Indian Economic Recovery; sid Harth
bademiyansubhanallah
fe Bureau
Posted: 2009-07-15 01:46:42+05:30 IST
Updated: Jul 15, 2009 at 0146 hrs IST
New Delhi: The government will push through its disinvestment
programme, cut the fiscal deficit to 5.5% by next year and create the
necessary policy environment—including reforms—in the financial
sector, finance minister Pranab Mukherjee said on Tuesday.
“We all know that the global financial crisis did not affect Indian
banks or financial market directly. But it did expose a number of
weaknesses in our financial system,” was the minister’s candid
acknowledgement in Parliament.
The minister used his reply to the debate on the general Budget to
outline the government’s reform agenda. He touched on all topics that
domestic and foreign investors as well as stock markets had missed in
his Budget speech on July 6, saying there were early signs of economic
recovery.
“There is sometimes a perception among financial and other investors
that in the recent past, government has been slow on policy reforms. I
intend to look into all issues, legislative or otherwise, necessary to
carry forward the reforms to their logical end,” Mukherjee said.
Elaborating on the UPA government’s disinvestment policy, he said,
“The President’s address had clearly spelt out the policy of the
government on disinvestments--the government would develop people-
ownership of public undertakings while ensuring that government equity
does not fall below 51% and the government retains management control
of the company. I reiterated this in my Budget speech.”
The finance ministry has already begun discussions with other
ministries and departments to identify PSUs where the government can
divest a portion of its stake or issue fresh equity to meet their fund
requirements. “The details are being worked out and would be announced
in due course,” Mukherjee said, adding that this would “enable the
PSUs to benefit from techno-managerial efficiencies and become more
competitive”.
Stake sales in four PSUs are already on the cards, Mukherjee told the
Rajya Sabha earlier in the day. The Centre would divest its holding in
NHPC Ltd and Oil India Ltd through IPOs this fiscal, and has also
approved disinvestment of two loss-making companies-- Tyre Corporation
of India Ltd and Central Inland Water Transport Corporation Ltd--he
told the Upper House.
Mukherjee did not say if disinvestment proceeds would be used to
bridge the fiscal deficit. But he assured Parliament that the fiscal
deficit would come down from 6.8% of GDP in 2009-10 to 5.5% in 2010-11
and further to 4% by 2011-12. “Much of our recent success in raising
our growth trajectory has come about due to adherence to FRBM targets,
both at the central and state levels. Fiscal prudence is critical for
maintaining stable balance of payments, moderate interest rates and
steady flow of external capital for corporate investment,” he said.
On financial sector reforms, Mukherjee said the UPA would “create the
necessary policy” to address weaknesses. He said this was necessary to
counter the volatile nature of FII equity and private capital that
created a negative impact on investment decisions.
The minister also clarified the Centre’s borrowing programme for
2009-10, estimated at Rs 3,97,957 crore, saying it has no intention of
monetising its debt because the borrowing was being supported by RBI
through its open market operations. He also dispelled fears that
higher government borrowings would crowd out the private sector and
increase the cost of borrowings.
...and I am Sid Harth
bademiyansubhanallah
Are we back to the 1980s?
Ajay Shah
Posted: 2009-07-07 00:28:25+05:30 IST
Updated: Jul 07, 2009 at 0028 hrs IST
The budget speech of July 2009 offered little by way of a vision for
economic reforms or concrete movement on economic reforms. The
inferences we draw from this depends on the role of the budget speech
in the functioning of government.
There are three kinds of budget speeches. The first is the typical
budget speech from India of the 1980s. The FM would talk about how he
proposed to earn revenues and how he proposed to spend them. In India
of the 1980s, the tax system was a dreadful mess. FMs enthusiastically
engaged in ‘industrial policy’, or the activity of choosing which
industries are ‘good’ and deserve encouragement as opposed to the
industries which are ‘not good’ and deserve discouragement. Budget
speeches were clogged with minutae of government micro-managing the
economy through discretionary tax policy, such as a five percentage
point increase in the customs duty on set top boxes or tax pass-
through for venture capital investments in nanotechnology projects.
