Cut Spending, Boost Investment

After we had successfully tackled the effects of the  global financial crisis in 2009, the general euphoria led me to warn about four potential dangers.

    One, that sustaining growth would be a challenge. Two, a higher fiscal deficit saved us from growth collapse in 2008-09 and ensured faster recovery in 2009, but was politically addictive. It had to be brought back to the sustainable level reached in 2007-08 as soon as growth was restored. Three, food inflation was becoming more entrenched because of faster growth in income (demand), rising supply chain constraints and traditionally slow productivity growth. Agriculture, the only unreformed sector, needed decontrol of external and internal trade and land market.

    Four, capital flow volatility, which was known to display surges and sudden stops, had to be tackled by unconventional policy means. Capital inflow surges and exchange rate appreciation had to be allowed or countered, but capital outflow must be allowed unhindered, with the exchange rate allowed to depreciate.

    There is no public information to show that the ruling party, government ministers, bureaucrats or economists took any of this seriously till late 2012. Since then appreciation and action have lagged the pace of economic deterioration, so that options that may have been available earlier have been closing one-by-one till the government and RBI appear to be boxed into a corner.

    What can the government and RBI do at this late stage when one mini crisis after another seems to be hitting the economy? What we need is an updated version of the expenditure reduction-expenditure switching-cum-policy reform strategy successfully employed in 1991. This has two major aspects which are supplemented by confidence building measures.

    First, is to re-establish the macroeconomic balance using three interrelated policies. They are a reduction in government consumption and subsidies, and compression of revenue and fiscal deficits. This will allow a loosening of monetary policy, particularly through a reduction in medium- to long-term interest rates. An interest rate twist would be ideal, with very short-term interest held steady or increased. The inflation differential that led to a real appreciation of the rupee and undermined competitiveness has been corrected between Rs 62-65/$. Above Rs 65, the currency market is being driven by the misperceived response of the government and RBI to the earlier fall and the perceived inability of the government to act correctly and decisively.

    Second, is to revive corporate investment and growth. The following policy recommendations illustrate the magnitude of the policy reform thrust that is now required to achieve this aim. A dismantling of the government coal monopoly, the central government monopolies in infrastructure sectors like railways, ports, airports and state governments’ monopoly in electricity distribution (open access as per 2003 Electricity Act). A major political thrust on investment enhancing (as against vote enhancing) legislation is now required. The public is not convinced that the ruling party has made a credible effort to do so.

    Other reforms include correction of legal and administrative missteps taken by the revenue department in the last five years. Also, instead of waiting endlessly for Goods and Services Tax, it may still be worth introducing a proper central value-added tax, including services. The new direct taxes code is still awaited.

    These reforms need to be backed by measures to introduce transparency in the system and streamline processes. These include introduction of simple, transparent procedures for auctioning of mineral exploration and production rights, and for government land. Processes could be improved by setting up a professional, independent environmental protection agency and through a transfer of regulatory functions to it.

    Agriculture needs attention. The sector requires comprehensive liberalisation, with decontrol of imports, exports, internal trade and also that of land markets (leasing in and out of land; regulated sale-purchase of land in non-tribal areas). A fixed system of variable import and export duties on major crops should be devised within three months to balance interests of farmers and consumers.

    Rural fertiliser, electricity and kerosene subsidies need to be replaced by free solar lanterns and cookers plus Aadhaarbased cash transfers. FDI should be not just allowed but encouraged in all agricultural-based activities such as retail of agricultural food products, agrirural banking, insurance, including crop and weather. Government must eliminate taxes on processed food. The land acquisition Act must be purged of clauses that restrict the freedom of well-informed private parties to buy, sell and lease land for industrial purposes.

    These reforms must be complemented by measures to restore confidence in government and its weakened credibility. The confidence enhancing measures could include acceptance and subsequent action on election reforms to remove criminals from politics, state funding of elections and auditing of accounts under the aegis of Election Commission (MPLAD funds could be used here), police reforms including a new police Act to break the criminal-police-politician nexus, and legal and judicial reforms to improve respect for law.

