Tag Archives: Ministry of Finance

The Superior Financial Powers of Modi’s Fiscal Roadmap

One of the key features of the Modi administration’s fiscal roadmap is the move to increase disinvestments to include both disinvestments in loss making units, and some broader strategic disinvestments.  The government plans to raise 695 billion rupees ($11.2 billion) in the year starting April 1, an amount crucial to its efforts to narrow the budget deficit.

The sale target includes stakes in central public sector enterprises, holdings in non-government companies, strategic disinvestment and Specified Undertaking of the Unit Trust of India (SUUTI).  In an interview with Bloomberg News (March 3), Disinvestment Secretary Aradhana Johri  reported India’s divestment receipts in the current year ending March 2015 was at 254 billion rupees.  The government is looking to raise 285 billion rupees through sale of its holdings in SUUTI, Bharat Aluminium Co and Hindustan Zinc Ltd.

The scaling up of disinvestments is ambitious, and highlights an important characteristic of Indian federalism: Central government possesses superior financial powers.

Part of the revenue levied at the Central government is of course redistributed among states, on the basis of advice of the organizationally independent Finance Commission or through the National Institution for Transforming India (NITI Aayog), and constitutes a significant source of income for them.  However, the impression that is thus created is one of profligate states, and a more careful and sophisticated Central financial management (Mitra/Pehl, 2012).

Since the liberalization of economic policies and the decentralization of policymaking to states from the early 1990s onwards (and even before then), states have been able to exercise some autonomy in regulating their own development trajectory (Mitra/Pehl, 2012).  However, the picture today is one of differentiation among India’s states in terms of their fiscal capabilities as well as their developmental potential, and a need for reform of inter-state mechanisms of coordination and equalization (an issue NITI Aayog promises to address).

The government is firm on achieving a fiscal deficit target of 3% in 3 years.  The fiscal deficit targets are 3.9%, 3.5%  and 3.0% in FY 2015-16, 2016-17, and 2017-2018  respectively.  But that journey has to take account of the need to increase public investment.

Is India Better (or Worse) Off Increasing Competition in the Banking Sector?

asifma-annual-conference2014-header564x185At the Annual Asia Securities Industry & Financial Markets Association (ASIFMA) conference in Singapore, Deputy Governor of the Reserve Bank of India Shri R. Gandhi explained why India would be better off increasing competition in the banking sector.  The opening of branches in un-banked and under-banked centers, he said, would increase the flow of credit necessary for equitable development, diversify risks and help to tap latent opportunities.  “On the one hand channelizing foreign investments; on the other hand boost competitive spirit amongst the financial sector entities, thereby, raising the efficiency bar of the domestic players,” he continued. (Gandhi, 2014)

These statements are a powerful reminder of the transformational role foreign banks play in influencing the host country economies.  However, let us also consider the implication of policy preferences of various socioeconomic groups toward further financial integration.

First, foreign banks account for less than one per cent of total branches of commercial banks in India.  Out of the total of 318 foreign bank branches, 315 are in urban and metropolitan areas (RBI, 2014).

Second, over the long Photo taken by Sophia N. Johnson Chandigarh Punjab Sector 25. 2008run, international financial integration has historically favored capital over labor (Rogowski, 1987; Frieden, 1991).  In the shorter run and in terms of politics and policies, financial integration favors capitalists with mobile or diversified assets, and disfavors those with assets tied to specific locations and activities such as manufacturing or farming (Frieden, 1991).

Third, its true an important explanation for the current stability and growth of India’s financial sector has been the role of the Reserve Bank and the Ministry of Finance (along with other institutions like the Securities and Exchange Board of India (SEBI) that were set up by them in the 1990s), (Kapur, 2010).  However, international capital mobility changes the pattern of lobbying over national policies in developing country economies.  More specifically, it tends to shift the debate toward the exchange rate as an intermediate or ultimate policy instrument, thereby driving a wedge between those more sensitive and those less sensitive to exchange rate fluctuations and between those who favor currency appreciation and those who favor depreciation (Frieden, 1991).  This tracks a division of the economy between producers of tradable goods on the one hand, and international investors of producers of non-tradable goods and services on the others.