The second kind of budget speech is found in OECD countries. These
countries have understood that industrial policy is a bad idea; that
governments have no idea about which industries are ‘good’ or which
industries are ‘bad’, so the only thing that tax policy can do is to
be even handed in the treatment of all industries. Further, these
countries have understood that changes in tax rates are a bad idea
because they confound the planning of the private sector. Hence,
changes in tax rates happen only rarely. The normal budget speech
involves no changes to tax rates. The focus is more on the expenditure
side, where the challenge is always about how to produce better public
goods for a lower price. Good governments in OECD countries try to get
the most bang for the buck, of high quality public goods while keeping
the ratio of expenditure to GDP as small as possible.
The third kind of budget speech was invented by Manmohan Singh in
1991. The Manmohan Singh budget speech of 1991 painted a vision of
medium-term economic strategy of India. It announced that India was
turning away from autarky and socialism. We were going to remove entry
barriers, hack away at the thicket of capital controls and
restrictions against trade, and unleash the power of markets to obtain
high growth.
Purists argued that larger economic reforms were not the business of
the budget speech. But this was a master stroke. The budget speech is
a most watched event, particularly in the new world of television. It
was an ideal platform to communicate a new vision of India to a very
large audience. The most important elements of this audience were the
domestic and foreign private sectors. When they saw this speech, they
decided that India was no longer a moribund backwater. Investment in
India rose, and that made all the difference.
With this, the budget speech turned into a platform for communication
of India’s economic strategy to the private sector. Every FM hopes
that the domestic and foreign private sector will respect what the
government is up to, and sign up for a substantial scale of investment
in India.
The budget speech was additionally turned into a management process by
Yashwant Sinha. Every sentence of the budget speech is put into a
spreadsheet, responsibility for implementation is assigned, and
quarterly reports are produced about progress of implementation.
Through this, the budget speech has become the work plan of government
for the year. What gets announced in the budget speech tends to get
done. Few things get done in the year other than what is announced in
the budget speech.Which brings us to Pranab Mukherjee’s budget speech.
It is certainly not an OECD style budget speech, for it repeatedly
engages in industrial policy. At one point, the minister was almost
proud of a big number for the expenditure of government.
It was not a Manmohan Singh style budget speech for there was no
vision of medium-term economic reforms in India. In an unprecedented
business cycle slowdown, after a remarkable election victory, the
budget speech was an opportunity to show a medium-term programme of
how India would make progress towards becoming a mature market
economy. If the private sector was impressed with this vision, it
could have led to an increase in investment. This attempt was not
made.
The budget speech did not utilise the dimension of a work plan, in the
spirit of Yashwant Sinha, for there is very little in there by way of
the specific work that will be done in the year.
There are, hence, two possibilities. One possibility is that the
budget speech is the plan: that there is no plan for undertaking
economic reforms. Or, that we have slipped back to a 1980s budget
speech, where the business of economic reform will be relatively
decoupled from the budget speech. Which of these two possibilities we
are in will unfold in the next 45 days.
The author is an economist with interests in pensions, finance and
macroeconomics
bademiyansubhanallah
Ajay Shah
Posted: 2008-11-21 15:30:43+05:30 IST
Updated: Nov 21, 2008 at 1530 hrs IST
Everybody loves to have government spend more. In the environment of
an impending downturn, pleas for government spending on infrastructure
have become universal. However, given the fiscal constraints and
inefficiency of the government, efforts in this direction will not
materially influence the macroeconomy in calendar 2009. A more useful
strategy for the government is to focus on the fundamental bottlenecks
holding back infrastructure projects and infrastructure financing.
Alleviating these bottlenecks will yield a sustained impact on
infrastructure spending.
How big is the shock to the macroeconomy? The gloomy outlook for
exports and for prices has reduced the profitability of many
investment projects. It is, hence, not unreasonable to think of a
reduction in corporate investment from 15% of GDP to 10% of GDP. The
macroeconomy may get an adverse shock of roughly 5% of GDP.
