ECONOMIC HIGHLIGHTS

New Delhi, 5 May 2006

Computer Industry

Balanced Development needed

By Dr. Vinod Mehta

There is little doubt that the advent of computers has revolutionized our life styles and made much of the routine task easier.  They are being used almost in every sphere ranging from households and schools to scientific research organizations, in manufacturing and service industry, in agriculture, in the army, government departments, financial sector and so on.

Internet has not only reduced the world to a global village but it has also made it easier for people to shop, make statutory payments, conduct banking transactions, buy air or rail tickets from the comfort of their living rooms.  The computer revolution has led to the creation of data bases in almost every sphere and one can retrieve any specific information from those data bases by pressing a few keys.  For instance, a researcher can find out about any scientific paper published anywhere in the world just sitting in his room at his computer. 

Mainframe computers and super-computers are used by big organizations or scientific research institutions. But it is the personal computers, popularly known as PCs, which is impacting our daily lives.  Because of its numerous applications in our daily lives it is no more a luxury item, but an item of necessity.  Many families have invested in PCs and on laptops. In the past one decade the PCs have become powerful in terms of speed, storage capacity and applications and at the same time they have become cheaper. As a result, now more people can afford to buy at least one computer.  This ensures a vast market for computers in India, but the development of the computer industry has been lopsided.

It is common knowledge that a computer has two components: computer hardware or the machine which includes the processor, monitor, keyboard etc. and the computer software which operates the system as also runs specific programmes like word processing, spreadsheets, databases and special applications software like accounting packages, payroll systems, personnel management, hotel management etc.  Though India has emerged a powerhouse in the development of software as the Indian software engineers and programmers are in great demand all over the world, we are lagging behind even countries like Taiwan, Singapore and South Korea in the production of computer hardware.

This does not augur well for us.  As everyone knows, the heart of any computer is the chip. The technology of chip is changing very fast.  Every other day more powerful chips are coming in the world market. The potential of one chip has not been fully utilized when the next chip has hit the market.  And the production of earlier chip is discontinued.  Since India does not manufacture its own chips and meets all its requirements through imports, the cost of updating or replacing old computers with new ones becomes prohibitively.

The companies which import these chips and other components and then assemble and sell computers in India are in no position to service these computers.  As a result, a computer with a specific chip purchased this year becomes junk in two years because it cannot be serviced anymore.  That is to say half a lakh of rupee invested in a computer today goes down the drain in two to three years because that computer cannot work any more as the production of its chip has been discontinued. With resource crunch everywhere, can our households, educational institutions, and other numerous organizations afford the luxury of changing their computer hardware every one, two or even three years?

This is also true of applications software.  Though India has a large pool of computer software experts who are developing customized software for various applications, but we are weak in the development of general applications software relating to word processing, spreadsheets, and data base management systems which are being imported mainly from the U.S.A.  Almost all the users worldwide, including India, are using these softwares in a big way.

The rate of obsolescence of general applications software is also as high as that of computer hardware.  The US companies selling the general applications software are coming out with newer versions with two or three newer features almost every year.

The question, however, is that when the features of the earlier versions of applications software have never been fully exploited what is the sense in bringing out newer versions?  Every computer user knows that hardly 25 per cent of the features of any applications software are used.  But these companies are forcing the users to go in for newer and newer versions without in any way enhancing the usability to the user.  On the top of it one has to buy one software package for every single PC one has. 

For instance, if one organization has installed ten PCs then that organization must buy ten separate packages of each of the applications software (or buy licence for multiple use) it is using.  Moreover, to check piracy of applications software, the companies selling such software have been inserting codes in their packages which makes the software unusable after a certain period unless the licence is renewed by the user. Since most of these packages are imported against hard currency, it is going to be an unnecessary big drain on the country's resources.

Since computer, especially the personal computer, is emerging an item of necessity, it is high time the Government comes out with a concrete policy to protect not only the interests of domestic individual and institutional users but also of the nation as a whole.

