Author: Smriti Sharma

Smriti Sharma is a researcher at the National Institute for Public Finance and Policy.

• Sustainable strategy to eliminate vector-borne diseases, 28 February 2017
• Problems of the Health Management Information System (HMIS): the experience of Haryana, 13 June 2016.
  
• Closing the gap between farmers and warehouses, 13 July 2015.
  
• Improving warehousing in India through a grading mechanism, 25 March 2015.
  
• A dramatic cost reduction for KYC using the e-KYC API of UIDAI, 14 September 2014.
  

Sustainable strategy to eliminate vector-borne diseases

by Shubho Roy and Smriti Sharma.

In his budget speech of 2017, the Finance Minister Arun Jaitley announced that the government has prepared an action plan to eliminate two vector-borne diseases by the end of this year (Paragraph 64):

"Poverty is usually associated with poor health. It is the poor who suffer the maximum from various chronic diseases. Government has therefore prepared an action plan to eliminate Kala-Azar and Filariasis by 2017..."

Kala Azar, also known as Visceral leishmaniasis, is caused by a protozoan parasite of the Leishmania genus. It is carried by an insect vector: Sandfly. If left untreated, Kala Azar can lead to the death of the patient.

Filariasis is a painful disfiguring disease which is caused by roundworms of the Filarioidea superfamily. It is carried by a mosquito vector: Culex quinquefasciatus. The most disturbing symptom is elephantiasis where the patients body parts swell to massive proportions. The infection generally occurs during childhood but manifests itself later in life and can lead to permanent disability.

In this article, we analyse this announcement. We argue that eliminating vector-borne diseases is a good cause for health policy to pursue. However, there is a need to place these actions within a larger strategy on communicable and vector-borne diseases. The critical component of that, which is at present lacking in India, is a sound surveillance system.

Communicable diseases in health policy

A lot of what governments do in the field of health is of dubious value. Tackling communicable diseases, like Kala-Azar and Filariasis, however passes the basic tests of public economics (Hammer, 2015). Communicable diseases involve a market failure, an externality. When one person gets infected, not only does that person suffer, there is the possibility of others getting infected. This is a negative externality. Each person will under-spend on preventing or curing the disease as the individual does not price the adverse impact upon others. This creates a market failure and justifies a role for the State.

In the extreme, when we get to eradication, we get to a public good. When a communicable disease is eliminated, everyone is protected, even if they did not pay for it. It fits both the tests of a public good:

1. non-excludable: it is not possible to prevent consumers who have not paid for it from having access to it. There is no way to ensure that only the people who paid to eliminate Kala Azar don't get Kala Azar and others are still exposed to it.
   
2. non-rivalrous: it may be consumed by one consumer without preventing simultaneous consumption by others. When an infectious disease is eliminated, it cannot come back. Enjoying good health by some persons does not reduce the supply of good health, i.e. absence of the disease.
   

Why Kala Azar and Filariasis?

But we must ask: Why were Kala Azar and Filariasis prioritised for elimination in the Budget speech?

It is not because they are most widespread diseases in the country. Statistics from the Directorate of National Vector Borne Disease Control Programme (NVBDCP) (Table 1) show that here are other vector-borne diseases like Malaria, Dengue and Chikungunya which are more important.

Table 1: Magnitude of vector-borne diseases in India (2014)

Disease	Cases in 2014	Deaths in 2014
Malaria	1,102,205	562
Dengue	40,571	137
Chikungunya	16,049	Unavailable
Encephalitis (Japanese and Acute)	12,528	2,084
Kala Azar	9,241	11
Filariasis	Unavailable	Unavailable

Perhaps it is felt that these diseases are low hanging fruits. Kala Azar is restricted to four states while other vector borne diseases are everywhere. In 2014, a new drug liposomal amphotericin was found to cure Kala Azar with a single dose. Previously, a course of 28 daily doses with hospitalisation was required.In the case of Filariasis, India has reduced the national microfilaria rate (based on sample blood tests) from 1.24% in 2004 to 0.44% in 2014. In Goa, Daman & Diu and Pondicherry, the rates have fallen low enough that mass drug administration (the standard treatment methodology) was stopped in 2012. The government has also achieved good coverage under Mass Drug Administration with 85.6% of the population covered in 2014.

Choosing low hanging fruits has its virtues. It allows for quick results and can potentially help create State capacity. There is a unique charm to eradication. Once a communicable disease is eradicated, you do not have to work on it again (apart from some low-level continued surveillance to check for recurrence). This frees up resources for other purposes.

A story of failure

In the recent past, India has seen many outbreaks of re-emerging infections, which were claimed to be eliminated. Kala Azar itself reemerged after near eradication in the 1960s. DDT was used for controlling malaria between 1953-64. This helped to decimate the sand-flies that cause Kala Azar. But the pathogen continued to reside in humans. In 1977, when the sand-flies resurged, Kala Azar resurfaced. The disease again resurged in 1983 and 2003 (Muniaraj, 2014). The National Health Policy of 2002 had envisaged elimination of Kala Azar and Filariasis by 2010. This was postponed to 2015.The plague in Surat in 1994 was followed by an outbreak of pneumonic plague in Himachal Pradesh in 2002 (Joshi et al., 2009). There was another bout of plague in Uttarkashi in 2004 (Mittal et. al., 2004). The first outbreak of Chikungunya in India was reported in 1963 but it resurged after three decades in 2006.

What does it take to finish the job?

It is important to ensure that an elimination drive is sustained beyond its stated date. Vector-borne diseases will not cease to exist with the administration of mass dosage of drugs alone. We need continued disease surveillance and epidemiological investigation post-2017 too. A Kala Azar patient can relapse after six months after the end of treatment. Similarly, Filariasis does not manifest itself in early stages in any outward symptoms. The infected person can thus continue to host the disease for several years.

