The protagonists of economic reforms argue that the new India is where things are happening. Those who were walking are on a bicycle, those on a bicycle have moved on to a two-wheeler, the scooter owner now has a car, and so on. Also, almost everyone has a mobile phone; and stories of how fishermen in Kerala get better prices due to the telecom revolution are legendary and a vindication of reforms. On the other hand, India remains low on human development and the Human Development Index ranks us 119 in a set of over 170 countries. We still have starvation deaths and farmers suicides. What is the true picture?
The answer is that the Indian development model has been schizophrenic and while a lot of good has been happening, the fact that 41% of the population earns less than $1.25 a day is a dark reality. While the government has a lower number, it cannot be denied that we are low on development and, so, there is a call for inclusive growth. Reforms have probably permeated urban areas but may have only scratched the periphery of rural India, thus presenting a dualistic picture.
The model so far pursued is to induce various measures across different areas and different population at different points of time. Banks lend to the priority sector and the microfinance institutions (MFIs) are reaching out to the same group. In between there is interest subvention. This helps the farmer in one year, but does not create productive assets. There are several government programmes that target the farmers, and this year, around Rs 11,000 crore has been allocated. The Budget makes allocations for different crops every year to address the issue of low productivity, though pulses and oilseeds have repeated interest. There are allocations for health and education, and while the sums are not significant, there is definitely good intention. However, education and health expenses invariably lead to the creation of below-standard facilities along with ubiquitous leakages.
The National Rural Employment Guarantee Scheme (NREGS) has been a big step forward in having a dole-like system where the unemployed get relief for 100 days a year. The allocations are huge, at around Rs 40,000 crore a year. NREGS spends money in the ratio of 60:40 on wages and materials and deals with non-capital goods. The average number of days that are used by households is 35-40 instead of 100. The ratio of works completed is just under 5%.
Our approach to inclusion has, hence, been on allocations with limited focus, and the objective has been to meet targets, which though laudable is not adequate. Besides, since the schemes do not work together, different people are covered at different points of time. The result is that the beneficiaries would be slipping in and out of suffering depending on their level of inclusion.
As the efforts are not cohesive, the results are not satisfactory. One gets a feeling that the money, to the extent that there are no leakages, is not being efficiently spent. Clearly, there are issues with the project design. Is it possible to bundle all these products together to make these schemes more effective? The road ahead evidently should be to deliver an inclusive package where focus must be on quality rather than traversing a wider geography.
A new approach would be to create centres of prosperity (CoP) within the country, which actually make the population self-sufficient and prosperous. We have to narrow the canvas and concentrate on a set of pre-decided villages or districts to begin with. The objective must be to cover these centres in their entirety such that an entire package of benefits flows to the concerned people. Providing employment through the NREGS should be accompanied by making the areas chosen the new agricultural fields of the revived green revolution. Funds must be used to ensure that the lacunae in agriculture are addressed and that farmers work with a motive rather than use it as a temporary option. Warehousing initiatives should be linked to these specific areas.
The intention should also be to improve the quality of life by setting up basic infrastructure facilities of the highest order: electricity, water, sanitation, education and health. Education at the primary and secondary level should actually be aimed at attaining comparable levels in cities - an English education perhaps - so that every individual in the village has scope to aim for the best and can actually look towards getting a competitive job in industry. This will help to lower the level of inequality that exists between rural and urban incomes both in terms of people as well as infrastructure. Similarly, modern hospitals should be set up that get in the best medical staff to provide rural access. These CoPs would be the way forward as we can see private investment being channeled into these areas once the growth potential is created.
Where do we start? Given the limited funds that are available, the government should start with the least developed areas in the less developed states with the panchayat being the fulcrum. A strict audit would be the corollary to ensure that the funds are well spent and that the structures needed for building these centres do work in the desired manner.
We have seen states like Punjab becoming success stories of agro-based progress where new cities have developed as alternatives to the metros. Similarly, new agro-based rural hubs with a bundled development package can bring in prosperity by making our allocations more effective. The selection criteria will remain a practical challenge given multiple political interests. A rule of thumb, such as the least developed districts in least developed states can be the starting point.
