Most important point, in the whole onion episode, is the way every authority is overlooking hoarding and supply controls by wholesalers and middlemen to secure high prices
The common man's luxury of onion consumption was covered in Moneylife issues recently. In spite of repeated assurances by the government, the aam aadmi continues to shed tears for the non-supply and the galloping prices of onions, if he can lay his hands on them. In fact, the price has sky-rocketed close to Rs90 a kilogram in some places and it may hit the Rs100 mark soon, before the festive season.
What has the government done so far to alleviate this basic requirement and grievance of the aam aadmi except for "promises" and "assurances" in ‘kilograms’, free of cost?
In the meantime, potatoes and tomatoes too have joined the onion bandwagon, and the prices of these have gone up between 25% and 40% in most cities.
Before the onset of cyclone Phailin hitting the Odisha and Andhra coasts, the price (of onions) had more or less stabilised and was hovering around Rs50 per kilogram. Now, after the cyclone hit these two states, trade sources claim that both harvesting and transportation have become difficult!
It may be recalled that when the onion crisis was in the embryo stage, the government had announced that the import of onions had been approved and shipments were expected from China and Pakistan. Egypt was the third source of supply.
It was also projected that onions from Karnataka would be hitting the market by the middle of September. True, the situation in Karantaka is better than before. But details are not available of the quantity of onions actually received from China and Pakistan, if any, and at what cost?
In any case, it appears to have made no difference to the market, as the demand remains high. On the top of this, according to Rajinder Sharma, chairman of Azadpur Mandi, in Delhi, the buyers have found imported onions to be less "tasty" compared to their counterparts from India!
In the meantime, protests have also been made as to why India should export onions without meeting its home demand first. The Gulf countries have been our traditional markets for a number of products and agricultural supplies are a regular feature for decades now. Just because we have failed to control the nefarious activities of middlemen and hoarders, we cannot afford to stop shipments to places like Dubai. We need to accept the fact that these are also staple items for consumption for fellow Indians, who are toiling in the desert sun!
We must also remember that both India and Pakistan were the main suppliers of onions to the Gulf countries. Because of our fluctuating policies, many other suppliers have come into the market. In the recent report that Moneylife carried on the onion situation in Dubai, we had mentioned the price factors. Now, we have additional information that Australia (Dh4.95 per kilogram) and USA Dh6.95 per kilogram) have started supplying "brown" onions to Dubai. At the current exchange rate of Dh1 = Rs17.50 these are not cheap, but, by and large, are consumed by expatriates from these countries.
Reverting to the Indian situation, it may be noted that NAFED (National Agricultural Cooperative Marketing Federation, Nashik) has been the apex body for onion exports. Now, the government proposes to entrust them with the task of importing additional quantity of onions from Turkey, Afghanistan and Egypt, besides China and Pakistan, to overcome the current impasse. Why didn’t they think of this earlier so as to not let the matter precipitate to this level? The imported onion is estimated to be priced around Rs40-45 per kilogram, an acceptable price situation, though, at the peak season, indigenous supplies would be costing anything between Rs10 and Rs15 per kilogram.
On this issue, there is really no use taking it up with Sharad Pawar. He did not bother to frame a workable solution with regard to rotting foodgrains in the FCI (Food Corporation of India) godowns. Nor, did he support the idea of distributing the same to the poorer section of the community, free of cost!
KV Thomas, on the other hand, has recently come up with the idea of setting up smaller
versions of godowns in various places, which will be able to reduce the storage problem, and possibly, reduce the control that some cold storages have in hoarding these onions!
But the most important point, in the whole exercise, is the way every one in authority is overlooking the hoarding and supply controls by wholesalers and middlemen to secure high prices. It is time the government wakes up from its deep slumber and breaks up this mafia, which appears to be well entrenched.
(AK Ramdas has worked with the Engineering Export Promotion Council of the ministry of commerce. He was also associated with various committees of the Council. His international career took him to places like Beirut, Kuwait and Dubai at a time when these were small trading outposts; and later to the US.)
What assurance can the RBI Board provide that important discussions and decisions will not be shared by its non-executive directors with their parent (or related) organisations that may have some commercial interest in financial sector?
Institutional accountability of the Reserve Bank of India (RBI), as a central bank, can come in two major ways: a) long term measures such as making the RBI directly accountable to the Parliament and the mechanisms that go with it; and b) short term measures such making the board of RBI accountable and the aspects associated with this.
While it is easy to propose long term measures and distract from the real issue at hand, in my opinion, certain short term steps can and should be immediately taken by Dr Rajan (the RBI Governor, who has sweeping powers) and the Ministry of Finance to make the RBI more administratively accountable.