India is at the cusp of eliminating Kala Azar and Filariasis. It must ensure that the eliminated diseases do not re-emerge. This requires a surveillance system. Surveillance can provide information on entomological data, which can help in creating clusters of diseases that can be targeted by similar vector management measures. Surveillance for epidemiological data can help in calculating the disease burden attributable to each disease. Lastly, surveillance can provide information on implementation. This can help in monitoring and evaluation of disease control and prevention.

Prevention, control and surveillance: current scenario

NVBDCP's present strategy concentrates on vector management by using indoor residual spraying, nets impregnated with insecticides and anti-larval measures. In addition, early diagnosis and complete treatment is provided to afflicted patients. NVBDCP frames technical guidelines and policies to guide States for implementation. Health departments are responsible for the prevention and control of vector-borne diseases at the State level. But their approach to vector-borne diseases continues to be ancillary and ad hoc in absence of entomological and epidemiological data, and data dissemination:

• Poor entomological surveillance: The government established 72 zonal Malaria offices to conduct entomological surveillance but only 50% of these are functional. State health departments conduct larval surveys but they do not count adult mosquito populations. The field staff uses the outdated ladle and dip method for studying the vector population, despite the availability of new and improved devices like ovitraps. Vector management efforts employ fogging and anti-larval activities to contain mosquito populations. But, this is done without adequate evidence on vector populations.
  
• Poor epidemiological surveillance: IDSP has a laboratory network of 117 district labs in 28 States/UTs to perform tests for epidemic-prone diseases. Out of the 117 laboratories, 44% of the laboratories do not conduct all the tests recommended under IDSP. This means that some diseases cannot be confirmed and therefore they remain unreported. Private healthcare providers do not report diseases and that leads to under-estimation of the disease incidence. The data for dengue, Kala Azar and Chikungunya on NVBDCP's website is outdated enough to render it useful for public health management. Case and death data for filariasis is unavailable.
  
• Poor data collection and dissemination: The reports from the rural reporting units to District Surveillance Units of IDSP are often delayed. While 85% districts communicate surveillance data through emails, 67% report data through the portal. This leads to delays in collating and analysing data. State health departments campaign, educate and inform the public about the diseases. But, none of the measures taken by State health departments are ever evaluated for their impact.
  

The information from NVDCP has three groups of problems:

1. Missing data: The epidemiological data for some diseases is either incomplete or missing. The missing data on deaths cannot be construed as zero deaths.
   
2. Policy decisions without evidence: India hopes to eliminate Filariasis by the end of 2017. But there is no data on the number of cases and deaths resulting from Filariasis.
   
3. Under-estimation of incidence: The burden of disease is likely to be highly under-stated by the official statistics. As an example, Dhingra et. al., 2010 estimate that Malaria kills between 125,000 and 277,000 persons in India every year. This is vastly unlike the official statistics. Similarly, Haanshus et. al., 2016 find that in the class of hospitalised patients with undifferentiated fever in India, malaria prevalence is as high as 19%. Similarly, Shepard et. al., 2014 estimate there were 5.8 million cases of dengue per year.
   

Building a surveillance system

A sustainable strategy should bring down the infectious diseases in the short term and avoid resurgence later on. The US Centers for Disease Control and Prevention (CDC) has developed a framework for preventing infectious diseases which focuses on:

• Continued surveillance of infectious diseases, laboratory detection and epidemiological investigation;
  
• Reducing diseases by developing vaccines, preparing strategies for infection control and treatment;
  
• Using scientific data to inform health policies to prevent and control infectious diseases.
  

India requires the development of similar principles. We need a robust surveillance system that measures all vector-borne and communicable diseases. This system should generate a constant stream of good quality data which can feed back into management decisions in public health.

The policy agenda for vector borne diseases involves the following components:

• Building entomological surveillance capabilities: State health departments should invest in their entomological surveillance capabilities. They should systematically collect and document changes in vector occurrence, abundance and infection rate for the entire country. State health departments should complement larval surveys with adult surveys. In order to estimate and monitor adult mosquito prevalence, health departments should procure mosquito traps like ovitraps and BG-Sentinel traps (Sivagnaname and Gunasekaran, 2012). State health departments should make the entomological surveys public. For example, the Health Department of New York has launched interactive maps. These maps show the progress made on mosquito surveillance and control operations. The City of Chicago publishes maps with a list of locations and mosquito test results. The CDC displays information on vector borne diseases in maps which also give information on the vectors for each disease.
  
• Improving epidemiological surveillance: The government should assess the disease burden for each vector-borne disease. State health departments collect information on disease incidence and mortality. The epidemiological surveillance should also include information on geographical distribution of the disease and sub-populations affected. This information should be compiled and made publicly available. Better laboratories are required that conduct tests for all the vector-borne diseases.
  
• Improving data collection and dissemination: The government should strengthen data management. The health staff responsible for collecting entomological and epidemiological data should be given electronic devices like tablets or mobile phones. The field staff should enter surveillance data through these digital devices. For example, Kenya moved away from manual data reporting to electronic data reporting for its National Tuberculosis, Leprosy and Lung Disease Programme with an Android based application called TIBU. Florida's Department of Health puts out weekly and annual reports on surveillance. State health departments should also conduct impact analysis on vector control measures. NVBDCP and IDSP should make these studies publicly available to all the stake-holders including other State governments, the private sector and consumers.
  

Building a generalised and integrated communicable disease management system is laying infrastructure. It can be used for tackling different problems from year to year. Our objective should be to lay this general infrastructure, and not narrowly run campaigns targeting one disease or another.

