ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

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Microfinance in India: Odysseus or Interloper?

With the growing emergence of microfinance in India, increasingly jostling for institutional space, we need to ask ourselves if it will actually manage to finally get credit to the rural poor in a sustained manner. Or will microfinance turn out to be an interloper that will end up three decades later in the usual way: another wave of dud institutions that neither die nor heal?

Some Reflections on Monetary Policy in the Leaden Age

This article attempts to understand how key features emanating from the twin processes of globalisation and financial liberalisation - especially the growing ascendancy of domestic and financial markets - have considerably narrowed the manoeuvring window of monetary policy.

Economics of Securitisation and Risk Transfer

Securitisation is a transaction structure that makes it possible to transfer a large variety of risks from one set of economic entities to another set. Such transactions are welfare enhancing because the originator achieves a reduction in its risk exposure while the investors get access to the risks at a market-clearing price. The growth of this market is therefore of utmost importance for the development of the Indian financial sector.

India's Foreign Exchange Reserves: An Embarrassment of Riches

India's capital account is too open. There are flows that can destabilise the non-financial (real) sector. There is (almost) full convertibility for inflows but restrictions on outflows. While the composition of the capital inflows has changed over the last decade, the capital account has remained in surplus. Some flows, like FDI, add to productive capacity and/or facilitate the transfer of technology and are not volatile. There are other flows that are more volatile, e g, FII flows and NRI deposits. What are the problems that such flows pose?

A Leap in the Dark

The orientation of fiscal policy should be on fiscal correction and long-term issues. Aggregate demand management is then the exclusive domain of monetary policy which by initiating a softer interest rate regime can also encourage capital inflows.

Customs Tariff Reform

This note argues that India?s tariff rates be brought down to globally competitive levels and proposes a uniform structure of tariffs. The reduction of duties will be accompanied by a real depreciation of the rupee relative to the exchange rate in the base line scenario (of no tariff reductions). This will substantially offset the direct effect of tariff reduction on industrial goods. The easy availability of inputs at low tariff rates and the pressure to improve productivity should take care of the remaining gap. No significant industrial product line is likely to go out of business, though intra-industry trade will increase even more rapidly.

Dynamics of State Debt

The institutional framework for improving the fiscal situation through incentives for reduction in the revenue deficit has already been put in place in some states and is expected to be done in the others. However, only time will tell whether the states are able to utilise the window of opportunity provided by the favourable debt dynamics (in terms of excess of the growth rate over interest rates) and increased transfers from the centre.

Banking Sector: Looking Ahead

Even as the cost efficiency and profitability of the public sector banks have improved significantly, recent research suggests that financial deepening involving banks may have suffered on account of the risk aversion of public sector banks, and their inability to effectively allocate credit in the face of credit risk. This article argues that it is time to bite the bullet and privatise the public sector banks and, in the interim, to reduce the risk associated with creation of bank assets by facilitating greater securitisation of credit.

Grand Bargains and Free Lunches

The debate about 'using' up to $10 billion of the country's foreign exchange for investment in infrastructure is at a stage where all major players, the RBI, ministry of finance and Planning Commission, are locked into their traditional, politically easy and safe positions. Yet there can be little doubt that the present equilibrium is a wasteful one. It would be a grand bargain if the major players were to collaborate and redesign our macro policies to be genuinely supportive of growth and development, but this would have to be an exercise of hard economic and political choices, not a free lunch.

Board Independence and Corporate Governance

In view of the demand-and-supply constraints created by the existing and proposed regulations for independent directors on corporate boards, it is necessary to choose the right set of recommendations of the various committees that have studied the issue, and sequence them appropriately. The newly introduced definition of independence should be implemented strictly and nominees should not qualify as independent directors. Also, lowering the requirement that independent directors constitute a minimum of 50 per cent of the board will give companies more flexibility as well as meet a basic threshold of independence.

An Alternative to Crop Insurance

The market solution in insurance for the small farmer demands payment of very high premium. An alternative is possible, one that can be implemented by NGOs who will have a low transaction cost of providing insurance.

Investing in NPAs

There are certain regulatory and fiscal issues facing investors in the emerging NPA business. These in their current form would deter investors from investing in the business. This article highlights the issues and points the way forward to their effective resolution to facilitate the investment process.


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