Indian BudgetBonanza: Sid Harth
bademiyansubhanallah
6 Jul 2009, 1416 hrs IST
Budget 2009-2010: Speech of Pranab Mukherjee, Minister of Finance
July 6, 2009
Madam Speaker,
I rise to present the Budget for 2009-10.
2. Just 140 days back, I had the privilege to present the Interim
Budget for 2009-10. It is a rare honour that I have been called upon
to present the regular budget after the new Government assumed
office.
3. The Congress-led UPA Government has come back to power with a
renewed mandate. As Prime Minister, Dr. Manmohan Singh, said recently
“It is a mandate for continuity, stability and prosperity. It is a
mandate for inclusive growth and equitable development.” It is a
mandate that we accept with humility and a firm resolve to do all that
we can for the welfare of this nation.
4. I am deeply conscious of the faith reposed by the people in our
government and the responsibilities that come with it. I am sensitive
to the great challenge of rising expectations of a young India . It
reflects a population that is restless, yet engaged and is ready to
seize the opportunities that it is presented with. There are new and
powerful reasons for us to create, facilitate and sustain those
opportunities.
5. In the Interim Budget for 2009-10, I had stated that the new
Government would need to anchor its policies for 2009-10, in a medium
term perspective that would have to:
(a) sustain a growth rate of at least 9 per cent per annum over an
extended period of time;
(b) strengthen the mechanisms for inclusive growth for creating about
12 million new work opportunities per year;
(c) reduce the proportion of people living below poverty line to less
than half from current levels by 2014;
(d) ensure that Indian agriculture continues to grow at an annual rate
of 4 per cent;
(e) increase the investment in infrastructure to more than 9 per cent
of GDP by 2014;
(f) support Indian industry to meet the challenge of global
competition and sustain the growth momentum in exports;
(g) strengthen and improve the economic regulatory framework in the
country;
(h) expand the range and reach of social safety nets by providing
direct assistance to vulnerable sections;
(i) strengthen the delivery mechanism for primary health care
facilities with a view to improve the preventive and curative health
care in the country;
(j) create a competitive, progressive and well regulated education
system of global standards that meets the aspiration of all segments
of the society; and
(k) move towards providing energy security by pursuing an Integrated
Energy Policy.
6. The Government recognizes the challenges that this task entails,
particularly at a time when the world is still struggling with an
unprecedented financial crisis and an economic slowdown that has also
affected India . While we are determined to convert our words into
deeds, Members would appreciate that a single Budget Speech cannot
solve all our problems, nor is the Union Budget the only instrument to
do so. Yet, it is an important means to share the vision of the
Government, particularly as we begin a new term. I propose to do just
that for the next hour or so, as I dwell on the challenges and outline
the approach of the government in the short term and medium term
perspectives.
7. The first challenge is to lead the economy back to the high GDP
growth rate of 9 per cent per annum at the earliest. Growth of income
is important in itself, but it is as important for the resources that
it brings in. These resources provide us with the means to bridge the
critical gaps that remain in our development efforts, particularly
with regard to the welfare of the vulnerable segments of our
population.
8. The second challenge is to deepen and broaden the agenda for
inclusive development; and to ensure that no individual, community or
region is denied the opportunity to participate in and benefit from
the development process.
9. The third challenge is to re-energize government and improve
delivery mechanisms. Our institutions must provide high quality public
services, security and the rule of law to all citizens with
transparency and accountability.
...and I am Sid Harth
bademiyansubhanallah
6 Jul 2009, 1632 hrs IST, AGENCIES
MUMBAI: The BSE benchmark Sensex suffered the biggest fall on any
Budget day and in the year by plunging over 869 points on the Bombay
Stock
Exchange on concerns over the high fiscal deficit set by the Union
Budget. ( Watch )
The Sensex, which started coming down soon after the announcement of
budgetary proposals, dipped below 14,000-point level before closing
869.65 points down at 14,043.40, surpassing the hefty fall of 749
points on January 7.
The key index had touched the day's low of 13,959.44 as all the
heavyweight stocks led by Reliance Industries suffered a heavy loss
6.53%.
Besides the fiscal deficit, trading sentiment also affected as
European stocks dipped to a seven-week low on worries that economic
recovery might still be far way off.
The 50-share National Stock Exchange index Nifty also tumbled by
258.55 points to 4,135.70, after hitting the day's low of 4,133.70.
Finance minister Pranab Mukherjee said the fiscal deficit may rise to
6.8% of gross domestic product in the year 2009-10, the highest since
1994.
Banking sector stocks suffered the most, losing 8.17% to 7,768.63, as
ICICI Bank tumbled by 10% and HDFC Bank by 5.88% among lenders as the
Budget did not have measures to open up the industry and on concerns
that the borrowing plan will reduce the value of bond holdings,
brokers said.
bademiyansubhanallah
bademiyansubhanallah
6 Jul 2009, 1502 hrs IST, AP
MUMBAI: Aiming to revive economic growth, India's government said
Monday increased spending in its new budget would inflate the fiscal
deficit to
6.8 percent of the country's gross domestic product.
Stocks plunged on concerns about a ballooning budget deficit and
disappointment that Finance Minister Pranab Mukherjee stopped short of
announcing any new liberalization measures. Speculation that the
ruling Congress Party would quickly enact sweeping pro-market reforms
have been running high since May's national elections.
Hoping to create jobs and spur growth, the government will boost total
spending 36 percent to 10.3 trillion rupees ($214 billion) for the
year that ends March 2010, Mukherjee said in presenting the budget to
Parliament.
"The first challenge is to lead the economy back to a high growth rate
of 9 percent per annum at the earliest," he said. Economic growth for
the year through March slowed to 6.7 percent.
Mukherjee said he aimed to increase infrastructure spending to 9
percent of gross domestic product by 2014, boost defense spending,
provide credit to troubled exporters and simplify the tax code.
Spending on a rural employment program that last year provided jobs to
44.7 million poor households would go up 144 percent to about $8
billion, he said. Government food subsidies for the poor and farmer
loan relief programs would also be extended.
"Aam aadmi", the "common man" in Hindi, "is now the focus of all our
programs and schemes," he said.
Investors, however, worried about India's bulging fiscal deficit and
the lack of new concrete reforms. The benchmark Sensex index tumbled
890 points, or 6 percent, to 14,018.42 in afternoon trading.
The country's deficit has grown since the government enacted three
fiscal stimulus packages of tax cuts and spending, on top of deep
spending on fuel subsidies, government pay hikes, and farmer loan and
employment programs. Last fiscal year, the deficit amounted to 6.2
percent of GDP; the year before that, it was 2.7 percent of GDP.
That has caused credit ratings agencies to threaten downgrades and
made economists concerned that government borrowing will crowd out the
private sector.
Taking into account state deficits and off-balance sheet items, the
total deficit is far higher. Goldman Sachs puts the consolidated
fiscal deficit at 10.1 percent of gross domestic product for this
fiscal year.
Prime Minister Manmohan Singh praised Mukherjee for carrying forward
"inclusive growth," a mantra of the ruling Congress Party, which has
pushed vast social welfare and wealth redistribution programs even as
it slowly opens Asia's third-largest economy to market forces and
foreign investors.
The budget "seeks to carry forward the process of inclusive growth,"
Singh said in a nationally televised interview with an editor of the
Economic Times newspaper. "It is essentially a rural development-
oriented budget."
Singh acknowledged that the burgeoning fiscal deficit is "a problem."