We, therefore, need two sets of complementary policies, one for computer hardware and the other for computer software.  Given the engineering and technical skills in this area it should not be a difficult task.  As regards the computer hardware the Government must lay down technical standards and then encourage the production of critical components like chips, mother-boards, hard disks, disk drives, pen drives, flash cards etc. in a big way.  To attract investment in these areas the manufacture of computer hardware items within the country may be made totally tax free while keeping the present rate of import duties intact on such items.  We should also become a major international player in the computer hardware sector like China.

Similarly, we must also pay attention to the development of general applications software as this software is meant for mass use.  Since India is known for the development of customized software for specific uses as in hospitals, banks etc., there should not be any difficulty in developing standard general purpose applications software packages for word processing, spreadsheets and database managements, so as to reduce our dependence on imported software.  The US general software companies like Microsoft may not like it but we must try. With the necessary software development skills available in the country it is not a difficult task. 

In this way we will not only reduce our dependence on imported hardware as well as software in this critical but "mass use area" of computer applications, but will also help save precious funds as well as save the country from the onslaught of computer obsolescence as well as useless version war of computer applications.---INFA

 (Copyright, India News and Feature Alliance)

ECONOMIC HIGHLIGHTS

New Delhi, 27 April 2006

Looking Beyond Fossils Fuels

NEED TO CURB OIL IMPORT DEPENDENCE

By Dr. Vinod Mehta

Recently the Finance Minister stated that the huge surge in global prices of crude is a matter of concern.  In fact, it has always been so for India.  It is common knowledge that the country does not produce enough crude to meets its requirements -- 70 per cent of it is met by imports. Worse, a large part of our export earnings are spent to meet our import requirements of crude and natural gas. As a result we have less foreign exchange for import of other products and services. 

Thus there is need for constant monitoring and major efforts to reduce this dependence on imported crude for strategic reasons. It could be tackled at various fronts. At the first level, we need to increase the domestic output of crude oil by improving the recoveries from existing oil fields and by exploring new oil wells. At the second, we need to reduce the consumption of fossil fuel in a planned manner.

The Ministry of Petroleum has been actively pursuing a strategy for the past few years  not only to increase the recovery of oil from Bombay High wells but also allowing the  ONGC to enter into deals with foreign companies for oil exploration outside India on production-sharing basis. The first such venture was 20 per cent participation in a Russian oil firm Roseneft.  The ONGC has invested about Rs 8,000 crore along with oil companies from the US and Japan and is expected to get about two to four million metric tonnes of oil and five to eight millions metric tonnes of gas. 

In fact, the ONGC is giving out places for oil exploration. In the private sector, Reliance is exploring oil in the country and has met with some success. At the same time, the Government is actively pursuing the Iran-Pakistan-India gas pipeline deal and other gas sources in Central Asia and Burma. But results will take time.

At the same time, the Government is also conscious of the terrible effect fossil fuel has on our environment.  Unleaded petrol has been introduced to fight pollution in metropolitan cities.  Apart from the extra low-grade sulphur unleaded petrol, low sulphur diesel has also been introduced in major cities. Besides, steps are being taken to check adulteration of diesel.  Plus, manufacturers are told to switch to production of vehicles conforming to Euro III emission norms. All this is bound to have a salutary effect on our environment.

Why have we not been able to think on these lines? Well, because there is no integrated approach to energy requirements. We have separate Ministries/departments which deal with different kinds of sources of energy like coal, renewable sources of energy, nuclear energy and so on.  The users of these energy sources are also treated as separate entities with little coordination amongst them. As a result, instead of a coordinated energy policy, we have separate policies for each of these sub-sectors, which are contradictory at any point of time!

It is here that the Government needs to act – to bring a strong coordination among Ministries. We should, in the next 10 to 20 years reduce our consumption of petroleum products and gas and switch over to other sources of energy.  For instance, India has large deposits of coal and water resources which are used for electricity generation. If we switch our public transport system from the use of fossil fuel to use of electricity then not only would we be reducing our consumption of petroleum products but at the same time will be contributing to a cleaner environment and saving on our import bill. The Metro in Delhi is one such fine example.

