Fiscal stimulus in the Keynesian framework consists of extreme affirmative government action through the Budget to boost economic activity. Traditionally, this concept would refer to increasing fiscal deficits wherein the government spends, through high borrowings or printing of currency, to provide purchasing power to the people so that demand is sustained.
Therefore, the pre-requisite of a fiscal stimulus is a high fiscal deficit. Such deficits are brought about by either higher expenditure or lower tax rates. The objective here is to analyse the routes chosen by the government and the extent of their success.
Table 1 shows that the stimulus was exhibited sharply in 2008-09 through the big increase in fiscal deficit by 166%. Subsequently, the increase in 2009-10 was moderate at 23% and has been largely withdrawn in 2010-11 . The interesting observation is that the stimulus does not appear to be really driven that much by expenditure, as total expenditure , as indicated by the size of the Budget had actually increased sharply before the financial crisis in 2007-08 , when the deficit was at 2.7% of GDP. The maintenance of this increase in 2008-09 was actually more due to higher inflation as inflation-adjusted total expenditure increased at a slower rate in 2008-09
Even in case we look at nominal expenditure , the increase in 2008-09 was on revenue account — the typical Keynesian variety of NREGA, where income was provided for the poor to spend money and got reflected in Plan expenditure. But the government did not spend on projects as seen in the decline in capital expenditure in 2008-09 , which was subsequently brought back to the 2007-08 level in 2009-10 .
The view evidently was the short run where the thrust was on reviving consumption by addressing issues of poverty. Further, the government spent more on the three critical components of non-development expenditure, i.e., subsidies, interest and defence, in 2008-09 . Subsidies were just about maintained in 2009-10 at 2008-09 level. The conclusion is that while there was nominal increase in expenditure in 2008-09 and 2009-10 , the stimulus was sharper in 2008-09 . A gradual withdrawal was evident in 2009-10 that has been hastened in 2010-11 .
How effective were these expenditures ? It must be realised that the country’s GDP growth had slid to 6.7% in 2008-09 from two successive years of over 9%. This was so as both, growth in private consumption expenditure and capital formation, had slowed down to 6.8% and 4.0% respectively in 2008-09 from 9.6% and 16.9% in 2007-08 . Further , in 2009-10 , growth in consumption and capital formation was tardy at 4.1% and 5.2%.
Therefore , the higher spending invoked by the government, which gets reflected in the social services and government administration component of GDP, displayed a high growth rate of 13.9% in 2008-09 and 8.2% in 2009-10 . This was a classic Keynesian stimulus of higher government expenditure compensating for the loss of demand generated by the private sector.The question now is really whether lower government expenditure will be substituted by the private sector to kickstart the economy in 2010-11 . Government expenditure of the non-projects variety cannot lead to sustained growth and can, at best, compensate for any shortfall in private sector activity. This is a major conclusion here.
How has the private sector been affected by the Budget? The government simultaneously has taken a major hit in its tax collection in 2008-09 and 2009-10 by reduction in excise and Customs duty rates that it seeks to reverse in 2010-11 through its duty rate reversals. Table 2 provides information on growth rates on the revenue side as well as effective rates. The effective duty rates have been calculated as follows: Customs collections to total imports and excise collections to GDP from manufacturing.
Table 2 reveals that indirect tax collections actually declined in the two crisis years and the effective tax rates have come down quite drastically by 3.7% in the case of Customs and 5.6% for excise duties. This was the stimulus provided on the production side to industry in particular that will be reversed in the coming year.
What are the takeaways from this analysis? The first is that the expenditure stimulus was more in 2008-09 than in 2009-10 . The second is that it was directed not at creating capital but more at providing relief at the lower level of income. The third was that it helped to compensate tardy growth in private consumption and capital formation.
Fourth, following from this thought, it may be explained that even though the fiscal deficit was high, the borrowing programme was non-obtrusive as it did not put pressure on the system as growth in credit was also tardy and there was enough room for this borrowing. Fifth, the lowering of tax rates provided an impetus for sure, as the government took a hit on tax collections. Therefore, it was Keynes at both the ends.
However, the point for debate is whether the present reversal of liberalism in this area will be compensated by the private sector growth. This will surely be the subject of debate in the coming year.
