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Subject: Economics

  • Listening to the call of the informal

    Context

    Attempt to formalise the informal sector would not necessarily benefit it as two recent papers reveal.

    What do the research papers reveal?

    • The first paper-No strong evidence that formalisation improves business outcomes.
      • Published by the National Bureau of Economic Research, economist Seema Jayachandran argues that there is no strong evidence from studies conducted in many developing countries that formalisation improves business outcomes.
    • The second article-Formalisation an evolutionary process:
      • In the second article, a background paper for the International Labour Organisation (ILO), economist Santosh Mehrotra calls formalisation an evolutionary process.
      • During this evolutionary process small, informal enterprises learn the capabilities required to operate in a more formal, global economy.
      • He says they cannot be forced to formalise.

    The formalisation trap

    • Why does the state want to formalise?
      • Easy monitoring and taxation: The state finds it easier to monitor and to tax the firms that adopt its version of formality.
      • Reduced last-mile cost for banks: Formality can reduce the last-mile costs for banks also.
    • Problem with the imposed formalisation
      • The added cost outweighs benefits: Ms Jayachandran’s study reveals that most of the formalities imposed from above, add to the costs of the firms that outweigh the benefits of inappropriate formalisation.

    How informal sector improves themselves?

    • Association with their peers: Small entrepreneurs gain from forming effective associations with their peers.
    • Mentoring: They also benefit greatly from ‘mentoring’.
    • On job skill development: Skills of small entrepreneurs and their employees are best developed on-the-job.
      • This is because they cannot afford the loss of income by taking time off for training.
    • Soft skills to form associations and manage enterprises, matter as much for the success of the enterprises as ‘hard’ resources of finance and facilities.

    Problems with connecting to global supply chains-

    • There is a desire to connect small firms in India more firmly with global supply chains.
      • Search for lover cost source supply: Mehrotra points out that the primary motivation of multinational companies for expanding their global supply chains is to tap into lower-cost sources of supply.
      • Supply chains compete with each other.
      • When wages and costs increase in their source countries, they look for other lower-cost sources.
      • Informal-the lowest labour cost firms: The lowest labour cost firms at the end of supply chains are generally informal.
      • Thus, the push by the state to formalise firms is countered by the supply chain’s drive to lower its costs.

    Way forward

    • India’s jobs, incomes, and growth challenges necessitate a reorientation of policies towards the informal sector.
    • First-The government and its policy advisers must stop trying to reduce its size.
      • The development of an economy, from agriculture to the production of more complex products in the industry, is a process of learning.
      • Informal enterprises provide the transition space for people who have insufficient skills and assets to join the formal sector.
    • Second-Policymakers must learn to support informal enterprises on their own terms.
      • Merely making it easy for MNCs and large companies to invest will not increase the growth of the economy.
    • Third-Find ways to speed up the process of learning.
      • Policymakers must learn how to speed up the process of learning within informal enterprises by developing their ‘soft’ skills.
      • Large schemes to provide enterprises with hard resources such as money and buildings, which the government finds easier to organise, are necessary but inadequate for the growth of small enterprises.
    • Fourth-Networks and clusters of small enterprises must be strengthened.
      • They improve the efficiency of small firms by enabling sharing of resources.
      • More clout to negotiate: They give them more clout to improve the terms of trade in their favour within supply chains.
      • Reduced last-mile cost: They reduce the ‘last mile costs’ for agencies and providers of finance and other inputs to reach scattered and tiny enterprises.
    • Fifth-The drumbeat for labour reforms must be changed.
      • The laws should be simplified, and their administration improved. And, their thrust should be to improve the conditions of workers.
    • Finally- The social security framework for all citizens must be strengthened.
      • Health insurance and the availability of health services must be improved.
      • And disability benefits and old-age pensions must be enhanced.
      • The purpose of ‘labour reforms’ must be changed to provide safety nets, rather than make the workers’ lives even more precarious with misdirected attempts to increase flexibility.