"In the medium term we have to return to path of fiscal rectitude," he
said but refused to give a deadline.
bademiyansubhanallah
6 Jul 2009, 1957 hrs IST, PTI
MUMBAI: Investors lost over Rs 2.54 lakh crore on Monday as the market
gave a thumbs-down to the Union Budget 2009-10, which failed to
provide a
concrete road map for reducing the burgeoning fiscal deficit.
The total investors' wealth, measured in terms of combined market
capitalisation of all the listed companies, declined by over Rs
2,54,153 crore at the end of trade today to Rs 46,23,304.34 crore.
The total market capitalisation of all listed entities was at Rs
48,77,457.38 crore at the end of Friday last.
Analysts believe the Budget fell short of high market expectations as
it did not make clear how it would push forward with the divestment
plans.
The government today said the fiscal deficit for the financial year
ending March 2010 would increase to 6.8 per cent of GDP from 6.2 per
cent in the previous year.
The 30-share Bombay Stock Exchange Sensex nosedived by 869.65 points
at 14,043.40, after witnessing a low of 13,959, down 952 points.
Further, the 30-Sensex companies, which account for over 46 per cent
of the total market capitalisation of all the companies, saw their
combined market valuation declined by over Rs 1.23 lakh crore today.
The combined market capitalisation of the 30-blue chip stocks fell to
Rs 21,13,970.97 crore today from Rs 22,37,570.19 crore at the end of
trade on Friday.
Among the Sensex companies, Reliance Infrastructure was the biggest
loser as it plunged 12.47 per cent, followed by ICICI Bank 10.09 per
cent.
Other major index-wise losers include Jaiprakash Associates, Tata
Steel, HDFC and Larsen & Toubro, which fell between 9 per cent and 10
per cent.
At the end of trade today, Reliance Industries remained the most-
valued firm in the country with a market capitalisation of Rs 2,98,018
crore, followed by ONGC at Rs 2,28,933.95 crore, NTPC (Rs 1,59,961.92
crore), MMTC (Rs 1,49,686.75 crore) and Bharti Airtel (Rs 1,48,756.27
crore).
Sid Harth
6 Jul 2009, 1729 hrs IST, Mohammed Sabir, ET Bureau
MUMBAI: Indian markets tanked on Monday reacting sharply to the Union
Budget 2009-10 presented by Finance Minister Pranab Mukherjee. The
key
indices, which had surged in run-up to the budget on expectations of
reforms, caved in after it turned out to be a “budget of continuity
and inclusive growth.”
Emphasis on rural as well as urban India, infrastructure spending,
raised income tax exemptions and scrapping of taxes like Fringe
Benefit Tax and Commodities Transaction Tax were some of the positives
of the budget. But lack of clarity on disinvestment of PSUs and
increased fiscal deficit were the factors that dogged traders’
sentiments.
Industry experts are of the opinion that the fall in market is a knee-
jerk reaction and the budget will pave for better corporate India
earnings.
Bombay Stock Exchange’s Sensex closed at 14,043.40, down 869.65 points
or 5.83 per cent. The index touched an intra-day low of 13959.44 and
high of 15097.87.
National Stock Exchange’s Nifty ended at 4165.70, down 258.55 points
or 5.84 per cent. The broader index touched a low of 4133.70 and high
of 4479.80.
“As far as the markets are concerned, the recent out-performance over
other emerging markets and the over-bought status of the markets has
led to the correction. The increase in the rate of MAT may also have
an impact on profits of select companies. We see this fall in markets
as a short term phenomenon and focus will now shift to more
fundamental factors like earnings growth and the near term phenomenon
of monsoon. Abolishment of FBT will be profit accretive for
corporate,” said Narayan SA, Managing Director, Kotak Securities.
Sid Harth
6 Jul 2009, 1600 hrs IST, PTI
NEW DELHI: The government on Monday doubled the threshold for calling
a person or entity wealthy, saying the wealth tax would be imposed
only on Tips to lower your tax bill
Plan tax investments early those having a net wealth exceeding Rs 30
lakh.
Under the existing provisions, wealth tax is charged on "every
individual, Hindu undivided family and company at the rate of one per
cent" of the amount by which their net wealth exceeds Rs 15 lakh.
However, Finance Minister Pranab Mukherjee today proposed to amend the
relevant section of the Wealth Tax Act. Pursuant to this, for every
year commencing on and from April 1, 2010, the one per cent wealth tax
will be charged on the amount by which the net wealth exceeds Rs 30
lakh.
Besides, the Finance Minister has also proposed to amend certain
provisions related to agreement for avoidance of double taxation with
respect to wealth tax.
Currently, the Central Government has been conferred with powers to
enter into an agreement with the government of any reciprocating
country outside India for grant of relief in respect of the wealth tax
laws in India and the other nation.
As per the proposed amendment, India can also enter into such
agreements with governments of any territory outside India, which may
be notified by the Central Government. This particular amendement
would take effect from October 1, 2009.
Sid Harth
6 Jul 2009, 1857 hrs IST, PTI
LONDON: Lauding as "good" the Indian budget for fiscal 2009-10,
leading NRI industrialist Lord Swraj Paul said it would help raise
people out of
poverty besides ensuring jobs and rural development.
Congratulating Finance Minister Pranab Mukherjee, Lord Paul said he
was happy that the budget "is attending to food security, jobs and
rural development which are all most important."
Lord Paul, Britain's Ambassador for Overseas Business and recently
appointed member of the Privy Council, said "it is a good budget."
"I would like to congratulate the Finance Minister for first accepting
the reality that India is also affected by the credit crunch and the
world financial crisis, and second for helping to raise people out of
poverty and recognising that without raising the standard of living
for all the people in the country India can't make progress," he
said.
"So I am pleased to see the budget is attending to food security, jobs
and rural development which are all most important," Lord Paul said.
Sid Harth
6 Jul 2009, 1543 hrs IST,
MUMBAI: Indian markets reacted sharply to the Union Budget 2009
presented by the finance minister Pranab Mukherjee. Indices had surged
in run-up to
the budget on expectations of reforms but it turned out to be “budget
of continuity and inclusive growth.”
The government has given thrust to infrastructure spending, raised
income tax exemption limit and scrapped taxes like FBT and Commodities
transaction tax.
Bombay Stock Exchange’s Sensex closed at 14,035.67, down 877.38 points
or 5.88 per cent. The index touched an intra-day low of 13959.44 and
high of 15097.87.
National Stock Exchange’s Nifty ended at 4162.80, down 261.45 points
or 5.91 per cent. The broader index touched a low of 4133.70 and high
of 4479.80.
BSE Midcap Index was down 5.15 per cent and BSE Smallcap Index
declined 4.41 per cent.
BSE Realty Index fell 7.92 per cent, BSE Bankex slipped 7.72 per cent
and BSE Metal Index was down 7.22 per cent.
bademiyansubhanallah
The Hindu
Go easy with the family silver
Privatisation is not a panacea for either the fiscal deficit or the
observed inefficiencies of the public sector.
Siddharth Varadarajan
Of all the affronts that the slogan ‘India Shining’ evoked in 2004,
none was symbolically more fatal for the political fortunes of the
Bharatiya Janata Party than the “strategic sale” of key public sector
assets to a handful of lucky private companies.
In the most well-developed of capitalist economies with bureaucratic
transparency, a well-functioning judicial system and deep competition,
the auction-based sale of companies is fraught with problems of price
discovery. That is why the offering of PSU shares to the public
through the stock market has been the preferred route to privatisation
in advanced market economies rather than the outright sale of the
company. India, where virtually none of the textbook conditions for
efficient auctioning obtains, made the mistake of following the second
route with disastrous results.