In principle, more infrastructure spending could help partly stem the
problem. But it is difficult to envisage sufficiently large responses
coming about quickly. One of the most successful infrastructure
programmes of the government, ever, was the NHDP. This was announced
in October 1998, more than a decade ago. It took a long time to get
going. In 2006-07, the resources flowing through NHAI were Rs 11,041
crore or roughly 0.2% of GDP.
A grand scale of infrastructure construction is very important for
India’s long-term growth, and reasonable bottom-up plans involve
spending 50% of GDP on infrastructure construction so as to endow
India with a reasonable set of roads, railway lines, airports,
pipelines, and urban infrastructure. But getting these projects up and
running is slow. If the goal is to achieve short-term macroeconomic
stabilisation, countering the business cycle, then infrastructure
spending is a poor tool. The most outlandish fantasy would involve
doubling the resource flow through NHAI in 2009 when compared with
2008. This would get us from 0.22% of GDP to 0.44% of GDP. This is
just not big enough to matter.
This is not to say that this should not be attempted. Every little
drop helps. With the fall in prices of steel and cement, and with the
reduced prices that will be charged by construction companies, we will
get a good bang for the buck. With mature projects such as the Delhi
Metro, the NHDP, and the Bombay-Delhi Industrial Corridor, every
incremental lever should be utilised to push them to a bigger scale of
operation. But the significance of this effort for the macroeconomy is
quite limited.
If, in principle, the government were very efficient and actually got
a large mass of infrastructure projects rolling, the fiscal constraint
will loom large.
The time to fix the roof is when the sun is shining. With buoyant
business cycle conditions from 2003 to 2008, this should have been the
time to reform tax policy, tax administration, expenditure programs,
and achieve fiscal surpluses. If this had been done at that time, it
would have been possible to enlarge the fiscal deficit by 2% of GDP in
2009 and make a useful difference to the macroeconomy. Instead, the
fiscal deficit of the centre alone for 2008-09 will be 4.7% of GDP.
Including the deficit of the states, we would still have one of the
worst deficits in the world.
We squandered the opportunity of the 2003-08 upturn. The sun was
shining and Parliament was focused on exuberantly spending. These
mistakes have real consequences. One reason for being fiscally prudent
is to have the space to cope with downturns or other unforseen
emergencies. Now a remarkable darkening of the horizon is upon us, and
we can only regret the lost opportunities.
In the classic Keynesian argument, there is no fiscal constraint in a
‘liquidity trap’. It is then safe to run large deficits even when they
are financed by printing money. However, India is not in a liquidity
trap. If India embarks on bigger deficits now, this will lead to
higher interest rates for the private sector (since government will
make a claim on the finite supply of savings). In addition, credit
rating downgrades will increase the cost of foreign borrowing by the
private sector.
What counter-cyclical levers, then, does the government control? The
most effective levers are those of economic policy reform. There is no
short-cut to infrastructure spending. The way forward requires
addressing bottlenecks faced in infrastructure financing and against
PPP.
The most important bottleneck in infrastructure financing is the lack
of the bond-currency-derivatives nexus. The way forward for building
this has been mapped out by the Patil, Mistry and Rajan reports. It is
possible to push this agenda forward dramatically within weeks.
PPP projects are held back because of policy mistakes in specific
areas. As an example, a wave of spending will take place in the
economy when 3G telephony is launched. But this requires confronting
the ministry of communications. A wave of spending will take place
across the cities of India if urban reforms come about, which empower
the municipality and establish it as the nerve centre of local
government.
The author is an economist with interests in finance, pensions and
bademiyansubhanallah
Rajesh Chakrabarti
Posted: 2009-07-10 21:03:57+05:30 IST
Updated: Jul 10, 2009 at 2103 hrs IST
Coming up with a budget is an arduous task in the best of times. This
year it was particularly hard. In addition to the usual reforms vs aam
aadmi balancing act there was the constraint of an already stretched
fiscal situation. To make things tougher, there were the enhanced
expectations from impatient reformists given that this was the first
year of a term with a clear mandate. The ‘if not now, when?’ chorus
was almost deafening. All this made for the budget this year a great
exercise in political economy.