Saturday, March 19, 2011
Piling on the straws: Financial Express: Editoiral 18th March 2011
To hike or not to hike, was ultimately not an issue for Hamlet or rather RBI, as it has gone in for the 8th round of rate hikes, which was, in fact expected by the market. This monetary policy review was not expected to go beyond interest rates; and liquidity, though tight, has been so for over 6 months, was not expected to be addressed. One can guess that RBI expects conditions to return to normalcy when we enter the new financial year and that the present high levels of borrowing from the repo window are temporary. The statement is brief and highlights that the economy is still under the threat of inflation, which will not reach the 7% mark by March-end, but be closer to 8%. Therefore, RBI has persevered with the rate hike. It has highlighted core inflation as the main concern today, which goes beyond the ordinary argument of supply bottlenecks. But the question to be asked is whether or not this core inflation is due to high demand pressures. Is the economy getting overheated? One is not sure, if one looks at the industrial activity that may have shown signs of slowing down. Also, investment is slated to be lower this year according to the CSO and the government has not been spending. Besides, GDP growth at 8.6% is not significantly higher than 8% last year to fuel these thoughts. In that case, where is the spending that has to be curbed through higher interest rates? If this was the case, the higher prices of manufactured goods could just as well be driven by high commodity prices—metals and crude oil, which are actually imported from the global space.
Food inflation is coming down and will probably continue to do so on the back of a high base year as well as rabi harvest flows. So the rate hike may have a limited impact on inflation emanating from primarily
supply impulses or rather the lack thereof. Banks have been equivocal in their response of whether they will be increasing rates—if they don’t, then the hike would not be justified and if they did, it will further affect investment decisions. Clearly, RBI’s take could leave one confused as one does not quite know what to expect in future. Will RBI continue to increase rates and, if so, do they have a target number of inflation in mind? What one can conclude is that RBI will keep looking at the inflation number before releasing its foot from the rate hike pedal and the number could be 6% to begin with. What happens to growth in this period? One cannot guess as every hike in the past has had industry saying that it has reached the limit but corporate numbers have so far not reflected the pain. While this is comforting news, we cannot stretch our luck.
Food inflation is coming down and will probably continue to do so on the back of a high base year as well as rabi harvest flows. So the rate hike may have a limited impact on inflation emanating from primarily
supply impulses or rather the lack thereof. Banks have been equivocal in their response of whether they will be increasing rates—if they don’t, then the hike would not be justified and if they did, it will further affect investment decisions. Clearly, RBI’s take could leave one confused as one does not quite know what to expect in future. Will RBI continue to increase rates and, if so, do they have a target number of inflation in mind? What one can conclude is that RBI will keep looking at the inflation number before releasing its foot from the rate hike pedal and the number could be 6% to begin with. What happens to growth in this period? One cannot guess as every hike in the past has had industry saying that it has reached the limit but corporate numbers have so far not reflected the pain. While this is comforting news, we cannot stretch our luck.
Signalling concern: Financial Express Editorial 16th March 2011
The curious thing about monetary policy is that it has to not only be forward looking but also be either ahead or behind the market to have an impact. When the monetary authority does something what the market already expects, and is hence buffered, then the policy action is not quite that effective. So is the case with RBI’s monetary review—the last for the year on March 17. Under normal circumstances, this should not matter, considering that we are in the last fortnight of the financial year where the government’s borrowing programme is known and almost done with, and the banking indicators on credit and deposits growth are also almost final. Why then should we give importance to this policy? The answer is actually quite simple—we need to know how RBI sees the economy, which, quite interestingly, looks different when viewed from different angles. By this we mean that we all know that inflation is a concern but has been coming down. Besides, it is food inflation that has created a problem for us, something that RBI cannot actually address through its conventional tools of monetary policy. But, if RBI perseveres with rate hikes, which the market believes will be the right course, then it’s indicative that inflation is still the target and that it will continue to work on this number until the final objective of either 4% or 5% (which will be stated in its Annual Policy in May) is achieved. In fact, any rate hike will be indicative of further hikes during the year.
On the other hand, growth, though sanguine for most part of the year, poses a puzzle. While the number of 8.5% or in its vicinity will be accomplished, there is some concern on whether or not investment has slowed down on account of high interest rates. If one talks to corporates, there is definitely concern as investment plans have been deferred and only necessary investment has been undertaken. Now, if this tendency persists, there is a possibility of industry being drawn back with capacity utilisation having reached the optimal levels across sectors, in which case potential growth gets affected. The IIP numbers have brought little cheer last week and it is very likely that the target this year of 8.8% in manufacturing will not be achieved. This being the case, RBI has to think deeper before tossing the coin. Past behaviour of RBI indicates that it would not like to spook the market and hence will opt for an increase in rates by 25 bps, though strong economic rationale would probably suggest that a pause on March the 17th could be the best solution until a clearer picture emerges when the year ends.
