Recommendations for Indian debt markets

Corporate and municipal bond markets in India are in very early stages of development. The development of these markets however is critical to liberalisation and will go a long way in easing stresses inherent in our financial system.

Both corporate and municipal bond issuances face specific challenges, but some of the common themes relevant to the smooth functioning of Indian debt markets is the debtor-creditor relationship and legal standing of the debt contract, secondary bond market liquidity, and barriers to entry faced by both bond issuers and bond investors. These have been spoken/written about in lot of detail and I have tried detailing some of these challenges here.

Here, I would like to focus on some of the steps India needs to take to address these challenges and enable our corporate/municipal bond markets to take off. Some of these steps are a must-do and some are a nice-to-have, but all will surely be credit positive for the Indian economy. Few thoughts around this:

Recommendation 1: India needs to develop robust bankruptcy laws and strengthen legal enforceability of contracts. This probably is one of the most fundamental problems plaguing our financial system, and thankfully right noises have been made around this over the last many months/years. There seem to be few positive developments with the Bankruptcy Law Reform Commission headed by TK Viswanathan. A lot of resources need to be invested though in strengthening and staffing the legal system and our courts. Reinforcing the ability to take defaulting debtors to court, the ease of court proceedings, and the process of orderly winding up – all will go a long way in building trust in the Indian debt contract, which will automatically attract investors (domestic and foreign) into the Indian bond market.

Recommendation 2: To tackle the problem of liquidity and market supply/demand, it needs to be made easier for bonds to change hands among the larger set of retail investors, and tax incentives can really go a long way toward this:

1) For intermediaries: Incentives and tax breaks could be given to banks and financial intermediaries to provide a secondary market on corporate/municipal bond issues. Intermediaries need to hold sufficient bond inventory to be able to provide two way markets for potential buyers and sellers, else liquidity takes a hit and investors shy away. Insurance companies, on the one hand, are longer term investors and would hold such bonds in their hold-to-maturity books, however they can actively leverage up their balance sheets through repo market liquidity, which will create the much-needed secondary market churn. Banks should be in a good position to provide the secondary market liquidity through their shorter-term profit taking activities.

2) For bond suppliers/issuers: Tax incentives could be given to corporates raising money via the bond market, as also to local governments as described below.

3) For bond investors: Tax exemptions could be given for retail and institutional players investing in corporate and municipal bonds. Similar to the 80CCF clauses which were meant specifically for investments in infrastructure bonds, additional clauses could be created to broaden the remit to investments in municipal and corporate bonds as well. To start off, retail investors could be given the option to invest via debt mutual funds (easy liquidity, tax-free dividend and affordability by way of small minimum investments.

Recommendation 3: Specific to municipal bonds, local governments need to be challenged to become more self-reliant in meeting their funding needs. The revenue base of local authorities consists of their own tax and non-tax income, grants as defined by the Finance Commission, grants and loans from the higher level of governments, and market borrowings. There are wide differences among these urban local bodies (ULBs) in their tax jurisdiction, the extent of control exercised by the state government in terms of the fixation of tax base, tax rates and tax exemptions. Again, the efficiency with which the taxes are administered and implemented varies from state to states. Property tax is one of the important sources of urban revenue; but a complicated valuation procedure, legal disputes, ceilings imposed on rents of the properties under the Rent Control Act etc. have made the revenues from properties near stagnant for the ULBs.

As per the Report on Indian Urban Infrastructure and Services (2011), between 2012 and 2031, India will need to invest approximately INR 39.2 trillion (at 2009-10 prices), to meet its urban infrastructure requirements. Given we have had inflation in the 5-9% range over the last 4 years, a CAGR adjusted rise in factor prices will make this infrastructure investment requirement around INR 55 trillion, which is almost 49% of India’s 2013-14 GDP. With such massive infrastructural demand for urban development (more so with the Smart Cities project), it is only in the best interest of the local authorities that they diversify into other funding sources, enabling them tap into a larger pool of investor money. These local governments currently rely largely on grants (for example, money from the JNNURM) to meet their funding needs.

The centre can help with the above process by beginning to tie these grants to the success of local authorities in raising money via municipal bond issues, which will:
(a) gradually increase their monetary self-reliance;
(b) reduce their dependence on central government grants, which can gradually be phased out; and
(c) give them a much-needed push to clean up their finances

We can come up with innovative ways to incentivise local governments, by way of competitions between authorities, similar to the way the Smart Cities project went about shortlisting the target cities.