     

  • The billion standard

    Context

    India has crossed the target of a billion monthly digital payments. Now, to a billion transactions a day.

    The story of payment revolution and financial inclusion in India

    • Progress on the financial inclusion: India was long a financially excluded nation –only 17 per cent of Indians had a bank account in 2011.
      • 50 more years estimate: The World Bank suggests it would have taken 50 more years for 80 per cent of Indians to get a bank account at the pre-2011 speed.
      • Yet, we reached that milestone in 2018.
      • How? A magical combination of
      • Political will (Jan Dhana Yojana and Aadhaar embedding).
      • A proactive central bank (creating a non-profit market participant entity and levelling the playing field between non-banks and banks).
      • And a technology stack with three layers (identity, payments, and data).
    • The rise of UPI
      • The swift rise in use: The digital payment transactions on the Universal Payment Interface (UPI) platform rising from 0.1 million in October 2016 to 1.3 billion in January 2020.
      • Result of working together: This represents the magic of entrepreneurs, nonprofits and policymakers working together.
      • And gives us a new target — a billion transactions a day.
    • India’s Payment revolution
      • What are the components of the payment revolution: India’s payment revolution comes from-
      • A clear vision: Shifting the system from low volume, high value, and high cost to high volume, low value, low cost.
      • A clear strategy: Regulated and unregulated private players innovating on top of public infrastructure.
      • And trade-offs balanced by design: Regulation vs innovation, privacy vs personalisation, and ease-of-use vs fraud prevention.
    • What consumers wanted?
      • Consumers wanted a payment experience that was mobile-first, low-cost, 24/7, instant, convenient, interoperable, fintech friendly, inside banking, and safe.
    • Answers lies in UPI.
      • What did UPI achieve?
      • Interoperability: UPI created interoperability between all sources and recipients of funds -consumers, businesses, fintechs, wallets, 140 member banks.
      • Instant settlement: UPI settles instantly inside the central bank in fiat money -state-issued money declared by the sovereign to be legal tender.
      • Blunted data monopolies: Big tech firms have strong autonomy but weak fiduciary responsibilities over customer data, it was taken care of by UPI.

    5 Policy lessons from the success of UPI

    • First- how the India stack: Interconnected yet independent platforms or open APIs — are a public good that-
      • Lowers costs, spur innovation and blunts the natural digital winner-takes-all.
      • Replication in other areas: Replicating this in education, healthcare, and government services are likely to be a harbinger of large scale multi-domain collaborative innovation.
    • Second-collaboration: Collaboration can create ecosystems that overcome the birth defects of its constituents–
      • The execution deficit of government, the trust deficit of private companies, and the scale deficit of nonprofits.
    • Third-policy intervention: Complementary policy interventions are important.
      • Demonetisation and GST are changing the stories that firms and individuals tell themselves around cash and informality.
    • Fourth-human capital and diversity matter: This revolution needed career bureaucrats to partner with academics, tech entrepreneurs, venture capitalists, global giants and private firms.
    • The final lesson-Western model is not needed always: India doesn’t need to be Western or Chinese to be modern. If our policymakers had copied Alipay or US banks, we wouldn’t have leapfrogged their birth defects.

    Way forward

    • Fix the deadline: The central government must deadline digitising all its payments.
    • RBI implement 100+ action items: The RBI must implement the 100-plus action items arising from its own Vision 2021 document and the Nandan Nilekani Committee for Deepening Digital Payments.
    • UPI for inward remittances: RBI must also make UPI and RuPay fit for use in our $70 billion inward remittances that currently come through exploitative financial institutions which don’t have clients but hostages.
    • Replication of UPI in bank credit: The RBI must replicate the core design of UPI — fierce but sustainable private and public competition in bank credit-
      • Our 50 per cent credit-to -GDP ratio is one of the reasons India is poor.
      • China’s 300 per cent is the wrong number, but reaching the OECD average of 100 per cent needs the RBI to do many things-
      • Raising its human capital and technology game in regulation and supervision.
      • Catalysing an ecosystem for lending against the rapidly expanding digital exhaust of small firms and individuals.
      • Issuing more private bank licences, facilitating management changes in old private banks with market caps that signal questions about book value, and shepherding governance and human capital revolution at PSU banks.