Whether there was collusion or not, the sale of Modern Foods, BALCO,
IPCL, Centaur and the numerous standalone hotels of ITDC amounted, in
the public mind, to little more than sweetheart deals. Not only did
the erstwhile National Democratic Alliance government not realise the
full value of all underlying assets these companies came bundled with,
especially land, but the very rationale for privatisation was never
very convincing. At a time when a single bungalow in Lutyens Delhi was
selling for more than Rs. 100 crore, the sprawling Lodhi Hotel complex
nearby was auctioned for just Rs. 72 crore. The official valuation
made of BALCO, sold to Sterlite/Vedanta for Rs. 550 crore, was a
scandal, as was that of IPCL, a fact noted by the CAG. And the
extensive property owned by Modern Foods in every big metro was not
valued, with the government claiming — falsely — that the new owners,
Hindustan Lever, would have no right to dispose of the land.
In 2001, the Supreme Court unwisely put its imprimatur on the sell-off
process by declaring in the BALCO case that economic policymaking was
beyond the purview of judicial review. However, the political
controversy generated by these sales — and the inter-corporate battle
over who would get to grab the lucrative rents on offer — led to the
slowing down and eventual suspension of the privatisation drive even
before the NDA’s defeat in 2004. When the Congress-led United
Progressive Alliance government came to power that year, it did not
require much prodding from the Left to declare that disinvestment
would no longer be a priority. And with India’s GDP continuing to grow
at a fast rate, it became clear the lack of privatisation was not a
binding constraint on the economy’s potential.
Nevertheless, for the corporate sector and followers of the Sensex
cult, the fact that this potential ‘sale of the century’ had come to
an end so abruptly was always the source of heartburn. And today, with
the economy in the doldrums and the stock markets not quite in
recovery mode, the sale of public sector assets is being pushed as a
tonic for restoring investor confidence, kickstarting growth,
promoting economic efficiency and reducing the fiscal deficit.
In the run-up to the budget, the markets had worked themselves up into
a frenzy because the re-election of the Congress and the formation of
UPA-II without Left support seemed to suggest the return of aggressive
reforms. When the budget failed to deliver the opportunities for quick
enrichment that ‘reformers’ were clamouring for, the markets tanked.
However, it would be a mistake to assume that the privatisation agenda
has gone away. In their post-budget statements, Prime Minister
Manmohan Singh and Finance Minister Pranab Mukherjee have both spoken
of the importance of disinvestment. One can only assume the government
is waiting for a more propitious moment, both politically and
financially, before rolling out its sell-off plan.
Before going down this route, however, it is essential that the case
for privatisation be discussed anew from first principles. And that
this discussion be conducted rationally, without the free market dogma
and leftist sentimentality that has tended to cloud the real picture.
Broadly speaking, one needs to ask four questions. First, is public
ownership of industry inherently inferior to private? Second, is
private ownership the only way to deal with managerial inefficiency?
Third, is there a difference in the positive and negative outcomes
produced by privatisation through the strategic sale route and through
the sale of shares to the public? Fourth, is plugging the fiscal
deficit a sound rationale for disinvestment?
In his recent book, Privatisation in India: Challenging Economic
Orthodoxy (RoutledgeCurzon, 2005), by far the most comprehensive and
rigorous study of the issue in the Indian context, T.T. Ram Mohan of
the Indian Institute of Management, Ahmedabad, conclusively debunks
the assumption that the private sector is more efficient than the
public. After carefully reviewing both financial performance and input-
output related physical productivity in the two sectors, he concludes
that “the evidence thus shows that the perception that the private
sector is uniformly superior to the public sector … rests on a weak
evidential foundation.” This does not mean other aspects of the reform
package are necessarily bad.
Indeed, Professor Ram Mohan argues that the advent of reforms in the
early 1990s has led to a convergence between the public and private
sectors. If this is so, there is a strong case for looking at the
reforms process — especially the introduction of greater competition,
and the partial public listing of PSUs — as a way of unshackling the
public sector rather than doing away with it altogether. Indeed, the
empirical data of the past decade strongly indicates that those PSUs
which had greater functional autonomy and public accountability
through mechanisms like stock market listing and professional boards
improved their financial performance.
Like other serious scholars of management, Prof. Ram Mohan also points
to the pervasive nature of the “agency problem” in modern capitalism
where there is a separation between ownership and control in large
corporate entities. Public ownership may exacerbate this problem but
poor corporate governance and law-enforcement make it likely that
agency problems will be as acute under private ownership. In other
words, serious reform should focus not on a change in ownership but on
devising mechanisms for more effective governance. One suggestion has
been made by R. Nagaraj of the Indira Gandhi Institute of Development
Research in a recent paper: that the government examine the
feasibility of “Japanese and German style interlocking ownership of
complementary PSUs tied together with a bank that enforces greater
managerial accountability, and encourages long term outlook of output
growth and acquisition of technological capabilities.” There may be
other ways of doing this as well.
On the third question, international evidence suggests there is no
reason to assume that the strategic sale of PSUs will produce better
efficiency outcomes than the sale of PSU shares to the public. So far,
at least, it seems as if this is one lesson the Manmohan Singh team
seems to have learned from the negative experience of the BJP’s
experiments with privatisation. Mr. Mukherjee’s budget speech spoke of
bringing the government’s holdings in the public sector down to 51 per
cent. If this is done gradually, the limited sale of shares to retail
investors may raise substantial revenues. Prof. Ram Mohan’s study
conclusively suggests that this kind of limited disinvestment enhances
the managerial efficiency of PSUs, especially if it is accompanied by
greater autonomy. But care has to be taken to ensure that the issuing
of shares does not turn into a cover for the eventual transfer of
ownership to private hands, an outcome that would have no fiscal,
commercial or social rationale if the PSU concerned is actually making
profits.
If there is a rationale for the limited and well-planned divestment of
PSU equity as part of a long-term process of governance reform of the
public sector, it would be utterly myopic on the government’s part to
think of such sales as an easy means of plugging the fiscal deficit.
The deficit ought not to be an issue when there is a global recession
lurking around the corner. But to the extent to which it is, it is far
better for the government to find ways of broadening the tax base and
ensuring better compliance. Here again, the myth of the private sector
needs exploding. This year’s budget papers contain a study of revenue
foregone under the Central tax system in the previous financial year.
There we see that the effective tax rate of the corporate sector was
22.24 per cent “which was substantially lower than the statutory rate
of 33.99 per cent.”
When the corporate data is decomposed, the tax liability turns out to
be unevenly distributed: PSUs pay a larger proportion of their profits
than the private companies; IT enabled service providers and BPO
service providers and software development agencies had a tax
liability of just 15 per cent and 12 per cent respectively. Total
revenue foregone from corporate taxpayers in 2008-9 was Rs. 68, 914
crore. That is 17 per cent of this year’s budgeted fiscal deficit. If
the government wants to cut its deficit, let it focus its efforts on
the tax system. For that will pay recurring dividends rather than the
one-time payoff that each piece of family silver will fetch. The only
thing worse than disinvesting badly is to do so unnecessarily.
posted by Siddharth Varadarajan at 1:12 AM
bademiyansubhanallah
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Stocks end flat after wide fluctuationsSensex closes below 14,000
markSensex closes up 127 pointsSensex dips 800 pts on deficit concerns
Mumbai The BSE Sensex fell 1.8 per cent on Friday and posted its
biggest weekly fall in more than eight months as concern about the
economy kept investors jittery, but Infosys bucked the trend and
rallied on strong quarterly result.