Recommendation 4: From an issuer credit risk perspective, local governments may be provided some initial handholding via issuances of municipal bonds with a soft state government guarantee. This would add the necessary ‘credit enhancement’ to the structure, which would make the risk more palatable to investors.

Recommendation 5: Public bond ratings by global credit ratings agencies (like Fitch, Moody’s and S&P) are a reinforcement of issuer creditworthiness, serve as a key driver of investor sentiment and drive liquidity in overseas bond markets as well. The process of rating however requires not just the day one rating assessment, but regular and independent ongoing monitoring of the issuer performance. Corporate governance practices in credit ratings agencies in India need tightening so the ongoing monitoring teams in these agencies are independent of the primary issue ratings teams, so verification and ongoing performance assessment can be reliably digested by market investors.

Recommendation 6: Debt market regulation in India is currently undertaken by multiple authorities like the RBI, SEBI, IRDA and PFRDA, and often at cross purposes. We need convergence in regulatory decision making and for the regulators to speak one common language across the various financial market participants.

Recommendation 7: Indian bond markets need to be further opened up to participation by FIIs and global players. This is also very timely given investors all over the developed world (in this near zero or sub-zero interest rate environment) are in a desperate hunt for yields, and India is simultaneously perceived to be one of the healthier emerging markets they can invest in. One of the big constraints investors face in India is the lack of investible instruments. The right noises and actions like the above from both the government and monetary authorities can help kick-start corporate/muni bond supply, which will find a home in the balance sheets of global banks, pension funds, insurance firms, etc. Increased participation also has the potential to create further financial industry lobby groups, which will channel ideas from the European/US markets towards further evolution of India’s public and private bond markets.

Recommendation 8: Issuers should be encouraged to supply bonds
(a) for various parts of the capital structure – senior unsecured, subordinated
(b) for varying coupons – fixed, floating, zero coupons, step-ups
(c) for varying maturities ranging from 1y to 30y – thereby providing investors across the spectrum a chance to invest (typically individuals/retail investors will find the short-term risk attractive, while pension funds/insurers will take up the longer term risk to match the maturity of their long term liabilities)

Recommendation 9: Lock-in periods could be reduced for such investments by FIIs, which would give investors additional flexibility/liquidity.

Recommendation 10: Bond pricing requires publicly available credit curves and a benchmark risk-free curve for pricing purposes. Agencies like Markit or even banks can be mandated to come up with publicly available benchmark credit curves which could be used by market participants. These could be classified into corporates of a certain size (by market capitalisation), of a certain sector (healthcare, technology, consumer cyclicals, etc.), or of a certain rating (AA, A, BB etc.)

Recommendation 11: Demat accounts could be used more effectively as a mechanism to invest in corporate and municipal issues as well. The Bombay Stock Exchange recently announced the launch of a trading in government securities through demat accounts, we need to capitalise on these moves and expand the mandate of demat accounts.

Recommendation 12: All of the above steps in the long run would pave the way for the development of a larger asset-backed securitisation market. Financial technology is fairly developed in European/US markets, and there are ways in which collateral can be mobilised intro tradable instruments. Corporates, banks and other financial institutions could pool their loans into a securitisation special purpose vehicle (SPV) and issue tradable and rated debt securities out of this vehicle (will also lead to increased transparency and market monitoring). The vehicle can also be given a guarantee from the issuing bank – which will ensure risk retention and ongoing servicing of the loans by the issuing bank. Such a process of potentially taking assets off balance sheet is increasingly being used by European banks (across the developed and periphery economies). With the search for higher yields we are also currently seeing heightened demand among PE funds and global institutional investors.

The steps described above would need to be worked through in a lot of detail, given multiple stakeholder interests involved. From the larger objective of Indian financial market development, the evolution of debt markets will open up choices, and drive ahead the benefits of liberalisation.

Debt markets in India

It is of no doubt that a vibrant, well-functioning public debt market helps diversification of:
(1) funding sources for borrowers, and
(2) investible alternatives for investors;
thereby freeing up available choices, which go a long way in the overall financial market development. Debt could be issued by borrowers like banks & financial institutions (FIs), state/national government, corporates, and even local governments. Indian debt markets, especially issuances from corporates and local governments, are still in very early stages of development, and the bond market is largely populated by government / quasi-state issuers / public sector enterprises (PSEs). Debt financing is mostly of 2 kinds: (a) bank loans (b) bond issuances.