    If the macro pivot and some bold policy reforms are not initiated, and conventional monetary policy continues, rising interest rates will trigger a further reduction in the growth rate and decline in stock market, while CPI inflation persists and rupee depreciation continues.

    ( The writer is president, chintanlive.org, and a former chief economic adviser. )

Muddling Through Food Security

Having passed the food security Bill in the Lok Sabha, its ardent proponents are promising freedom from hunger and malnutrition. The skeptics, however, believe that it will have dire consequences on the fiscal situation, further eroding India’s business confidence, slowing down growth, further tumbling of the rupee and higher inflation. To know the reality, however, one needs to dig a little deeper.

    First, one may note, while the FSB promises basically 5 kg of cereal per person per month (pppm), the average consumption of cereals in the country is 10.7 kg/pppm. That means even for cereals, consumers will have to go to the markets for more than half their needs.

    Second, over time, the consumption basket of an average Indian has been diversifying away from cereals and moving towards more vitamins (fruits and vegetables) and protein foods (milk, eggs, meat and fish). All these foods are bought from the open market. So the largest chunk of food of an aam admi will keep coming from the open market, even after the FSB.

    And if cereal inflation in the market is hovering at 18%, vegetables prices soaring at 46% and protein goods at 11% (this July over last July), then where is the ‘right to food’ of the poor? If policy makers really want to help the poor with sufficient and nutritious food, the highest priority should be to bring down food inflation from current level of 12% to less than 4%.

    Third, what would be the Bill’s cost? The estimates of direct food subsidy for a full year hover around Rs 1,30,000 crore at this year’s prices, up from about Rs 80,000 crore last year. By next year, when hopefully the full roll-out takes place, at least 8-10% more can be added on account of rising support prices and costs

of procurement, storage and distribution.

    The full year cost will not be below Rs 1,40,000 crore in FY 2015. And this does not include additional investments that would be needed to store grains, in the railways to move the grains, to modernise the PDS at the state level and, above all, in agriculture to stabilise production of grains. If one adds all these additional costs to make the FSB a meaningful ‘right to food’ Act, the costs will reach Rs 2,00,000 crore a year.

    Fourth, can one really afford this at this juncture? Well, if one is committed to the Bill, one will have to find resources by cutting down some other subsidies, say on energy (power, diesel, gas) and fertilisers. Will the government bite the bullet on this account in an election year? I am not sure. But if that is not done, it will keep the fiscal situation under strain, inflation high, and implicitly tax the poor.

    Fifth, in some quarters, there is a misconception that 5 kg/pppm can solve India’s malnutrition problem. It will not. To address this, research reveals that one needs to focus on supply of clean drinking water, better sanitation and female education, all of which require massive investments which don’t appear explicitly in the Bill. But large food subsides could eat into these potential investments.

    Sixth, how can one make the best of the FSB? Reminding ourselves of what Rajiv Gandhi once said, that only 15 paise for every rupee spent by the government on welfare schemes reach the poor, the first and foremost action should be to plug the leakages in PDS, which hover around 40%. It is doubtful that state governments, which could not achieve this in the last 50 years, will attain the target over the next year. And if one cannot fix these leakages, especially in Uttar Pradesh, Bihar, Jharkhand and Rajasthan, the FSB will turn out to be a very expensive and failed experiment.

    Next, there is a need to rationalise taxes on cereals in procuring states, where they reach as high as 14.5% (as in Punjab), and contain the high costs of operations of state agencies by bringing in the private sector through competitive bidding of tenders.

    But above all, we need to open the way for conditional cash transfers through Aadhaar, starting with 33 cities of more than one million population where there is sufficient banking network, and then extending it to farmers, who need not sell all their produce to the government, say wheat at Rs 14/ kg and then ask the government to give them back the wheat at Rs 2/kg. This is absurd and will unnecessarily overload the system. It will be much better to give them cash support. After all, India is too large to have just one model for all states.