Saturday, March 20, 2010
Don’t just bank on new banks : Mar 15, 2010 Financial Express
The Union Budget has given a signal that the government is not averse to having more private sector banks in the country. The reason ostensibly is to spread the reach of banking and usher in more competition. The introduction of new private banks did bring in technology and better quality of service; and the logic of competition forced public sector banks to follow suit. This has been the good part of the story. There is also the other side to this story which needs to be kept in mind. One may recollect that of the original 7 private banks, only three have survived, which are institution-driven. Three have sold out to other banks, while one was taken over by a public sector bank. Therefore, the history of new banks doing well and surviving has been a mixed one. One is not too sure if the promoters are after valuation or out to create value for the system. Banking today could be seen as a steady business which also gives high valuation in the market. There could be an incentive to finally sell out to the highest bidder in due course. Here, RBI would need to take a commitment from the promoter that there could be no exit route under normal circumstances for a fixed period of time. The other issue really is the physical infrastructure. RBI has been reiterating its stance on the need to obviate the creation of duplicity in infrastructure in the banking infrastructure such as ATMs. The concept of shared ATMs has gained currency in the country. The creation of new banks would necessarily have to address this issue. Similarly the question of having branches in areas which are already heavily ‘banked’ may not add value. If the aim is to spread to new areas, the same could be permitted for the existing ones. The more obvious issue that has to be addressed is the one relating to promoters’ background. There would be a conflict of interest in case the promoter has a business which depends on finance. Corporate houses so far have been kept out of the ambit, which is likely to change in the new scheme of things. While regulation should ensure that such conflict of interest does not arise as there could be rules on the dos and don’ts of banking, the broader issue really is of the risk in non-banking activity spilling over to the.banking sector. This would need to be separated clearly, especially in the light of the recent financial crisis, where spillover of risk from one business segment to the other had hastened the process of decline. The NBFC business, which is relatively more risky would have to address this question when converting to or floating a bank. At the ideological level the question to be raised is whether there is really need for more banks. Two issues emerge. The first is whether there is a lacuna in provision of banking facilities. The answer here is no, because the network is large and mere additions of new banks which would focus on urban centres on grounds of viability, will not address the issue for the un-banked people. Further, the reasons for a large section of people being out of the system are not the absence of adequate banks but one of access on account of their creditworthiness. Small borrowers can be addressed through micro-finance institutions and not more banks. The other issue is whether more banks will add to competition. Banking is largely regulated by RBI with all interest rates of products being monitored. Further, when banks had freedom in pricing of services, there were instances of profit-seeking by some banks, which forced the Ombudsman to reinforce control over these rates and also usher in transparency. Often it is felt that there is not much difference between banks, as the menu of products and services are almost identical. In such a scenario, the addition of say another 2 or 3 banks is unlikely to change the canvas. While a free society should allow more players to enter, the entry and regulatory costs are high. With restrictions on banking operations within the present circumference, getting in more players may not achieve the goal. Instead, our thoughts should get centralised on making the existing banks stronger, especially in terms of capital, which can be organic or inorganic through the M&A route. The other set of institutions such as RRBs, micro-finance institutions, cooperative banking and NBFCs should be made more vibrant, because these are the institutions that are actually operating in areas which require more banking or quasi-banking facilities. Even if we do allow new private banks, it should be more on the principle of liberalisation, rather than the mistaken belief that they would even remotely do what the present structures are striving for.
Four good steps that will yield results:Mar 05, 2010 Financial Express
The finance minister has quite correctly put agriculture on the radar in this year’s Budget against the background of the drought that has somewhat spoilt the otherwise amazing growth story. He has focused on the immediate requirements as well as the medium-term goal of making agriculture self-sustaining. The four-pronged approach to be pursued, covers issues relating to making agriculture stronger through the spread of the Green Revolution, improving logistics support for this revolution, providing immediate relief to farmers affected by the drought, and probably using the food processing industry route to complete the chain through firmer binding.
It has been a constant plea to the government to restart the Green Revolution, which was quite successful in the seventies. To refresh memory, the approach was to use better HYV seeds (high-yielding variety), fertilisers, pesticides, irrigation facilities, etc to improve farm productivity. The Green Revolution, however, turned out to be a wheat revolution and was confined to the states of Haryana, Punjab and Western UP. As is normally the case, once agriculture became stable, there was a distinct dwindling of interest in pursuing the goal, as the nation preferred industrialisation as the engine of growth from the mid-eighties onwards. The current approach to the Green Revolution is two-fold. The first is to stretch it to new regions, as the soil in the states of Bihar, Jharkhand, Orissa and Eastern UP is fertile and should be leveraged to enhance production. This will also help the farmers to move to higher income levels and to that extent reduce the level of regional imbalances.
The second is the focus on pulses and oilseeds. The idea is to create 60,000 pulses and oilseeds villages with an outlay of Rs 300 crore. One can assume that the money would be spent specifically on improving production levels in targeted areas. This is significant because India walks the edge on these two sets of crop. The conundrum here is that while shortages in oilseeds can be met through higher imports of vegetable oils—India imports around 40-45% of its edible oil requirements—the same does not hold for pulses.
Further, as was witnessed this year, even within pulses there is a schism, where substitution is not that easy between, say, arhar and chana or urad and chana. As pulses are staples, this move, which hopefully is an initial step in a series of other measures that will be taken, will help to tide over the problem. India does import 10-20% of its pulses requirements, but given the limited supplies and variations in harvest seasons, there are invariably phases of price stress when domestic crops fail.