Bank loans typically have bespoke contracts negotiated between the borrower and the lending bank. Towards monitoring the financial health of the borrower, these contracts contain covenants like a debt service coverage ratio (essentially the cash/liquidity available to a borrower to pay the loan interest), again bilaterally negotiated and not easily observable. Typically, assignability/novation of loans from one lender to another requires the consent of the borrower, which restricts transferability of the loan. All these factors make bank loans a relatively illiquid financial instrument. Loans thus tend to remain bilateral facilities and lenders largely account for them on their hold-to-maturity books, restricting active trading of these instruments. Further, lenders depend on borrowers providing their own financial information, which makes transparency a big question. The concept is the same across European and US markets as well, where the market for trading loans is more esoteric and is restricted to a limited set of participants. Many of these loans also get issued without publicly available ratings by credit rating agencies, further restricting their liquidity and tradability. In India, apart from these problems of reduced liquidity and borrower transparency, the market for bank borrowings is unfortunately compounded by the relatively weak bankruptcy code and stressed legal system. Lenders find it increasingly difficult to enforce upon the assets of a defaulted borrower, court cases go on forever, and the proportion of non-performing loans (NPLs) keeps building up in the books & records of banks/lenders; which is a problem rampant in Indian banks today (across both state owned lenders like SBI and privately owned entities like ICICI).

Bonds however, are transferable debt instruments, typically issued to a larger set of investors. The transferability arises from their listing on exchanges, standardised documentation and reporting. However, most of the bond issuances in India today are either restricted to private placements or are issued by a restricted set of borrowers like banks/FIs and governments/PSEs. Corporate and municipal bond issues, as I mentioned earlier, face entry barriers on account of both:

(a) Demand side constraints – investors are sceptical towards assuming the unsecured credit risk of smaller entities which may not have easily available and public financial information. Further, some of the more sophisticated investors like insurers and pension funds are restricted by regulation in the kind of risk they can hold in their balance sheets.

(b) Supply side constraints – perception of increased disclosure norms and requirements to get ratings from credit rating agencies, as opposed to the apparent ease of bilateral negotiations with to one or two lenders to get an unsecured loan.

Well-functioning bond markets do indeed require issuers to provide better financial transparency, but at the same time, help them diversify into various other sources of funding, thereby providing them access to a larger pool of money which they could use for growth & investment.

Some of the key issues in the development of debt markets (corporate/muni) in India are as follows:

(1) Law & regulations – under the RBI prescribed statutory liquidity ratio (SLR), banks are required to hold 21.5% of their liabilities in gold, cash and government securities, with similar restrictions under the IRDA prescribed Investment Mandate Regulations for insurance firms which need to hold a large proportion of their assets in ‘mandated investments’ like public sector bonds. This restricts their demand for corporate/muni bond issues. Hence, we see market demand only for government / quasi-government / public sector issues – and consequently the Indian bond market gets crowded out by PSE/government issues (like Rural Electrification Corporation of India, Indian Railways, etc.)

(2) Liquidity – most of the bond issues in India are private placements, i.e. a pre-decided list of a handful of investors/buyers are lined up for the bond issue, and who many-a-time have a say in the structuring of various covenants, leading to bespoke terms and lack of a secondary market (liquidity) for trading. That further leads to the absence of a refinancing and secured financing (repo) market for such bonds, which are primarily driven by bond liquidity. The universe of bond issuers & bond investors are thereby restricted to banks/FIs. And consequently, these bonds keep changing hands only between those 20-30 major participants, which heighten barriers to entry for other potential retail investors.

(3) Transparency – issuers of bonds need to be able to provide clear and transparent regular investor reports detailing their performance and usage of funds. While this may be slightly easier for corporates (who have such requirements built in to their internal systems for their equity investors), this becomes a big challenge for municipal bond issuances, which require the local governments to clean up their balance sheets.

(4) Limited product knowledge – due to the absence of sufficient market information, risk appetite for corporate and municipal bonds is limited among individuals and retail investors, and this adds to their risk-averse behaviour.

(5) Absence of adequate risk management instruments – international bond markets have well-developed derivative and swap markets to complement them. These provide the investors the ability to hedge the inherent interest rate risk and credit risk associated with these instruments, giving freedom to the investors to increase their risk tolerance limits and diversify their investments. Derivative products in India are very limited in scope, and methods to hedge credit risk are virtually non-existent, as a result money is poured into largely ‘risk-free’ investments like bank fixed deposits, and government-guaranteed bond issuances.