For an analogy, consider Aadhar. Aadhar is just an identity platform. However, it has been built on robust technology using sound processes. In itself, Aadhar does not do much. However, Aadhar can act as a backbone for multiple initiatives ranging from financial inclusion, rationalising subsidies, targeting delivery of public services, national security, preventing corruption and leakage, etc. It constitutes a general purpose infrastructure which builds a platform on which many specific public services can run.

In similar fashion, a well designed communicable disease management platform which leverages technology can be used to deal with kala-azar and filariasis this year, but can be used for malaria, chikungunya and dengue the next year. The same surveillance, monitoring and data dissemination systems will work for multiple diseases. So far, the government has integrated the disease surveillance programme, i.e. brought multiple programmes under one umbrella but it has not re-imagined the way it should be carried out.

References

The case for Universal Healthcare is weak by Jeffrey S. Hammer, July 2015, Ajay Shah's blog

The lost hope of elimination of Kala Azar (visceral leishmaniasis) by 2010 and cyclic occurrence of its outbreak in India, blame falls on vector control practices or co-infection with human immunodeficiency virus or therapeutic modalities by Muniaraj Maylisamy, 2014, Tropical Parasitology

Epidemiological features of pneumonic plague outbreak in Himachal Pradesh, India by Joshi K et al., May 2009, Transactions of the Royal Society of Tropical Medicine & Hygiene

Quick control of bubonic plague outbreak in Uttar Kashi, India by Mittal V et al., December 2004, The Journal of Communicable Diseases

Report of the Working Group on Disease Burden for the 12th Five Year Plan by Planning Commission, Govt. of India, May 2011

Adult and child malaria mortality in India: a nationally representative mortality survey by Dhingra Neeraj et al., October 2010, The Lancet

A high malaria prevalence identified by PCR among patients with acute undifferentiated fever in India by Haanshuus CG et al., July 2016, PLOS ONE

Economic and Disease Burden of Dengue Illness in India by Shepard Donald S. et al., December 2014, The American Journal of Tropical Medicine and Hygiene

Need for an efficient adult trap for the surveillance of dengue vectors by Sivagnaname N. and Gunasekaran K., Indian Journal of Medical Research, November 2012

Handbook for integrated vector management by World Health Organization, 2012

Smriti Sharma and Shubho Roy are researchers at the National Institute of Public Finance and Policy, New Delhi.

Protecting retail investors' interest in the bond market

by Ritika Chhabra and Anjali Sharma.

Context

On January 04, 2017, SEBI released a discussion paper titled "Public Issuance of Non-Convertible Debentures having credit rating below Investment Grade" (hereafter, discussion paper) for public comments. The proposals in the discussion paper focus on retail investors' participation in public issuances of sub-investment grade non-convertible debentures (NCDs). Each of these terms is technical and its useful to understand what they mean before analysing SEBIs proposals:

• While protecting retail investors' interest in securities markets is one of SEBIs stated objective, there is no standard definition of a retail investor which is consistent across securities. For example: for equity public issuances, a retail investor is one whose bid does not exceed Rs. 2 lakhs. For issuance of tax free bonds, the IT Act, 1961 defines retail investor as one whose bid does not exceed Rs. 10 lakh.

• A public issuance is defined as per Section 42 of Companies Act, 2013 as one where securities are issued to more than 200 investors. Typically, public issuance of corporate debt securities is in the form of NCDs. The issuance process is laid down by the SEBI Issuance and Listing of Debt Securities (ILDS) Regulation, 2008. As per ILDS Regulation 4(2)(c), for public issuance of debt securities, the issuer has to get at least one credit rating.

• A sub-investment grade rating is one that is below BBB-. Debt securities with this rating are commonly referred to as junk bonds.

In the discussion paper, SEBI makes two proposals with regard to such issuances. First, the introduction of a pictograph, known as the risk-o-meter, to disclose credit rating in the offer document. Currently, credit rating is disclosed on the first page of the offer document in text form. Second, the introduction of a two level restriction on retail investor participation - an investor level restriction: Rs. 2 lakh; and an aggregate restriction on all retail investors: 5% or 10% of the issue size.

In this article, we evaluate SEBIs proposals and offer our analysis of key issues that this discussion paper highlights.

Analysis of SEBIs proposals

1. The proposals are relevant for a very small part of the corporate bond issuance market: The market for public issuance of sub-investment grade NCDs is small, both in absolute terms and relative to the corporate bond market (Table 1). In 2015-16, 2 of the 20 public issuances were sub-investment grade and these accounted for only 1.3% of the public issuance volume. As a proportion of the total corporate bond issuance volume, these were less than 0.1%.

   When we look at the identity of issuers and the rating profile of their issuances, we find that the public issuance market is dominated by highly rated issuers. These include large public sector entities like NTPC, NHAI, NABARD, IRFCL and 3-4 private non-bank finance companies (NBFCs) who are regular issuers. There are only 2-3 NBFCs which issue in the sub-investment grade category and these are repeat issuers.

Table 1: Corporate bond issuance market in India

Year	Issuance value	Private placement	Public issuance	Public issuance - sub-investment grade1
	(Rs. trillion)	(%)	(%)	(%)
2014-15	4.1	97.7	2.3	0.34
2015-16	4.9	93.2	6.8	0.09
2016-172	5.1	94.3	5.7	0.09
Source: SEBI
1 Sub-investment grade represents a credit rating below BBB-
2 Data till December, 2016

2. Retail investors, for whom investment limits are proposed, are the main investors in publicly issued sub-investment grade NCDs: We find that retail investors are the primary investors in these issuances. For example: 16 unique ISINs were generated as part of 2 issuances in 2015-16. An analysis of the ownership pattern of these ISINs, using data from NSDL, shows that in 15 ISINs, retail investors' subscription was more than 90% of the issue size. In the remaining one ISIN, it was more than 70%.