 (Copyright, India News and Feature Alliance)

ECONOMIC HIGHLIGHTS

New Delhi, 20 April 2006

Credit Policy Support

MAINTAINING ECONOMIC MOMENTUM

By Dr. Vinod Mehta

The Reserve Bank of India in its Credit Policy for the year 2006-07 has attempted to provide support to the growth rate of around eight per cent without in any way unduly restricting the growth of credit.  Last time the changes that were made in the Credit Policy were during the mid-term Appraisal of the Annual Policy for the year 2005-06, which endeavoured to encourage the high growth rate and at the same time tried to control the rate of inflation.

The Economic Survey has already projected a growth rate of around 8.1% during the current fiscal.  The RBI’s Credit Policy is again geared to achieve this goal.  As in the last mid-term review, the RBI while announcing its policy has been guided by two concerns – growth and inflation – and measures announced by it are  designed to allow the economy to sustain this growth rate and at the same time contain the rate of inflation at around 5%. 

In the mid-term Appraisal in October last the RBI did not change the CRR ratio but it  raised the reverse repo-rate – the rate at which Central Bank borrows from the banks – by 25 basis point from 5% to 5.5%. The implication of this measure was that the interest rates both on lending and deposit will rise. The interest-rates both for lending and borrowing did rise marginally. But in the Credit Policy for 2006-07 there has been no change in bank rate, cash reserve ratio, Repo-rate and reverse repo-rate                                     

During the mid-term Appraisal, the RBI had expressed its concern over the housing loans which have been growing at a very fast pace in the past few years. With the hardening of the interest rates the interest rates on new housing loans also went up marginally.  In the Credit Policy also the RBI is concerned about the growth of housing loans which is a worrying factor. 

This is also true of other consumer loans.  Therefore, it has increased general provisioning requirements on standard advances like personal loans, housing loans etc. beyond Rs.20 lakhs and commercial real estate loans from present level of 0.4 per cent to one per cent. Because of this provisioning that rate of interests on personal loans will go up by ½ per cent to one per cent.

However, those who have been waiting for a hike in the interest rates in bank fixed deposits may can now be sure of an increase in the interest rates in the coming months.  The nationalized banks have marginally raised their interest rates on term deposits, while one foreign bank has raised the interest rate on term deposit of one year to eight per cent, which is equal to the interest rate being offered by PPF and Post Office. At the moment the interest rate on savings bank deposit, which was deregulated last year, is 3.5%.

The RBI’s reading is that with the competition hotting up among the banks, the rate on interest on savings bank account will not go below 3.5%.   It will be recalled that the interest rates on the savings bank two years ago was fixed at 5%. De-regulation means that every bank can offer any rate of interest on savings bank account depending upon its financial health.  As of today there is no change in the savings bank interest rate in the past six months when it was deregulated.

In this mid-term Appraisal, the RBI had also taken a step to bring more people to keep their money in the banks. It had suggested that the banks may introduce “no-frills” account where the minimum balance would be either zero or very low but the account holders will have to pay for the services like issuance of cheque books, ATM cards and also statement of account.

Some of the new Indian private sector banks have already offered zero balance facility to many depositors. Now this measure will also be applicable to foreign banks operating in India.  Though there is no mention of this in the Credit Policy, many banks including foreign bank have already introduced no frill accounts without fanfare. But it is not known if more clients have taken advantage of this.         .

The Credit Policy for 2006-07 will not raise interest rates for investment in the economy but will curb inflation. The reason for the optimism is that there is adequate liquidity available in the economy, that is to say, the funds which are available for lending are available in large quantity.

The funds to be made available to small and medium industries have already been doubled since October last.  Moreover, it may be added that the interest rates on loans to stronger companies are always flexible and negotiable so it is unlikely that the interest rates on loans to bigger companies will rise to any significant extent. The loan offtake is unlikely to go down.