    Conclusion

    Converting the collective independence our citizens got in 1947 to individual freedom surely involved universal financial inclusion. The gap between this aspiration and reality was not a lie but a disappointment because our capital got handicapped without labour and our labour got handicapped without capital. Change has begun -the RBI, the finance ministry, and many individuals deserve our gratitude and dues for a billion digital payments a month. We now ask you for a billion digital payments a day.

  • [op-ed snap] Fashioning the framework of a New India

    Context

    As the Indian economy is going through a severe crisis, a major solution to the present economic crisis is to go in for inclusive growth; it also means shared prosperity.

    Where India stands on poverty and how the slowdown is impacting the poor.

    • Bottom 30-40% adversely impacted: The slowing economy has had an adverse impact on the bottom 30%-40% of the population.
      • Absolute poverty on the rise: The incidence of absolute poverty, which has been falling since 1972-73, has increased to 30% (4% jump).
    • 44% population below the multi-dimensional Poverty line: The Human Development Report (2019) has shown, more than 44% of the Indian population is under the multi-dimensional poverty line.
    • Rising inequality: The poorest 50% population at present owns only 4.1% of the national wealth.
      • While the richest 10% of people own 73% of the total wealth in India (Suisse Credit 2019).
    • Rampant malnourishment: India has 15.2% population malnourished (women 15%) as against 9.3% in China.
      • And 50% of the malnourished children in the world are in India.
    • At 112th position on global hunger: India’s global hunger rank has gone up to 112 while Brazil is 18, China is 25 and South Africa, 59.
    • Dismal performance on education: In the field of education as per a UN report (2015), overall literacy in India is 74.04% (more than the 25% are totally illiterate) against 94.3% in South Africa, 96.6% in China and 92.6% in Brazil.
      • Almost 40-45% population is either illiterate or has studied up to standard 4.
    • Poor quality of education: Given the quality of education in India, the overall population is very poorly educated, with the share of ‘educated unemployment’ rising by leaps and bounds.

    What needs to be realised?

    • Focus on domestic demand: It needs to be realised that when exports are declining, the economy will have to depend on domestic demand for growth.
      • It is no more feasible for the top 20-25% population to continue growing without depending on the demand from the bottom 40-45% population.
    • Demand by the bottom 40% a must: There is thus a strong reason now for the economy to increase effective demand of this bottom 40-45% population at least to continue growing-to reach a $5-trillion economy by 2024.

    What is wrong with the growth process?

    • Bottom 40% not getting the fair share of growth: A major reason for the crisis is that the growth process has marginalised the bottom 40-plus% of the population.
      • It is in the sense that they do not get a fair share of the economic growth, and are more or less deprived of productive employment with a decent income.
      • They have not been used as active participants in the growth process. Their potential has not been promoted.
    • Less spending for the poor and its consequences: Though the bottom population depends on the government for basic health and elementary education (and also for access to higher educational opportunities)-
      • The government spends just 4% of GDP on health (against the norm of 4-6% of GDP) and 3% of GDP on education (against the norm of 6-8% of GDP).
      • How this dismal spending affects the poor: As a result of this below norm spending, these people are left hardly literate and sick, with poor nutrition and high morbidity.
      • They are incapable of acquiring any meaningful skills or participating actively when new technology is spreading in the rest of the economy.
    • The sub-optimal use of labour force: This sub-optimal use of the labour force in the economy is not likely to enable India to achieve optimal growth with proper use of the national resources -the labour force.