3. SEBIs problem identification is unclear and not supported by data: In the discussion paper, SEBI states:

   Unlike private placement of debt securities, retail investors participate in the public issues. These public issues which are rated below investment grade (i.e. below BBB-) give high coupon rate. The advertisements of such issues also focus mainly on the coupon which lures the retail investors to invest.

   Further, certain issuers with credit rating below investment grade, have issued both secured and another unsecured NCD through same offer document with different credit ratings. Thus, for a retail investor to differentiate between secured and unsecured tranches within the same offer document and with different credit ratings may be a complex task and may affect their investment decision.

   It is felt that there needs to be an additional layer of protection for the retail investors, who get attracted towards such debt securities which though on one side pay higher coupon but on the other side have a below investment grade credit rating.

   From these statements, it appears that SEBI identifies three problems: (1) the manner of disclosure of credit rating in sub-investment grade issue advertisements; (2) issuers offering secured and unsecured tranches within the same offer document, which makes in complex for retail investors to understand credit rating; and (3) retail investors getting attracted to the return and investing in risky securities.

   There are two issues with SEBIs problem identification process. First, it is not supported by any data or analysis. For example in case of problem (1) and (2), there could be two issues: with the visibility of the text based disclosure, or with investors' understanding of the meaning of a credit rating or both of these. It could also be that there are more problems with disclosure quality than just credit rating or that disclosure quality is not a problem at all. Retail investors are attracted by high returns, are aware of the risk, yet invest because of other considerations, such as fact that these are repeat issuers and their past performance is known. Second, the problem identification does not evaluate whether a regulatory intervention is needed. For example: in case of problem (3) if retail investors are attracted to risky securities, it is unclear why the regulator should step in.

4. Cost benefit analysis is missing: Proposal 1 -- introduction of a risk-o-meter, seeks to address problem (1). Credit rating is currently displayed in text form on the first page of the offer document. The table that explains the implications of the rating is placed inside the offer document (Figure 1).

   Figure 1: Current disclosure of credit rating in offer document

   The proposed NCD risk-o-meter makes the credit rating more clearly visible than a text based disclosure (Figure 1 and Figure 2). However, it does not necessarily improve investor understanding of the credit risk. In case of the mutual fund risk-o-meter, from which this proposal is inspired, the risk of the offer can be clearly understood from the risk-o-meter (Figure 3). As mentioned earlier, its possible that investors do not understand credit risk or that there is no problem with the current disclosure format. In both these cases, the inclusion of a risk-o-meter adds no value. The modification of the offer document format may create costs for issuers. However, no cost-benefit evaluation is offered in this regard.

   For problem (2), where an unsecured and secured tranche is issued through the same offer document, SEBI offers no proposals. For example: it does not state whether such offer documents will have two risk-o-meters.

   Figure 2: Proposed NCD risk-o-meter

   Figure 3: Mutual fund risk-o-meter

   In Proposal 2 -- introduction of a investor level and aggregate level investment limit for retail investors, SEBIs approach is contrary to its approach to retail investors in equity markets. An equity security is far riskier than a sub-investment grade bond, yet SEBI actively encourages retail investor participation in equity issuance. Further both the limits proposed: Rs. 200,000 per investor and 5% or 10% aggregate limits are arbitrary. The benefits of this proposal from an investor protection perspective are unclear. Yet the costs are obvious. Given that retail investors are the main investors in these issuances, these limits may cause the sub-investment grade issuance market to dry up completely. Also, regulatory interventions that seek to limit investor choice are a firm step away from SEBIs stated objective of being a disclosure based regulator and a step towards being a merit based regulator.

A small survey: can key disclosures be easily found in offer documents?

Given that SEBI has identified the visibility of credit rating disclosure in offer document as a problem, we conducted a small survey to understand whether other key disclosures can be easily found from an NCD offer document. We gave respondents an offer document for a public NCD issuance, and asked them to find three details about the issue from it: (1) whether the issue is secured or unsecured, (2) what is the rate of return, and (3) what is the tenure. We asked them to measure the time it took them to find this information. 15 personnel from Indira Gandhi Institute of Development Research (IGIDR) and the National Institute of Public Finance and Policy participated in the survey. Table 2 provides a profile of the respondents and Table 3 shows they survey results.

Table 2: Profile of survey respondents

No. of respondents	15
Respondents with demat account	53%
Respondents who invested in equity securities in the last 18 months	40%
Respondents who invested in debt securities in the last 18 months	20%
Average time taken to respond to the survey	15-30 minutes

Table 3: Survey results

	Responses
Questions	Correct (%)	Incorrect (%)	Can't say (%)
Is the issue secured or unsecured?	67%	20%	13%
What is the size of the issue?	47%	40%	13%
What is the minimum tenure of the NCD?	27%	53%	20%
What is the yield for minimum tenure NCD?	40%	40%	20%
What is the maximum tenure of the NCD?	33%	40%	27%
What is the yield for maximum tenure NCD?	20%	53%	27%

The survey results point to a deeper problem in offer document disclosures than just the credit rating. Even locating basic information like yield and tenure is not easy.

As a separate exercise, we reviewed 5 abridged prospectuses from public issuances done in 2015-16 and 2016-17. An abridged prospectus accompanies the application form, and SEBI has mandated that the issue term sheet be disclosed on the first page. Even here, we found that in 1 case the terms of the issue were not on the first page. This was a case where issuance was done as part of a shelf prospectus. A typical abridged prospectus is around 40 to 50 pages in length, and even here it is not easy to locate key disclosures within it.

Conclusion: way forward for SEBI

SEBIs proposals in the discussion paper focus on retail investor protection. Globally, regulators follow a two pronged disclosure based approach to do this. First, reducing information asymmetry between issuers and investors by regulating the quantum and quality of disclosures. Second, enforcing disclosure standards and penalising violations of disclosure norms. Securities regulators, even in Asian countries, have moved away from the merit based approach of imposing investment limits.

