India has witnessed roughly 10% annual inflation in retail prices for the last three years. That would mean the same consumption basket costs about 33% higher now as compared to three years ago. This should have caused poor people to starve and some of them to commit suicide, thefts, lootings and crimes to increase sharply, low middle-class households to come out on street for continuous protest rallies and governments to arrest hoarders and release stocks of essential commodities to poor people at subsidized prices. Nothing of that sort has happened so far. There have been occasional leftist political party meetings where they blamed the Union Government for the high and continuing inflation. The major opposition party is just announced anti-inflation protest rallies in different parts of the country just as the five states go to assembly elections in the next two months. There have been sporadic articles in newspapers and glossy weeklies decrying the inflation and highlight the sufferings of the common people. The TV channels still find their regular entertainment programs and other news analysis programs getting higher TRP than coverage of inflation news and stories. In sum, there is no sign yet for serious anti-inflationary agitation by the common people gathering momentum. This appears to be an amazingly higher level of tolerance on the part of the people – a behavior no one seems to be interested in explaining...
Four candidates may be willing to accept and share the responsibility of shaping this odd common people’s insensitivity to sustained high inflation rates. But politicians and economists are unwilling to give them any credit for shaping common people’s neglect of the inflation issue. These candidates are: (a) the common people have been able to increase their money incomes adequately enough to approximate the price inflation rate and the inherent money illusion among most people, (b) they have been able to alter their consumption basket in a manner that the revised basket is just about equally satisfying but costs significantly less than the original consumption basket, (c) the political parties have been so busy doing other things in the Parliament and outside (including stalling the sessions) to deal with corruption, with court cases and judicial activism that affect political parties, with fear/ threat of terrorist attacks and with intra-party squabbles, and finally (d) common people have realized that the stronger the anti-inflationary agitations and rallies, the lower is the likelihood of inflation rate coming down substantially and quickly agitations: rather, such agitations may only stoke the inflation further instead.
Take the above candidates in the reverse order now to assess their claim. Take candidate (d) first: it would be difficult to find real evidence in the last five decades of strong anti-inflationary agitations and protests really resulting in lowering inflation in any significant way. People may now be more willing to strengthen their capacity to live with inflation rather than wasting time on agitations. Fortunately for them candidate (c) has allowed them to concentrate on this strategy: It is easy to notice the contribution of the political parties to help the people increase the tolerance of inflation... They could correctly assess that the political leaders could gather more popularity and greater publicity by debating issues of corruption, secularism and terrorism and by engaging in intra-party fight for dominance than by organizing anti-inflationary public agitations against the Union Government. They could also sense that the common people are not yet really complaining because till now the first two candidates have also played a considerable part to enhance the people’s ability to endure high inflation in prices. The opposition political parties may also been afraid that anti-inflationary agitation can also boomerang against them as they are running Governments in States who can be accused of not taking those of the anti-inflationary measures that State Governments themselves can take. For example, some State Governments are not willing to reduce the duties they levy on transportation, transport fuel and essential consumption goods as also not willing to allow more competition in the trade in food items.
Now, explore candidate (b). Are common people continuously changing the composition of their consumption baskets? As prices rise along with rise in money incomes, households may have been trying to experiment with addition of new items in the basket giving up some consumption of existing items. For example, people may be spending less on physical travels and letters as communication over mobile phone has become drastically cheaper. When onion prices shot up, many people may have just skipped onions for a month or so. When vegetable prices rose sharply, they may have reallocated their consumption of vegetable Kilograms in favor of the cheaper and lighter ones that are filling but not as much tasty. More energy efficient, durable lamps are being used to save on electricity. Households may be saving on consumption of LPG to save on cooking time and allocate more time for the entertainment channels on the TV. Certain things people consume in terms of numbers like two pieces of sweat meats or two pieces of cut potatoes in the vegetable curry or two chapattis – the individual continue to eat them but they are now of smaller sizes. The distinction between rich man’s vegetables / fish and poor man’s vegetables/ fish is fast disappearing: households now have shifted in favor of a larger variety. Bengalis now think paneer massala a great dish and alu-pataler curry is not a daily must now. Many have shifted from Rui Fish to Katla Fish and as Katla’s have become costlier, some other fish have become relatively cheap. Change in relative prices resulting from greater play of market forces in different seasons are being used to minimize the impact of inflation through continuous changes in consumption basket. Many people have shifted to tea without milk. Medicine prices and doctor’s fees have risen: people are just going to chemist shops and buying OTC medicines - saving on doctor’s fees. While in terms of nutrition and volume the food basket has shrunk but people may be enjoying greater satisfaction from the increased variety. There is no point in giving more illustrations. Everyone knows how they are changing the composition of consumption basket so often in response to both rise in the average prices as also the change in relative prices of substitutes and complementary items.
