UPA plays the numbers game

P Chidambaram may have shown his articulate command over pure economics and political economy, time and again. But his understanding hasn't led to the enhancement of the country’s macro-economic health
The recently presented interim Union Budget is skewed. The Vote on Account gives no space to overhaul the revenue or expenditure sides, and its provisions will haunt the successive Government as the latter seeks to review or implement policy. The last Union Budget of UPA2 lacks serious intents of fiscal consolidation.

The Union Minister for Finance spent his precious time personifying the achievements of his Government as well as his personal wisdom. Unrelated to Indian economy’s woes, the statements irritated the sufferers of the UPA’s macro-economic mismanagement.

The Indian economy has been passing through trying times, with the GDP growth sliding below five per cent and inflation hovering around 7.5 per cent. Consumer price inflation, which affects the common man the most, has been around 10 per cent or more. And food inflation rarely climbs down from the double-digits. Industrial and services growth has dropped and jobs have withered away from the scene. Naturally, the slowdown created by different factors constituted in a big way to the anti-Government mood among the masses.

An election is around the corner and the legions of the UPA have no proper ideas to curb bad governance. They could have moved to the better path when Congress vice president Rahul Gandhi admitted the policy blunders of his Government, but sadly the Prime Minister and the Finance Minister observed that history will be kinder to them than their contemporary critics. Will this be true?

It is unlikely that any proper history-writing will let off the UPA2, characterised by scams and indecision which have lowered the morale of the economy and the people. Recent years have witnessed an erosion of confidence in economic activities at the mass level. The sagging sentiment has taken a high toll on the growth momentum.

UPA2 couldn’t live up to the benchmark set by UPA1. The excuse of the Finance Minister that it still performed better than the six years of NDA rule is an eyewash through data. In the NDA Government, average GDP growth rate and inflation stood simultaneously at six per cent and around 4.5 per cent. Under UPA1, average GDP growth shot higher at 8.4 per cent but inflation too rose to 6.6 per cent, and UPA2 ends with an average GDP growth of 6.7 per cent and inflation surging over eight per cent.

Astonishingly, the UPA2 has no patience to recall the good work of its own preceding Government. Instead it is comparing its performance with the NDA Government even though the fundamentals for it were different compared to the previous decade which was known for the rise of emerging economies like India.

It is undeniable that the global economic crisis of 2007-2008 messed-up the external environment. The economic slowdown has severely damaged the rising momentum in emerging economies but India has suffered more through the sustained high inflation, supported by impractical policy planning.

The UPA’s much celebrated commitment to inclusive growth made on modest gains on the ground. In 2003-2004, Gross Tax Revenues stood at 8.8 per cent of GDP — this figure witnessed a vertical growth under UPA1 to 12 per cent of GDP in 2008-2009 but came down dramatically to near 10 per cent of GDP under UPA2. Capital outlay and subsidies have modestly risen under the UPA rule but whether the funds were delivered for intended purposes remains a concern.

On the public expenditure front, the NDA Government spent around 2.6 per cent and one per cent of the GDP, respectively on education and health. Under the UPA rule, total public expenditure on education and health, respectively stood at 3.3 per cent and 1.3 per cent of the GDP. This clearly marked the violation of Common Minimum Programme of the UPA1 Government, which had promised spending six per cent of GDP on education and three per cent of the GDP on health facilities.

Mr P Chidambaram, who has presented many Budgets, failed to clean up the indirect taxation regime since 1991. Only Messrs Manmohan Singh and Yashwant Sinha, as Finance Ministers, tried to reform import duties and excise. So, Mr Chidamabaram’s claim to be a progressive mover of the public finances seems unbelievable. This last one was an interim Budget and he may have bound by electoral compulsions but the same was not true in previous years.

The interim Budget estimates fiscal deficit for 2013-14 at 4.6 per cent of the GDP, over-performing the target of 4.8 per cent of the GDP and projects next year’s deficit at 4.1 per cent, again better than the projected 4.2 per cent. But these do not including the pain of carrying revenue deficit at 3.3 per cent.

Time and again, Mr Chidambaram has shown his articulate command over pure economics and political economy. However, his understanding hasn’t translated in macro-economic health of the nation.
-Atul K Thakur
Email: summertickets2gmail.com
(Published in The Pioneer on February25,2014)

Wrong advice that we must avoid

Banking reforms are definitely needed, but they have to be driven by recommendations that people who are thoroughly conversant with the sector, make

The idea of inclusion, otherwise a ‘progressive hypothesis', has been sadly confused with ‘technical overplay' by the Reserve Bank of India and the Union Ministry of Finance. The most sightable case is Aadhar that lays too much emphasis on technical procedures and the opening of a maximum number of bank accounts. But merely having a bank account does not make someone genuinely aligned with formal banking.