Given SEBIs stated objective of being a disclosure based regulator, it needs to focus on improving disclosure quality, not on constraining retail investor participation. However, this requires adopting a systematic and research based approach to addressing the disclosure problem. Our survey findings suggest that SEBI needs to do the hard work of evaluating disclosure effectiveness more comprehensively. In undertaking this exercise, SEBI can take cues from the recommendations of the Sumit Bose Committee (2015) on improving disclosures and curbing mis-selling for financial products. Simply, introducing a risk-o-meter will be insufficient and ineffective.

Other measures, such as stepping up investor education efforts in the debt securities space, may also be relevant. In case of equity securities, SEBIs efforts in this area along with the efforts of a growing industry of equity analysts and proxy advisory firms has contributed to improving investors' understanding of risks and return. A similar effort for the corporate debt market may have greater long term benefits, for both investors and issuers, than introducing any investment constraints.

Finally, sound regulatory governance is critical to building participants' confidence in the financial system and fostering certainty. Regulatory capacity is finite and regulatory interventions not cost-less. Hence, regulation making needs to follow the discipline of a robust process of identifying a problem, proposing an appropriate solution based on research and analysis, evaluating costs and benefits and carrying out a public consultation process. This will ensure that only meaningful interventions, for which benefits exceed the costs, get enacted. SEBI has already started on this path by regularly seeking public feedback on proposed interventions. However, its proposals are not supported by robust problem identification. There is no cost benefit analysis, research or empirical evidence in support of the proposals made. It shows that SEBI has some way to go in meeting global standards of regulatory governance.

The Finance Research Group has submitted its comments on this discussion paper to SEBI.

Ritika Chhabra and Anjali Sharma are researchers at Finance Research Group. We thank all the FRG-IGIDR and NIPFP team members who took time out from their busy schedules to respond to our survey. We also thank Renuka Sane and Bhargavi Zaveri for useful discussions and suggestions.

Interesting readings

The agenda at SEBI by Ajay Shah in Business Standard, February 20, 2017.

Containing Trump by Jonathan Rauch in The Atlantic, March, 2017.

Budget and agri-commodity trading: Searching for a spot in the future by Pravesh Sharma and Raghav Raghunathan in The Indian Express, February 16, 2017.

Half-hearted FDI reform by Bhargavi Zaveri & Radhika Pandey in Business Standard, February 16, 2017.

American Institutions Are Pushing Back Against Trump by Peter Beinart in The Atlantic, February 15, 2017.

Importance of goods and services by Bhanu Joshi and Neelanjan Sircar in The Hindu, February 15, 2017.

Stringent data protection law is the need of the hour by O N Ravi in The Economic Times, February 15, 2017.

ISRO PSLV-C37 Launch with Onboard Camera and Stage/Satellite Separation events by Wayne Tsai, February 15, 2017.

Tech and the Fake Market tactic by Anil Dash in Medium, February 10, 2017.

Big Brother is winning by Pratap Bhanu Mehta in The Indian Express, February 8, 2017.

PM and the UP crucible by Kumar Ketkar in The Indian Express, February 8, 2017.

Budgeting For Democracy by Chakshu Roy in The Indian Express, February 7, 2017.

Why algorithmic trading is unpopular among finance practitioners: As Goldman Embraces Automation, Even the Masters of the Universe Are Threatened by Nanette Byrnes in MIT Technology Review, February 7, 2017.

Recipe for unfettered raid raj by Saumitra Dasgupta in The Telegraph, Febraury 6, 2017.

Ur-Fascism by Umberto Eco in The New York Review of Books, June 22, 1995.

Announcements

Workshops at IGIDR, 2017

The Finance Research Group at Indira Gandhi Institute of Development Research is inviting submission of papers for Field Workshops during 2017. Each field workshop will discuss six papers in a day, dedicating a full hour to each paper for presentation, discussions by an expert in the field and the general audience. Details are as follows:

• Household Finance Research, 1^st April 2017
  Submission deadline: 5^th March. Acceptance: 8^th March
  Details at http://www.ifrogs.org/EVENTS/hhfin2017.html
  
• Financial Markets Research, 6^th May
  Submission deadline: 26^th March, Acceptance: 2^nd April
  Details at http://www.ifrogs.org/EVENTS/finmkts2017.html
  
• Firm Finance Research, 24^th June, 2017
  Submission deadline: 20^th May. Acceptance: 27^th May.
  Details at http://www.ifrogs.org/EVENTS/firmfin2017.html
  
• Mathematics and Economics, 10^th and 11^th August, 2017.
  Details at http://www.ifrogs.org/EVENTS/mande2017.html
  
  

Support: IGIDR will provide accomodation at the workshop venue for 2 nights around the dates of the workshop.

Contact details: Submissions must be sent as PDF files, to Jyoti Manke at jyoti@igidr.ac.in, +91-22-28416592 (office) or +91-98205-20180 (cellphone).

Financial Sector Reforms: A status report, 2017

by Ashish Aggarwal.

In this article, I piece together information in the 2017 budget to write a status report on financial sector reforms.

1. Consumer protection: Three important initiatives are in progress: -

   Financial Redress Agency (FRA): The FRA is expected to provide a unified, speedy and convenient complaint settlement mechanism to retail financial consumers. In the Budget speech of 2015, the Finance Minister had proposed to create a Task Force to establish a sector-neutral FRA. In June 2016, the Task Force recommended enacting a financial sector consumer protection law and proposed an implementation blueprint. It also addressed concerns expressed by RBI and SEBI. RBI has supported the idea of a single grievance redress agency. One example is their submission in the context of regulating deposit taking activities across regulators and State Governments (Twenty-first Standing Committee on Finance, 2015-16, Para 59). The government had recently invited public comments on the Task Force's report. The next steps in this journey consist of draft Bill on the proposed law, and the establishment of the FRA.