But candidate (b) could not have played its role effectively in the absence of candidate (a). How far has money incomes increased? For the Government pensioners, pensions have increased substantially – they are even saving more than what they did when they were working. Workers in many organised sector across industries including banking, insurance and other financial services and bulk of the teachers and government funded education service employees, have their salaries indexed partly or fully to inflation. The 6 lakh+ household with employment linkage with the Indian Railways have got an average pay rise of 95% in 2010.The MPs got about a 100% rise in their incomes. On their savings, they have been earning 7-9% interest from banks and post office fixed deposits. The effective rates of tax on their incomes have gone down. The people covered by the Rural Employment guarantee Scheme have seen an increase of 16%-25% increase in their household incomes. Those who are not covered under the 100 days guaranteed employment are also benefited by 16%-20% rise in wage rates as a fall out of the Scheme and continued high level of activity in housing and infrastructure construction. The workers in the entertainment industry, especially the artists/ actors/ anchors, journalists have seen a substantive jump in their earnings - ther are mostly from very low and middle income households and have shifted to higher middle income brackets. Many of the high-salary IT and IT-enables Service sector's young employees come from poor families and they have lifted their households from wretched conditions and have been able to protect their households from the adverse effect of inflation.
Despite the high official rate of unemployment at over 8%, the number of employees per poor household has increased. The mid-day meals in schools despite the inefficiency and leakages contribute to additional income spent on food. The rickshaw pullers have been able to get at least 16% rise in the rates during the last three years. The barbers have got at least 20% increase in hair-cut charges. The man who pumps air into your car tires has got a rate hike of at least 30%. The electricians and plumbers who serve high/ middle income households/ offices in cities and towns have increased their rates by 25%-40%. Domestic help wage rates have increased substantially, Car drivers have been able to get a hike of 25%-33% rise in their emoluments in the last three years. In many rural areas, women have formed self-help groups to raise their household incomes through various kinds of activities like commercial farming of flowers in high demand, animal husbandry and poultry, etc. The constancy in railway fares and the host of concessions in the system as also the near constancy of LPG are effectively a rise in real incomes when the general price level is rising. Bicycles for girls students, more and speedier trains, better and wider network of roads helps improve the overall productivity of the poor people as they get more time to earn a little extra. With rising money incomes, middle class develop a money illusion and reduce the percentage allocation to food and start buying manufactured products whose inflation rate has been around 5%. True, there would still be households whose income have remained virtually constant and they are the worst sufferers. Where are those people located and how the government is reaching them subsidies is not known. There is no transparency or clarity heare. Inclusive growth requires direct cash subsidy to protect from the adverse effect of price inflation, those with fixed incomes at low levels. Where are they and how are they dealing with inflation? No one specifies them: only the middle income people with various opportunites may be complaining.
If the GDP grows at 8%, an inflation rate of 10% is more tolerable than when GDP grows at a 4% or 5%. Should India give priority to raising real GDP and employment growth or to reducing inflation rate to 5%? Should India try to find out what really has happened: with the massive subsidies on fuel (cooking gas, kerosene, transport) and redistribution on income and wealth through rural employment guarantee and loan waivers, has the post-tax, post-subsidy real income distribution has protected the poor from the high rate of inflation? India will not consider these at all. Because Indian economists and policymakers never question their age old beliefs – effective real incomes are always distributed in progressively more skewed manner when both GDP and inflation rates are high. That is the most amusing part of economics and economists in India.
Sunday, March 13, 2011
Friday, March 4, 2011
Dear, Competitive Vegetables
Worldwide, non-vegetarians are turning vegetarians in increasing numbers. Vegetables are turning very dear because of this and also because some non-vegetarians are eating more of meat. Urban Indian are complaining of galloping, multifold rise in the prices of vegetables even as the Finance Minister of India has lamented the other day that Indians lost one winter season of fresh vegetables with decline in prices. No one seems to be able to explain why and how poor vegetables all of a sudden and rapidly became rich, high net worth articles in terms of market valuation. Even fish and mutton or eggs are unable to compete with vegetables and fruits in the competitive race to secure high valuations in the market. A Kilogram of vegetable or a dozen of some fruits now command more premium than a share of many listed companies. Just find out how much it costs to get a dozen of lemons or a kilo of green chilies.
Do not worry. Gracefully accept the emerging future: high priced vegetables are here to stay. Cereals, pulses, cooking oil, fuel oil, meat, eight-hours of unskilled work effort cannot become dearer keeping the vegetables and fruits lagging far behind. Do not expect vegetables and fruits to come within your reach: you have to raise your income to reach them. Or, cut your expenses on mobile phone calls, entertainment, electricity and fancy wear to eat vegetables and fruits in quantities you consumed before. Do not waste vegetables: if possible, grow them in your roof-tops, terrace gardens, balconies and backyards (if you still have them).
Government will be able to do very little to bring vegetables back to their poor status. To know the reality facing you ahead, read on.
Adverse weather conditions like absence of rainfall affected vegetable crops in some pockets. This may be a small reason why vegetable prices have gone up and remain at higher levels than a year ago. Future weather is unlikely to be adverse for vegetables every year.