    Finally, the art of policy making lies in achieving the desired ends with minimal costs. The best international practices (Brazil, Mexico) tell us that wisdom lies in using income policy instruments (like conditional cash transfers, and not a price policy of cheap food) to achieve equity ends. This can save at least Rs 40,000 crore a year, without damaging the functioning of agri-markets and/or production structures. Can India steer this transition successfully? Only time will tell.

   (  The writer is chairman of the Commission for Agricultural Costs and Prices. Views are personal. )

Honorable Prime Minister of India on Slow Down of Economy in Lok Sabha on August 30 , 2014

Land Acquisition, Rehabilitation and Resettlement Bill 2012

PM's speech at the inauguration of the National Media Centre

It gives me immense pleasure to be here today on an occasion that represents a milestone in public engagement. The inauguration of the National Media Centre is not only about unveiling New Delhi’s latest landmark. This Centre also showcases our ability to keep pace with similar state-of-the-art facilities across the world. It symbolizes the vibrant mood of the existing media landscape in our country. As a ‘Communication Hub’ and a ‘Single Window’ facility, I am sure it will fulfill the needs and requirements of our media fraternity, many of whom are present here today.

The exponential growth in India’s media sector began during the decade of the nineties. The media, not coincidentally, were among the principal beneficiaries of the wave of economic reforms that were introduced in the country during that period. Growing economic activity created the need for better and more intensive communication, which itself had a commercial aspect to it. A virtuous cycle came about in which the increased reach of media, both print and electronic, opened up ever newer markets, which benefited producers and consumers alike. In fact, I would like to think that the phenomenon of India as a world power in cricket has something to do with the fact that our electronic media are able to create and unite a huge block of consumers, reaching which is the dream of many marketing professionals.

The story of reform and liberalization in the media sector, which is a continuing one, is obviously a success story. The size of the media industry alone demonstrates that very amply. But the media are not merely a mirror of business activity; they are a reflection of the entire society at large. Economic reform and liberalization over the last two decades and more have wrought great societal change in our country. Our media have reflected this process and also been affected by the associated changes. I would even say that the pace of these changes has been so rapid that the documentation of its impact on the media has been somewhat inadequate. Technological advancements like the internet, telecom revolution, low cost broadcasting, social media and cheaper publishing facilities that exist today were inconceivable two decades ago.

Change inevitably brings challenge in its wake. Those of you who are the practitioners of the media industry have a very special responsibility to assess, tackle and overcome the challenges that two decades of socio-economic change have brought about. In a vibrant democracy such as ours, which revels in free enquiry and quest for answers, this is a significant calling. But there is need for caution while executing this responsibility. A spirit of inquiry must not morph into a campaign of calumny. A witch-hunt is no substitute for investigative journalism. And personal prejudices must not replace the public good.

At the end of the day, credibility is the media’s currency and is integral to its contract with the reader or viewer. There is also the question of a certain responsibility for social harmony and public order. I emphasize this particularly in the light of the social media revolution, which is rendering irrelevant the lines between a connected citizen and professional journalist. A mature and wise handling of this phenomenon is essential if we are to avoid the tragedy last year that befell many innocent souls who became victims of an online propaganda campaign and were then driven across the country to save their lives in their home states.

It is a reality that journalism cannot be divorced from the business of which it is a part. The responsibilities of a media organization are not limited to the viewers and readers alone. The companies also have an obligation to their investors and shareholders. The tussle between bottom-lines and headlines is a fact of life for them. But this should not result in a situation where media organizations lose sight of their primary directive, which is to hold up a mirror to society and help provide a corrective.

The media and civil society are an essential part of democracy and nation building. Now that we are at a decisive stage in taking our rightful place in the comity of nations, I am confident that they will not be found wanting in this collective effort to consolidate India as a plural, inclusive and progressive society.