These problems are not insurmountable, but need immediate and active steps to be taken to address them. Addressing hurdles around corporate/municipal bond markets will have tremendous positive knock-on effects for the wider financing economy. Especially with financial inclusion high on the government agenda and new banks opening up their services to rural areas, debt financing and related liquid secondary markets would be a very healthy way to circulate credit across the Indian and global economy.

Why the RBI alone cannot fight inflation in India?

Inflation or change in prices is largely driven by two factors – demand & supply. And consequently, we have two kinds of inflation – demand-pull & supply-push. The most direct way in which a central bank may fight inflation is by moving around the “central bank rates”, thereby addressing the demand-pull kind of inflation. How does a central bank achieve this? One of the key tools at the disposal of the RBI is the liquidity adjustment facility (LAF) via the repo rate or policy rate (the rate at which banks can borrow money from the RBI, currently at 8%). The central bank periodically reviews this rate, and directly impacts the cost of money available to all the banks within the country. An increase in repo rate leads to an increase in cost of capital for banks – who, in order to continue making the same kind of profits, consequently increase the rate at which they lend money to borrowers, companies and the larger economy. These higher costs lead to lesser demand for money, lesser borrowing, and consequently lesser money in the hands of the people.

Further, the central bank could increase the cash reserve ratio (CRR) which, via the money multiplier effect, can have knock-on effects on restricting the overall money supply in the economy. Such reduction in money supply as well as a consequent decrease in overall demand helps achieve the objective of fighting “demand-pull” inflation. Some of the other monetary policy tools, towards achieving a similar effect, at the RBI’s disposal are the statutory liquidity ratio (SLR) – a directive to banks to invest a percentage (currently at 22%) of all their deposits in government securities, the marginal standing facility (MSF) – currently at 9%, which is a corollary of the repo rate, and open market operations (OMO) – direct market intervention by buying/selling government securities.

However, such monetary policy changes in India unfortunately do not have as direct and immediate an impact on money supply in the Indian economy – as compared to more advanced economies like Europe and the US. Reasons are manifold. Financial markets in India are still very nascent. Product penetration and financial inclusion are abysmally low. Almost 60% of the 1.25 billion population does not have access to basic banking services. Even among the 40% who do access banks, financial product knowledge is limited. Risk taking is limited, and a large part of this 40% are inherently risk averse, especially senior citizens and middle class families. Consequently, a large part of the savings of this population is invested in relatively “risk free” bank fixed deposits, or simply parked in savings accounts at banks. These in turn become a much larger source of money, as compared to the RBI, for banks in India. Given this, rate changes by the RBI do not immediately impact the money supply for Indian banks, and do not necessarily mean the Indian banks will immediately reflect those RBI rate changes in their deposit and lending rates. And the relatively poor 60% of the population who can’t access banks form part of the unorganised sector, “India UnIncorporated” as some may call, and rely on small time moneylenders who charge loan rates in excess of 30% – almost a parallel economy to that controlled by the RBI.

Compare this scenario with the more advanced economies – where the more developed financial markets provide people with numerous other “educated” investment opportunities outside of plain bank deposits, which consequently means, the central banks in those economies are a far bigger source of money for the banks in that country. As a result, central bank rate changes in the more advanced economies can have quicker and more direct effects on money supply, as compared to India and the RBI. Gist of the matter for India – with such a big parallel economy, restricted options for investment and under-developed financial markets, how can we expect RBI’s monetary policy alone to fight inflation?

What is more urgently required in India, which is facing a problem of moderate growth and still relatively high inflation, is a method to fight the “supply-push” kind of inflation. Prices rise not just because of increased demand, but also because of restricted supply – the kind we see in the Indian housing market (with far more potential for housebuilding to house the millions of homeless) or the kind we see in the Indian food market (with hoarding of goods to artificially distort the market), to take couple of examples. These two by themselves account for 49.7% and 9.8% respectively, i.e. about 60% of a typical Indian consumer basket – as described in the CPI index calculation. Factors like these are mostly outside the RBI’s control via monetary policy, and are better impacted by strong, clear and transparent decision-making and implementation by the Government, more under the realm of fiscal policy. Concepts like minimum support prices, the 3F subsidies (food, fuel & fertilisers), minimum wages, constrictive labour and land acquisition laws – all have an effect of creating an artificial impression of the market and masking the inflation beast under more and more layers of government discretion and control, and these need to be done away with. Further, we also need to urgently do away with the many “protectionist” government policies which discourage competition in various sectors of the economy, depriving consumers of better quality product at lower prices. Such policy moves will not only help combat inflation from a non-monetary policy perspective, but also foster a sense of belief among the citizens in individual rights, freedoms, government transparency and free markets. The current NDA government which has been elected with absolute majority, has the power to take concrete steps towards the above – without disruptive political allies throwing a spanner in the works.