Vegetables are now in intensifying competing for space to grow: they need higher prices to retain space, survive and feed us. Land for vegetable farming is getting progressively scarce as more remunerative alternative uses are taking land away from vegetable crops: flowers, poultry, fodder for cattle, residential houses, roads, rail tracks, factories, hospitals, schools, government offices are more remunerative to snatch away land from vegetables. True, all lands are not suitable for vegetables: but those lands where vegetables grew so long are being attracted away by flowers and other alternative uses. Prices have to rise to get vegetables back their competitiveness relative to alternative uses of land. But this may be just one reason why vegetables would be dearer to you.
The larger an urban or city area grows, the larger is the amount of vegetables that the area demands but greater is the distance from which vegetables have to be transported to the urban kitchens. Greater distance means higher transport costs and there is no way the World can avoid secular rise in petrol, gas and diesel used as transportation fuel. This again is a small reason, but a permanent one.
The ‘marketable surplus’ from small vegetable growers are going to dwindle. The wage rated for rural labor is on secular rise, especially after the Rural Employment Guarantee scheme has come into existence. The wage rate under this scheme is now indexed to inflation. The poor households who now be having higher and higher money incomes will improve their food in take including the intake of vegetables, thereby leaving a smaller surplus to be sold in the market. But this is also a small reason and may turn out be permanent. Who would mind if the poor people in the interior villages with some access to land to grow vegetables for their own consumption, have cheaper vegetable-based square meals a day, but people-friendly city/ town-based politicians will organize demonstrations against rising prices of vegetables hurting the millions of poor people in the villages.
Vegetables are perishable products in general, although some can be kept in cold storages for long (cabbages and potato for example) and refrigerated for a few days. The use of these facilities will reduce wastages as also even out the supplies over a longer time. This will in turn reduce the difference between off-season and peak season prices. But carrying and refrigeration costs will add to the value of vegetables that has to borne by the consumers.
Vegetables can be air-freighted at fairly low cost from Bangladesh, Thailand, Burma and Malaysia. This will increase supplies. But who will organize this. There does not seem to be traders with this kind of entrepreneurial ability. The customers authority and politicians out to protect large (not income tax paying) domestic vegetable traders transacting only in cash. Even if they take up the job of importing vegetables, the local politicians will ensure that only a few selected traders control the wholesale trade in their localities. So, they will keep their margins high because of the absence of competitive markets. And, they will increase their margins whenever the local politicians increase the unofficial tax/ royalty they extract from the traders. Vegetable retail chains like Reliance, Spencer will not be able to compete with them. Politicians will never allow entry of corporate houses to invest in a big way in vegetable trade and retail chains and let the country gain from higher productivity, lower wastage, greater preservation and lower costs that they could achieve in a competitive vegetable market regime. The existing localized trader oligopolies will continue to color the vegetables green with harmful chemicals causing injury to the health of the citizens. Even such vegetables will have to be bought at higher prices. This reason for vegetables to become dearer may not be very small and almost certain to be permanent given the huge number of locality level politicians earning income-tax free income out of the large difference between wholesale/ farm-gate price and retail price (Spectrum and Games provide opportunities once in a while: vegetable trade provides a permanent daily opportunity throughout India to distribute huge black income in cash for millions of political-administrative mafia.
So, start growing some bonsai vegetables yourself in your drawing rooms to enjoy viewing them as you eat your dinner of cereals and pulses.
Do not worry. Gracefully accept the emerging future: high priced vegetables are here to stay. Cereals, pulses, cooking oil, fuel oil, meat, eight-hours of unskilled work effort cannot become dearer keeping the vegetables and fruits lagging far behind. Do not expect vegetables and fruits to come within your reach: you have to raise your income to reach them. Or, cut your expenses on mobile phone calls, entertainment, electricity and fancy wear to eat vegetables and fruits in quantities you consumed before. Do not waste vegetables: if possible, grow them in your roof-tops, terrace gardens, balconies and backyards (if you still have them).
Government will be able to do very little to bring vegetables back to their poor status. To know the reality facing you ahead, read on.
Adverse weather conditions like absence of rainfall affected vegetable crops in some pockets. This may be a small reason why vegetable prices have gone up and remain at higher levels than a year ago. Future weather is unlikely to be adverse for vegetables every year.
Vegetables are now in intensifying competing for space to grow: they need higher prices to retain space, survive and feed us. Land for vegetable farming is getting progressively scarce as more remunerative alternative uses are taking land away from vegetable crops: flowers, poultry, fodder for cattle, residential houses, roads, rail tracks, factories, hospitals, schools, government offices are more remunerative to snatch away land from vegetables. True, all lands are not suitable for vegetables: but those lands where vegetables grew so long are being attracted away by flowers and other alternative uses. Prices have to rise to get vegetables back their competitiveness relative to alternative uses of land. But this may be just one reason why vegetables would be dearer to you.
The larger an urban or city area grows, the larger is the amount of vegetables that the area demands but greater is the distance from which vegetables have to be transported to the urban kitchens. Greater distance means higher transport costs and there is no way the World can avoid secular rise in petrol, gas and diesel used as transportation fuel. This again is a small reason, but a permanent one.
