Reforms implementation, the key

This year, the economy is expected to do much better than in 2012. If the reform measures taken last year are implemented properly, they can mitigate the biggest bane of our system, corruption.

Some of the potentially positive steps are cash transfers, and the promise of coal and pension sector reforms.

Although the government has initiated a host of market interventions, such as MGNREGA and microfinance for betterment of the poor, the truth is, much of the cash transfers do not reach them, because of corruption and the high administrative cost of implementing these social welfare programmes.

To plug leakages in the system, an important reform push is direct cash transfer scheme. Direct cash transfer will initially focus on scholarships and pensions but later will be used for subsidies on cooking gas and payouts for MGNREGA. The target is to roll out this system in the 600-odd districts by the end of 2013.

Aadhaar BENEFIT

How can the benefit of these schemes reach the target groups? Each element of cash transfer, on account of pensions or scholarships, is linked to an individual bank account using the Aadhaar Card (Unique Identification Number).

As each individual has Unique Identification Number, the scope for duplication will be plugged and fund transfer can be monitored.

For instance, a person getting money because of MGNREGA should not ideally get pension benefits, as he is working. But because of corruption, the ‘connected ones’, withdraw money from various schemes, simultaneously. Also, the fund does not reach the intended group.

Earlier, if one were to collect his scholarship money, one would wait a long while, and pay bribe to the official concerned.

With Aadhaar and direct cash transfer, all these would perhaps go. For example, in the State of Andhra Pradesh, money lost on account of duplication ranges between 20 per cent and 40 per cent. Direct cash transfer can save the government exchequer these losses.

FINANCIAL INCLUSION

It will also have a tremendous impact on financial inclusion. The number of people with bank account will explode.

The Reserve Bank (RBI) has given a direction to banks that anyone with an Aadhaar Card will have a ‘no-frills’ account. The central bank had introduced ‘no-frills’ accounts in 2005 to provide basic banking facilities to the poor and promote financial inclusion.

The accounts could be maintained without or with very low minimum balance. In fact, the RBI has asked commercial banks to convert the existing ’no-frills’ accounts into ‘Basic Savings Bank Deposit Accounts’.

While there will be no limit on the number of deposits that can be made in a month, Basic Savings Bank Deposit Account holders will be allowed a maximum of four withdrawals in a month, including through ATMs.

Critics argue that access to bank branches may be a problem. Owing to administrative cost it may not be profitable for banks to open bank branches in every village. As a way out, it is now mooted to have a banking correspondent in every village. Banking correspondents are people who will get commission from banks for every transaction they facilitate between the recipient of cash transfer, and the banks.

A person, on whose account the government has transferred money, can approach any banking correspondent visiting his village. The banking correspondent carries a mobile device where the recipient can give his thumb impression or electronic signature, and get the money.

This process is more like village retail shops selling telephone calling cards.

To ordinary people this will save half the day, and the hassle of visiting and collecting money. Around 147 million no-frill accounts have been opened during the last five years. Within the next two years, this number is expected to touch 500 million, making financial inclusion a reality.

OTHER REFORMS

As a result of the Banking Amendment Act, recently passed by Parliament, the government is expected to issue bank licences to non-banking finance companies, and large business houses, starting from the first quarter of 2013. This will strengthen linkages between the financial and the real sector. The RBI is also widely expected to go for more rate cuts.

While interest rate cuts by themselves do not immediately translate into investments, they bring down corporate expenses and allow them room to plan expansions and investments.

Another measure that is expected to bring down corruption is the role of the regulator. The Independent Coal Regulatory Authority Bill, 2012, seeks to empower the proposed regulator to decide coal prices.

It will also have powers to suspend or cancel licences of errant coal producers.

A coal regulator will be seen as a sign that India wants to open up mining to the private sector.

Similarly, the pension Bill proposes to give more power to the regulator and allow foreign investment.

The government proposed to bring in reforms in insurance and pension sector. The insurance Bill proposes to increase the FDI cap to 49 per cent.

The government is considering a cut in the base price of another round of spectrum auctions in 2013, which should bring in more money to the exchequer and give telecom firms more radio waves.

It is to be noted that India’s latest auction of mobile phone licences during November 2012 has fallen flat, raising less than a quarter of the money the government had targeted.

The auction for second-generation (2G) mobile phone licences raised less than Rs 10,000 crore. The government had hoped for closer to Rs 40,000 crore.

All these reforms will have some beneficial impact. Although reforms have led to an increase in per-capita income and reduction in poverty, questions were raised about their effectiveness, as some programmes launched for betterment of the poor were not implemented.

Corruption and misgovernance have reduced the effectiveness of these policies.

(The author is Professor, Institute for Financial Management Research, Chennai.)

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