On the other hand, growth, though sanguine for most part of the year, poses a puzzle. While the number of 8.5% or in its vicinity will be accomplished, there is some concern on whether or not investment has slowed down on account of high interest rates. If one talks to corporates, there is definitely concern as investment plans have been deferred and only necessary investment has been undertaken. Now, if this tendency persists, there is a possibility of industry being drawn back with capacity utilisation having reached the optimal levels across sectors, in which case potential growth gets affected. The IIP numbers have brought little cheer last week and it is very likely that the target this year of 8.8% in manufacturing will not be achieved. This being the case, RBI has to think deeper before tossing the coin. Past behaviour of RBI indicates that it would not like to spook the market and hence will opt for an increase in rates by 25 bps, though strong economic rationale would probably suggest that a pause on March the 17th could be the best solution until a clearer picture emerges when the year ends.
Sunday, March 13, 2011
An Interesting Passage To India: Book Review of Patrick French's India: A Portrait: Business World 5th March 2011
'India: A Portrait' is insightful as it traces our rajya, lakshmi and samaj with their idiosyncrasies, following a narrative that is non judgemental and open to interpretation.
A picture is a factual depiction on film, while a portrait is the conceptualisation of the image that is objective, compared with a caricature which legitimately exaggerates the subject. Patrick French’s India: A Portrait is insightful as it traces our rajya, lakshmi and samaj with their idiosyncrasies. The narration is a delight and reminiscent of other non-Indian authors such as Mark Tully, Edward Luce, Christopher Kremmer and William Dalrymple. French is not patronising like Naipaul and, in fact, presents India in a balanced way, highlighting successes with limited qualifications without being judgemental. It is left to the reader to draw inferences, especially where he brings in seemingly incongruously a section on the rise of the Maoists in the chapters on economic progress. Or the way of life of quarry workers show the darker side of the progress.
A lot of research and conversation has gone into sketching this portrait, which stretches from India’s independence to the present. The political journey is crisp. French is rather frank about the Nehru family and traces the rise of Indira Gandhi and the more gauche Rahul Gandhi, raising déjà vu. An interesting political chapter is an analysis on the age profile and lineages of politicians, which conclude if you are a young member of Parliament, you should have an ancestor who is a politician.
The section, Lakshmi, is written with panache. French explains how, economist John Maynard Keynes who had worked on India during the Raj found it illogical that Indians were hoarding gold except for the fact that there was no banking. Maybe now, he would have changed his view. The legendary Mahalanobis model has been described as being an imaginative piece of Bengali creativity with an implausible vision leading to contradictions. One classic example was how the Heavy Engineering Corporation, Ranchi, made things which no one wanted. And what industry wanted, such as coal, could not be had. The coal sector blamed the railways for not giving wagons, which turned to the steel sector for not providing the material. And, you can guess it, the steel sector points to the coal sector for not providing the raw material.
French recounts the development of enterprise despite the many frustrations. The lawyer, T.V.S. Iyengar, started making bus parts and diversified into making car parts and then, logically, the two-wheeler. To get an imported prototype, he had to export a certain amount to unknown markets, which was ridiculous as he could not produce the product without the imported part! Finally, he had to set up an office in Delhi for lobbying. Another interesting story is of Sunil Mittal’s evolution from dealing with import of generators to VCRs, push-button phones to the Airtel empire. At a different level, C.K. Ranganathan showed amazing enterprise to make the famous Chik shampoo sachet. The author lauds the imprint of Indian industry in the global arena, with the final frontier being foreign acquisitions. Major innovations are seen in Cadbury’s adaptation to the Indian mithai concept or Rajeev Samant’s tryst with making wines from wasteland.
This was a new India, which arrived with entrepreneurs moving into the ‘no-strings generation’ where economic reforms unleashed opportunities. The author, however, misses the point that economic reforms may not have been an Indian brain wave, but a compulsion on account of the International Monetary Fund loan.
French’s description of the other side of India Inc. is lined with subtle humour — when talking of the symbiotic relation of Swaraj Paul and John Major or his obsequiousness with Indira Gandhi. His description of Mukesh Ambani’s 27-storeyed building or Mrs Lakshmi Mittal’s ‘movable assets on ears, neck and fingers’ does provoke a smile. He smartly juxtaposes this with the cases of philanthropy exercised by corporates.