The ‘marketable surplus’ from small vegetable growers are going to dwindle. The wage rated for rural labor is on secular rise, especially after the Rural Employment Guarantee scheme has come into existence. The wage rate under this scheme is now indexed to inflation. The poor households who now be having higher and higher money incomes will improve their food in take including the intake of vegetables, thereby leaving a smaller surplus to be sold in the market. But this is also a small reason and may turn out be permanent. Who would mind if the poor people in the interior villages with some access to land to grow vegetables for their own consumption, have cheaper vegetable-based square meals a day, but people-friendly city/ town-based politicians will organize demonstrations against rising prices of vegetables hurting the millions of poor people in the villages.
Vegetables are perishable products in general, although some can be kept in cold storages for long (cabbages and potato for example) and refrigerated for a few days. The use of these facilities will reduce wastages as also even out the supplies over a longer time. This will in turn reduce the difference between off-season and peak season prices. But carrying and refrigeration costs will add to the value of vegetables that has to borne by the consumers.
Vegetables can be air-freighted at fairly low cost from Bangladesh, Thailand, Burma and Malaysia. This will increase supplies. But who will organize this. There does not seem to be traders with this kind of entrepreneurial ability. The customers authority and politicians out to protect large (not income tax paying) domestic vegetable traders transacting only in cash. Even if they take up the job of importing vegetables, the local politicians will ensure that only a few selected traders control the wholesale trade in their localities. So, they will keep their margins high because of the absence of competitive markets. And, they will increase their margins whenever the local politicians increase the unofficial tax/ royalty they extract from the traders. Vegetable retail chains like Reliance, Spencer will not be able to compete with them. Politicians will never allow entry of corporate houses to invest in a big way in vegetable trade and retail chains and let the country gain from higher productivity, lower wastage, greater preservation and lower costs that they could achieve in a competitive vegetable market regime. The existing localized trader oligopolies will continue to color the vegetables green with harmful chemicals causing injury to the health of the citizens. Even such vegetables will have to be bought at higher prices. This reason for vegetables to become dearer may not be very small and almost certain to be permanent given the huge number of locality level politicians earning income-tax free income out of the large difference between wholesale/ farm-gate price and retail price (Spectrum and Games provide opportunities once in a while: vegetable trade provides a permanent daily opportunity throughout India to distribute huge black income in cash for millions of political-administrative mafia.
So, start growing some bonsai vegetables yourself in your drawing rooms to enjoy viewing them as you eat your dinner of cereals and pulses.
Wednesday, March 2, 2011
Sparkling Economy Imparts Confidence to Public Finances
The Economic Survey and the Union Budget for 2011-12 were presented to the Indian Parliament on 25th and 28th of February 2011. The Survey confirmed the buoyancy in the economy that was reflected in the economic data released from time to time in the last few months. The Government stimulus in the 2008 and 2009 appeared to have worked and the growth of output and employment has been strong in 2010-11 (April-March). The pessimists, especially the leftists and communists, who had predicted in 2008 huge job losses in India following the World’s Financial Crisis and Great Recession have now turned coat to say that fortunately they had obstructed, through their clout in the Parliament, India from further steps to globalize and liberalize markets and saved the country from disaster. The leftists and communists are just like that they change arguments to suit their need to blame others and take credit for good things as the material conditions change over time: the reason of course is that they have to show the smartness of their poor brains and lack of understanding as to how economies function in reality. Other politicians are generally equally poor in understanding economic dynamics, but they generally speak and write based on the advice the gather from the few available economists who understand economics.
Returning to more than 9% growth trajectory
With GDP growing at 8.6% in 10-11 on top of an 8 % increase in the previous year, agriculture posting 5.4 % growth, industry 8.1% and services 9.3%, the Finance Minister expects the GDP to grow at 9.6 % in 2011-12 (rate achieved in 2006-07). This seems a reasonable estimate and speaks for the inherent strength of the economy after the liberalization process began in 1991 and the Government had to stop interfering in production, capacity and price decisions in most spheres. The economic performance of the last two decades has been on the average far superior than any of the previous four decades of Government command and control regime. The rates of savings exceeded 30% and investment rate of 35% or more during the last few years – something that the command and control regime never succeeded in achieving.
Dream Showers of Revenues Pouring in
The Exports grew at a faster rate than imports in 2010-11. Tax revenues are just pouring in (revised estimate of net tax receipts for the Centre is about 28% higher than the actual of 2009-10) for 2010-11 like heavy rains to allow progressively much larger amounts of public money for ruling politicians and ministers to spend away in the name of financial inclusion, rural development, backward area development, infrastructure development, education, health care, unemployment guarantee, pensions, salaries to government employees, sports, culture – just as rich country monarchs used to do before democracy spread through out the World. The politicians are all happy except when they are in the Opposition or when as rulers they think they try dictating the economy to behave as per their wishes and the economy with no ears does not listen to them.
Inflation: Challenge to Endure?
