The Reserve Bank of India’s monetary policy was a non-event this week. In trying to maintain a delicate balance between fragile growth and a persistent price rise in the economy, the central bank did the best it could. Nothing at all.
It is mandated by law to ensure price rise or retail inflation in the country does not rise beyond 6 percent, a mark that was breached for two consecutive quarters. Supporting growth remains its priority, and so it has to swallow higher inflation until the economy can get back on its feet. In the process, with the policy rate at 4 percent and inflation at over 6 percent, the real rates (adjusted for inflation) are in the negative territory. This has invited criticism from some quarters. The RBI, however, maintains that the hump in inflation is “transitory” still, and will come to pass.
For the current financial year, the RBI assesses that inflation could average about 5.7 percent, an improvement over the 6.2 percent average seen last year. Thereafter, it sees inflation at 5.1 percent for the first quarter of FY23. This means that inflation will remain above the midpoint of 4 percent as per its 2-6 percent inflation target. This also signals that the room to cut rates any further, with inflation remaining high, is none at all. Most economists expect the RBI to start hiking rates over the course of the next financial year, and it returns to normal course after its unusual largess the previous year to fight the pandemic. Your home loan or other loan rates have essentially bottomed out.
RIP Vodafone?
Everyone is writing obituaries for Vodafone Idea. It simply has too much debt to really be able to pay up, and the owners are done with burning cash. The captain has abandoned ship (KMB is no longer Chairman), offered to hand over reins of the company to the government.
The outstanding debt is nearly Rs 1.80 lakh crore. A large chunk of this — about Rs 60,000 crore — is what VI owes the government in the form of adjusted gross revenue (AGR) dues, another Rs 23,000 crore as money owed to banks, and Rs 96,000 crore as deferred spectrum obligations. Phew!
Add to this, Vodafone Idea has to invest in 4G and 5G infrastructure, deal with living in an environment where tariffs are one of the lowest in the world, and you have to constantly watch your back or your competitor will take away your customers.
Running a telecom business in India is no piece of cake. This cake requires a whole lot of cash burn, fees and charged to be paid to the government, massive investments to upgrade the infrastructure, license fees and the list goes on. Vodafone has little cash left in the company, maybe just enough to survive a couple more months.
If the worst fears are realised, and Vodafone defaults or folds up, it may not turn out to be as large a systemic issue for the banking system as the markets are making it out to be. After all, the funded exposure of the banking system is relatively small, and even if the debt figure looks large in absolute terms, it is minimal with respect to the loan book size of these banks. However, smaller banks like IDFC First Bank and Yes Bank — whose Vi exposure is 16.1 percent and 12 percent respectively of their networth — may face a larger hit to asset quality.
The writing is on the wall. One of India’s top telecom players, with a large subscriber base of over 27 crores, is on the verge of bankruptcy, and there’s precious little that can be done. There is absolutely nothing to cheer about the company going down. It is not good for the economy, it is certainly not good for consumers.
We know what happens when a lot of power is left in the hands of too few people. So what is the solution?
A Satyam-like takeover, some suggest, or some mercy from the government, maybe another large loan? Perhaps a merger with government-owned BSNL? Got any idea, sirjee?
E-RUPI launched!
The government also introduced an e-RUPI this week, a digital payment initiative that it believes will revolutionalise the direct benefit transfer system. The government describes it as “a cashless and contactless instrument for digital payments. It acts like an e-voucher based on a QR Code or SMS string, which is delivered to the mobile phones of beneficiaries.”
It does look promising, and here’s a roundabout way to tell you why.
Governments want to take care of their people, especially those at the bottom of the pyramid. To ensure such people have access to basic necessities, the government could offer food, pulses at subsidised rates. So you pay a lower price, and the government foots the difference by paying the ration shop. Very simply put, this is how the public distribution system would work. But it didn’t really work that well. The problem of leakages or corruption through the PDS was massive, where a middleman could maneuver the system to help an ineligible person claim subsidies, leaving out those actually in need. The Indian government ended up losing millions every year offering subsidies to imaginary people.
To fix this, the government run a massive drive to open bank accounts for the poorest of households under the Jan Dhan scheme, and link it to a unique identity, Aadhaar. This way, the government ensured it was going to the right beneficiary, and not being appropriated or misused by middlemen. Problem solved? Not quite.
We have over 1.3 billion people, and even after 42 crore-plus accounts have been opened under the Jan Dhan scheme, many households are still uncovered, or simply unable to use their accounts because of a lack of banking infrastructure in remote areas, among other reasons. What does the government now do to get to these people, also potentially the most disadvantaged lot? It comes up with e-RUPI.
As of January 2021, reports suggest India had over 1.10 billion mobile connections. That equals almost 85 percent of our population. Viola! The government sitting in New Delhi can thus send “e-RUI” via an SMS or QR Code to an Aadhaar-linked mobile number, which the beneficiary can access of his or her phone. This works like a prepaid gift voucher, which you can redeem at designated accepting centres, like a Sodexo voucher.
While no system is 100 percent perfect, and we may or may not see challenges in e-RUPI transfers, it does seem like more leak-proof way for Direct Benefit Transfers.
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