Forthcoming Budget: 2011-12 Expectations

Reforms

Dr. Prem S. Vashishtha School of Business Studies Sharda University

Main Issues
Inflation. Fiscal Consolidation. Is there a Threat to India Growth Story? Rising Subsidy Burden. FDI in Multi-brand Retail. Infrastructure/Core Sector. Social Sector. Black Money. Incentives to Small Scale Factor. Reviews of SEZ Policy. Implementation of General Sale Tax (GST). Implementation of Direct Tax Code (DTC).

1. INFLATION
According to IMF Indias inflation has high inertia (i.e. once it starts rising; it has a tendency to go up or at least to remain at high level for some years). It needs to be stopped early before it became entrenched. General inflation of 1.5% pa may result due to high growth of 9% pa.
Inflation : Main Components

Food Items: (Onion, fruits & vegetables, milk and edible oil, etc.). The demand for these items is rising partly due to structural factors. (i.e. shift in tastes and preferences due to rising incomes and urbanization). Domestic (fruits, factories, vegetables, milk) Global Factors: (edible oil imports)

Energy: (Mainly crude oil 75 80% of Indias petroleum needs is met with imports) Current crude $111 per barrel. Oil price Futures price $ 97. For 9% GDP growth Oil imports will increase. (if crude prices go beyond $160, very difficult to sustain 9% growth)

 The phenomenon of food inflation is taking place in at least three fast growing BRIC Countries. Brazil China India
Fig: 1

 Its nothing peculiar to India alone. The conditions in all the three countries differ. Hence, strategy for each country to deal with inflation may differ. Knee-jerk reactions are counter-productive (ban on exports and duly cuts are short term measures often not advisable). Crack down on all forms of hoardings (political mileage, adverse business reaction) measures like Good and bad Cholesterol (CEA). What needs to be done to meet the rising demand of fruits, vegetables & milk?
Avoid wastage

(40% waste in horticultural products) develop post harvest technology. Enhance cold chain Cold storage (capacity). Do not intervene in all commodities. Items may disappear from shelves. Attract investment both private and FDI in these areas. This is in addition to desirability of enhancing public investment in creating more cold chain facilities and cold storage. Allow FDI in retail (Fruits, vegetable & milk). FDI is a politically sensitive issue. They would deliver directly to the end-consumer. Farmers will also get better price. Put more investment in rural infrastructure. Link mandis with villages/ farmers.

 Overall Agricultural Growth Scenario Agri Growth 0.4% 2009-10 5.4% 2010-11 If Agri Sector is to grow at 4% pa to maintain 9% + growth, agri must grow at the rate of more than 8% pa. (8.53%) to meet the Plan target. (in this plan average growth has been 2.0% pa.). It is much below the target level.
Table 1: Compound growth rates of area, production and yield (in %)
Crop Total Pulses Foodgrains* Sugarcane Oilseeds Cotton 1980-81 to 1989-90 Area -0.09 -0.23 1.44 1.51 -1.25 Production 1.52 2.85 2.70 5.20 2.80 Yield 1.61 2.74 1.24 2.43 4.10 2000-01 to 2009-10 Area 1.17 0.29 0.77 2.26 2.13 Production 2.61 1.96 0.93 4.82 13.58 Yield 1.64 2.94 0.16 3.79 11.22

 Highly volatile growth rate a matter of worry (although foodgrain growth for 2000-01 to 2000-10 look impressive it is highly volatile)
Need long term solution. Second Green Revolution. High productivity growth needed. High capital formation (technological breakthrough only in cotton due to Bt cotton). Attract private investment in agriculture

Should corporate farming be encouraged? Not a straight forward answer unless it is done on public-private partnership basis and the farmers do not lose ownership of land. Proper framework needed.
Exploit the potential of yield-gap in Eastern India.

Raise investment in the Eastern Sector.

Focus on efficiency of investment especially on the irrigation sector (canal administration), and not just on capital expenditure.

 Reform/Priority Agenda for Agri Sector

Focus on Stability (or minimizing Volatility) in Agricultural Production and Raising Productivity.
Action:

More investment in R&D.

More investment in the Eastern Sector Agri.

Attract private investment (model for public-private partnership in which farmers do not lose ownership Requisite reforms).

Bt Cotton yield break through confined to few (mainly Gujarat) state Encourage states to partner in technological break through R&D important.
Encourage FDI in retail in agri. products - (to bridge the gap between producer price and end-consumer price). Attract investment in cold storage and general storage (warehouse receipt model). Bring pulses and edible oils also under PDS.

2. FISCAL CONSOLIDATION
Fiscal Responsibility and Budget Management Act.(FRBMA) - Mandate to maintain fiscal deficit at 3.0% of GDP.

Financial Crisis 2008-09 (excise duties reduced by 6 percentage - Fiscal deficit rose to 6% points to boost demand in Indian Economy). Last Budget 2009-10 Excise duty again raised. (Ranging from 2 percentage points to 10 percentage points). - Fiscal deficit 5.5% - Revenue deficit 4% GDP.