But the Finance Minister this time has a few so-called challenges to deal with as well. The first and foremost was the high rate of inflation of close to 10%, though it has come down from 20% a year ago. He also finds it unacceptable that the differences between wholesale and retail prices and between markets in different parts of the country are so high to hurt the interests of both the producers and consumers, though he can do only little to narrow these gaps to acceptable levels: much depend how the active support of the governments in various States. He knows that that Government can do very little in substantially reducing inflation rate in the short to medium term: if the Govt. had effective powers, the inflation would not have been high in the first place. He also knows that the halving of the inflation rate in the past twelve months was more to with the dynamics of the market rather than fiscal or monetary policy which are largely a kind of placebo pills. So, with all his wisdom, experience and maturity gained from long association with public finances over the past 40 years, he did what was relevant and possible. First, express his confidence that inflation rate in 2011-12 would be much lower than in the previous year. Second, expand and/ or promote the expansion of storage capacity of food grains so that if required he could release them to stop food inflation from rising (although he knows that building up a huge stock in the last two years had also made its contribution to rise in food-grain prices. Third, take measures to raise productivity and production of vegetables, nutrient-intensive cereals, palm oil much more intensively in the past to strengthen the resilience of food supply. He knew that in the Budget he can argue for a policy for large-scale commercial farming to raise production and productivity and allow the Opposition parties to stall the Parliamentary activities. Fourth, he did not reduce the duties on petrol and diesel, keeping the option for later days if the oil prices in the international market increase further from $110/barrel as of end-February. Fifth, he tried to give some relief to the common people: (a) inflation indexing the daily wage rate for BPL workers under the Mahatma Gandhi Rural Employment Guarantee Scheme (this should in turn increase the wage rate of unskilled workers outside BPL category (it is another matter that this itself will cause vegetable inflation a little with surplus vegetable available outside rural areas will continue to get depleted (unless higher prices leads to higher productivity), (b) a relief of about Rs3 per day on income tax in general and Rs. 6 per day for income tax payers above 60 but with income in excess of Rs. 2 lakhs per year (slightly higher for those above 80 years of age) and (c) leave the fate of those who do not come into taxable range income depend on the rise in market wage rates. Sixth, he trusts that the Reserve Bank of India will be, as usual, alert at tightening monetary policy without affecting the growth of credit for productive purposes, thereby contributing to curbing inflation rate. And, finally, being a devout Brahmin worshiper, he prays to both, Indra - the God of Rains and to Lakshmi - the Goddess of Wealth to bless the country.
It is worth appreciating the rationale of inflation controlling policy of the Finance Minister. The Chief Economic Adviser has spoken about this in simple economics: "In controlling inflation at times what is needed is not more action by government but less." He illustrated as follows: for moving food from farm gates to retail outlets, licencing APMC Acts and octroi checks are applicable and these prevent new players and small farmers to bring their goods directly to the urban markets. Therefore, governments should get out of these control mechanism to allow easier movement of food to let retail prices fall as competiton among food traders intensify. The proposed vegetable clusters around urban centres would provide incentives to increase productivity closer to cities, provided all current impediments for vegetables to move easily to reach the cities. Trying to bring down prices by diktat didnot work in east-European nations and the erstwhile Soviet Union, where extensive price controls were tried: prices were low but virtually no goods were sold at those prices with people queuing up outside shops amidst acute shortages. (http://businessworld.in/bw/2011_03_05_Dont_Watch_Budget_Like_A_Cricket_Match.html)
Deficit Reduction: Easy with Buoyant Revenues
His second challenge was to reducing government spending profligacy to a level where fiscal deficit can go down as percentage to GDP. He has done this well. He has projected total expenditure for 2011-12 to grow by just 40,000 crore, a mere 3% increase over the revised estimates of 2010-11, but keeps the Capital receipts stagnant and plans to draw down cash balances by Rs. 20,000 crore. In a Budget size of Rs 12. 6 crores – Rs 60,000 crore is relatively small. And, yet allocates 24% higher to Education, 20% higher to Heath Care, 23% higher to Infrastructure and 15% higher to Women and Child Welfare. Where did he cut or curb expenditures then?
Once the fiscal deficit target is set, estimating budget receipts and expenditures becomes an easy task, reflected emphasis on containing the extent of profligacy in expenditure and some prudence diversification of risk of going wrong across various items of revenue estimates. Setting a Budgeted Fiscal Deficit in absolute terms for 2011-12 at slightly less than the Actual in 2009-10 and a mere Rs12,000 crore higher that the Budget estimates for 2010-11 makes a fiscal deficit to GDP ratio of 4.5 % looks easily achievable under normal circumstances. He has budgeted for an 18.5% growth in Gross Tax Revenues as against the estimate of 26% growth in 1010-11 over the actuals in 2009-10. For Net tax revenues, he has budgeted 17.9% rise against previous year's revised estimate of 23.%5. The over all cushion of about 7% points is large enough to withstand shocks. He has been conservative in assuming a growth in customs duty revenue growth of 15% (Rs20000 Crore) against the revised estimates of 58% growth (Rs.48000 Crore) in the previous year. In respect of Excise duty also, he assumes a lower growth of 15% or Rs 27000 crore (last year’s 33% or Rs34000 crore). In respect of Corporate Tax and Service Tax, he assumes the same annual growth as in last year (21% and 18% respectively). On the other hand, he assumes a 15.4% growth in Income taxes as against 11.9 % in the previous fiscal). In case some thing goes wrong on the downside, something may go wrong in the upside and the overall estimate fiscal deficit percentage may still be achieved. He must have cross-checked the reasonability of his assumption: the overall growth rate in tax revenues would be a real income growth of 9% plus price increase of 7% plus 2.5 % for broadening of base, better tax compliance and windfalls less relief’s granted this Budget.