The RBI is still cautious about India’s current account deficit but feels it is manageable. India’s import to GDP ratio is on the rise and it has risen to 17.2% in the first quarter of last fiscal year from 13% five years ago which is mainly due to increases in both oil and non-oil imports. This trend will continue. Surplus in the capital account has, however, helped in easing the overall balance of payment situation.  This trend the RBI feels will continue.

The Deputy Chairman of the Planning Commission has already stated that the economy is ready to transit from a phase of moderate growth to a new high growth stage where it may achieve an average growth rate of about 8% over the next 15 years. But this calls for supportive action to make this growth rate attainable. He was particularly hinting at the increase in the FDI which at the moment is 1% of the GDP and could be increased further through appropriate measures.

He further observed that with population growth slowing down to about 1.5% over the next 15 years, an 8% growth in GDP means that per capita income will grow at about 6.5% per year instead of around 4% or so in the past fifteen years. The faster growth in per capita income means that per capita income which increased by 80% over the past fifteen years will increase by 160% over the next fifteen years. This in other words means higher living standards for the people of India.

The RBI is doing its bit to push up the growth rate and curb inflation by way of monetary policy.  It is supplementing the efforts of the Finance Ministry.  The Annual Credit Policy including the mid-term Appraisal for the past two years have been quite consistent in their approach.                                                                                                              

 (Copyright, India News and Feature Alliance)

ECONOMIC HIGHLIGHTS                                 

New Delhi, 13 April 2006

Reform Finance Sector

Create Competition Among Banks

                                                               By Dr. Vinod Mehta

The one-week strike by the employees and officers of the State Bank of India has once again brought into focus the urgent need for reforms in the financial sector, especially the banking sector. The banks were nationalized a few decades ago with a view to divert scarce funds into certain sectors of the economy.  It has served that purpose.  Today when we are moving towards liberal economy, the assumptions of yesteryears do not make sense.  Apart from meeting social sector needs the banks have an important role to play in maintaining a high growth rate. With the changed international economic scenario and the entry of private sector banks and failure of cooperative banks, a situation has emerged which calls for consolidation and one way is to merge the banks to create mega entities. Even this is being opposed by the unions.

Ten years ago, the Economic Survey had clearly stated that decades of non-commercial orientation, directed lending, loan waivers and rising (though camouflaged) trend in non-performing assets, initially made it difficult for banks to adjust to a market environment having strict prudential norms.  The latter included norms for classification of assets, income recognition, provisioning and a stipulated time schedule for attaining capital adequacy, a greater thrust on prudence and transparency imposed through a reformed system of regulation and supervision.

Finally, the nationalized banks will have to retrain its staff and imbibe in them some of kind of work-ethics.  In some of the branches the staff is rude to the customers and can be seen gossiping their time away without bothering to attend to the customers during the working hours. True some of the nationalized banks  have increased their working hours but the work culture has not changed.

In some of the computerized bank branches, there has been no change in the work organization; computers have only replaced the bound ledgers.  In computerized branches of nationalized banks, one can still find different counters for current accounts, savings bank accounts, fixed deposits, issuing of bank drafts, conversion of foreign currency and so on.  As a result some counters are overcrowded while at others there are hardly any customers. 

In foreign countries, there are generally transaction counters in the banks.  As one enters the bank, one has to tear out a number ticket at the entrance and the number gets registered in the bank's computer.  And when one’s number comes, the vacant counter would display it.  One can then go to the said counter and do all the transactions in one go.  This means that the work load is equally distributed at the counters and that a person does not have to run from one counter to the other to finish off his multiple transactions.

The nationalized banks must understand that computerization does not mean replacing bound ledgers with computers at different counters.  It also involves changes in work organization to gain maximums advantage of computer facilities. Finally, the merger of banks to create mega banks which can withstand international competition has become important. Mega banks have become order of the day.  The merger of Bank of Tokyo and the Bank of Mitsubishi in Japan is one such instance.  Relatively strong nationalized banks may think in terms of mergers to create mega entities.  This will help economize on expenses and reap economies of scale.---INFA

(Copyright, India News and Feature Alliance)