Financial inclusion is a broader aim, and its ambit is far too wide to be limited to symbolic gestures. The incentive-based system, especially in private sector, has rather ensured the low effect of recently channelised banking access. In such a backdrop, Mr Nachiket Mor-headed Committee on Comprehensive Financial Services for Small Businesses and Low Income Households, makes the chance of financial sector reform even more distant.

The sharp corporate edge is visible in the recommendations of this committee — as it was expected of RBI Governor Raghuram Rajan. Quite naturally then, Mr Mor has seen the real solution of financial inclusion in covering each and every Indian with a bank account in next 24 months.

It is not that all initiatives taken by the RBI in the past had failed. Some did really well in increasing the delivery of institutional credit and relationship-based banking with the masses. In the first four decades after India's independence (1951-1991), the reach to institution credit went up from 7.2% to 64 per cent but to fail again at level 57 per cent with the opening of economy that year. Also money lenders have largely stayed on in the post-reform era, with some statistical differences.

They kill business with spirits of ‘wayward innovation' and walk easy step in this jubilant phase, when lobby rules the whole course. Mr Mor has missed an opportunity to re-define the utility of micro-lending. Instead, he committed blunder by underestimating the contribution of regional rural banks and cooperative societies. Probably out of focus, he couldn't check the past and present of RRBs, which are serving the rural segments, and solemnising the real intent of financial inclusion.

The RBI has played stringent with the branch affairs at banks. It is hardly a revelation, though the committee presented both malady and cure as something in fledgling state. Even before the birth of this committee, Mr D Subbarao, the former RBI Governor, had taken some crucial steps which, although not in the limelight, have done well in relaxing certain norms of banking.

In the ambit of financial inclusion, the basic rights should begin with making banking simple and accessible to all. Moreover, the services offered should be diversified and not restricted to offering a bank account, and stay satisfied. The overtures with people have to be at fast pace and fine carved out — disconnect with people or potential client makes the equilibrium of ‘good intent and business', impossible to achieve.

While opening another round of bank licensing, Mr Rajan has a fair opportunity to circulate in the vein of new entrants, sustainable determination to go ahead for achieving genuine financial inclusion. A lot would depend on how the RBI will deal with the aspiring banks and those existing ones.

A great deal has to be achieved in the months ahead, but mostly without any support from Mr Mor's recommendations. The RBI will realise this sooner than later. Next time, hopefully, it will include some bankers who have worked across this wonderland. India is a complex set of systems and our corporate lieutenants need to sharpen their knowledge and intuitions thoroughly, if they have to remain relevant in the changing environment.
-Atul K Thakur
Email: summertickets@gmail.com
(Published in The Pioneer,on January21,2014)

Tragedies of budgetary show

As finance minister of union cabinet, Pranab Mukherjee forgot to elaborate about the much awaited 12th five year plan during his budget speech in parliament, which is aimed to strive for “more financial inclusion”. Instead, he chosen a horrific quote from foregone Shakespearian drama “Helmet” that “being cruel to be kind” in quite dramatic fashion…moreover, his exuberant declamation of Indian cinema’s centenary year with service tax holiday for a year was among the height of deviant financial planning of the economy that was waiting for a slew of measures for retrieving its desired tune!

Unfortunately that remained complete amiss and further counterpoints overshadowed the all prominent expectations were attached to this budget. For year 2012-13, GDP has projected at 7.6%, fiscal deficit-5.1% and subsidy to 1.9%, which is completely irrational from the fiscal discipline point of view and constitutional mandate of this country as it would be toughest to expect that these figures would substantially lowered the government’s borrowing in next few years. This economics from planning commission and finance ministry is very questionable, as they never have even second thought in prioritizing the beleaguered IT industry by allowing UDI, headed by Nandan Nilekani to be black pearl with incessant flow of many billion dollars every year in their favour and leaving aside the masses adrift from the dividend of state.

So there should be no surprise, have if the new definition will term “subsidy” as the biggest threat to the imaginative blooming economy which produced a Vijay Mallaya for few years with all notoriety of insane wealth! Further showing the overview of economy, finance minister has set the target of Rs 30,000 crore for disinvestment of PSUs, which is quite amateurish and shocking-even after the worst performance of stake selling of these state run companies few months back, the morale should have been never so weak. Instead rushing for sordid professional expertise, as Monetk Singh Ahulwalia often relies over before taking sides on major policy matters from the ghost house of socialism-Planning commission; a simple thought would be rather more convincing-why this unexpected undermining of one’s own assets?