   Curbing illicit deposit taking schemes: There is considerable understanding of the problem of ponzi schemes. The twenty-first report of the Standing Committee on Finance (referred above) had recommended various measures to plug the regulatory gaps and overlaps related to deposit taking activities. This year, the Finance Minister has promised to introduce the Banning of Unregulated Deposit Schemes and Protection of Depositors' Interests Bill soon. This is the second version of the draft law and was released in November 2016 for comments. The Government had promised this law in last year's budget as well as in the ATR on the above report. The proposed law aims to empower the State Governments to regulate deposit schemes which today slip through the regulatory cracks. It allows the designated courts to impose significant penalties (Jail up to 10 years and fine of up to twice the amount of total funds collected). It proposes significant powers to the State Governments and the police.

   The Government should use concepts from the draft Indian Financial Code to strengthen the regulating of deposit taking activities by the State Governments. For example, provisions related to accountability (Chapter 14), regulation making (Chapter 17), show cause notices and orders (chapter 25) could be adapted to strengthen the proposed Bill. The clause on warrant-less searches should consider the provisions related to investigation in the draft IFC (chapter 22). These would help improve the balance of regulatory powers with accountability. This year, the Finance Minister has also promised to plug the regulatory gaps in the Multi State Cooperative Societies Act, 2002, as part of the follow up to the recommendations of the above Standing Committee. As part of the clean up, the Government is also expected to soon introduce a Bill to amend the Chit Funds Act, 1982, though that has not been mentioned in the budget documents. Given the extensive nature of changes, it would be doubly useful to harness the work embedded in the draft IFC.

   Securities Appellate Tribunal (SAT): SAT's jurisdiction today covers SEBI, IRDAI and PFRDA. Orders by RBI are still not appealable at a tribunal. Other than that, the scope of SAT now approaches that of the Financial Sector Appellate Tribunal (FSAT), proposed in 2014. In light of the expanded jurisdiction, the Finance Bill, 2017 (S.145) proposes to provide for more members and benches of the SAT, including benches outside Mumbai. This would be achieved by amending the Securities and Exchange Board of India Act, 1992.

   The Government should consider modernisation of SAT's processes and administrative functions. Tribunal members should be able to focus on their case load instead of the day to day aspects of administrative functions like finance, human resource and information technology (Datta, 2016, Towards a Tribunal Services Agency). This would help reduce the time taken to dispose off cases.

2. Systemic Risk Regulation: Financial Data Management Centre (FDMC) is expected to provide for a nation-wide integrated repository of information relating to the financial sector. It would be used to study systemic risk, system-wide trends and facilitate a discussion about policy alternatives. Para 90(iii) of Budget document on implementation of last year's announcements (Implementation Document) notes that a draft Bill to set up the FDMC is proposed to be placed for public consultation. Last year, a draft Cabinet Note on setting up of a non-statutory FDMC was circulated. Based on the feedback received, the Finance Minister had approved creation of a statutory FDMC. Thereafter, a Committee to suggest a draft law was set up. In October 2016, this Committee submitted its report which included a draft Bill titled Financial Data Management Centre Bill 2016.

   The Government should focus on ensuring that FDMC has the statutory ability to: (i) create a truly integrated repository; (ii) develop capacity to provide research and analysis support to the Government and (iii) ensure that the Data Centre has the ability to evolve with the changing requirements over a period of time. It would be a sub-optimal if the FDMC would need to rely on the executive powers of the Government/ FSDC or the willingness of the regulators to achieve its objectives.

3. Digital Payments: The Committee to review framework related to digital payments has, as part of its report, suggested that regulation of payments should be separated from the central banking function of the RBI. This year, the Finance Minister has proposed creation of a Payments Regulatory Board (PRB) within the overall framework of RBI to regulate payments. The proposed PRB has equal representation from RBI and nominees of the Central Government, with the RBI Governor being the chair (S.148, The Finance Bill, 2017). In the proposed PRB design, no decision can be taken unless RBI agrees. However, this is an improvement over the present regime where a sub-committee of the Board of RBI is regulating payments.

   The Finance Minister has said in his budget speech that the Government will undertake a comprehensive review of the Payment and Settlement Systems Act, 2007 and bring about appropriate changes. This would be a major reform in this field.

4. Monetary Policy: In March 2015, as part of its monetary policy framework agreement, India had established inflation targeting as a goal for RBI. In June 2016, the Parliament amended the RBI Act to require the Government to set a CPI based inflation target once in every five years (S.45ZA). A six member Monetary Policy Committee (MPC) was designed to determine the Policy Rate required to achieve this target (S.45ZB). RBI and Central Government have three votes each on this Committee. In case of a tie, the RBI Governor has a second vote. In addition to creating institutional capacity, this reform brings transparency to the decision making process. Section 45ZI(11) requires each member of the Committee to record the reasons for voting in favour or against the resolution. Section 45ZL requires the RBI to publish the minutes of the meeting with details of vote of each member and the reasons recorded by them. Para 90(ii) of this year's Implementation Document notes that action on this reform has been completed.

   The Government should re-visit the design of the MPC in the future. In the current design, the RBI does not need to convince even one non-RBI Committee member on its policy stance for the decision to go through.

   The Government should use the MPC meeting process to develop a cookie cutter approach to improve working of regulatory forums. The effect of these amendments is immediately visible. Contrast the detailed minutes of the MPC with the brief disclosures of the meeting of the Central Board of RBI, held around the same time (Minutes of MPC meeting, December 6, 2016 vs. Release on the 562nd meeting of the Central Board, December 15, 2016). The meeting of the Central Board is summarised in 150 characters, excluding details of attendance etc. The tweet style disclosure of the Central Board meeting is not a one-off. The immediately previous meeting details are also 150 characters long and are, co-incidently, exactly the same in content. The gaps in the quality of disclosures are glaring when we make international comparisons (Patnaik and Roy, 2017, The RBI board: Comparison against international benchmarks).