French discusses the caste system and how there is a reversal with the ascendancy of people such as Mayawati. Indian society has also become progressive where gay rights are accepted and more women are working, but he cannot digest the concept of servants who “move around without assurance, and the expectation is that they will always be there to facilitate a certain way of life”. Quite hard hitting really, when we look at our own homes. Finally on Hinduism, he says that it can be understood only by seeing how it is lived. How true!
A picture is a factual depiction on film, while a portrait is the conceptualisation of the image that is objective, compared with a caricature which legitimately exaggerates the subject. Patrick French’s India: A Portrait is insightful as it traces our rajya, lakshmi and samaj with their idiosyncrasies. The narration is a delight and reminiscent of other non-Indian authors such as Mark Tully, Edward Luce, Christopher Kremmer and William Dalrymple. French is not patronising like Naipaul and, in fact, presents India in a balanced way, highlighting successes with limited qualifications without being judgemental. It is left to the reader to draw inferences, especially where he brings in seemingly incongruously a section on the rise of the Maoists in the chapters on economic progress. Or the way of life of quarry workers show the darker side of the progress.
A lot of research and conversation has gone into sketching this portrait, which stretches from India’s independence to the present. The political journey is crisp. French is rather frank about the Nehru family and traces the rise of Indira Gandhi and the more gauche Rahul Gandhi, raising déjà vu. An interesting political chapter is an analysis on the age profile and lineages of politicians, which conclude if you are a young member of Parliament, you should have an ancestor who is a politician.
The section, Lakshmi, is written with panache. French explains how, economist John Maynard Keynes who had worked on India during the Raj found it illogical that Indians were hoarding gold except for the fact that there was no banking. Maybe now, he would have changed his view. The legendary Mahalanobis model has been described as being an imaginative piece of Bengali creativity with an implausible vision leading to contradictions. One classic example was how the Heavy Engineering Corporation, Ranchi, made things which no one wanted. And what industry wanted, such as coal, could not be had. The coal sector blamed the railways for not giving wagons, which turned to the steel sector for not providing the material. And, you can guess it, the steel sector points to the coal sector for not providing the raw material.
French recounts the development of enterprise despite the many frustrations. The lawyer, T.V.S. Iyengar, started making bus parts and diversified into making car parts and then, logically, the two-wheeler. To get an imported prototype, he had to export a certain amount to unknown markets, which was ridiculous as he could not produce the product without the imported part! Finally, he had to set up an office in Delhi for lobbying. Another interesting story is of Sunil Mittal’s evolution from dealing with import of generators to VCRs, push-button phones to the Airtel empire. At a different level, C.K. Ranganathan showed amazing enterprise to make the famous Chik shampoo sachet. The author lauds the imprint of Indian industry in the global arena, with the final frontier being foreign acquisitions. Major innovations are seen in Cadbury’s adaptation to the Indian mithai concept or Rajeev Samant’s tryst with making wines from wasteland.
This was a new India, which arrived with entrepreneurs moving into the ‘no-strings generation’ where economic reforms unleashed opportunities. The author, however, misses the point that economic reforms may not have been an Indian brain wave, but a compulsion on account of the International Monetary Fund loan.
French’s description of the other side of India Inc. is lined with subtle humour — when talking of the symbiotic relation of Swaraj Paul and John Major or his obsequiousness with Indira Gandhi. His description of Mukesh Ambani’s 27-storeyed building or Mrs Lakshmi Mittal’s ‘movable assets on ears, neck and fingers’ does provoke a smile. He smartly juxtaposes this with the cases of philanthropy exercised by corporates.
French discusses the caste system and how there is a reversal with the ascendancy of people such as Mayawati. Indian society has also become progressive where gay rights are accepted and more women are working, but he cannot digest the concept of servants who “move around without assurance, and the expectation is that they will always be there to facilitate a certain way of life”. Quite hard hitting really, when we look at our own homes. Finally on Hinduism, he says that it can be understood only by seeing how it is lived. How true!
Budget 2011: With some luck, it should work out: DNA 1st March 2011
The budget should be evaluated in terms of what it was expected to achieve. From the macro-economic perspective, the budget was to bring about growth and control inflation while keeping within the FRBM limits. Has it achieved this troika?
The budget has focused on growth in a semi-Keynesian manner; pump priming to spur the economy. Here, the FM has kept the deficit under control but has channelled the expenditure into making it work more efficiently.The focus is on infrastructure and agriculture, which is appropriate, given that these have been two lacunae in our system. This will help to increase investment as well as generate output in the medium term of 2-3 years. The focus on farming will ultimately help to improve logistics and make supplies more resilient. Therefore, the impact on inflation will be felt with a lag while growth would be more instantaneous.