Infosys Technologies, the country's No. 2 outsourcer, reported a
better-than-expected 17 per cent rise in June quarter profit and
marginally raised full-year forecast but warned the business
environment was still challenging.
However, a poor start to monsoon rains, crucial for India's domestic
demand-led economy, and lingering concern about a world recovery
weighed.
The 30-share BSE index fell 1.84 per cent, or 253.24 points, to
13,504.22, its lowest close after the ruling coalition won re-election
in mid-May and triggered a strong rally.
"I have been expecting a fall but not to this extent," said Ambareesh
Baliga, vice president, Karvy Stock Broking. "Some foreign funds were
selling."
Twenty-four index components ended down in choppy trade as a pullback
of more than 1 per cent at one stage triggered heavy profit-taking in
the last half hour.
"The immediate reason for the fall is a sell-off by some hedge funds
due to redemption pressures from their investors. The biggest worry
for the market, apart from the monsoons, is the global economic
crisis," said R.K. Gupta, managing director, Taurus Mutual Fund.
The benchmark index lost 9.4 per cent on the week in its sharpest fall
since last Oct. 26, with Monday's annual budget setting the trend as
big government borrowing plans and few expected reforms disappointed
investors.
"Now that the budget is over the market will come back to basics,"
said Gaurav Dua, head of research at Sharekhan, adding traders and
investors would be looking more closely at valuations.
The BSE index is still up 40 per cent in 2009 after an almost 50 per
cent rally in the June quarter.
"Markets are going to be tentative next week on account of monsoons,
quarterly earnings, global cues and most important foreign fund
flows," said Arun Kejriwal, director of research firm KRIS.
Farm Minister Sharad Pawar told parliament on Friday the poor monsoon
rains in northern parts of India were a serious problem.
Rains have been 8 per cent below normal in early July, reviving after
the driest June in 83 years, but water in the main reservoirs has more
than halved, putting at risk even winter-sown oilseeds and wheat.
Higher than expected industrial output in May also failed to move the
market, with traders shrugging it off as historical data. Output rose
2.7 per cent in May, above a Reuters poll forecast of 1.4 per cent.
Energy giant Reliance Industries, which led the index losers, fell
nearly 4 per cent to Rs 1,778.40. The stock has fallen 12.3 per cent
this week, the second steepest weekly slide this year.
Infosys firmed 3 per cent to Rs 1,726.50 and spurred other
outsourcers. Bigger rival Tata Consultancy Services rose 1.6 per cent
to Rs 394.65, while No. 3 outsourcer Wipro Ltd gained 3.4 per cent to
Rs 384.70.
In the broader market, losers outnumbered more than 2:1 on moderate
volume of 333 million shares.
The 50-share NSE index, or Nifty, closed down 1.9 per cent at 4,003.90
points.
"The market will be volatile next week, and the Nifty can fall below
3,800," Gupta said.
Sid Harth
Borrowing programme presents an operational challenge
Business Standard / New Delhi July 09, 2009, 0:40 IST
The big issue thrown up by the Budget for 2009-10 is the extent of
government borrowing planned for the year. At close to Rs 400,000
crore of market borrowings, it is about four times what was initially
planned for the last fiscal year. This is a stupendous figure when
seen in another context as well, the size of India’s banking sector.
The last financial year saw an increase in total bank deposits of well
over 20 per cent, or about Rs 650,000 crore. If the government were to
swallow Rs 400,000 crore (or 60 per cent of such a figure) this year,
it would leave precious little for anyone else. Bear in mind that the
government’s Budget is equal to only 17 per cent of the GDP figure,
and that the statutory requirement for banks is to hold government and
other approved paper (including state government paper) of just 25 per
cent. Pre-empting 60 per cent of bank resources for just the Centre
would be therefore an extraordinary situation.
But, of course, all market borrowings by the government are not from
the banks; there are others who pick up government paper, like the
Life Insurance Corporation. But it does not help that, at the start of
the fiscal year, the banks were already overbought on government
paper, as this accounted for 31 per cent of total deposits (against a
requirement of just 25 per cent). The excess government paper held by
the banks was therefore more than Rs 220,000 crore at the start of the
year. Even if that 31 per cent ratio were to be maintained through
2009-10, and not lowered as it would ordinarily have been, the banks
would be able to pick up only about Rs 200,000 crore of government
paper.
This is what underlies the official explanation that only half the Rs
400,000 crore of market borrowings proposed by the government will be
through issues in the primary market. The rest, it is said, will be
done through options like the Reserve Bank’s open market operations,
or OMO. But OMO in India has historically been used on a very small
scale; the total in 2007-08 was barely Rs 13,500 crore. That figure
shot up last year (when government borrowings ballooned), to over Rs
100,000 crore. If OMO this year is to double further, to Rs 200,000
crore, it goes without saying that it would be unprecedented and might
test RBI’s ability to deliver. Equally, what it means is that RBI
would add 3.3 per cent of GDP to the money supply—and this surely runs
an inflation risk some months down the road.
It is not that the situation is unmanageable; also, the scale of the
challenge would depend on the overall context. For instance, RBI
managed massive dollar inflows a couple of years ago by sterilising
vast quantities of money through what was called the market
stabilisation scheme (MSS). So it must be presumed that the government
and RBI between them can work out ways of raising enough money to feed
the government’s appetite. But the issue goes beyond the management or
operational challenge, and extends to the macro-economic consequences
of such an appetite for borrowings. It is controlling these that
present the additional challenge.
Sid Harth
BS Reporter / Kolkata/ Bhubaneswar July 08, 2009, 0:51 IST
The Union budget for 2009-10 is non-committal on the issue of
disinvestment of the public sector undertakings (PSUs) in the country
even though the fiscal deficit has been projected at 6.8 per cent of
the GDP for this fiscal.
This observation was made by the experts in the areas of taxation and
finance at an interactive session on Impact of the Union Budget
2009-10 organised by the Orissa State Council of the Confederation of
Indian Industry (CII). “The Union finance minister has refrained from
going into the specifics of the disinvestment process of the PSUs. The
budget merely says that the Centre would raise Rs 1,200 crore from the
disinvestment process in 2009-10”, said BL Bagra, convener (finance
and taxation panel) of CII’s Orissa State Council. AK Sabat, a city-
based chartered accountant, said, “In the Economic Survey, the Union
finance mister said that the Centre would raise Rs 25,000 crore every
year to reduce fiscal deficit which is projected at 6.8 per cent of
the GDP for this fiscal. However, the budget makes no mention of the
manner in which the government would go for the disinvestment of the
PSUs.”
Moreover, this year’s Union budget has nothing to offer for the
nation’s middle class which has been hit hard by the spiralling prices
of essential food commodities, he added.
Speaking on the occasion, Rajeev Mawkin, head (taxation) of CII-North
said, “The Minimum Alternate Tax (MAT) has been raised from 10 per
cent to 15 per cent and this is not a comfort signal for India Inc.
Moreover, new services like transportation of goods and services
through railways and goods transported through inland waters have been
brought under the ambit of service tax. This measure is going to hit
the export oriented firms in the country.”
Mawkin pointed out that the budget has increased allocation under
various Centrally sponsored schemes meant for the rural masses but
there is no monitoring mechanism to ensure the successful
implementation of these schemes.