Here the basic notion “good sale is always good” should be in the state of mind seeing the impressive consumerist size of Indian economy which allows a $2billion house (own by Mukesh Ambani whose literal meaning is too ambitious to live alone in its surroundings) and 56% urban slums in the same city, which for only few months and only by few, once seen as the potential global finance hub. That never happened alas! For a more pragmatic shift, the crucial policy circles must draw a line-between progressivism and reform, I am sure even the performing corporate besides the common men would chose earlier as it would allow them to be close of a sustainable model rather maligning with very ambiguous web of “reform” which is itself needed a new dossier of reform very sooner than later.

Under the regime of confused state, this year, no big announcements have made. Infact, announcements have no culture to be backed by the timeline in India, so even the tall promises of allowing few more private banks as promised by the last budget is still in the ideation of hibernation state. Another major component of financial sector-Insurance has given tough time with increased services tax and no touch of much needed regulatory changes. Mutual funds industry had long back have heard off regulatory eulogy, so it’s no longer an exciting domain like its peers Private Equity or Venture Capital Funds which are breathing existential crisis more acute than a fish out of water!

Although a sycophant scheme, Rajiv Gandhi Equity Scheme with allowing income tax deduction of 50% to new retail investors, who will invest up to RS50,000 directly in equity and whose annual income is below Rs10lakh would boost the temptations for legalized gambling rather invoking the confidence of retail investors who have lost too much in the recent past. Even in overall ambit of financial businesses, it would be very tough in the days ahead to draw back the retailers to the business as they used to be till year 2010. Only the bond market has gained, if say in monosyllabic mode-Rs 60,000 crore worth of tax free infrastructure bond from financial institutions would carve some niche here, even though for a temporary period.

Regional Rural Banks, which are doing fabulously fine, were hardly needed any new financial infusion, rather their unification and making them on all counts at par with the PSBs were sincerely expected for bridging the gap of rural financing and making an unique financial institution of strength. So, unusual touches of exotic “reform” simply abstaining financial sector to get on cheering spree. The gain indeed shifted to infrastructure and slumbering bond market, where allocations under Rural Infrastructure Development Funds (RIDF), increased to Rs20,000 crore from preceding year’s Rs18, 000 crore.

Further for addressing the warehousing shortage in the country, an amount of Rs 5,000 crore earmarked from the above allocation exclusively for creating warehousing facilities under RIDF. Under 12th five year plan, $12 billion dollar would be spend on infrastructure and this will be done on Public Private Partnership basis, so more of commercially exciting time is awaiting ahead than the real infrastructural development. Taxation remained disappointing with increase in service tax and excise duty by 2% which will have very adverse effects on the price rise…slight cut of .25%in Security Transaction Tax(STT)is hardly suffice, so is true with the token increase of initial income tax slab by Rs20,000 to 2lakh.

Adding retrospective claws in checking the tax evasion is completely erroneous, as the timely practices of existing laws are quite suffice to handle the Vodafone like situation where the loss of $2billion dollars has suffered by the exchequer. Other bizarre targets are the fuel and fertilizer subsidies which have larger binding over the agrarian classes, could create a big survival crisis among the majority of peoples involved in primary sector. Rationalisation of diesel/LPG s would not be entirely wrong but it should be come only with giving ample room for targeted subsidies to weaker sections. Albeit in broader framework, it’s interesting to know, that the government is not loosing much by oil imports with excessive revenue that coming through the existing importing duties, here too chances are alive of big correction for letting breather to an average oil consumer.

Social sectors, which constitute the pivotal roles in equitable growth, have suffered immensely by the consistent flaws in policy orientation and bad execution of ongoing flagship programmes, which is cause of grave concern. The severe human development deficits confronting India in various sectors require a major stepping up of public provisioning for inclusive development; but that would require the government to adopt progressive policies in policy framework and execution. Ironically whose chances appears very feeble as par now. On different social sectors, India has only 7%allocation of its total GDP unlike the OECD countries average that is totally stark.

This year, total allocation on Rural Development has fallen to Rs 73, 175 crore from Rs 74,100 crore last year. Decline of total outlay on MGNREGS to Rs33,000 crore from Rs40,000 is utterly shocking though it also shows the changed polity of UPA-II which is no longer rural centric even symbolically. The marginal rise in allocations for Ajeevika (National Rural Livelihood Mission) to Rs3915 crore from 2681.3 crore, Indira Awas Yojna to Rs11075 crore from Rs10,000 crore and PMGSY to Rs18172crore from Rs17412.5crore can be only said the tip of iceberg against the real needs.