The tax changes have been largely neutral even though there has been a marginal increase in excise on certain items. The inflation impact is not expected to be significant on this score and the marginally higher income tax saved by the raising of the income tax exemption limit would negate this impact. Going by the textbook one would call this a Pareto optimal situation where some are better off while no one is really worse of under the new tax rules.
There are, however, three qualifications that must be made here. The fiscal deficit has been a challenge. This is commendable, though we are bargaining for high growth to garner the revenue needed to lower this ratio. Presently, the GDP growth rate has shown signs of slowing down with interest rates being high. Industrial growth has been resilient so far, but one is not sure if there is an inflexion point after which it will be impacted by interest rates.
The other risk factor is disinvestment. The FM has placed the target again at Rs40,000 crore, and any slippage would mean that the deficit will increase again.
The third pertains to oil prices. The budget has not taken into account the possibility of oil prices spiralling and leading to higher fuel prices. What will the policy be like then? If prices of diesel, LPG and kerosene are not to be increased then the budgetary support has to increase through subsidies.
Therefore, with a bit of luck, these numbers should work out well for us.
The budget has focused on growth in a semi-Keynesian manner; pump priming to spur the economy. Here, the FM has kept the deficit under control but has channelled the expenditure into making it work more efficiently.The focus is on infrastructure and agriculture, which is appropriate, given that these have been two lacunae in our system. This will help to increase investment as well as generate output in the medium term of 2-3 years. The focus on farming will ultimately help to improve logistics and make supplies more resilient. Therefore, the impact on inflation will be felt with a lag while growth would be more instantaneous.
The tax changes have been largely neutral even though there has been a marginal increase in excise on certain items. The inflation impact is not expected to be significant on this score and the marginally higher income tax saved by the raising of the income tax exemption limit would negate this impact. Going by the textbook one would call this a Pareto optimal situation where some are better off while no one is really worse of under the new tax rules.
There are, however, three qualifications that must be made here. The fiscal deficit has been a challenge. This is commendable, though we are bargaining for high growth to garner the revenue needed to lower this ratio. Presently, the GDP growth rate has shown signs of slowing down with interest rates being high. Industrial growth has been resilient so far, but one is not sure if there is an inflexion point after which it will be impacted by interest rates.
The other risk factor is disinvestment. The FM has placed the target again at Rs40,000 crore, and any slippage would mean that the deficit will increase again.
The third pertains to oil prices. The budget has not taken into account the possibility of oil prices spiralling and leading to higher fuel prices. What will the policy be like then? If prices of diesel, LPG and kerosene are not to be increased then the budgetary support has to increase through subsidies.
Therefore, with a bit of luck, these numbers should work out well for us.
Growth must go on: Going slow on stimulus rollback: Mint 28th February 2011
The government appears to be firm on rolling back the fiscal stimulus at a time when the investment climate looks shaky.
The Economic Survey in a way sets the prelude for the Union Budget in so far as it broadly provides the goals to be targeted. While talking of sustainable growth and stable inflation are metaphorical bromides in any document, they are significant this time as the circumstances are singular.
We now have a situation where growth has been maintained in fiscal year 2011 at 8.6%, but inflation remains a worry. The fact that core inflation—which is non-food, non-fuel inflation—is increasing has implications for monetary policy, which will remain hawkish. The government appears to be firm on rolling back the fiscal stimulus at a time when the investment climate looks shaky. The survey talks of the cost that we have to bear in terms of higher inflation when we speak of sustained growth. Are we to infer that growth would be the priority this year? If so, what should we expect from the Budget to ensure that growth is on course?
The survey talks of 9% growth in FY12, while most experts, including the International Monetary Fund, have forecasted a slower pace than the one in FY11. In any case, the 9% figure is based on an academic exercise—juxtaposing the FY10 capital formation number with an incremental capital output ratio (ICOR) of 4.1. Curiously, the Central Statistical Organisation’s number for capital formation in FY11 is lower than that in FY10. But, as we are talking of 9% gross domestic product (GDP) growth, let us see what the Budget can do.