    Inclusive growth- a solution to the present economic crisis

    • Inclusive growth also includes shared prosperity: Here, inclusive growth does not mean only including all sections of the population in the growth process as producers and beneficiaries; it also means “shared prosperity”.
      • Since India has already committed to sustainable and inclusive growth at the UN General Assembly, India is definitely obliged to implement inclusive growth.
      • This should be our “New India”.
    • What “New India” would involve?
      • Improve the capability and opportunities: To start with, to improve the capabilities of the masses as well as their well-being by expanding productive employment opportunities for them.
      • What expanding productive employment mean? The main steps to expand productive employment for all in the economy should be made up of-
      • A process of inclusion.
      • Expanding the quality of basic health for all.
      • And ensuring quality education to all.
    • How will “New India” help?
      • Which will by itself generate large-scale employment in the government.
      • Having a well-educated and healthy labour force will ensure high employability.
      • Such people will be able to participate actively in the development process.
      • The cycle of more productive employment: Having a well-educated labour force will help start-ups and MSMEs, in turn triggering a cycle of more productive employment in the economy.
      • Global competitiveness increase: This will also improve the global competitiveness of our production units.
      • Labour absorption potential of MGNREGA: Employment guarantee schemes such as the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) will also increase employment.
        • Assets generated under MGNREGA will expand capital formation in the economy, thereby raising the labour-absorbing capacity of the mainstream economy.
      • Why this strategy is advantageous?
        • Such a strategy has multiple advantages:
        • First– it will raise incomes and the well-being of those who need it most urgently.
        • Second– it will raise effective demand rapidly, which is so badly needed in the economy today to raise economic growth.
        • Third– growth will be equitable and sustainable.

    Way forward

    • Finally, how does one raise resources to increase new public investments in the selected sectors?
    • Raise direct taxes: One major strategy is to raise direct taxes, both capital tax and wealth tax.
      • Past growth has failed to reach the poor: Growth led by providing tax cut and extra incentives, but this growth does not much percolate to the poor.
      • Consequently, taxing the rich has to be a major strategy to raise government revenue.
    • Treat public expenditure as an investment: The public expenditure on raising capabilities should be treated as social investment rather than social welfare, policymakers will be willing to spend on this capital formation.
    • Let the fiscal deficit slip: Finally, there was no sound economic reason to control fiscal deficit ratio. Sound macroeconomics never supports this.

     

     

     

  • Defence Bill in Budget

     

    The Union Budget for 2020-21 has allocated Rs 1,33,825 crore to defence pensions. This is up by 10œ times in a decade and a half, from Rs 12,715 crore in 2005-06.

    The ‘hype’ of defence pension

    • The allocation of Rs 1,33, 826 crore is 4.4% of the total expenditure of the central government or 0.6% of GDP.
    • And of the overall allocation made to the Defence Ministry, 28.4% goes towards pensions.
    • So sharply has the bill for defence pensions gone up that it is now Rs 15,291 crore more than the Defence Ministry’s total capital expenditure, a bulk of which goes towards modernization of the armed forces.
    • It now nearly equals the salaries bill for Defence Ministry. The more the government spends on salaries and pensions, the less it can spend on modernizing the armed forces.
    • To put it in perspective, the government’s spending on education is Rs 99,300 crore and on health is Rs 69,000 crore.
    • To compare it with other sectors, the government’s rural employment scheme MGNREGA has an allocation of only Rs 61,500 crore — 46% of the bill for defence pensions.

    Why the bill is high?

    • As per the Defence Ministry, there are about 26 lakh armed forces pensioners and family pensioners and approximately 55,000 pensioners are added every year.
    • In 2015, the government announced the OROP (One Rank, One Pension) scheme which cost it Rs 8,600 crore.
    • The implementation of the Seventh Pay Commission recommendations in 2017 again increased the defence pensions bill.

    What makes defense pensions distinct?