As proportion of total expenditure from the Union budget, share of agriculture has fallen from 11.21 to 9.3%. Though total outlay for the Department of Agriculture and Cooperation has been marked by an increase of 18%to Rs17,123 from Rs20,208 crore but again this tokenism is too little. Additional provisioning for Bringing Green Revolution to Eastern India (BGREI) to Rs1000 crore from Rs400crore is somehow satisfying but slashing on corp insurance to Rs1136crore from Rs3135crore shows the classic case of black comedy. Rest, target of credit flow to farmers to Rs5.75lakh crore from Rs4.75lakh crore will only encourage the targeted segments, if the compliance of Priority Sector Lendings would be made hard fast, but there is no such assurance supporting this change.

Its proven that per capita food consumption is declining in India, in this scenario declined provisioning to Rs 1,79,554 crore from Rs 2,08, 503crore is the cruelest act from a government claims to stand for marginalised classes. Public Distribution System (PDS) stood with Rs75,000crore allocation and many populist burdens like universal distribution of rice/wheat, the extra pressure of lowered petroleum subsidy to Rs43,580 crore from Rs 68,481crore will make life more difficult for rural inhabitants based on local incomes. A very much related theme, climate change found no sincere attention in entire budget document however, economic surveys have added a separate chapter on climate change but without any overt working guidelines.

The total magnitude of the gender budget has declined to 5.8% from 5.9% and allocations for the Ministry of Women and Child Development has increased to Rs18,500crore from Rs16,100crore, which is too short from anticipated enhancement. Budgetary allocation on children have grew up modestly to 4.8%from 4.6% last year-in total spending on child specific schemes have set out on Rs71,028.11crore. Allocations on ICDS and ICPS have marginally stepped up though both the amount and execution of schemes are in worrying conditions.

Health still accounts only2.31% of total GDP, many plans for new hospitals, urban health care on the line of NRHM will be in bad state grappling with no extra allocations. NRHM got 15% hike toRs20,822crore from Rs 18,115crore but overall financing public health couldn't merely be an act of tokenism, that has missed in consideration. Allocation on water and sanitation has moved up to Rs14,005.2crore from Rs11,005.2crore, rural drinking and sanitation have given priorities, which is only half good. Budgetary spending on education has increased to 4.97% from 4.65%-but allocation for SSA has gone up by just Rs21,000crore to Rs25,555 crore, which is discouraging, similar are the cases of primary, middle or even higher level of educational plans.

Allocation under Scheduled Caste sub plan has increased to Rs37,113.03crore from Rs31,434.46 crore and for Schedule Tribal sub plan, allocation has increased to Rs 21710.11 crore from Rs18,466.23crore-though most of the genuine demands related to their welfare were rejected. Though “minorities” found no mention in budget but a slight hike in allocation came to Rs3135crore from Rs 2750 crore...disabled people got no or very feeble specified assistance through this budget.

MSME Sector-
In this budget, it's well to see basic custom duty coming down to 2.5%from earlier exorbitant6% on specified parts and machinery components. To setting up a Rs5,000crore India Opportunities Venture Fund with SIDBI is a right step but the real question of financial access is related with the cooperation of banks at bottom level, where is need of greater changes. Mention of two newly created MSMEs exchanges and MSMEs being called as "building blocks" of our economy by the finance minister in his budget speech was symbolically appreciable for this hitherto marginalised segment of industry.

Though it would have better, if the procurement policy for micro&small enterprises would have broaden to private sector along with the proposed change for CPSE to make a minimum of 20%of their annual purchases from MSEs.-of this, four business deals will be earmarked for procurement from MSE owned by SC/ST enterprises.
At the moment of political and financial adverseness, there was much expectation attached with this budget, which is completely shattered now as neither market nor the mass sentiments seems uplifted even in tint after the all statistical deliverance. So, it would be right, if we will still believe more in our edge of “economies of scale” rather on statistical commentary of budget. After twenty years of liberalisation, India is lagging behind in spirit rather in fundamentals…that’s the cause of maximum worries!

(Courtesy-Centre for Budget and Governance Accountability (CBGA) - a New Delhi based research organisation for some of the data’s used in this piece)

Atul Kumar Thakur
March 23, 2012, Friday, New Delhi
Email: summertickets@gmail.com