...and I am Sid harth
bademiyansubhanallah
Editorial
Budget: Congress finds globalisation too hot for comfort
Some called it pedestrian. The pink media characterised it as negative
stimulus and CMP (Common Minimum Programme)-II. For others, it was
lackluster. By all accounts, the budget for 2009-10 presented by
Finance Minister Pranab Mukherjee was a damp squib. Particularly after
the hype created by the media about the new budget as a vision
statement of the second term of Dr. Manmohan Singh. A cynical view
could be that the dispensation has grown brazen because of its re-
election after its awkward and loathsome record in the first term.
There can also be a more generous appreciation of the context.
Perhaps, the big message of the budget was washed away in the
monumental Sensex meltdown and the orchestra of disappointment played
out by the protagonists of big-ticket reforms.
Mukherjee meant to dismiss some pet agendas of the reform lobby. He
stood his ground, in spite of the tsunami of big bang reform
predictions as the only way forward for tiding over the recession.
There was a promise in the budget speech that the government will
retain majority stakes in the public sector companies. This ruled out
distress sell-off of PSUs and share disinvestment which foreign
investors were eagerly waiting for. Mukherjee underlined that the
control of the financial institutions in India will remain in the
public sector and ruled out stake sale in banks, insurance and other
such institutions. This meant putting the Raghuram Rajan Committee
Report on finance sector reform on the back burner. Mukherjee quoted
India's traditional wisdom on taxation when he said: “Our tax
collectors are like honey bees collecting nectar from the flowers
without disturbing them, but spreading their pollen so that all
flowers can thrive and bear fruits.” Mukherjee has not substantially
reduced the tax burden on the people. The rates especially the
incidence of taxation, service tax and the numerous other forms of
taxation are still excruciating for the commoner. The benefits have
largely gone to help high earners, particularly the waiver on fringe
benefit tax and surcharge. But, it is in many years that a finance
minister in India spoke of the virtue of low taxation, which this
journal has always advocated.
Mukherjee’s budget did not exuberate the euphoria splashed all over in
the Economic Survey of the government presented in Parliament two days
before the budget. The Survey spoke generously on new generation
reforms. Its roadmap was big-ticket reforms in financial sector,
reforms in role of government and it stressed on disinvestment to
encourage foreign and private investment. All the previous 17 budgets
after the 1991 liberalisation policy focussed on FDI and private
investment and their promotion for economic growth. Pranab Mukherjee
spoke of achieving nine per cent growth, but his emphasis was on
higher government spending on rural regeneration, farm sector, welfare
schemes and infrastructure. Mukherjee, not parroting the priorities
underlined in the Economic Survey, marks a paradigm shift in the
government’s thinking. The Congress is clearly finding virtues in the
philosophy of mixed economy as a consequence of the global meltdown.
There are two competing schools of economic thinking in UPA-II. If the
Economic Survey reflected the thinking of Manmohan Singh, P
Chidambaram and Montek Singh Ahluwalia, the budget reflects the
thinking of the politician segment in the party, which for long felt
suffocated under the mindless reform binge of the career politician
bandwagon which so far held sway over the administration. In a way,
Mukherjee’s budget is a rethink on the economic policy adopted under
globalisation.
In fact, the undoing of the reform is a consequence of the reform
itself. In a way, it is ironical that the hype about the budget was
created by the pro-globalisation lobby. They should have known that
budget, especially in a truly liberalised economy, is nothing more
than an account of expenditure and revenue. It is not about instant
revolutionary solutions. Actually, it should have been dismissed as a
relic of the pre-reform days. But in India under reform the government
has only grown more intrusively.
bademiyansubhanallah
Column : A week later, re-reading the Budget
Meghnad Desai
Posted: 2009-07-13 22:12:20+05:30 IST
Updated: Jul 13, 2009 at 2212 hrs IST
Now that the Budget has had the week to settle down, how do we read
the tea leaves ?
Let us start with Sensex. On May 18, the market had gone through the
roof and trading had to be suspended. This was the market celebrating
the demise of the Left. Dalal Street and Wall Street both concluded
that now the barriers to liberal reforms were removed, India would
fast become like Singapore. This hope was what kept Sensex alive for
the last six weeks. Just as the Budget day neared, the Economic Survey
fed the delusions further. It looked like a wishlist of the CII and
FICCI. Hopes rose that Pranabda would just deliver.
Now the punters know better. There is no quick lunch, let alone a free
one. Congress is no pushover about reforms. The veil of delusion thus
having been removed, the market is back in a world where the growth
recession is still a fact, reflation is needed and the deficit cannot
be brought down any time soon. The climb back to 8% or even 9% GDP
growth looks less easier than it did on May 18. No wonder Sensex was
sliding down all last week.
Could it be worse? Martin Wolf, writing in FT last week, raised doubts
about sustainability of the growth rate of 2005-2008 if special care
was not taken. The world wants India to grow rapidly, but few think it
is a simple exercise. India has to will to grow faster. This is where
the Budget raises doubts. Does Congress/UPA have the desire for
sustained high growth ?
The problem is that powerful voices in the Congress prize
redistribution above growth. Indeed, there are people on the Congress
Left who think that rapid growth harms inclusion, and raises
inequality. Hence, it is no longer inclusive growth but growing
inclusion.
The idea inside Congress is that success in the election came not from
four years of 9% growth, but the last year of rampant populism—the Rs
60,000 crore of debt cancellation and NREG. That is the continuing
story in this Budget. The front seats are taken by rural distributive
measures not by growth-oriented measures.
Of course, rural India deserves a break. After all, 60% of Indians
live there. Spending on health and giving them jobs, even for 100
days, cannot be grudged. If people are healthier, it will be helpful
for growth. With elections coming in Maharashtra, UP and West Bengal
over the next two years, the Congress is taking no chances. Populism
in rural areas won the 2009 election and this winning formula will be
tried again and again.
There is, however, a serious caveat. Rural workers have low
productivity and if we keep them in villages, they will continue to
have low productivity. NREG gives makeshift jobs. The point is not the
value of final output but income transfer.
This is a pessimistic strategy. It assumes that rural India will stay
overpopulated and have low productivity for the foreseeable future and
so the task is to smother it with goodies to alleviate the suffering,
but not cure its poverty. This is the Congress Left’s idea of the ends
of economics. They don’t trust rapid growth as a cure for poverty
since they think rapid growth can only help the already dynamic sectors
—services and high tech manufacturing.
There is an alternative. It is to reform labour laws so that there can
be large manufacturing units employing hundreds of workers on low-tech
product manufacturing. These will be rural workers, unskilled or semi-
skilled. This is what India has missed out on. Malaysia and Indonesia
have used low tech manufacturing to lower their head count of poverty.
Only among Indian Left economists do you find an aversion to admitting
that labour law reform is the answer. These views are still in
command. The wish to protect the organised 10% of privileged labour
force has won out and so the rural poor would be kept on the farm and
manufacturing will continue to be high -tech.
The danger here is that there is no realisation that India’s good
growth record of the last ten years was riding on a global boom. Now
with a much colder climate, India should try harder to grow faster and
not take growth for granted as the Budget is doing.
The next step, which will cost a lot and be ineffective, is the
National Food Security Act. It wants to distribute foodgrain at low
price to BPL families. Now despite all the rounds of NSS expenditure
studies, we still don’t have an accurate estimate of the number of
poor. But the idea of food handouts is based on a fallacy. Amartya Sen
has shown that people starve not because there is not enough food but
because they don’t have enough purchasing power. The answer is to give
BPL families cash transfer and not foodgrain packages. There is still
time to rethink this white elephant.