Challenge of Legislation: Leave it to the Opposition
Corporate Sector should happily claim and tell the leftist politicians that they directly contribute to the Gross Tax Revenues to the extent of 38%-39%, besides taking a large burden of indirect taxes (which together contribute much less than the direct taxes). The rich people should also claim proudly that they contribute as Income Tax much more than Customs Revenue or the Excise Revenue and also contribute a large part of the burden of the indirect taxes. This should help them meet the BJP and Leftists to convince them to help the Finance Minister to meet his last challenge: the challenge of getting all reform legislation passed in the Parliament as soon as possible. The list is quite big: the dozen includes
The Companies Act Amendment, Goods & Services Act, Direct Tax Code, Insurance Laws (Amendment) Bill, Life Insurance Corporation (Amendment) Bill, revised Pension Fund Regulatory and Development Authority Bill, Banking Laws Amendment Bill, Bill on Factoring and Assignment of Receivables, State Bank of India (Subsidiary Banks Laws) Amendment Bill, Indian Stamp Act ammendmentRDBFI Act Amendment and SARFAESI Act and many of these are pending for quite a few years.
Beyond Challages
As an ardent believer of dominant Government in economic life, the Finance Minister on his own and the Ruling Government is taking many measures to enhance the efficiency of tax administration, improve performance of government department, prompt delivery of service to tax payers. He also announced government’s five fold-strategy to curb corruption including a detailed review of the systems of procurement, discretionary powers of ministers to enhance transparency and better governance of the Government as an organization. He also refrained from too much tweaking of the excise, customs and service duty/ tax rates apart from making the system move towards the objectives of achieving Asean levels, reduction in number of rates, withdrawal of ghosts of concessions and conformity with the requirement of GST. He has also be soon introducing direct cash subsidy to food purchased by BPL households from the market instead of continuing with the inherently inefficient, wasteful and corrupt public distribution system. The Chief Economic Adviser, Kaushik Basu, has explained the logic of smal, small pieces of efficiency enhancing reforms in simple economics. "The system proposed in this budget, and to be worked out by the Nandan Nilekani committee, will allow us to hand out a smart card or kerosene coupon to the poor. The poor will then use this to buy kerosene from the market at market price. The poor still gets the subsidy but since they pay the shopkeeper the full price for kerosene, the shopkeeper has no incentive to turn the poor buyer away and sell the kerosene elsewhere. A huge amount of the leakage can be checked by this new mechanism." He also gave another example of improved governance proposed in the budget. "Indian exporters cannot compete with exporters from China and Singapore, not so much because of the prices and exchange rates but because our customs procedures are so complex and time consuming. Sending goods from the factory gate in India to the New York store takes about double the time that it takes from a Chinese factory gate. The proposed self-assessment for customs announced in this year’s budget will enable exporters to save a huge amount of time. The system will run on trust with a few traders being randomly picked and scrutinised. This increased efficiency can have a dramatic effect on our exports and the current account deficit." He also demolishes the usual foolish arguments of the adminstrative raj in trade system. All exporters and importers may not be totally honest. But random checks and severe punishments to the guilty of dishonesty, would be incentive enough to be honest (the American income tax system is run entirely on the basis of random checks} The poosibility of bribing out of punishment will still be there as it is now. The self assessment system with custms offices available for clearance round the clock, instead of fised working hours now, would speed up the process of trade and contribute to competitiveness of Indian businesses as total savings of transactions cost could be very large.
Good job done by the Finance Minister – he has been transparent and frank in admitting that some challenges of the economy cannot be solved unless all political parties are open to discuss based on logic and arrive at solutions through discussions and compromises at a faster speed.
Returning to more than 9% growth trajectory
With GDP growing at 8.6% in 10-11 on top of an 8 % increase in the previous year, agriculture posting 5.4 % growth, industry 8.1% and services 9.3%, the Finance Minister expects the GDP to grow at 9.6 % in 2011-12 (rate achieved in 2006-07). This seems a reasonable estimate and speaks for the inherent strength of the economy after the liberalization process began in 1991 and the Government had to stop interfering in production, capacity and price decisions in most spheres. The economic performance of the last two decades has been on the average far superior than any of the previous four decades of Government command and control regime. The rates of savings exceeded 30% and investment rate of 35% or more during the last few years – something that the command and control regime never succeeded in achieving.