Finance Commission (FC) recommendation on Fiscal deficit as below: As below, keeping macro-economic stability in view: 2010-115.7% 2011-124.8% 2012-13 4.2%

 What is the achievement?

Ok as per the recommendation of FC. Fiscal deficit as per budget estimates was 5.5%. Now it is only 4.8% of GDP (good amount of money received from Tele auction).

Government Dilemma:
To have fine balance on the trade-off between GROWTH and INFLATION. If 9% Growth (or more) is to be achieved, inflation may go up (as estimated by Economic Survey, Growth spurs 1.5% inflation). Tight money policy may push interest rate cost of capital goes up credit squeeze adverse effect on investment by the Pvt. Sector.

Should stimulus be withdrawn or reduced substantially? PMEAC favours it. It may be withdrawn gradually after watching the impact at each step. Let us see if it is done in the budget.

3. IS THERE A THREAT TO INDIA GROWTH STORY?

Trade deficit on merchandise account (13% approx) leading to unstable current A/c deficit. Danger from rising current A/c deficit See Box.
Why is a large current account deficit a worry? A current account deficit of over 1.5 2% of the GDP is undesirable as the country needs to have stable capital flows to finance such deficit. Otherwise, there could be excessive reliance on foreign borrowings to finance these shortfalls. Reliance on debt beyond this threshold level could push a country into a sovereign debt crisis like the way some European countries are now facing India too was on the brink of a sovereign debt crisis in 1991, but managed to avert a default. How can this be addressed? Promoting policies conductive to stable long-term capital flows is one option. That would mean primacy to foreign direct investment and non debt creating inflows. Policies which could encourage more remittance and other private transfers will also help besides promoting merchandise and services exports.
[Source: Economic Advisory Council: (See ET, Feb.24, 2001, p.1)]

Fig.2

 Promote policies to stabilize long term capital flow (e.g. FDI). (Inflow without creating debt). Imports rising without commensurate growth in exports a matter of concern. Have clear strategy to reduce current A/c Deficit. Push exports substantially (double the exports in 3 years; otherwise payment difficulty will emerge). Even 22% export growth would leave a balance of trade (BOT) of 1213% of GDP. Focus on High value exports. Search for new markets. Incorporate new technologies. (See what is done in the Budget)

4. RISING BURDEN OF SUBSIDY

A. Petroleum Subsidy
Crude oil imports (upto 80% dependent on imports). Subsidy

Subsidy sharing mechanism: 1/3 to be borne by the Public Sector up-stream oil marketing companies (ONCs): rest by the Central Government.
Subsidy on petroleum has gone upto Rs.75,000 crore this fiscal. Hence, Government share is about Rs.50,000 crore. Government not planning to issue bonds to ONCs provision in budget is to made. Rise in price of crude oil increase in subsidy deterioration in balance of payment of net oil importing countries downwards presser on exchange rates. Diesel Kerosene Rs.10.74/ltr. Rs.20.56/Ltr. Rs.376/ Cylinder of 14.21/ Kg. Rs.2.5/Ltr. (in spite of decontrol of price entire price hike not passed on to the consumer).

Loss to ONCs

LPG Cylinder Petrol -

 Loss to state-owned oil marketing companies: more than 1 lac crore. Issues? Raising the price of these items? (Economics vs. Politics and Populism). Link it with inflation. B. Food Subsidy through PDS:
40 TO 55% grain meant for poor is diverted. Food Security Act would need much more foodgrains and high subsidy (approx. 65 million tones of foodgrains would need to be procured). If it is implemented through PDS: it would lead to a massive leakage and subsidy burden. Extreme shortage of storage capacity. PDS needs drastic reform.

Suggested Measures:

Direct cash transfer to poor (the amount of subsidy).

Use of SMART CARD. (When UID comes in operation, it may be of tremendous help to plug leakage).

 What do you do until the technology of SMART CARD/UID is implemented? Problem in areas with poor infrastructure, without bank or even post office facility.

Food Coupons? (try Bihar experiment Reform awaited).

Food coupons are printed with price and the entitlement. Food coupons to be submitted to the PDS dealer only after gapping grains/ration. PDS dealer can claim his quota from state food corporation only after submitting the coupons received from the customers. Diversion of quota for poor can be checked/reduced. General awareness among the poor of their entitlement. Correct identification of poor still remains. Committee at the village level has reduced the identification error reduced the chances of error in exclusion and inclusion

5. FDI IN MULTI-BRAND RETAIL

Resent situation:
100% FDI in cash and carry wholesale trading. Up to 51% FDI is single-brand retail since 2006. (At present FDI in retail is just 0.21% of total FDI). Allow FDI in multi-brand retail in a phased manner. Begin with metros. Give incentive to existing retail shops to modernizehelp farmers.

Advantage:
To bring technical-know how to set up efficient supply chain. Act as a model of development.
(See what is in the Budget 2011-12)

MNC Retailers Waiting in Queue to Enter India. $ 25 billion: size of organized retail whereas Indian retail sector is estimated at $500 billion. Arguments Against FDI: Deep discount sales by foreign retailers will put at risk the livelihoods of kirana stores. Retail FDI Status: India allows 100% foreign investment in wholesale big and 51% FDI in single brand retail. (Source: ET, 25.02.2011) Note that some research findings do not support the fear that kirana stores would necessarily be at disadvantage in small towns and villages. Notwithstanding the merits of FDI in retail, it remains politically sensitive issue. Let us see what provision is made in the budget.