—The author is a prominent economist and Labour peer
bademiyansubhanallah
Rajesh Chakrabarti
Posted: 2009-07-10 21:03:57+05:30 IST
Updated: Jul 10, 2009 at 2103 hrs IST
Discuss : 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
Sid Harth
Posted: 2009-07-13 22:20:19+05:30 IST
Updated: Jul 13, 2009 at 2220 hrs IST
Discuss : The aam aadmi got a mixed bag from the Budget. On the
positive side, the government has increased allocations for the NREG
to Rs 39,100 which is a 144% increase. This should factor in not just
the increase in wages to Rs100 but also partially cover the electoral
promise of the Congress to extend the 100 day job guarantee in NREG
from one member of every rural household to every adult in the
household. Second, the promised rationalisation of the misdirected
fertiliser subsidy and the extension of the duration of the farm loan
waiver till December 2009 will be silver linings. But not all the
promises are necessarily as they seem.Consider the ambitious Food
Security Act. If this is meant to be a panacea then for rural hunger,
a closer look reveals that it is far from it. In the absence of the
government coming clean on the BPL numbers, the number of people who
will benefit from this scheme remains purely speculative. The NC
Saxena committee of the ministry of rural development has asked for
50% of all households in the country to be declared BPL. Unless the
the government accepts the recommendations of this committee, it may
well be a case of too little, too late.
Secondly, the current entitlement under the Antodaya Anna Yojana which
covers nearly 2 crore of the poorest families is 35 kilos of rice /
wheat at Rs 3 per kg and Rs 2 per kg respectively. There is therefore
a straight reduction of 10kg in terms of entitlements. This is not
just for families benefiting from Antodaya Anna Yojana but also for
BPL families.
Similarly, if the market price of rice goes above Rs 8.60 paise, the
additional ten kilos that BPL families will have to procure will mean
that the effective transfer of resources to the household has actually
reduced after the introduction of the National Food Security Act. This
reduced allocation also goes contrary to the Supreme Court order of
January 10th, 2008, in the Right to Food Case which unambiguously
states that all families benefiting from the TPDS would be entitled to
35 kg of food grains.
—The author is the principal adviser to the Supreme Court
Commissioners on the Right to Food
Sid Harth
Mumbai
Saturday, 11 July 2009
Budget 2009-10: An opportunity lost
After coming to power in May this year the UPA Government had
presented before the people of the country a 100 day Agenda which was
supposed to strengthen and insulate our economy from a deepening and
depressing recession.
The Union Budget was one important tool to spur growth and development
in the country through innovative ideas coupled with disciplined
implementation.
Unfortunately the UPA Government has missed that opportunity and
presented a budget which is not only disappointing but also
directionless in many ways.
Agriculture
Agriculture is one of the most important sectors of our economy which
demands immediate attention and long term action plan from the
Government. But the Union Budget this year has failed to address the
problems of this sector.
Inspite of tall claims made by the Government the growth rate of
agriculture has plunged to 1.6 percent in 2008-9, well below the
desired level of 4 percent. The BJP has been vehemently demanding the
Government for the past five years or so to lower the rate of interest
on agricultural loans to 4 percent and introduce major reforms in the
sector but the Government has not taken any positive step in this
regard.
The country is going through an agrarian crisis where the farmers are
forced to live in perpetual distress. Although the Budget has hiked
the target of agricultural credit for 2009-10 to Rs 3, 25,000 crore
but without lowering the interest rate substantially the Government
would push the farmers in another debt trap.
Exports
Exports have taken a severe hit during the UPA regime and yet to show
the proverbial “green shoots of recovery”. After taking a record 34
percent plunge in April this year the Government should have come up
with something imaginative for the sector. Even in the month of June
the exports dropped 29 percent. This is the sector which witnessed
maximum job losses.
According to Commerce Ministry exporting units in 17 sectors saw 134,
593 people losing their jobs between August 2008 to April 2009 and 648
exporting units across the country posted a loss of Rs 8982 crore
during this period. But the Union Budget has been a big disappointment
for this sector. Without a clear hint of revival in exports all green
shoots of recovery should be dismissed as brown weeds.
Infrastructure
Infrastructure in the country is in really bad shape. The Budget
directs the Indian Infrastructure Financial Corporation Limited
(IIFCL) to evolve a financing mechanism for giving increased support
to infrastructure projects.
On the one hand the Budget vowed to increase infrastructure spending
on the other hand it increased Minimum Alternative Tax from 10 percent
to 15 percent which will hurt the profitability of Special Purpose
Vehicles (SPVs). The Budget makes lofty claims on infrastructure
spending but the total capital expenditure (long term expenditure) on
Infrastructure has been increased only marginally by Rs 5000 crore.
Although the Finance Minister stepped up revenue expenditure in the
Budget but did not address questions of delivery and implementation of
the infrastructure projects.
The Government should make a special endeavour to remove procedural
hurdles to expedite project clearances, subsidized loans through a
ceiling lending rate, simplicity and transparency in the tendering
process, faster loan disbursement and sops like tax and excise duty
exemptions.
India needs many more super highways like Mumbai-Pune Expressway and
mega bridges like Mumbai Sea Link. What it does not need is
politicization of developmental projects and the Congress penchant for
naming all national projects after the members of one family.
Inflation
Inflation is the area of BJP’s prime concern. Although the WPI has
entered into negative territory but the CPI is still hovering in
double digits. The recent spurt in the prices of essential commodities
clearly indicate that the UPA Government is yet to learn the mantra to
balance prices keeping with the interest of aam aadmi.
The callous behaviour of the UPA Government and its poor sense of
timing on the issues pertaining economy was recently evident when the
prices of petrol and diesel were hiked at a time when the prices of
crude oil were falling world wide.
Keeping in mind the recent fall in international crude oil prices the
Government should immediately roll back the Rs 4 a litre hike in
petrol and Rs 2 a litre increase in diesel rates. The BJP is of the
firm view that the Government should not increase the prices of petrol
and diesel in an arbitrary manner because it stokes the prices of
essential commodities.
The Government should also develop a mechanism to regulate and
rationalize the prices of petrol and diesel in a manner so that the
common man is not hit hard.
Fiscal deficit
Higher fiscal deficit targets of 6.8 percent in 2009-10 mentioned in
the Union Budget has already become a topic of national debate. The
BJP believes that such elevated levels of fiscal deficit are
unsustainable and will fuel inflation in the long run.
Although the Finance Minister has announced to bring deficit to 4
percent in 2012 but there are no such precedents in the history of
modern India where the Government has made a more than 2 percentage
point move from fiscal indiscipline to austerity within a short span
of 2-3 years.
Fiscal deficit has been increased by the Government on the pretext of
stimulating growth in the country. The UPA Government had provided a
fiscal stimulus equivalent to 3.5 per cent of the gross domestic
product through three packages even before the country went to polls.
Government should publish Status Paper on Stimulus packages
Even after three stimulus packages and one interim Budget the growth
rate of the country has not shown encouraging results. From the highs
of 9.7 percent the GDP growth rate has slipped to 6 percent.
The BJP believes that stimulus packages were badly designed and
executed. The BJP demands the Government that before going further
with the Union Budget it should publish a detailed Status Paper on the
three stimulus packages which were announced before the General
Election. This would help the people to understand the impact of all
stimulus packages in the country.
bademiyansubhanallah
Neerja Chowdhury
First Published : 16 Jul 2009 12:40:00 AM ISTLast Updated : 16 Jul
2009 01:07:06 AM IST
In 1994, when the Congress was routed by the TDP in the assembly
elections in Andhra Pradesh, which happened to be then Prime Minister
P V Narasimha Rao’s home state, the knives were out for Rao—and his
then finance minister Manmohan Singh — in the Congress Working
Committee. Many expressed their dissatisfaction with economic reforms
put in place by the Rao and Singh duo, arguing that they had failed to
trickle down to the poor or yield political dividends for the party.