I would also like to take this opportunity to reiterate the commitment of the UPA Government in fostering a free, pluralistic and independent media. Our initiatives aim to bridge the ‘Information Divide’ and to provide our citizens knowledge and information so as to equip them to respond to social, economic and technological challenges. Our communication architecture is aimed at empowering our people with quality information. Through the innovative use of social media, I am confident that our Government will address and strengthen the communication needs of an aspirational India and connect with our younger generations.

The National Media Centre is just the latest step in addressing the diverse communication needs of our country in the future. I congratulate the Ministry of Information and Broadcasting on this achievement and urge it to remain at the cutting edge of media innovation.

Sadbhavana Divas , Aug. 20 , 2013

Focus should be on the real sector and not on Rupee : T. C. A. Ranganathan , Chairman & Exim Bank

How do you view the crisis over the current account deficit and the falling rupee?

If you look at it in perspective this is not something that happened suddenly. It was building up over a period of time and in 2010-11 it was pointed out that current account deficit (CAD) was becoming unsustainably large and we need to focus on that.

This CAD is coming on top of our record export growth performance over the last 10-12 years, which is far higher than the world average if you see a period of 2000 to 2013. The world growth has been about 11-12 per cent while Indian exports have grown by a compounded annual growth rate (CAGR) of 20 per cent. So, the export performance has been strong, diversification has been strong and dependence on U.S. and Europe has come down from 60 per cent in 1999-2000 to less than 40 per cent today. Despite this the CAD has been growing.

While exports were growing at a 20 per cent CAGR, imports were growing at 25-28 per cent CAGR. What happened in 1991-92 was that the government deregulated and liberalised a number of sectors and allowed entrepreneurship to bloom. At the same time, it also conducted a huge amount of reforms in the financial sector. However, real sector reforms were not fully focussed on. Indian promoters went for quickest and fastest growth at lowest risk. One set of people went into low or medium technology, where deployment of capital was is not high. Others went to realty and service industries. Very few went into core middle manufacturing, which involves lot of capital, technology imports and tie ups.

So, you don’t have a middle sector in the Indian economy. And these are the real sector issues.

Exports rose 11.6 per cent in July from a year earlier while imports fell. Can this trend be sustained?

A figure of $25 billion of exports in July is okay but it will only take us to a target of $300 billion in the year. But imports are still at around $500 billion. Now exports keep on growing. We are trying to help Indian companies to diversify to other markets and we have carried out huge number of studies about penetration in Latin America and penetration in Africa. Potentially, there is a flow, but increase in capacity is also a challenge, because the scale economies are not there. Second, if you see how our exports are structured, the largest item today we have is the processed petroleum, which is about 18-19 per cent of our exports.

Second largest is gems and jewellery, these two constitute around 36 per cent of our exports. Next big item is agriculture products and it is about 8-9 per cent. After these come engineering, chemicals and textiles, each about 8-9 per cent.

If you see chemicals, there is a growth problem; not enough capacity is getting created. In the case of textiles, we don’t have much of the higher-end apparels, the value-added, superior textiles because those are constrained because of various issues.

In apparels, one of the challenges India faces is that it has not grown at a fast pace. In 2002-03, we used to export significantly higher than what Bangladesh was exporting. In eight years, the equation has completely reversed and now they export apparels worth about two-and-half times of what India exports. This has happened because of lack of attention to real sector issues; the challenges it poses, the constraints, which it imposes on the productive agents of the economy.

How much has the rupee’s tumble helped exports?

Rupee’s behaviour was not out of line compared with other currencies of emerging market economies. This is not because of what is happening in India but aggravated by what has happened because of the U.S. Federal Reserve’s decision to roll back its stimulus programme, which had an effect on the decisions of investors in emerging markets. The second thing was that as U.S. economic prospects revived, the attention which was fully focussed outside the U.S. is now partly converted to U.S. Its return flow and that is impacting.

One must bear in mind that despite whatever growth we achieved in the last 20-odd years India is a very small player in the world scene. Even though our export performance has been very good, our total contribution to world exports is only 1.57 per cent, this percentage is like a tiny boat in an ocean where there is a storm. It will be thrown about more and more.