India can truly benefit with this majority government and the central bank working in close cooperation with matched objectives – we just need to step up the rhetoric and action on the above.

How the state of the current global macro-economy doesn’t warrant a rate cut in India

There’s been a lot of clamour lately with the government of India and market participants suggesting that the RBI should be cutting its policy rate in order to provide a growth stimulus to the Indian economy. This seems too myopic a view to me. Firstly, in a ‘financially unstructured’ country like India, with a large shadow economy, demand gets only moderately impacted by the central bank cutting rates . Second and more important, the large amount of supply side constraints will constantly force up inflation, whatever be the RBI policy rate, and these constraints need to be addressed with immediate urgency. Third, there are the more technical factors like the inflation base effect, which has driven the inflation numbers down in the last 3-4 months (and probably will do so in Nov’14 as well), but then will quickly turn to drive the numbers up in Dec’14 and into Q1 2015. All these ‘domestic’ points are understandably holding the RBI back from cutting the policy rate.

Further, looking at this from a global macro perspective, India is increasingly being seen as a favourite among global investors – mostly through the foreign institutional investors’ route. In search for higher yields, these investors continue to flock to Indian markets, and consequently demand for Indian financial assets can still be considered to be on the higher side. India is definitely one of the leading emerging market economies of the world today, but of course, this is volatile money, and can easily go in and out of the economy depending on various market-driven factors. Let’s look at some of these external factors.

In the United States, analysts anticipate the Federal Reserve to hike rates sometime before mid 2015, although no clear statement is out on this from the Fed yet. Financial markets are preparing themselves for this event, which might lead to a flight of capital from perceived riskier and emerging markets like India. A lot of this probable move though seems already priced in to the markets, and the Indian economy might just even consider itself robust enough for the currency and overall demand to not get massively impacted by the Fed’s rate hike decision. But there are other factors adding to the uncertainty.

In the Middle East, OPEC has indicated no intention to cut the oil supply. And consequently, global oil prices have been plummeting over the last few months, stoking deflation fears in many countries. People are generally viewing this as reason for cheer, since the International Monetary Fund (IMF) estimates that a 30% decline in oil prices would improve growth by 0.8% in most advanced economies. And oil prices are down more than that – about 40% since 30 June 2014. With OPEC’s clear indications to stay their current course, there surely seems more room to go for this oil price slide, which will further suppress prices globally.

In Europe, despite subsequent rate cuts by the European Central Bank (ECB), investors’ expectations for future inflation have been falling in most of the leading economies. In Germany, bond market prices suggest annual inflation will be only 0.26% over the next five years, down from 0.8% at the end of June. With inflation still well below its target, the ECB has stepped up its rhetoric in the last few months on a massive round of quantitative easing (QE) and money printing. In Asia, Japan has been worrying about their declining GDP and a fall into a deflationary spiral, and as of the end of Oct’14, the Bank of Japan (BoJ) significantly ratcheted up its own quantitative easing program, with an intention to increase the BoJ balance sheet by 15% of GDP per year. So much money coming into the markets. The other big Asian giant, China, cut its central bank rates in Nov’14, again from the perspective of stimulating the Chinese economy.

Summary being, in the face of falling inflation and suppressed growth in many of the big economies, these countries are pursuing extremely dovish monetary policies, and are flooding the market with so much cash – which will desperately look for or already be looking for a home. Many of these policy moves have already happened or are imminent, and when executed, where do we think all this money is going to flow into? Investors are forever greedy, and in the hunt for increasing yields, this money is going to come pouring into emerging economies like India – driving up demand, and thus driving up prices. Interest rates that are under RBI control can only partially address, as mentioned above, this same demand side of the inflation equation. And given demand is only going to go up with such global shocks, India seems better placed to stay put on the RBI rates front and work harder to tackle supply-side constraints, in our constant efforts to fight this beast called inflation.

On direct cash transfers & financial inclusion

Direct cash transfers, which were initiated by the previous UPA government and are being furthered by the current NDA government, are gaining increasing significance in the Indian economy today. In my opinion, this step is the cleanest way of providing any form of social welfare to the large part of the population which is heavily dependent on state subsidies. Of course, the precursor to this is for those poor beneficiaries to have a bank account to receive these cash subsidies, and to possess the know-how to operate those accounts. And towards this, the government’s financial inclusion program via the PM Jan Dhan Yojna is indeed taking some concrete steps.