It was Pranab Mukherjee, deputy chairman of the Planning Commission,
at the time who had struck a balancing note, articulating the need to
give economic reforms a ‘human face’, and Rao who talked about walking
the ‘middle path’.
In 2009, this is just what Sonia Gandhi would like Pranab to do. The
political grapevine has it that when she asked him which ministry he
wanted, he opted for finance. Pranab has known, through experience,
that he would not be given home (he had hoped for it in 2004) and
Sonia herself wanted him to head the finance ministry.
In 1991 also, Pranab had coveted finance but was not given the
ministry when Narasimha Rao took over. With the collapse of the Soviet
Union and India’s balance of payments crisis, Rao had preferred
Manmohan Singh to give suitable signals to the international
community.
Normally, governments plump for populist budgets in the last year of
their term, or at best during the last two years. It does not normally
happen in the first year, but Pranab’s budget is as political as it
could get.
It goes without saying that the budget is more than an exercise in
revenue and expenditure and contains the vision of the government.
This year’s budget was widely criticised for being lacklustre without
any big bang announcements. The corporates were disappointed and the
Sensex tanked by almost 900 points.
And yet, there was nothing wishy-washy about the underlying message of
the budget, as Pranab made suitable noises about redeeming the
promises that the Congress had made during its campaign.
Given the economic downturn, the FM could have adopted a conservative
approach and cut down on schemes and money spending. But he chose
instead to take a calculated risk, allowing the fiscal deficit to
grow, in the hope of increasing the purchasing power of people and
provide a stimulus to the economy.
The budget carries the stamp of the finance minister and it cannot but
have the PM’s approval. Having said that, if a distinction were to be
made between Singh and Pranab, the budget had the finance minister’s
imprimatur, not Singh’s. Left to himself, the PM may have a preferred
a clear cut announcement on disinvestment, now that the Left is not
breathing down his neck, and taken steps towards reforms in the
banking, insurance and pension sectors.
But Pranab Mukherjee has steered clear of this in the budget though
this does not prevent the government from taking these steps later. It
was as if the FM wanted to make a deliberate point through his budget.
He would not have done this, unless he knew he had Team
Congress’ (read Sonia and Rahul Gandhi) backing.
The budget goes on to enhance the outlay for NREGS, which was a factor
in Congress’ victory, by a whopping 144 per cent; Bharat Nirman
Programme, covering six infrastructure projects, by 45 per cent. It is
another matter that almost one third of last year’s outlay on NREGS
was un-utilised and the programme has leaks that need to be plugged,
but the political signals were clear — the Congress is for the poor,
for the farmer, for the aam aadmi.
Sonia Gandhi’s letter to the prime minister recently, on the need to
bring in food security legislation, underscored this. There had been
dissenting murmurs in the government that food security would be
tantamount to giving ‘doles’. Sonia could have picked up the phone and
called the PM or mentioned it to him at a meeting of the core group.
By writing a note, which made its way to the media, she was specially
making a point of the party’s commitment to it.
Pranab’s announcement that the government will enact a Food Security
Bill, in deference to the Congress’ poll promise of giving 25 kgs of
grain at Rs 3 a kg, is of the same piece. It is another matter that
the Bill is likely to take a year or more to be put in place and may
be referred to a standing committee. It is also not clear whether the
Antyodaya Anna Yojana for 2.5 crore destitute, providing 35 kgs of
grain at Rs 2 per kg for wheat and Rs 3 per kg for rice, and also the
scheme for four crore BPL families, giving them 35 kg per month would
continue or come under the food security law umbrella. In which case,
the amount allocated for BPL families may be reduced from 35 kgs to 25
kgs. Those are the details to work out, but again, it was more the
signal that mattered.
Mandate 2009 was only the semi final. The budget showed that the
preparation for the final has begun. Everyone in the Congress is clear
that Rahul Gandhi will take over as PM sometime in the future. There
are no longer any ‘ifs’ and ‘buts’ being voiced about him.
The party — and Rahul Gandhi — is preparing to go for the bull’s eye,
and that is to win Uttar Pradesh for the Congress in May 2012. If that
happens, there may be a clamour for him to take over as PM and lead
the party into the next election in 2014. Some believe that Manmohan
Singh may then be made the next President of India.
Rahul himself has shown no haste in taking over and the fact that he
did not accept a ministerial berth has gone down well publicly,
particularly as there was speculation that if the Congress won over
200 seats, Sonia or Rahul might take over.
The Congress is trying to put together its old rainbow alliance made
up of Muslims (who are gravitating back to the party), upper castes
(who too are looking at the Congress with renewed interest and this
became evident in the Lok Sabha polls in UP) and the Dalits (whom the
Congress is going all out to woo, much to the worry of BSP leader
Mayawati). The inclusion of 10 Dalits in the Manmohan ministry and the
elevation of Meira Kumar as the Lok Sabha Speaker were straws in the
wind.
So also were announcements by Pranab in the budget, of a new scheme,
the Pradhan Mantri Adarsh Gram Yojana (PMAGY) to be launched this year
on a pilot basis, geared to develop villages which have more than 50
per cent Scheduled Caste residents. And also the National Mission for
Female Literacy and the National Rural Livelihood Mission which will
focus specially on the SCs, STs and minorities.
During UPA I, the Congress was more reactive than proactive in its
approach. This time the party is moving politically from day one and
the budget is one nugget in that gameplan.
bademiyansubhanallah
Hyped Budget, low hopes
Great expectations, but... nemo dat quod non habet (no one can give
what he does not have). In the days leading up to the Union Budget, it
is fashionable for experts and opinion-makers of all hues to hold
forth on what the budget 'ought to be'. This is natural. After all,
divining the finance minister's mind, or lobbying openly till it
rankles, or making a public display of one's 'expertise' in public
finance is an annual indulgence of the financial and business
chatterati. This year is all the more exciting as the Congress party
has won (quite unexpectedly) the mandate to govern India for another
five years in the midst of global financial and economic turmoil. I
expect an early start to the budget season of Parliament and a late
finish.
More chatter is not necessarily better chatter. While the appetite for
revolutionary budget measures is understandably higher in the post-
election euphoria, I am not sure whether this budget will usher in
much of a revolution beyond creative accounting in public finance. The
greatest problems (the ballooning government debt and a persistent
fiscal deficit) and the greatest imperatives (welfare, subsidies and
infrastructure creation) are pulling the government finances in
opposite directions. Sadly, the former may eventually win even as the
current budget addresses the latter. Simply put, the government has a
'structural' or 'balance sheet' kind of a problem, while we await the
cheap and counter-cyclical thrills on the profit-and-loss or revenue
front.
Almost all the governments of the top 20 economies in the world are
facing financial challenges, mostly centering on the re-financing of
failed banks. But for many of them, this is a one-time burden that
will affect public finances adversely for a year or two. In India's
case, things are different. The government has always been profligate
and its recent sins have been luckily countered by strong tax revenues
as the 'India story' played out over most of this decade. In just over
a year of fiscal stress and economic upheaval, this veil of modesty
has been ripped apart.
Public debt as in March 2009 is estimated to be over 75% of the
country's GDP, and almost four times the annual revenue inflows of the
government. The interest on public (or government) debt consumed 31.6%
of revenue receipts in FY08; it rose to over 34% in FY09 and will get
worse from now on as revenue sags and debt balloons. Expect a figure
of around 38% for FY10e. The government is literally on a debt
treadmill.