6. INFRASTRUCTURE/CORE SECTOR
Coal Sector lagging far behind: 80% of Indias power generation uses coal as fuel. Why low growth in coal production? Environmental regulation? (Forest areas).
Table 2: Infrastructure Sectors Drag on Growth Percentage Growth: Core Industries

2007-08 Power Coal Freight Port Cargo Cement Crude Oil Natural Gas 6.3 6 9 12 7.8 0.4 2.1

2008-09 2.5 8.2 4.9 2.2 7.6 1.8 1.4

2009-10 6.8 8 6.6 5.7 10.1 0.5 44.8

2010-11 (Apr-Nov) 4.6 0.6 3.3 0.8 4.1 11.5 19.8

 Under performance in road sector: Target - 20 km play or 7000 km a year. Achievement - 25%
Why low achievement?
One reason Developers claim up front 40% of project cost as subsidy from Government. Developers take interests in the beginning of the project make huge profit do not take interest in project later. Has the Public-Private partnership model failed? If nothing wrong with the contract agreement? What kind of reform needed?

Power Generation:
Power generation growth Demand for Power growth (Widening gap -) : : 4.0% 6.0%

 Some States (Gujarat, MP, Maharashtra, West Bengal) are deficient; other laggards. Some states heavily subsidize electricity to farmers for lifting of ground water (Punjab..), state electricity boards in deficit little or no money for investment. Transmission Losses (including theft still very high 30 35%)

Reform Required:
Get electricity pricing right. Improve regulation and distribution. Create competition in power supply.

Financing of Infrastructure:
12th Plan will need investment of $ 1 trillion for infrastructure. Private Sector would contribute $500 million (Rs.4,50,000 crores). How about the rest? FDI in infrastructure has declined. India not rated high on investment destination.

Table 3: Cash Flow into Infrastructure Sectors

2006-07 Total Bank Credit Power Telecom Roads & Ports Others FDI ($ million) 30286 12994 1164 5352 10776 NA 2007-08 62220 21947 18663 9429 12179 5156.8 2008-09 64636 29372 12044 12584 10658 5386.1 2009-10 109916 63394 9036 26509 10956 5659.6 (Rs. Crore) 2010-11 (Apr-Nov) 102301 52502 38367 8790 2643 3338.2

Bank Credit into infrastructure has been robust with power getting the biggest share. FDI inflows slowed down compared to the same period in the previous year.

Infrastructure Debt Find. (as suggested by the Planning Commission) Infrastructure Debt Fund: Rs.50,000 crores (for long term debt requirement of infrastructure projects). Public-private partnership. Infrastructure fund will land only to projects that have started commercial operations and create a secondary market for debt bonds. Will Government allow External Commercial Borrowings (ECB) by the Infrastructure and Asset Finance Companies?

7. SOCIAL SECTOR
(Reap the Benefits of Demographic Dividend) VISION
Focus on Health Education Poverty Employment
Reaping of Demographic Dividend Growth Resource Generation for infrastructure and high outlay on social sector

(Discuss with view of Prof. Amartya Sen, Prof. Jagdish Bhagwatis and Prof. Arvind Panagariah)

Table 4: Expenditure on Social Sector Education Health Others Total Expenditure on Social Sector 2006-07 2.67 1.21 1.69 5.57 2007-08 2.59 1.27 2.05 5.91 2008-09 2.89 1.32 2.6 6.81 2009-10 3.23 1.45 2.56 7.24 2010-11 (BE) 2.98 1.27 2.38 6.63

Public Private Partnership in higher education.

(Govt. could still maintain regulation). Reform details?

Improve MGNREGA.
(Mahatma Gandhi National Rural Employment Guarantee Act.)

Shift in emphasis in favour of permanent asset building and infrastructure development. Reduce transaction costs. Extend the scheme to urban areas also. Significant Interventions Implementation of MGNREGA should not be at the cost of labour availability to the agricultural sector (discuss on research finding from field survey). Seek convergence with other schemes of employment generation and poverty alleviation. Plethora of Schemes. This would avoid duplication and leakage

8. BLACK MONEY
Amnesty: OECD countries experience shows that amnesty helps bring out money from tax evaders. Offer amnesty only to those who accumulated money by evading taxes; rest should be treated as criminal offence. Global Level: Tax Information Exchange Agreements (TIEAs) and bilateral agreements. G-20 is discussing it.

Land Market: Land transactions generate black money. Reduce stamp duty. Encourages registration at market price. If services are to be provided by the Govt. for the poor, let it be subsidized

9. INCENTIVES TO SMALL SCALE FACTOR (They demand level playing field)

10. REVIEWS OF SEZ POLICY. (Facility being mis-utilized scrutiny required)

11. IMPLEMENTATION OF GENERAL SALES TAX (GST). 12. IMPLEMENTATION OF DIRECT TAX CODE (DTC).

THANK YOU