Simple things, as given below, can be done to achieve this quickly. Just as charity begins at home, accountability must start with the RBI board which is in fact the first and most important layer in a multi-layered accountability process. Long term measures such as the RBI governor reporting to Hon Parliament and other such aspects (discussed in part III of this series) can happen eventually as also the formal adoption of the (proposed) Indian financial code. However, as Dr Rajan has so convincingly argued many times, there are low hanging fruits to be plucked and they need to be harvested right away with regard to the issue of making RBI more accountable. These are indeed the focus of this second article in a three part series
But before we discuss the substantive issues, let us go back to the RBI Act, 1934 whose preamble notes that the primary function of RBI is as follows:
"...to regulate the issue of Bank Notes and keeping of reserves with a view to securing monetary stability in India and generally to operate the currency and credit system of the country to its advantage."i
Therefore, as India’s central bank that has been created by society at large (and not just governments or politicians), the RBI has one key objective - the need to preserve the value of the bank notes which it has been mandated to issue for use by all of us. I emphasise maintenance in value because any erosion of this value would mean that we, the people, would lose the overall value of our wealth. To me that would amount to a betrayal of the trust which, we the people, have placed in RBI as the central bank. And in my opinion, this trust cannot be built either by government ownership of the RBI or the laws that have helped establish it, but rather by the efficiency, professionalism, integrity and adherence to good governance by those who run the RBI. And of those who run the RBI, the most important, in my opinion, is the board of the RBI, which is sacrosanct and must be so maintained. Thus, the first line of accountability would have to be the board of RBI and it must be made accountable to the people of India. That said, what then are the changes required to ensure this?
Specifically, this in effect would translate into the following:
Thus, the need of the hour is a transparent board appointment policy for the RBI and this policy must also ensure that directors have adequate skills and experience (apart from the availability of time to do their job effectively). The policy must also ensure that the overall composition of the RBI’s board of directors is suitably diverse — including more women, youth and individuals with the requisite skills (and appropriate backgrounds) on the RBI board is perhaps a way to improve the boards’ overall functioning and effectiveness. The policy must also ensure that conflict of interest issues are taken into account with regard to board appointments so that the independence of the non-executive directors is not compromised, under any circumstances (what-so-ever).
Otherwise, serious conflicts of interests and related situations, like what happened in the case of Mr Rajat Gupta, could happen here, much to the detriment of the reputation of the RBI. This is not to be construed that people with background in economics, finance, business administration and related areas should not be appointed to RBI’s board. They can be, provided, they meet the minimum non-negotiable criteria, such as those given above. In fact, the Financial Sector Legislative Reforms Commission has made (similar) good suggestions in this regardiii.
Let me give you a couple of examples to explain this further. Take the case of Mr KM Birla. By virtue of having served on the RBI board for several years, he could have lobbiediv (with the RBI) to facilitate the entry of large industrial business groups into banking – a practice that is still avoided in many countries. Please note that the current round of banking licenses to be given by the RBI includes large industrial business groups as applicants for banking licenses.
Likewise, it is completely inappropriate for people like Dr Mor to serve on the RBI board given that he was and still appears to be connected with IFMR trustv (at least there are some websites and documents which say that he is still connectedvi), which has strong interests in the financial sector through its involvement with financial inclusion and also its investments in NBFCs MFIs
Look at it this way.
The RBI is the regulator and supervisor of the financial sector in India and the board of RBI is involved in many critical deliberations related to the financial sector. What assurance can the RBI Board provide that these important discussions and decisions will not be shared by non-executive directors with their parent (or related) organisations that have some form of commercial interest in the financial sector? In fact, providing RBI board membership to anyone connected with institutions that have a strong commercial interest in the financial sector will for the above reason give undue advantage to these institutions as they will gain access to what economists often call as “superior information”. Dr Rajan should be able to understand this better than anyone else!
And this is not to say that people who have in the past served in organisations with a commercial interest in financial sector cannot become board members of the RBI. Maintaining a cooling period of between 3 – 5 years, before they are appointed to the RBI board seems an advisable strategy.
Again, let me remind the readers that the case of Mr Rajat Gupta looms large and should not be forgotten. Therefore, it would be prudent and appropriate if those with strong and on-going commercial interests in the financial sector are not made board members of the RBI.
However, take the case of the new financial inclusion committee headed by Dr Mor, who is also a central board member nominated from the eastern board. That is not appropriate because Dr Mor, being a part of the central board, will have a natural duty to evaluate the work of the RBI, which would also include these very advisory committees. This is indeed a serious conflict of interest and that is why board members should perform only roles meant for them. Likewise, Dr Mor’s participation in the RBI (external) banking selection advisory panel is again highly inappropriate for the same reasons.