To put things in perspective, the total subsidy bill of the Indian government as per reported 2013-14 figures amounts to about INR 260,000 crores, or approx 2.25% of the GDP. This might seem a small proportion of the overall government expenditure to start with, but is increasingly a matter of public debate, given the method of delivery of these subsidies. Unfortunately, a large portion of the subsidy, intended for welfare of the economically less-abled, does not reach the end user on account of a large and inefficient public distribution system. As per research conducted by the Department of Earth Sciences at Uppsala University in Sweden – “Pilferage and leakages at both central and local levels have been huge concerns in proper delivery of food grain. In 1999-2000, around 10 per cent of rice and almost 49 per cent of wheat allotted for the PDS have been diverted. Between 1999 and 2005, the leakages from the PDS at the all India level increased from 24 per cent to 54 per cent. In 2007-08, the overall diversion of the PDS grains was 44 per cent. States like Bihar and Punjab have witnessed abnormal leakage, i.e. more than 75 per cent, while states like Haryana, Pradesh and Uttar Pradesh have high leakage, i.e. between 50 to 75 per cent. Tamil Nadu, along with other states like Andhra Pradesh, Kerala, Tamil Nadu, Orissa and West Bengal, has less than 25 per cent leakage.”

Gist of the matter is – a public distribution system involving physical transfer of goods across locations, a large chain of middlemen, and lack of appropriate systems to monitor delivery will always remain an inefficient form of subsidy provision, and as is seen in India, will be characterised by massive corruption and leakages.

The government needs to take the following steps towards effectively implementing the dual objective of subsidy transfer to the targeted recipients and financial inclusion:
1)      Firstly, ensure the quantum of direct cash subsidies serves as a substitute, and not an addition to the already existing set of subsidies, which will then become a huge financial burden for the exchequer to bear. The driving motto behind DTC should be:
– Primarily, giving cash in the hands of individuals to make the choices/decisions best suited for themselves
– Secondly, a gradual reduction, spanning few years, in the subsidy bill towards strengthening the government’s financial position
– Plugging leaks in the public distribution system

2)      Initiate pilot projects, as a parallel implementation of the PM Jan Dhan Yojna, whereby cash is directly transferred to the bank accounts of the recipients of the subsidies. No doubt there have been such projects undertaken in the past (http://bit.ly/DTCPilots), and problems have been found in those. But the benefits and impact of these have neither been adequately studied, nor have steps been taken to correct problems where they were noted. Further, given DTC will completely revolutionise the subsidy transfer method, the government needs to step up communication and publicity on this matter, as well as consistently track and make improvements to these pilot projects.

3)      Educate the poor, constantly, about the benefits of these bank accounts, along with the large scale initiation of them via JDY. The subsidy recipients need to be educated on the incentives these create, and how direct cash transfer gives them the freedom to choose their bundle of goods, as per their individual needs. This will then truly qualify as financial inclusion. Towards this, we need increasing investment in human capital, by way of citizens serving as teachers and business correspondents at the respective locations. The government needs to create an incentive structure in order to attract private enterprise and high quality talent to serve as leaders for such projects.

4)      Tie all of the above to the tax structure. Bringing every Indian citizen under the tax regime is obviously of primary importance to the government. This should include all these “new entrants” as well, for which the Finance Ministry and tax authorities need to work in conjunction with the PM JDY project leads. This could gradually also lead the way for the government to consider a regime of negative income tax, i.e. a system whereby the direct cash transfer subsidy effectively becomes a “tax payment” from the government to the citizen. Negative income tax (NIT) has been widely spoken about, and is an income tax system where people earning below a certain amount receive supplemental pay from the government instead of paying taxes to the government. Thereby, people earning a certain income level would owe no taxes; those earning more than that would pay a proportion of their income above that level; and those below that level would receive a payment of a proportion of their shortfall, being the amount by which their income falls below the “desired” level – which is effectively the direct cash transfer subsidy. Implementing the NIT via the existing tax mechanism will also enable the government target the subsidies more effectively, i.e. provide them to only those citizens who are not economically as “well-off”, as well as track the effectiveness of this subsidy over time. Of course, the NIT still has the problem of creating perverse incentives, in that it would make the recipient constantly dependent on the cash flow – but again, the NIT seems like the “best bad way” of systematically delivering social welfare to a targeted population.