The second strategy is directed towards reducing wastages. It is estimated that the total losses in farm production could range between 10% and 30% for various crops due to the limited supply of cold chains, transport and warehousing facilities. The Budget has stressed the problem at the level of the FCI, wherein procurement and storage of grains has resulted in considerable wastage due to the non-availability of warehousing space. The FCI, CWC and SWCs combined has warehousing space of around 45-50 million tonne, which is inadequate, and timely availability of private space is a problem that accentuates the possibility of wastage. Reduction in wastages would automatically lead to higher availability of farm products.
This strategy has been linked to the food-processing sector as part of the third prong, where the forward linkage to making agriculture more commercial has been built in. ECBs have been permitted to set up cold storage facilities. This was necessary, since it has been estimated that there is a 60% gap in supply of stationary cold storage facilities and 80% gap in mobile cold storage facilities in the country. The Budget’s approach is fairly wholesome, as it interweaves overall production with logistics, and makes it more commercial at the retail stage.
The fourth route taken by the FM is to address the immediate concerns of farmers in terms of availability of credit and interest subvention. Credit availability is less of an issue today and the problem pertains to repayment of loans, especially at times when crops fail. By taking on the cost of subvention, immediate relief has been provided by the government so that banks can go ahead with the overall Plan.
The FM’s approach is fairly cogent and comprehensive and does not leave any loose ends. The total allocation of around Rs 700 crore (plus interest subvention) may not be too large and will have to be increased in subsequent years, as any effort towards making agriculture robust involves relentless focus and outlays, given that the canvas is expansive and the treatment must be deep rooted, both literally and figuratively.
It has been a constant plea to the government to restart the Green Revolution, which was quite successful in the seventies. To refresh memory, the approach was to use better HYV seeds (high-yielding variety), fertilisers, pesticides, irrigation facilities, etc to improve farm productivity. The Green Revolution, however, turned out to be a wheat revolution and was confined to the states of Haryana, Punjab and Western UP. As is normally the case, once agriculture became stable, there was a distinct dwindling of interest in pursuing the goal, as the nation preferred industrialisation as the engine of growth from the mid-eighties onwards. The current approach to the Green Revolution is two-fold. The first is to stretch it to new regions, as the soil in the states of Bihar, Jharkhand, Orissa and Eastern UP is fertile and should be leveraged to enhance production. This will also help the farmers to move to higher income levels and to that extent reduce the level of regional imbalances.
The second is the focus on pulses and oilseeds. The idea is to create 60,000 pulses and oilseeds villages with an outlay of Rs 300 crore. One can assume that the money would be spent specifically on improving production levels in targeted areas. This is significant because India walks the edge on these two sets of crop. The conundrum here is that while shortages in oilseeds can be met through higher imports of vegetable oils—India imports around 40-45% of its edible oil requirements—the same does not hold for pulses.
Further, as was witnessed this year, even within pulses there is a schism, where substitution is not that easy between, say, arhar and chana or urad and chana. As pulses are staples, this move, which hopefully is an initial step in a series of other measures that will be taken, will help to tide over the problem. India does import 10-20% of its pulses requirements, but given the limited supplies and variations in harvest seasons, there are invariably phases of price stress when domestic crops fail.
The second strategy is directed towards reducing wastages. It is estimated that the total losses in farm production could range between 10% and 30% for various crops due to the limited supply of cold chains, transport and warehousing facilities. The Budget has stressed the problem at the level of the FCI, wherein procurement and storage of grains has resulted in considerable wastage due to the non-availability of warehousing space. The FCI, CWC and SWCs combined has warehousing space of around 45-50 million tonne, which is inadequate, and timely availability of private space is a problem that accentuates the possibility of wastage. Reduction in wastages would automatically lead to higher availability of farm products.
This strategy has been linked to the food-processing sector as part of the third prong, where the forward linkage to making agriculture more commercial has been built in. ECBs have been permitted to set up cold storage facilities. This was necessary, since it has been estimated that there is a 60% gap in supply of stationary cold storage facilities and 80% gap in mobile cold storage facilities in the country. The Budget’s approach is fairly wholesome, as it interweaves overall production with logistics, and makes it more commercial at the retail stage.
The fourth route taken by the FM is to address the immediate concerns of farmers in terms of availability of credit and interest subvention. Credit availability is less of an issue today and the problem pertains to repayment of loans, especially at times when crops fail. By taking on the cost of subvention, immediate relief has been provided by the government so that banks can go ahead with the overall Plan.
The FM’s approach is fairly cogent and comprehensive and does not leave any loose ends. The total allocation of around Rs 700 crore (plus interest subvention) may not be too large and will have to be increased in subsequent years, as any effort towards making agriculture robust involves relentless focus and outlays, given that the canvas is expansive and the treatment must be deep rooted, both literally and figuratively.
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