It may help to present, in very broad strokes, the major forces whose
interplay decides economic policy-making in today’s India. First, and
perhaps the most vocal, are the reformists. The crisis had given them
a temporary setback but they seem to have recovered faster than the
economy. The immediate gains here go to the rich, the educated and the
urban segment but, over time, gains are generally believed to
percolate down. Here, squarely, is India Inc. with all its investors
and the upper-middle class: a strong media voice.
Then there are the organised incumbents of the labour force. Though
over 90% of India’s labour force works in the unorganised sector,
organised sector unions, linked closely to the party system, still
wield influence. These are the people with an axe to grind against
reform, though its indirect fallout may help them in the medium run.
Much of the lower-middle class, rightly or wrongly, perceives its
interests aligned with this formation.
Finally comes the bottom third of the population—in dire need of
government support for mere survival. In size they swamp the immediate
beneficiaries of reforms and hugely so if we consider the willingness
to vote factor. It can be swayed easily if the government does not
present a ‘poor-friendly’ image.
Given this landscape, a minefield is a better analogy for budget
making than tightrope walking. Politically, UPA’s victory is mostly
seen as a mandate for policies like NREG, rather than reforms, for the
simple reason that whether because of the Left or otherwise, there has
been little more than assertion of will to reform in the first UPA
term. By all indications, these measures have also been more effective
than poverty alleviation measures in the past. Finally with the
Maoists spreading across the country it is politically essential to
‘take the poor along’. This should, therefore, be clearly the prime
thrust areas. Also no one can, morally or politically, question these
outlays. It clearly benefits the people who most need support. So
that’s a no-brainer.
Government needs foreign investment in the medium and long run, not to
speak of the short-run. Energy and Infrastructure need to be
strengthened and need all possible support. Further opening up some
sectors like insurance and divesting in PSUs may increase flow of
funds but will also open up a Pandora’s box with the second group.
Labour reforms and petroleum pricing are other thorny issues. Best to
duck both these issues for the time being while keeping options open.
One battle at a time, and no point signalling moves before you are
ready to strike.
India Inc. has certainly not taken kindly to this. For those who
watched the Budget and markets simultaneously last Monday, the
connection appeared to be very clear. The sell-off came immediately
after the phrase “public sector enterprises such as banks and
insurance companies will remain in the public sector”. Markets were
betting on a definite disinvestment plan and perhaps an opening up of
the insurance industry.
The stock market does not spell votes, but it maybe a good forecaster
of future growth. However, nobody knows for sure how many basis points
are shaved from the growth rate by these postponements, if not
omissions, and politically speaking, even a slightly lower growth
performance can easily be blamed on the crisis in these times. Just to
lessen the disappointment a bit, the FBT is removed. The revenues
would be missed, but at least the executives would not be too mad.
Then there are those inconvenient rules of economics. Fiscal deficit
remains an issue. The crisis is still not completely behind us and
sector specific sops (take textiles) may avert trouble there, or at
least signal sympathy. Medium term inflation and international credit
rating agencies are the problems here, but sometimes you just have to
take sides.
Throw in a few pre-election sops for Maharashtra and your political
budget is ready. That’s not necessarily bad. It has benefits for
sections that need it most with no doors shut on reforms. Who knows,
it may even give some boost to consumption demand. As they say, “to be
a statesman, you sometimes need to be a politician first”.