5. Capital Controls: This year's budget speech proposes the abolition of the Foreign Investment Promotion Board (FIPB) in 2017-18. It notes that the FIPB has successfully implemented e-filing and online processing of the FDI applications. It proposes that the road map for abolition of FIPB would be announced over the next few months. The Government has also indicated its desire to further liberalise the FDI policy. The abolition of FIPB would be a significant step if abolition is achieved in substance.

   Government needs to ensure that important reform steps do not slip through or get stalled. Control on all capital flows is exercised by the RBI, in consultation with the Government. The Finance Act of 2015 (S.139) had amended Section-6 of the Foreign Exchange Management Act, 1999 (FEMA) to provide that control on non-debt capital flows would be exercised by the Government, in consultation with the RBI. This amendment has not yet been notified. This requires the Government to first issue a notification distinguishing debt and non-debt instruments. One would have assumed that once the Parliament has amended a law, the government would be able to notify the same in a reasonable time.

6. Government debt management and its bond market: Two important initiatives are in progress: -

   Public Debt Management Agency (PDMA): In October 2016, the Government took first step by setting up an advisory Public Debt Management Cell (PDMC). The Office Memorandum notes the functions of PDMC and mentions a two-year (October 2018) journey towards a statutory PDMA. The Finance Bill, 2015 (Chapter VII) had proposed setting up a PDMA but the move was rolled back in April that year. This reform appears to be back on track. However, the first real progress would be to introduce a law that would establish the agency (Pandey and Patnaik, 2016, Legislative strategy for PDMA).

   Unified market for government securities: This reform appears to have lost traction after the 2015 roll back of the move to shift regulation of bond market from RBI to SEBI. The Finance Bill, 2015 (S.157) had proposed to create a unified market for government securities. There is some action in this Budget aimed at improving retail participation in government securities. It also captures some initiatives aimed at deepening of the corporate bond market.

7. Recovery of debt: DRTs deal with cases related to debt due to banks and financial institutions. Last year's budget had said that the Government would focus to strengthen the DRTs through computerised processing of court cases. This year, the budget notes that the Government is providing appropriate infrastructure, filling up vacancies and providing training to DRT staff. Recent reports put the Debt Recovery Tribunals (DRTs) case backlog at over 95,000 cases. This year's Budget further note that along with the SARFAESI Act, the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (RDDB & FI Act) has been amended through The Enforcement of Security Interest and Recovery of Debts Laws and Miscellaneous Provisions (Amendment) Act, 2016. This is expected to facilitate expeditious disposal of recovery applications. Harmonisation of provisions of IBC, 2016 with the provisions of the SARFAESI and the RDDB & FI Act is expected to help to improve the credit and recovery environment.

   The Government should prioritise the capacity building efforts at the DRTs. Going forward, based on the Insolvency and bankruptcy Code, 2016 (IBC, 2016), the corporate cases are expected to shift to NCLT. However, the rules and judicial procedures need to be redesigned for both NCLT and DRT to deliver the expected outcomes (Understanding judicial delays in India: Evidence from Debt Recovery Tribunals).

8. Market for stressed assets: A well function market for stressed assets should encourage a lender sell its NPAs to an Asset Reconstruction Company (ARC). An ARC should be able to raise funds by issuing NPAs backed Security Receipts (SRs). It should then be able to sell the NPAs to redeem the SRs at a profit. This year, the Finance Minister has permitted listing and trading of SRs issued by a securitisation company or a reconstruction company in a registered stock exchange. This is aimed at enhancing capital flows into the securitisation industry and help deal with bank NPAs. This should help efforts to develop the market. Last year's budget proposal to enable the sponsor of an ARC to hold up to 100% stake in the ARC and permit non-institutional investors to invest in SRs have been effected. These have been achieved by amending the SARFAESI Act through The Enforcement of Security Interest and Recovery of Debt Laws and Miscellaneous Provisions (Amendment) Act, 2016 in August 2016.

9. Mechanism to close down failed financial firms: This year, the Finance Minister has promised to introduce the Bill relating to resolution of financial firms in the current Budget Session. He noted that together with the IBC, 2016, a resolution mechanism for financial firms would ensure comprehensiveness of the resolution system in our country. Last year, the budget had recognised the need for a specialised resolution mechanism to deal with bankruptcy situations in banks, insurance companies and financial sector entities so that losses are minimised. This year's budget notes that the draft law -- The Financial Resolution and Deposit Insurance Bill, 2016 is under vetting by Ministry of Law and Justice (See: Report of Committee to Draft Code on Resolution of Financial Firms). The Insolvency and Bankruptcy Board of India has already been constituted in October 2016. With the above work, the stage is now set for a resolution law. This would lead to creation of a Resolution Corporation (RC).