Dream Showers of Revenues Pouring in
The Exports grew at a faster rate than imports in 2010-11. Tax revenues are just pouring in (revised estimate of net tax receipts for the Centre is about 28% higher than the actual of 2009-10) for 2010-11 like heavy rains to allow progressively much larger amounts of public money for ruling politicians and ministers to spend away in the name of financial inclusion, rural development, backward area development, infrastructure development, education, health care, unemployment guarantee, pensions, salaries to government employees, sports, culture – just as rich country monarchs used to do before democracy spread through out the World. The politicians are all happy except when they are in the Opposition or when as rulers they think they try dictating the economy to behave as per their wishes and the economy with no ears does not listen to them.
Inflation: Challenge to Endure?
But the Finance Minister this time has a few so-called challenges to deal with as well. The first and foremost was the high rate of inflation of close to 10%, though it has come down from 20% a year ago. He also finds it unacceptable that the differences between wholesale and retail prices and between markets in different parts of the country are so high to hurt the interests of both the producers and consumers, though he can do only little to narrow these gaps to acceptable levels: much depend how the active support of the governments in various States. He knows that that Government can do very little in substantially reducing inflation rate in the short to medium term: if the Govt. had effective powers, the inflation would not have been high in the first place. He also knows that the halving of the inflation rate in the past twelve months was more to with the dynamics of the market rather than fiscal or monetary policy which are largely a kind of placebo pills. So, with all his wisdom, experience and maturity gained from long association with public finances over the past 40 years, he did what was relevant and possible. First, express his confidence that inflation rate in 2011-12 would be much lower than in the previous year. Second, expand and/ or promote the expansion of storage capacity of food grains so that if required he could release them to stop food inflation from rising (although he knows that building up a huge stock in the last two years had also made its contribution to rise in food-grain prices. Third, take measures to raise productivity and production of vegetables, nutrient-intensive cereals, palm oil much more intensively in the past to strengthen the resilience of food supply. He knew that in the Budget he can argue for a policy for large-scale commercial farming to raise production and productivity and allow the Opposition parties to stall the Parliamentary activities. Fourth, he did not reduce the duties on petrol and diesel, keeping the option for later days if the oil prices in the international market increase further from $110/barrel as of end-February. Fifth, he tried to give some relief to the common people: (a) inflation indexing the daily wage rate for BPL workers under the Mahatma Gandhi Rural Employment Guarantee Scheme (this should in turn increase the wage rate of unskilled workers outside BPL category (it is another matter that this itself will cause vegetable inflation a little with surplus vegetable available outside rural areas will continue to get depleted (unless higher prices leads to higher productivity), (b) a relief of about Rs3 per day on income tax in general and Rs. 6 per day for income tax payers above 60 but with income in excess of Rs. 2 lakhs per year (slightly higher for those above 80 years of age) and (c) leave the fate of those who do not come into taxable range income depend on the rise in market wage rates. Sixth, he trusts that the Reserve Bank of India will be, as usual, alert at tightening monetary policy without affecting the growth of credit for productive purposes, thereby contributing to curbing inflation rate. And, finally, being a devout Brahmin worshiper, he prays to both, Indra - the God of Rains and to Lakshmi - the Goddess of Wealth to bless the country.
It is worth appreciating the rationale of inflation controlling policy of the Finance Minister. The Chief Economic Adviser has spoken about this in simple economics: "In controlling inflation at times what is needed is not more action by government but less." He illustrated as follows: for moving food from farm gates to retail outlets, licencing APMC Acts and octroi checks are applicable and these prevent new players and small farmers to bring their goods directly to the urban markets. Therefore, governments should get out of these control mechanism to allow easier movement of food to let retail prices fall as competiton among food traders intensify. The proposed vegetable clusters around urban centres would provide incentives to increase productivity closer to cities, provided all current impediments for vegetables to move easily to reach the cities. Trying to bring down prices by diktat didnot work in east-European nations and the erstwhile Soviet Union, where extensive price controls were tried: prices were low but virtually no goods were sold at those prices with people queuing up outside shops amidst acute shortages. (http://businessworld.in/bw/2011_03_05_Dont_Watch_Budget_Like_A_Cricket_Match.html)
Deficit Reduction: Easy with Buoyant Revenues
His second challenge was to reducing government spending profligacy to a level where fiscal deficit can go down as percentage to GDP. He has done this well. He has projected total expenditure for 2011-12 to grow by just 40,000 crore, a mere 3% increase over the revised estimates of 2010-11, but keeps the Capital receipts stagnant and plans to draw down cash balances by Rs. 20,000 crore. In a Budget size of Rs 12. 6 crores – Rs 60,000 crore is relatively small. And, yet allocates 24% higher to Education, 20% higher to Heath Care, 23% higher to Infrastructure and 15% higher to Women and Child Welfare. Where did he cut or curb expenditures then?