As on date, Dr Mor, is a member of the eastern board of RBI, member of the central board of the RBI, member of the financial inclusion committee under Dr K C Chakrabarthy, head of the newly appointed committee on financial inclusion, member of the bank selection advisory panel, member of the research advisory panel of CAFRAL (which is said to be housed in RBI headquarters and completely funded by the RBI) and may be part of more committees.
This would never happen in any other central bank. With all due respect, I am not sure that the RBI is acting with accountability, when it puts a single board member on so many non-board committees and panels, which the Board (of which he is part of) will ultimately have to evaluate! And given Dr Mor’s linkages (as noted earlier)vii with IFMR trust, which works with NBFCs MFIs and is involved with financial inclusion, I am indeed sure that what is happening is NOT at all appropriate from an accountability perspective.
“Dramatic failures of corporate governance and risk management at many systemically important financial institutions were a key cause of this crisis. There was a view that instincts for self-preservation inside major financial firms would shield them from fatal risk-taking without the need for a steady regulatory hand, which, the firms argued, would stifle innovation. Too many of these institutions acted recklessly, taking on too much risk, with too little capital, and with too much dependence on short-term funding. In many respects, this reflected a fundamental change in these institutions ...which focused their activities increasingly on risky trading activities that produced hefty profits. They took on enormous exposures in acquiring and supporting subprime lenders and creating, packaging, repackaging, and selling trillions of dollars in mortgage-related securities, including synthetic financial products. Like Icarus, they never feared flying ever closer to the sun.”viii
And the results are there to see for all of us from both the global sub-prime and the 2010 AP micro-finance crisis
Likewise, the proposed financial inclusion committee under Dr Mor is to recommend the overall regulatory architecture for the financial inclusion sector. As noted earlier, the Dr Mor committee comprises (at least in majority) of industry insiders with significant conflicts of interests (such as those who have applied for a banking license and those connected to banking license applicants) and those having direct/indirect linkages with institutions that have a commercial interest in financial inclusion. That this committee is to recommend the regulatory framework for financial inclusion is surely akin to what happened in the global sub-prime as noted above. And by appointing such an (industry insider) committee, the RBI has shown that it does not have the PROCEDURAL ACCOUNTABILITY required of a central bank. The same is the case with the banking selection advisory panel, which is again an inappropriately constituted body! In fact, the manner and urgency with which both these committees have been set up, especially, when both topics are the subject of discussion at the Hon Parliamentary Standing Committee on Finance (PSCF), certainly shows that the RBI has not followed the norms of PROCEDURAL ACCOUNTABILITY expected of central banks.
Look at it this way. The RBI has fair practice and other codes for various stakeholders including NBFCs. Is it not fair that the RBI has an official code adopted formally for its board and staff? And once adopted formally, it should be available publicly and board members would have to make appropriate disclosures as per the code. This is a very simple task to set the ball rolling for greater institutional accountability and Dr Rajan must push hard to get this done quickly so that ‘the RBI indeed becomes the change that it wants to ultimately see on the ground in India’s financial sector’.
i Source: RBI Act of 1934, 2 of 1934, page 12 of pdf file from RBI site -http://rbidocs.rbi.org.in/rdocs/Publications/PDFs/RBIA1934170510.pdf
ii Other than monetary policy, which would have to be dealt with separately!
iii I have adapted clause 2 (c) to include any financial service provider.
“9. (1) Members of the Reserve Bank Board must be fit and proper persons, having expertise in dealing with matters relating to banking, payments and monetary
(2) A person cannot be appointed as a member on the Reserve Bank Board if such
(a) is an employee of the Central Government, except in case of the nominee members;
(b) is a member of Parliament or a state legislature;
(c) is a director, employee or officer of any banking or financial service provider;
(d) is a director, employee or officer of any system provider;
(e) is a member of an advisory council of the Reserve Bank; or
(f) is a member of the Monetary Policy Committee, other than –
(i) the Reserve Bank Chairperson; or
(ii) the executive member designated by the Reserve Bank Board to serve on the Monetary Policy Committee.”
iv Under the circumstances, it is a very reasonable assumption.
v Quoted from State of the Sector Report, 2012, Sage Publications, page 116 - “ICTPH and Sughavazhvu are working with IFMR Rural Finance, the Kshetriya Gramin Financial Services (KGFS) network of small branch-based village banks and insurance partners, to design and market a product that will couple fixed-price, pre-paid primary care and insurance mechanisms to pool risk for secondary and tertiary care.”According to this source, “The IKP Centre for Technologies in Public Health (ICTPH) and partner Sughavazhvu Health Care are demonstrating an innovative managed healthcare model designed to provide high-quality, cohesive and low-cost health services to rural populations. SughaVazhvu Health Care Pvt. Ltd. is a wholly owned subsidiary of IKP Trust.” (page 116).