For the Budget to influence growth, one has to take a Keynesian expansionary stance, which is difficult if we have the shadow of a stimulus rollback behind us. Therefore, we have to work within the confines of the rollback, which means a declining fiscal deficit to GDP ratio. The Survey has lowered the fiscal deficit for FY11 to 4.8% from 5.5%. This is because the denominator (GDP at current market prices) was revised upwards due to high inflation and new wholesale price index base year prices. Therefore, for the fiscal deficit ratio to be lower in FY12, there has to be a downward adjustment in the numerator at a time when the denominator will have a downward inflation bias.
This is the crux because if the deficit has to be lower, then either tax collections must increase or expenditure must decrease. Tax collections will increase on their own if growth takes place, thus offering a higher taxable base under unchanged tax conditions.
On the other hand, to bring about growth in GDP, we will have to lower tax rates. But there are limitations here, given our commitment to the goods and services tax and the direct taxes code, which have set the perimeter for policy. If rates are lowered, we can expect the Laffer theory to come into effect, wherein lower taxes stimulate investment and production, which leads to higher growth, which in turn leads to better tax collections. With inflationary pressures being exacerbated by high oil and metal prices, lowering excise rates selectively is an option to boost specific sectors and control inflation. Also, tax benefits on investment are pragmatic at a time when investment appears to be stagnant. One must remember that this year we will not have the buffer of 3G collections or higher disinvestment.
The other option is to work on expenditure, which is more direct and effective. But even here, there are constraints. A large part of expenditure is committed, such as interest payments and subsidies. These, for all practical purposes, cannot be rolled back. The government must make its expenditure work more efficiently so that it leads to higher productivity and growth. Here, the way would be to refocus the Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS) to more productive areas where capital is created. Considering that the government has to make agriculture more resilient, a prudent move would be to direct the Rs. 40,000 crore allocation to MGNREGS in FY11 to the creation of facilities such as warehouse chains, improved farming and so on. The wage-materials ratio for MGNREGS can be changed to wage-capital in the new scheme of things. This way, fixed revenue expenditure can be capitalized partly without changing the overall expenditure level, but by making it work more efficiently.
Any other capital expenditure to stimulate growth has to go beyond the existing framework and increase the deficit as investment expenditure has a lagged effect on output. Last year, the government had targeted an increase of 35% in its capital expenditure, which should be sustained. Focus on rural and general infrastructure will provide backward links to industries such as basic, capital and intermediate goods to propel growth.
The economic environment today is challenging for growth, with high inflation, interest rates, rising current account deficit and subdued capital markets acting as barriers. To maintain growth, the government has to take the lead, because monetary policy will remain cautious as long as inflation lingers. Private sector investment will remain subdued until economic conditions improve. Therefore, selective Keynesian prime pumping through tax incentives, probably capital expenditure expansion and capitalization of revenue expenditure should be done to make money work better. This may compromise the fiscal deficit a bit. But if it enables higher growth, the outcome will be worth the effort. The momentum will be maintained, which will finally matter.
The Economic Survey in a way sets the prelude for the Union Budget in so far as it broadly provides the goals to be targeted. While talking of sustainable growth and stable inflation are metaphorical bromides in any document, they are significant this time as the circumstances are singular.
We now have a situation where growth has been maintained in fiscal year 2011 at 8.6%, but inflation remains a worry. The fact that core inflation—which is non-food, non-fuel inflation—is increasing has implications for monetary policy, which will remain hawkish. The government appears to be firm on rolling back the fiscal stimulus at a time when the investment climate looks shaky. The survey talks of the cost that we have to bear in terms of higher inflation when we speak of sustained growth. Are we to infer that growth would be the priority this year? If so, what should we expect from the Budget to ensure that growth is on course?
The survey talks of 9% growth in FY12, while most experts, including the International Monetary Fund, have forecasted a slower pace than the one in FY11. In any case, the 9% figure is based on an academic exercise—juxtaposing the FY10 capital formation number with an incremental capital output ratio (ICOR) of 4.1. Curiously, the Central Statistical Organisation’s number for capital formation in FY11 is lower than that in FY10. But, as we are talking of 9% gross domestic product (GDP) growth, let us see what the Budget can do.
For the Budget to influence growth, one has to take a Keynesian expansionary stance, which is difficult if we have the shadow of a stimulus rollback behind us. Therefore, we have to work within the confines of the rollback, which means a declining fiscal deficit to GDP ratio. The Survey has lowered the fiscal deficit for FY11 to 4.8% from 5.5%. This is because the denominator (GDP at current market prices) was revised upwards due to high inflation and new wholesale price index base year prices. Therefore, for the fiscal deficit ratio to be lower in FY12, there has to be a downward adjustment in the numerator at a time when the denominator will have a downward inflation bias.
