February, 2017
Issue No. 15 / Archive
  1. On interest rates, Urjit Patel is bang on

    The Reserve Bank of India (RBI) governor has done the nation, not to mention his own reputation, a major service in speaking up against large-scale lowering on interest rates by means of subventions from the Union Budget and against credit guarantees. In a well-functioning market, the success of every enterprise is largely dependent on the interest rate offered to it, apart from the cost of money in general. Distorting of interest rates is likely to lead to misallocation of resources. Apart from this, money has alternative opportunities for deployment. If a risky venture attracts capital because someone is willing to subsidise a part of its interest cost, this could deprive another venture that has lower risk but does not have anyone to subside its interest costs. A similar logic applies to credit guarantees by the government. Tampering with the cost at which capital is available to an enterprise in a recipe for misallocating and wasting resources, lowering welfare in general.

    One cannot argue that interest subventions and credit guarantees are useful and necessary in small doses, helping compensate for risk perception arising from lack of information and large transaction costs in resolutions in case of failure. Urjit Patel’s comments come in the wake of the prime minister announcing significant interest subvention on housing and enhanced credit guarantees during his New Year Eve address.

    Source: The Economic Times, January 12, 2017

  2. Will Aadhaar help the poor become cashless?

    In the aftermath of demonetisation, digital infrastructure has been hailed by multiple parties for its ability to mitigate the effects of the government’s drastic measure, especially for the unbanked poor who conduct most of their transactions in cash. The Aadhaar system, centred on biometric data, is at the heart of this infrastructure. While Aadhaar provides users with a digital identity, one needs a space to deposit money digitally and means to exchange it. Due to technology ownership constraints, neither of the two is easy to obtain. Depositing cash into a bank account involves long queues at banking facilities and paperwork that many citizens do not know how to get. On the topic of transaction through digital wallets, these require a smartphone device to work, which are owned by only 17 per cent of the Indian population. Access to these services also requires access to the internet, which in India is geographically limited. As things stand, the poor and vulnerable groups affected by demonetisation are forced to change their saving and purchasing habits, surrounded by lack of appropriate resource and a distorted guidance on how to handle these digital transactions.

    Source: Mint, January 31, 2017

  3. Protecting borrowers in the digital era

    As India takes its first steps in digital lending, there is the promise of unleashing credit for hitherto underserved segments; however, this also brings with it the necessity of responsible digital lending. Digital lending consists of lending through web platforms or mobile apps, by leveraging technology for authentication and credit assessment. In India, there is a huge unmet credit need (approximately $400 billion plus every year), particularly in the microenterprise and low-income consumer segment. However, there are three major risks in the digital lending space that the Indian borrowers may face. The first is overlending due to the lack of centralized tracking of lenders and borrowers in the digital space, the second is unsuitable lending where people end up borrowing more than they can repay, and third, the misuse of personal data where sensitive data can be shared or sold without proper consent.

    Instituting strong data-sharing protocols, clear guidelines along with data can be held and exploring the possibility of ‘super credit bureau’ that tracked all digital loans and consumer/lender credit history can offer some solutions to the above mentioned problems. Additionally, it is incumbent upon providers to invest in more user-friendly and intuitive products that will help customer better understand loans and consent protocols so that they can make truly informed choices.

    Source: Mint, January 31, 2017

  4. How to resolve the fuel retailers’ plaint

    While it is admirable that the government has managed to persuade fuel retailers to continue to accept plastic money at petrol pumps without any burden on consumers, the debate carries on about who would finally bear the merchant discount rate (MDR) between banks and fuel retailers. The transaction cost of a credit or debit card has three elements, namely the fee charged to the card-issuing bank, the card-acquiring banks and the payment gateway (Visa/MasterCard/Ru-Pay) which processes the transaction securely. All three elements of the MDR can come down, now that volumes are poised to spike and with enhanced competition from the low-cost interchange offered by the National Payments Corporation of India. Issuing, managing, renewing, transporting and guarding currency costs a lot, and this cost is borne by the RBI and the banks. The cost reduction on this head should be transferred to make up the MDR deficit. The government, too, stands to gain revenue-wise from greater transparency in payments, and should gladly suffer lower dividend receipts from the RBI.

    Source: The Economic Times, January 10, 2017

  5. Universal basic income’s policy design dilemmas

    The Economic Survey 2017 has renewed hope that a universal basic income, or a variant thereof, is under serious consideration. While Chief Economic Advisor Arvind Subramaniam has indicated examining the mechanics of implementing, Niti Ayog stated that India simply lacked the fiscal room to deliver a basic income benchmarked to the poverty line. In India’s only experiment with basic income, pilot projects launches in Madhya Pradesh in 2011 where over 6,000 individuals received monthly payments for 12 to 18 months led to a multitude of positive impacts on nutrition, health, indebtedness and investment, with women, scheduled castes and the differently-abled benefiting the most. While the limited sample size does not allow one to extrapolate the results across the country, they do inspire confidence in the virtues of making small transfers to easily targeted communities in need.

    The other question remains of India’s state capacity constraints: how the state will distribute basic income grants and verify delivery. The combination of a unique Aadhar number linked to biometric data can provide a viable solution, however there remains the problem of unreliable fingerprints, connectivity infrastructure and false rejection rates due to system failures. There is also the question of replacing the government’s flagship poverty programmes, but India’s size and diversity warns against adopting a one-size-fits-all cash policy that risks leaving India’s poor with cash in hand but nowhere to spend it.

    Source: Mint, January 30, 2017