Independently, The websites of ICTPH (http://www.ikptrust.org.in/ikp-centre-for-technologies-in-public-health.html), SughaVazhvu Health Care Pvt. Ltd (http://www.sughavazhvu.co.in/about-us.html) and IKP Trust (http://www.ikptrust.org.in/index.html) show Dr Nachiket Mor as a director. Additionally, the websites of ICAAP (http://www.ikptrust.org.in/ikp-centre-for-advancement-in-agricultural-practice.html) shows Dr Nachiket Mor as a director and also says under about us that: “IKP Centre for Advancement in Agricultural Practices (ICAAP) (http://advanceagripractice.in) is jointly owned by IKP Trust (51%) and IFMR Trust (49%) (www.ifmr.co.in) and is a Company under Section 25 of the Companies Act (1956).” One another point – Ms Sucharita Mukherjee is a director serving on the boards of IFMR Trust and ICTPH. Lastly, IFMR rural channels is a part of the IFMR Trust group.
vi This is where a disclosure code for board members at RBI would have helped clarify the facts
vii Same as above endnote
viii Source: The Financial Crisis Inquiry Report - Final Report of the National Commission on the Causes of the Financial and Economic Crisis in the United States, The Financial Crisis Inquiry Commission, Pursuant to Public Law 111-21, January 2011, Official Government Edition
ix I have not come across a comprehensive formally adopted officially code of conduct for RBI board members and staff, to the best of my knowledge. In fact, if such a code did exist, then, disclosures on various conflicts of interests should have also happened but I am not aware any such disclosures (to the best of my knowledge).
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(Ramesh S Arunachalam has over two decades of strong grass-roots and institutional experience in rural finance, MSME development, agriculture and rural livelihood systems, rural and urban development and urban poverty alleviation across Asia, Africa, North America and Europe. He has worked with national and state governments and multilateral agencies. His book—Indian Microfinance, The Way Forward—is the first authentic compendium on the history of microfinance in India and its possible future.)
SEBI has mandated that NSDL and CDSL to jointly create and co-host centralised database for corporate bonds and debentures. It may be available as early as January 2014 and will be accessible to everyone without any fees. SEBI move aims to strengthen the debt market in the country
The Securities and Exchange Board of India (SEBI) has issued a circular on "Centralised Database for Corporate Bonds/Debentures" on 22 October 2013 mandating both the depositories viz. National Securities Depository (NSDL) and Central Depository Services (CDSL) to jointly create, host, maintain and disseminate the centralized database of corporate bonds/debentures. The depositories shall obtain the requisite information regarding the bonds/debentures from Issuers, Stock Exchanges, Credit Rating Agencies and Debenture Trustees. The Database can be accessed by the public or any other users without paying any kind fees or charges, which will help to strengthen the debt market in the country. Depositories and stock exchanges shall create awareness among issuers and investors regarding the centralized database.
High Level Expert Committee on Corporate Bonds and Securitization" ("Dr. R.H. Patil Committee") had recommended creation of "Centralized Database of information regarding Bonds". While the information in respect of various bonds/debentures issued by issuers is available in a fragmented manner, it is felt that there is a need for having a comprehensive database on corporate bonds at a single place.
In the first phase, the bonds/debentures available in the demat form shall be considered. Subsequently, in co-ordination with Ministry of Corporate Affairs (MCA), the database in respect of bonds/debentures which are unlisted and in physical form will be considered.
Stock Exchanges shall access the database on daily basis and shall update the requisite information regarding the listed bonds/debentures, within the stipulated time. Credit Rating Agencies shall access the database and shall update the credit rating provided by the agency and the subsequent rating migrations. Debenture Trustees shall access the database to verify and shall update the information regarding default history by the issuer and other relevant information pertaining to Debenture Trustees. The information providers such as Stock Exchanges, Credit Rating Agencies and Debenture Trustees, who shall be provided secure logins shall update the information in the database on an ongoing basis.
For historical information with respect to debentures/bonds for which ISIN number is already obtained and bond/debenture is still outstanding (historical information), the Depositories shall by 01 December 01 2013 request the Issuers to provide the information. The Issuers shall provide the information to the Depositories by 01 January 2014 in the manner prescribed by Depositories.