Once the fiscal deficit target is set, estimating budget receipts and expenditures becomes an easy task, reflected emphasis on containing the extent of profligacy in expenditure and some prudence diversification of risk of going wrong across various items of revenue estimates. Setting a Budgeted Fiscal Deficit in absolute terms for 2011-12 at slightly less than the Actual in 2009-10 and a mere Rs12,000 crore higher that the Budget estimates for 2010-11 makes a fiscal deficit to GDP ratio of 4.5 % looks easily achievable under normal circumstances. He has budgeted for an 18.5% growth in Gross Tax Revenues as against the estimate of 26% growth in 1010-11 over the actuals in 2009-10. For Net tax revenues, he has budgeted 17.9% rise against previous year's revised estimate of 23.%5. The over all cushion of about 7% points is large enough to withstand shocks. He has been conservative in assuming a growth in customs duty revenue growth of 15% (Rs20000 Crore) against the revised estimates of 58% growth (Rs.48000 Crore) in the previous year. In respect of Excise duty also, he assumes a lower growth of 15% or Rs 27000 crore (last year’s 33% or Rs34000 crore). In respect of Corporate Tax and Service Tax, he assumes the same annual growth as in last year (21% and 18% respectively). On the other hand, he assumes a 15.4% growth in Income taxes as against 11.9 % in the previous fiscal). In case some thing goes wrong on the downside, something may go wrong in the upside and the overall estimate fiscal deficit percentage may still be achieved. He must have cross-checked the reasonability of his assumption: the overall growth rate in tax revenues would be a real income growth of 9% plus price increase of 7% plus 2.5 % for broadening of base, better tax compliance and windfalls less relief’s granted this Budget.
Challenge of Legislation: Leave it to the Opposition
Corporate Sector should happily claim and tell the leftist politicians that they directly contribute to the Gross Tax Revenues to the extent of 38%-39%, besides taking a large burden of indirect taxes (which together contribute much less than the direct taxes). The rich people should also claim proudly that they contribute as Income Tax much more than Customs Revenue or the Excise Revenue and also contribute a large part of the burden of the indirect taxes. This should help them meet the BJP and Leftists to convince them to help the Finance Minister to meet his last challenge: the challenge of getting all reform legislation passed in the Parliament as soon as possible. The list is quite big: the dozen includes
The Companies Act Amendment, Goods & Services Act, Direct Tax Code, Insurance Laws (Amendment) Bill, Life Insurance Corporation (Amendment) Bill, revised Pension Fund Regulatory and Development Authority Bill, Banking Laws Amendment Bill, Bill on Factoring and Assignment of Receivables, State Bank of India (Subsidiary Banks Laws) Amendment Bill, Indian Stamp Act ammendmentRDBFI Act Amendment and SARFAESI Act and many of these are pending for quite a few years.
Beyond Challages
As an ardent believer of dominant Government in economic life, the Finance Minister on his own and the Ruling Government is taking many measures to enhance the efficiency of tax administration, improve performance of government department, prompt delivery of service to tax payers. He also announced government’s five fold-strategy to curb corruption including a detailed review of the systems of procurement, discretionary powers of ministers to enhance transparency and better governance of the Government as an organization. He also refrained from too much tweaking of the excise, customs and service duty/ tax rates apart from making the system move towards the objectives of achieving Asean levels, reduction in number of rates, withdrawal of ghosts of concessions and conformity with the requirement of GST. He has also be soon introducing direct cash subsidy to food purchased by BPL households from the market instead of continuing with the inherently inefficient, wasteful and corrupt public distribution system. The Chief Economic Adviser, Kaushik Basu, has explained the logic of smal, small pieces of efficiency enhancing reforms in simple economics. "The system proposed in this budget, and to be worked out by the Nandan Nilekani committee, will allow us to hand out a smart card or kerosene coupon to the poor. The poor will then use this to buy kerosene from the market at market price. The poor still gets the subsidy but since they pay the shopkeeper the full price for kerosene, the shopkeeper has no incentive to turn the poor buyer away and sell the kerosene elsewhere. A huge amount of the leakage can be checked by this new mechanism." He also gave another example of improved governance proposed in the budget. "Indian exporters cannot compete with exporters from China and Singapore, not so much because of the prices and exchange rates but because our customs procedures are so complex and time consuming. Sending goods from the factory gate in India to the New York store takes about double the time that it takes from a Chinese factory gate. The proposed self-assessment for customs announced in this year’s budget will enable exporters to save a huge amount of time. The system will run on trust with a few traders being randomly picked and scrutinised. This increased efficiency can have a dramatic effect on our exports and the current account deficit." He also demolishes the usual foolish arguments of the adminstrative raj in trade system. All exporters and importers may not be totally honest. But random checks and severe punishments to the guilty of dishonesty, would be incentive enough to be honest (the American income tax system is run entirely on the basis of random checks} The poosibility of bribing out of punishment will still be there as it is now. The self assessment system with custms offices available for clearance round the clock, instead of fised working hours now, would speed up the process of trade and contribute to competitiveness of Indian businesses as total savings of transactions cost could be very large.
Good job done by the Finance Minister – he has been transparent and frank in admitting that some challenges of the economy cannot be solved unless all political parties are open to discuss based on logic and arrive at solutions through discussions and compromises at a faster speed.
Subscribe to:
Posts (Atom)