What we need to do is to get our house in order and do not try to fight it. So the focus should be on the real sector and not on the rupee value. Whatever you may do the value would fluctuate because of the factors outside.

It is not different from what is happening in Brazil, South Africa, Australia and other emerging market countries. They may be slightly more there or slightly less here, that’s all. Normally, depreciating currency should be a source of some sort of relief because it makes your productive economy more competitive in the world markets.

Rupee’s tumble makes exports more affordable but there are two parts to it — one is existing companies, they find it profitable to export. But if those companies have a seller’s advantage then they make higher profits. But if they are not sellers if they are price takers, then they find prices getting bargained down. Many apparel companies are already saying that they are forced to give bigger discounts because of rupee depreciation.

But the long-term impact of rupee depreciation is that there is an inducement to produce in India which was not there earlier. When the rupee was 46 to a dollar and now 62 to a dollar, it is 25 per cent depreciation. So imports have become 25 per cent more expensive. So it would make it more profitable to produce in India. But this thing has to be capitalised upon by sending the right signals to prospective investors, Indian or non-Indian.

But imported inflation is likely to destabilise growth process?

It’s not imported inflation again. Inflation in India is rising again because we did not give enough attention to real economy. And this real economy needs to be tackled. And the source of the inflation is the supply-side issues, as in food inflation. This is despite the fact that we are the largest producers of food and vegetables, but the extent of wastage in India is abnormally high at about 35-40 per cent. Internationally, it’s a huge percentage.

This is because of insufficiency of supply chains, inadequacy of logistics. That’s where the sources of problems are. We need reforms in the real economy.

Second is the imported inflation of oil and third is the inflation in realty sector. Manufactured goods inflation is not too much whether it is in textiles or consumer goods, we don’t hear much about it.

But these three sectors’ dynamics have to be resolved. Inflation in realty is because not enough attention is being paid to B and C class cities being upgraded, it’s again an investment orientation issue.

In the case of petroleum the part of petroleum being imported will always be there. You can’t wish it away. But you have to see world players like Japan or South Korea, who are also completely import-dependent. It doesn’t rattle them. It rattles us because we are not able to pay for it. The only way to pay for that is manufacturing should be promoted. In India, very few states are aggressive in promoting manufacturing. When we deal with manufacturing, state governments are very important. For the real sector, state governments are the large ships. How many states are interested to make manufacturing conducive in their states and trying to create manufacturing jobs. That is the challenge we have to overcome.

As India globalises more and more, we have to fall in line with what other countries are doing. Our laws have to be similar to what other countries have.

India is importing huge amount of gold as demand for gold was shooting up. What are your views?

Gold is also something to which people gave too much importance. If people have got this desire to invest in gold, they will acquire it through legitimate channels or industrial channels. Why do they have desire to invest in gold? That is because of lack of investing or investible avenues. Why? Stock markets are stagnant in the last 5-7 years, because enough new companies are not coming to stock market, that is one thing. The Sensex has hovered around 16000-19000 in the last five years. So, equity investment is out. Mutual fund investment is also equally out. Inflation is there. So where does a person invest?

So, the root of the problem is that we failed to create investing avenues for the people. One thing the government talked about was Inflation Indexed Bonds, which did not fully take off. If inflation indexed products come, there would be some reduction in the demand for gold. That is not talked about by the media.

For many years now, India has relied on FII inflows to fund the CAD. This strategy has made India vulnerable to hot money flows. Shouldn’t India be focusing on encouraging FDI?

I completely agree with you. FDI and greenfield FDI will come when we have a real sector. India is at 132nd place in the World Bank index to do business and this is not a great place to be.

To bring it up, a number of measures have to be undertaken. If they are done, FDI will automatically flow. Until then, successful Indian entrepreneurs would look outside for growth opportunities. That is the challenge we have to face.

Ministry of ST Affair on I-Day 2013

High Level Committee to study Status of ST

PM Dr. Manmohan Singh sets up a High Level Committee to study socio-economic, health and educational status of the tribal communities -

In keeping with the special status accorded to Scheduled Tribes (STs) in the Constitution of India, the Union Government has affirmed its commitment to improving their socioeconomic status and has taken initiatives that encompass policy, programmatic and legislative interventions.

