi’ program is part of the continuous reform effort and subsequent steps are to follow with very little time lag. “Karmayogi’ in itself would not be able to deliver what the Union Government hopes to achieve.

Labour Code: Major changes

  In 2019, the Central government proposed to replace 29 existing labour laws with four Labour Codes on wages, social security, ...