The revenue inflows for the government are not likely to increase
significantly anytime soon given that the economic growth in India is
taking a breather, unless tax rates are upped (yes, the unthinkable
might be forced upon us, not in this budget perhaps, but soon enough).
So let's rule out any easing of tax rates which have a major effect on
the aggregate tax collection. There might be some tax sops for
individuals, such as an increase in deductibles for home loans, tax-
exempt bank deposits, etc, but these are likely to be measures
intended for hiding the lack of material tax breaks. The
implementation of VAT is already running into political and
bureaucratic problems (what pragmatic measure doesn't in this blessed
country?), while service tax might be increased to 12% again with
wider 'coverage'. This is because a uniform GST is still at least a
budget away.
On the expenditure side, the finance minister is under tremendous
pressure to increase the welfare/subsidy spend. True, many subsidies
are not reaching the intended recipients. However, this is not reason
enough to cut PDS allocations, minimum support prices for foodgrain
procurement, health, education and fertiliser subsidies. As for
populist programmes, let's be realistic. A government that has been
voted back to power on the strength of the NREGS (by any count, a
positive contributor), the Sixth Pay Commission hikes and farmer loan
write-offs, is surely going to preserve (if not pump up) subsidies.
It's on this basis that decontrol of petrol, diesel and LPG prices is
also a probable non-starter, just as it has been all these years.
Similarly, there is an urgent need to invest heavily in infrastructure
creation and provide large budgetary support/allocation for irrigation
schemes, highways, power plants, urban infrastructure, railways and
ports. Does any government have the gall to cut back on the spend in
this category?
As for the budget day (the actual deficit at the end of the year is
usually worse), my back-of-the-envelope guess is that the real fiscal
deficit for financial year 2010, including some invisible items that
the government often sweeps aside, will probably be a shade under Rs 5
lakh crore a truly toxic figure when you consider that it is about 50%
of the total budget and over 11% of the GDP. Obviously, the government
will have to resort to a mix of PSU divestments, increased borrowings
and printing (monetising) this amount over the year. Each option is
fraught with financial danger and moral hazards.
Divestment is sensible if you can sell the loss-making units. Selling
stakes in the profitable PSUs is akin to selling the family silver to
fund wayward and footloose progeny. It also requires support from a
reluctant DMK and Trinamool Congress. Monetising will bring back the
ghost of inflation (it has been benign so far because of the high base
effects from last year and soft oil prices, but both these factors can
wear off soon). That leaves borrowing, which is theoretically easy as
government paper is backed by a sovereign guarantee.
This time, though, it's different. The net incremental borrowings
during the year (about Rs 3.5 lakh crore, increasing at 60% CAGR over
FY08-10) will take government debt to over 80% of the GDP and weaken
the rupee. This will also crowd out private sector borrowings and
drive up interest rates. As a result, banks' bond holdings will
deflate and put pressure on corporate profits and the stock market PE
multiples. Where does that leave the investors in Indian stocks? Not
in wonderland, I'm afraid.
Dipen Sheth is Vice-President, Institutional Equities, BRICS
Securities Ltd.
bademiyansubhanallah
This is the fortnight of India’s budget. Pink and white papers scurry
around for comments on what the finance minister will do for India’s
economy, completely missing the bigger questions. What will happen if
the Indian monsoon fails—or fails in the critical period when farmers
sow the kharif crop? What will happen if reservoirs—holding water for
drinking or electricity—do not get their supply from the sky? Will we
have water to drink in cities? Will we have water and power to operate
industries? And, most critically, will we grow food for the next
season, to build stocks, run our food support programmes for the very
poor?
The monsoon is the true finance minister of this country. So, the
economic present is not about disinvestment—to do or not to do—but
about water and livelihood security. Indications are grim. The monsoon
is more variable this year than before. Even if it pours in the next
few months, and the rainman’s calculator shows normal or near-normal
rainfall, it does not mean there was rain when and where needed. The
variability is leading to a bizarre situation today: Mumbai, for
instance, is drowning in rain, and gasping for water, because its
reservoirs—located some distance away—have not got any rain. The city
will need to ration its water if the situation does not get better,
fast. At the same time, rain events are also getting more extreme—it
only pours—leading to floods and devastation. Not good. Not good at
all.
Is this change in our monsoon because of climate change? Nobody can
say yes, or no. But weather scientists agree something is definitely
afoot. Indian monsoons have always been unpredictable and variable.
And yet, after years of study and investment in improving our science
and instruments of prediction, the variability is growing, and
prediction becoming more impossible. Now join the dots. Models predict
the impact of climate change will be seen in terms of increased sub-
regional variations and more extreme rain events. This is what we are
beginning to see: more rain, in lesser rainy days. In a country which
already gets rain for less than 100 hours in a year (a year has 8760
hours), this is disastrous.
It is this change that must be simulated, for the future. Our need and
thirst for water are growing exponentially. We forget we cannot
develop our economy without water. Just consider: in the western rich
world, the bulk of water—roughly 80 per cent—is consumed in cities and
by industries. But it works for them: the same proportion of people
live in cities. Water has moved with the people and the economy.
Now consider where we are: the bulk of India lives in villages, where
water drives agriculture and local economies. But cities and
industries are growing and need more water. Yet, since people have not
moved in the same proportion, the water need has to be shared—between
old users and emerging ones. It is no surprise cities, with their
powerful constituencies, are pulling water away from what remains a
diffused constituency in rural areas. Today, most cities get their
water from dams, lakes and groundwater aquifers located further and
further away. This ‘appropriation’ is leading to tension, indeed war,
in many cases. These skirmishes will grow as the stress grows.
So there are two distinct features to our water-present. One,
variability in rainfall has increased, making it difficult to predict
or plan for. Two, our water need (and greed) has increased. In this
situation, we are literally on the edge of water-stress. Today, most
of the country does not have the capacity to withstand delay in the
monsoon, let alone one year of near-drought. We cannot cope with the
change that is afoot. Unless we do things differently.
Are we getting the future right? Let’s take the budget 2009 speech.
The finance minister has, it can be argued, provided for a water-
insecure world. He has substantially increased allocation for the
irrigation sector, for water and sewage provisioning in cities
(through the urban mission) and for rural areas (through hugely hiked
funds for the employment guarantee programme). The money for drinking
water is also not small—this year, allocation has increased to over Rs
9,000 crore.
But all this is still a zero-sum game. The more money is allocated,
even spent, the more thirst increases. Say the government identifies
100,000 villagers have a shortage of drinking water. Funds are
sourced, spent. But does the problem go away? No. The next survey
finds 100,000 villages not yet ‘reached’. Villages are reached but not
supplied; the water source is now contaminated; the tubewell has dried
up.
The situation is no different in spending on irrigation systems, where
capacity already created is lying wasted because canals or other
systems are hardly maintained. In fact, even as government after
government has spent money in building large water irrigation systems,
people have moved away to use the resource they can depend upon—
groundwater. Today, not only does the bulk of Indian agriculture
remain rainfed—now, on increasingly variable rainfall—but also it
depends on groundwater, not surface water. This is where the budget
stings: while allocation for surface irrigation has gone up,
groundwater remains ‘minor irrigation’ and has got less money. There
are over 19 million groundwater wells and tubewells in the country.
This resource, over-used and over-extracted, provides a distributed
water system in the country. The question is if rain is distributed,
why can’t recharge be distributed as well?
Let us be clear: we have a water emergency. Much more needs to be done
to secure our water for the future. But what? Next fortnight, no rain
or rain.
—Sunita Narain