The Government of India, in furtherance of its commitment and with a view to creating conditions that are conducive for the development of tribal communities, has decided to constitute a High Level Committee (HLC) to prepare a position paper on the present socio-economic, health and educational status of STs and suggest a way forward. The HLC shall suggest policy initiatives as well as effective outcome-oriented measures to improve development indicators and strengthen public service delivery to STs and other tribal populations.

The High Level Committee has the following composition:

1. Prof. Virginius Xaxa - Chairman

2. Dr. Usha Ramanathan - Member

3. Dr. Joseph Bara - Member

4. Dr. K.K. Misra - Member

5. Dr. Abhay Bang - Member

6. Ms. Sunila Basant - Member

7. Secretary, M/o Tribal Affairs - Member Secretary

The Terms of reference of the High Level Committee (HLC) are as follows :

• The HLC will prepare a report on the overall socio-economic, health and educational status of the tribal communities of India. The HLC will finalise and present its report within nine months from the date of this notification.

• More specifically, the HLC will:

a) Obtain relevant information from departments/agencies of the Central and State Governments and also conduct an intensive survey of the literature to identify published data, articles and research on relative social, economic, health and educational status of Scheduled Tribes in India at the State, regional and district levels, to address, inter alia, the following questions:-

(i) In which States, Regions, Districts and Blocks do tribal communities of India mostly live ? What changes have been visible in the wake of involuntary displacement and enforced migration?

(ii) What is the geographical pattern of their economic activity, i.e. what do they mostly do for a living in various States, Regions and Districts? In view of rapid urbanization of the country and consequent shrinking of their original habitats, what are the newer avenues of employment and livelihood available to them?

(iii) What is their asset base and income levels relative to other groups across various States and Regions? Have there been changes in the patterns of ownership and productivity of immovable assets of STs? What role does public policy and the legal framework play in facilitating/inhibiting such changes?

(iv) What is the level of their socio-economic development in terms of relevant indicators such as literacy rate, dropout rate, MMR, IMR etc.? How does this compare with other communities in various States and the causes of disparity, if any?

(v) What is their relative share of public and private sector employment? Does it vary across States and what is the pattern of such variation? Is the share in employment in proportion to their population in various States? If not, what are the reasons for their under-representation? What are the steps taken by States/UTs for capacity building and improving employability of Scheduled Tribes? Does this take into account their cultural diversity?

(vi) Do the tribal communities have adequate access to education and health services, municipal infrastructure, bank credit, and other services provided by Government/ public sector entities? How does this compare to access enjoyed by other communities in various States? What is the level of social infrastructure (schools, health centers, ICDS centres etc.) located in areas of tribal concentration in comparison to the general level of such infrastructure in various States? What are the causes of disparity, if any?

(vii) Are there adequate systems and structures for implementation of protective legislations such as the Prevention of Atrocities Act, Panchayats (Extension to Scheduled Areas) Act, Forest Rights Act and Food Security Ordinance 2013 , etc. ? What steps are needed for more effective implementation of these legislations?

(b) Consolidate, collate and analyze the above information/literature to identify areas of intervention by Government to address relevant issues relating to the socioeconomic, health and educational status of the tribal communities.

The above HLC will be provided all possible assistance by all Ministries/ Departments and other bodies under the Government to ensure timely collection of data and information to facilitate their task. All pertinent reports available with the Government on tribal and related issues including the reports of Bhuria Committee, Mungekar Committee and of the National Commission of Scheduled Tribes will be made available to HLC. All existing data (including RGI and NSSO data) and data collected by above mentioned Committees will also be made available to HLC.

The HLC will be located under the aegis of Ministry of Tribal Affairs and will be covered within the definition and explanation of High Level Committees as given in Cabinet Secretariat O.M. No.l/16/1/2000-Cab, dated 15.4.2002.