This is the crux because if the deficit has to be lower, then either tax collections must increase or expenditure must decrease. Tax collections will increase on their own if growth takes place, thus offering a higher taxable base under unchanged tax conditions.
On the other hand, to bring about growth in GDP, we will have to lower tax rates. But there are limitations here, given our commitment to the goods and services tax and the direct taxes code, which have set the perimeter for policy. If rates are lowered, we can expect the Laffer theory to come into effect, wherein lower taxes stimulate investment and production, which leads to higher growth, which in turn leads to better tax collections. With inflationary pressures being exacerbated by high oil and metal prices, lowering excise rates selectively is an option to boost specific sectors and control inflation. Also, tax benefits on investment are pragmatic at a time when investment appears to be stagnant. One must remember that this year we will not have the buffer of 3G collections or higher disinvestment.
The other option is to work on expenditure, which is more direct and effective. But even here, there are constraints. A large part of expenditure is committed, such as interest payments and subsidies. These, for all practical purposes, cannot be rolled back. The government must make its expenditure work more efficiently so that it leads to higher productivity and growth. Here, the way would be to refocus the Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS) to more productive areas where capital is created. Considering that the government has to make agriculture more resilient, a prudent move would be to direct the Rs. 40,000 crore allocation to MGNREGS in FY11 to the creation of facilities such as warehouse chains, improved farming and so on. The wage-materials ratio for MGNREGS can be changed to wage-capital in the new scheme of things. This way, fixed revenue expenditure can be capitalized partly without changing the overall expenditure level, but by making it work more efficiently.
Any other capital expenditure to stimulate growth has to go beyond the existing framework and increase the deficit as investment expenditure has a lagged effect on output. Last year, the government had targeted an increase of 35% in its capital expenditure, which should be sustained. Focus on rural and general infrastructure will provide backward links to industries such as basic, capital and intermediate goods to propel growth.
The economic environment today is challenging for growth, with high inflation, interest rates, rising current account deficit and subdued capital markets acting as barriers. To maintain growth, the government has to take the lead, because monetary policy will remain cautious as long as inflation lingers. Private sector investment will remain subdued until economic conditions improve. Therefore, selective Keynesian prime pumping through tax incentives, probably capital expenditure expansion and capitalization of revenue expenditure should be done to make money work better. This may compromise the fiscal deficit a bit. But if it enables higher growth, the outcome will be worth the effort. The momentum will be maintained, which will finally matter.
Even more contradictions to manage: 24th February 2011 Financial Express
Presenting a Budget is always a challenge, given that its importance has evolved from being a rudimentary reflection of the finances of the government to a policy document that drives economic activity. Budget 2011-12 becomes even more difficult since there are certain constraints within which it has to be drawn amidst multiple expectations from all constituents.
The budgetary numbers for FY11 will look good as the economy appears to be buoyant and the targets will be more or less achieved. Tax collections have been stable and increasing while expenditure has been reined in. The government has chosen not to spend the excess collections from 3G auctions, which in turn will help brighten fiscal numbers. The question, of course, is what the government will do next year. In fact, in retrospect, one could argue that the government could have been brash this year considering that globally Keynesianism has caught on, and when the mighty powers run deficits, it is accepted in the name of fostering global recovery. Such a luxury may not be available this year.
Let us look at the constraints first. The DTC has sort of capped the changes that the government can invoke and hence any tax change will have to be within these confines. Second, the GST has been a bone of contention between the Centre and the states, and also indirectly caps the changes that can be had on the domestic duty structure. Third, the benefit of 3G auctions will not be there, which cuts off a major exogenous source of revenue that was there last year. Fourth, while disinvestment has already come to a halt with a deficit likely in FY11, the number will have to be pruned in FY12, given that the stock market may be in a state of flux for the first half.
On the other hand, expectations are that the government will address inflation and growth. The recent IIP numbers will make the government think harder on the growth aspect while the inflation consideration would probably have already been buffered into the calculations. Income tax concessions as well as indirect tax relief would be expected. In fact, a judicious move would be to actually index the exemption limits on income tax with inflation so that it automatically moves up in line with price increases. Sector-specific duty concessions, especially petroleum sector, would be in order.
Government expenditure, on the other hand, will have to continue in the normal course, with added pressure on social and economic expenditure. The food inflation this year is a direct consequence of a neglected farm sector. The lacunae in logistics support will have to be addressed in a comprehensive manner. Warehousing is not a very lucrative business for large players, except where they are building their own retail chains. A look at FDI policy or credit concessions for setting up warehouses could be in order in the light of the Warehousing Act. Since there is talk of changing the APMC Acts, this could also be the focus, though this is a state subject and the government can at best make recommendations.