10. Taxation: Taxation of finance contains serious problems. The Government needs to re-engage with the task of enabling a simpler direct tax law. The Direct Tax Code Bill of 2009, which promised this, went through several amendments before being finally shelved (Para 129, Budget speech, 2015). The said speech made a case that the Income Tax Act had incorporated most of the suggestions. This assertion is a subject of debate (India still needs the Direct Tax Code, Requiem for a Code). The proposed amendments in this year's Financial Bill related tax administration are retrograde and need to be reconsidered (See: Rai, 2017, Notes on Union Budget 2017-18)

Outside of the above ten areas, the bad loans of the Public Sector Banks (PSBs) present a major concern for the Government. Based on RBI's data table, the net NPAs (gross bad loans less provisions) of nationalised banks and SBI stood at over Rs 3.2 trillion or about 2.4% of GDP at the end of March 2016. The problem of PSBs is an outcome of Government ownership. Unlike PSBs, the NPAs of private sector banks are relatively small at Rs 266.7 billion (7% of the PSBs' figure). RBI's recent Financial Stability Report (FSR, December 2016) forecasts that PSB category may continue to register the highest GNPA ratio (ratio of gross NPA to gross advances). Attempts at reforms are moving rather slowly. The road map for consolidation of banks is being drawn up. However, no specific progress is listed in this year's Budget. The Banking Bureau's job list is expanding but it seems to be struggling with relatively small battles. Last year, the Government had allocated Rs 229 billion for recapitalisation to 13 PSBs. This year, another Rs 100 billion has been budgeted with promise of more. However, over the years, infusing capital has not yielded the desired results.

There is much to look forward to in 2017-18. Most of the reforms seems to be headed in the correct direction. Direct tax administration and the NPA problem of PSBs seem to be the exceptions.

 

Ashish Aggarwal is a researcher at National Institute of Public Finance and Policy.

Monetary policy strategy for 2017

by Ila Patnaik and Ajay Shah.

India now has an inflation targeting central bank and a monetary policy committee. The first three monetary policy committee meetings have taken place. The first meeting cut the de jure policy rate, and the next two meetings chose to hold.

Winston Churchill once said If you put two economists in a room, you get two opinions, unless one of them is Lord Keynes, in which case you get three opinions. However, all the three meetings of the MPC featured six economists with one opinion.

In this article, we argue that conditions in the economy suggest that it is time to worry about forecasted inflation going closer to the low end of the target range.

Let's start at the measure of inflation that is used in defining RBI's objective, i.e. the year-on-year change of CPI:

Headline inflation, i.e. year-on-year CPI inflation

Y-o-y CPI inflation breached 5% in February 2006. After that, we had a long and painful bout of inflation. A recession began in India in 2012, and by mid-2013, inflation was on the decline. The latest value, for January 2017, shows 3.17%. This is benign when compared against the range from 2 to 6 per cent, which is coded into the RBI Act.

Each reading of year-on-year inflation is the average of twelve changes for the latest twelve months. To understand what is going on in the economy in recent days, it's useful to look at month-on-month changes. This requires seasonal adjustment. We have developed the models for seasonal adjustment at NIPFP, and will use this ahead.

Roughly half the CPI basket is food and food inflation is thus critical for the overall CPI. What is going on with food inflation? We use the WPI Food to look at this:

Month-on-month WPI Food inflation (SA, Annualised)

The values above are annualised month-on-month changes of seasonally adjusted WPI Food. This shows that from July onwards, we have had remarkably low food inflation. The CPI inflation that we have got stems from non-food inflation. Looking forward, the outlook for non-food inflation is limited because of softness in global prices of tradeables.

The poor man's statistical model of y-o-y CPI inflation is to forecast the m-o-m values using univariate time-series methods, and add up the latest 11 facts with 1 forecast to get a one-month ahead forecast. When we do this, the forecasts for February, March and April work out to 3.32%, 3.65% and 3.43%. These benign forecasts use no economic knowledge - they only reflect the time series structure of month-on-month inflation. These should be treated as the baseline on top of which we layer on economic thinking.

What about pressures on aggregate demand? There are four perspectives which suggest that the demand side will be weak in 2017 and 2018.

1. Exports growth is faring badly, partly owing to the difficulties of the global economy. The outlook for the global economy is poor, given the difficulties in China, Europe and the US.
2. From November 2016, we have been adversely affected by the demonetisation shock. We estimate that demonetisation induced a median -0.45 sigma shock to month-on-month seasonally adjusted changes in 27 macroeconomic series for November 2016, and a -0.15 sigma shock for 24 macroeconomic series in December 2016. For a comparison, when our surprise measurement methods are applied to 2008, we estimate there was a -0.25 sigma shock in September 2008 and a -0.44 sigma shock in October 2008. Demonetisation has adversely affected optimism of households. We expect that demonetisation will exert a sustained negative impact upon the economy through 2017.
3. Investment in India is faring poorly. The best measure of investment activity is the stock of projects classified as being `under implementation' in the CMIE Capex database. This stalled -- in nominal rupees! -- in 2012 and has not grown for five years. Things are likely to worsen on this front in the aftermath of demonetisation.
4. We are in the midst of a banking crisis. In December 2016, non-food credit grew by 5.32% nominal when compared with December 2015, which is 1.91% in real terms. The last time we saw lower values was at the time of the Lehman crisis in late 2008.

These four problems are, of course, inter-related. We overstate the gloom when we think of them as four orthogonal issues. Each of the four is a difficult problem which resists quick solutions. As an example, consider the time series of cash in circulation:

Cash in circulation (Trillion rupees)

If you extrapolate the straight line at the end, it will be many months before cash is back to pre-shock conditions. Similarly, consider the year-on-year changes of imports by the US from China:

Imports by the US from China

It is remarkable to see that the recent low value was as bad as that seen in the 2008 crisis. The sluggish values here bode ill for global demand for Indian exports.

These four difficulties suggest that output and inflation will evolve in a more negative way as compared with the baseline statistical forecasts described above. In this case, CPI inflation outcomes could be knocking on the lower end of the target range.

We feel that these issues will weigh on monetary policy in 2017 and 2018. Monetary policy acts with a long lag, so we have to look ahead when thinking about policy changes today. Further, monetary policy in India is relatively ineffectual, as the monetary policy transmission is weak. Mere 25 bps changes have little impact. When monetary policy in India has to move, large moves are required. We feel that substantial reductions of the short rate are required in 2017 in order to stay at the inflation target of 4%.


The authors are researchers at the National Institute for Public Finance and Policy.