The author teaches finance at the Indian School of Business,
Hyderabad
...and I am Sid harth
Sid Harth
Madan Sabnavis
Posted: 2009-07-15 22:48:53+05:30 IST
Updated: Jul 15, 2009 at 2248 hrs IST
It has been over a week since the Union Budget for 2009-10 was
presented, and we have had sufficient time to really digest the
content after all the preliminary reactions came in on the 6th. This
Budget is out-and-out Keynesian in spirit where there is unconcealed
aggression in increasing expenditure to provide a further stimulus to
the economy. This may be interpreted by the more conservative critics
as being too profligate. At any rate, the result is that the fiscal
deficit is as large as 6.8% of GDP which is the highest ratio since
1993-94. The revenue deficit at 4.8% of GDP is the highest ratio for
the central government in recorded time. While overall expenditure has
increased by 13.3%, plan and non-plan expenditure have increased by
15% and 12.5% respectively. Quite clearly the government has gone in
for a fiscal deficit holiday, if it may be so called, and has kept the
FRBM rules in the background. However, this approach may just be
pragmatic. Even countries like the US and UK are running double digit
fiscal deficit ratios.
Keynes had advocated that in times of an economic slowdown,
governments should increase expenditure or reduce taxes so that people
spend more which then through the ‘multiplier’ effect induces
investment, which in turn generates income through the ‘accelerator’.
In an extreme situation, the government could just spend for the sake
of spending (non-development expenditure) where those receiving the
same spend the money by demanding goods. This approach has been
advocated quite assiduously by most economists in times of an economic
slowdown when conventional monetary measures fail to deliver
adequately. It may be remembered that even last year, the government
had supplemented the CRR and repo rate cuts with tax cuts and
expenditure allocations to engineer growth as these measures are more
direct and work faster.
The increase in plan expenditure is project based and encompasses
those on infrastructure, irrigation, water, power, gas, weaker
sections, interest subvention (though the burden is on banks) etc.
which will have a corresponding increase in production of goods and
services. The non-development expenditure is in the form of interest
payments, subsidies (which are lower this year) and defence payments.
To top it all, tax collections are to increase only marginally, with
only corporate tax collections showing an increase while collections
from income, excise and customs collections showing a decline over
last year. Therefore the stimulus has two faces.
There are three issues here. The first is whether this stimulus will
work? The answer is at best a shrug of the shoulders because while the
FM has stated that the fiscal deviation last year of 3.7% of GDP
(budgeted and revised fiscal ratio) was the result of the stimulus
package which brought about the 6.7% growth in GDP, it is a matter of
conjecture whether it was brought about by a fall in tax collections
as well as higher expenditure. In any case, the important thing here
is that the allocations should materialise. The past is replete with
stories of budget allocations not being met, and there is a lot of
window dressing done towards the end of the year to show that the
money is committed, while the actual disbursements are not made until
the next year. In fact, even when it comes to projects like irrigation
there have been several instances of the projects not being completed
with either the ‘well’ or ‘motor’ or ‘irrigation track’ missing. Maybe
the resources should be channelled to complete these projects rather
than embark on new ones.
The second issue is about the FM stating that the government was
committed to meeting the FRBM targets in the medium term. While a
commitment is assuring, it would have been better to have a time frame
as expenditures cannot be rolled back that easily in future. While
higher deficits can be defended under the present circumstances, it
could mean harsh measures when we revert to FRBM guidelines.
Therefore, the present relief provided may at best be transient and
these measures have to work to propel GDP growth to bring in higher
tax revenue in the next few years.
The third issue is more serious. The fiscal deficit is now past Rs 4
lakh crore, with the gross borrowing programme being enhanced now from
Rs 3.62 lakh crore in the interim budget to Rs 3.97 lakh crore. Quite
clearly there could be a problem on liquidity as well as interest
rates when this happens. Therefore, the direct fiscal stimulus
provided would have a monetary implication and RBI will have quite a
job on its hands. This is so because higher government borrowing means
a larger quantity of government paper in the market which pushes down
the prices and increases the yields, thus providing an upward thrust
to interest rates.
Therefore, the present stimulus, like all bold measures, has some
doubt attached to it. Let’s hope it works because the gamble with the
fiscal deficit number is a big one.
—The author is chief economist of NCDEX Ltd. These are his personal
views