Two areas that have to be addressed are subsidies and MGNREGA. The petroleum subsidy bill has to increase, given that inflationary issues are a concern today. Also, until such time the UID is implemented, we cannot really enhance the efficacy of the food subsidy scheme. This will continue to remain on the government’s books for some more time. The MGNREGA should be reviewed seriously. While the allocation and motivation is laudable, as this is one of the few success stories of the government, it has to be channelled in a more productive manner.
Today, the numbers on display on the Website are quite disconcerting. While the number of households covered is large, the average number of days utilised is around 35, which is much lower than the 100 that was targeted.
Also, the completed schemes are very few. Clearly, we should make this money work better, which can be accomplished by integrating it with the other requirement in the farm sector.
The basic challenge in drafting any Budget is managing contradictions. Individuals want tax concessions while corporate are never happy with what they get. At the same time, economists want the government to spend more on development while the ubiquitous critics are there to question the fiscal numbers. Even when good budgeted numbers are targeted, the cynics contend that they cannot be achieved. What we should remember is that all the ends cannot be tied up to make everyone happy and some section has to give in. This should be the spirit in which we must look at the Budget.
The budgetary numbers for FY11 will look good as the economy appears to be buoyant and the targets will be more or less achieved. Tax collections have been stable and increasing while expenditure has been reined in. The government has chosen not to spend the excess collections from 3G auctions, which in turn will help brighten fiscal numbers. The question, of course, is what the government will do next year. In fact, in retrospect, one could argue that the government could have been brash this year considering that globally Keynesianism has caught on, and when the mighty powers run deficits, it is accepted in the name of fostering global recovery. Such a luxury may not be available this year.
Let us look at the constraints first. The DTC has sort of capped the changes that the government can invoke and hence any tax change will have to be within these confines. Second, the GST has been a bone of contention between the Centre and the states, and also indirectly caps the changes that can be had on the domestic duty structure. Third, the benefit of 3G auctions will not be there, which cuts off a major exogenous source of revenue that was there last year. Fourth, while disinvestment has already come to a halt with a deficit likely in FY11, the number will have to be pruned in FY12, given that the stock market may be in a state of flux for the first half.
On the other hand, expectations are that the government will address inflation and growth. The recent IIP numbers will make the government think harder on the growth aspect while the inflation consideration would probably have already been buffered into the calculations. Income tax concessions as well as indirect tax relief would be expected. In fact, a judicious move would be to actually index the exemption limits on income tax with inflation so that it automatically moves up in line with price increases. Sector-specific duty concessions, especially petroleum sector, would be in order.
Government expenditure, on the other hand, will have to continue in the normal course, with added pressure on social and economic expenditure. The food inflation this year is a direct consequence of a neglected farm sector. The lacunae in logistics support will have to be addressed in a comprehensive manner. Warehousing is not a very lucrative business for large players, except where they are building their own retail chains. A look at FDI policy or credit concessions for setting up warehouses could be in order in the light of the Warehousing Act. Since there is talk of changing the APMC Acts, this could also be the focus, though this is a state subject and the government can at best make recommendations.
Two areas that have to be addressed are subsidies and MGNREGA. The petroleum subsidy bill has to increase, given that inflationary issues are a concern today. Also, until such time the UID is implemented, we cannot really enhance the efficacy of the food subsidy scheme. This will continue to remain on the government’s books for some more time. The MGNREGA should be reviewed seriously. While the allocation and motivation is laudable, as this is one of the few success stories of the government, it has to be channelled in a more productive manner.
Today, the numbers on display on the Website are quite disconcerting. While the number of households covered is large, the average number of days utilised is around 35, which is much lower than the 100 that was targeted.
Also, the completed schemes are very few. Clearly, we should make this money work better, which can be accomplished by integrating it with the other requirement in the farm sector.
The basic challenge in drafting any Budget is managing contradictions. Individuals want tax concessions while corporate are never happy with what they get. At the same time, economists want the government to spend more on development while the ubiquitous critics are there to question the fiscal numbers. Even when good budgeted numbers are targeted, the cynics contend that they cannot be achieved. What we should remember is that all the ends cannot be tied up to make everyone happy and some section has to give in. This should be the spirit in which we must look at the Budget.
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