    • Defence pensions are unique in many ways. Defence personnel retire at a young age and thus continue to get pensions for a longer period of time than their civilian counterparts.
    • The current ratio of military pensioners to serving military personnel is 1.7 to 1, while the ratio of civil pensioners to civil working personnel is 0.56 to 1.
    • This ratio in defence is projected to further change as life expectancy in India goes up and retired personnel live far longer than earlier.
    • All civilian employees in the government who joined service on or after 1 January 2004 do not get an assured pension but come under the ambit of the contributory National Pension Scheme (NPS).
    • That is meant to reduce the pensions bill of the government on the civilian side, but military personnel have been excluded from the ambit of the NPS because of their short service span.

    Where this can lead to

    • With economic growth stalling and competing requirement from development and infrastructure sectors, the government is being hard-pressed for the last rupee in its kitty.
    • The defence services themselves need more funds to modernize themselves but are struggling with budgetary allocations.
    • In such a scenario, attention is likely to come to the fast-rising defence pensions bill.

    Feasible solutions

    • The short-term answer to keep the bill frozen at the same level is to increase the retirement age of serving military personnel and stop the rise in number of pensioners.
    • But at a time when the country is facing unemployment at an all-time high, stopping recruitment for a few years will worsen the situation.
    • The other solution is to send the retired military personnel to paramilitary forces but those forces, too, need to stay young and have not accepted the proposal.
    • That would also pose the problem of recruitment in a time of high unemployment, as in the case of increase in retirement age of military personnel.

    Conclusion

    • The sharply rising defence pensions bill, however, has become a challenge that cannot be ignored any longer.
    • Unless India’s economy grows at a double-digit rate, it will not be possible to furnish this bill and still modernize the armed forces.
    • There are no easy answers to the challenge, and the answer will have to come from the top political leadership.

  • Global Intellectual Property Index 2020

    India has been ranked 40th out of 53 countries on a global intellectual property index, even as the country has shown improvement in terms of scores when it comes to the protection of IP and copyright issues.

    GIP Index

    • The Global IP Index was released by Global Innovation Policy Center or GIPC of the US Chambers of Commerce.
    • The GIPC Index consists of five key sets of indicators to map the national intellectual property environment for the surveyed countries.
    • The major indicator categories are:
    1. patents, related rights, and limitations;
    2. copyrights, related rights, and limitations;
    3. trademarks, related rights, and limitations;
    4. enforcement;
    5. membership and ratification of international treaties.

    India’s performance

    • India was placed at 36th position among 50 countries in 2019.
    • India’s score, however, increased from 36.04 per cent (16.22 out of 45) in 2019 to 38.46 per cent (19.23 out of 50) in 2020, a 2.42 per cent jump in absolute score.
    • However, India’s relative score increased by 6.71 per cent.
    • India also continues to score well in the Systemic Efficiency indicator, scoring ahead of 28 other economies in these indicators.

    Challenges for India

    • GIPC has identified several challenges for India. Prominent among them are:

    Patentability requirements, patent enforcement, compulsory licensing, patent opposition, regulatory data protection, transparency in reporting seizures by customs, and Singapore Treaty of Law of TMs and Patent Law Treaty

    Measures to protect IPs in India

    • Since the release of the 2016 National IPR Policy, the government of India has made a focused effort to support investments in innovation and creativity through increasingly robust IP protection and enforcement.
    • Since 2016, India has improved the speed of processing for patent and trademark applications, increased awareness of IP rights among Indian innovators and creators, and facilitated the registration and enforcement of those rights.
    • To continue this upward trajectory, much work remains to be done to introduce transformative changes to India’s overall IP framework and take serious steps to consistently implement strong IP standards.

  • National Programme for Bovine Breeding and Dairy Development

    • The Minister of State for Fisheries, Animal Husbandry and Dairying has provided certain information in Parliament regarding the ongoing National Programme for Cattle and Buffalo Breeding.
    • The scheme is subsumed under Rashtriya Gokul Mission since December 2014.

    National Programme for Bovine Breeding and Dairy Development

    • The NPBBDD has been formulated by merging four ongoing schemes of the Department of Animal Husbandry, Dairying and Fisheries in the dairy sector.
    • It was launched in Feb 2014.
    • This merger has been done to integrate milk production and dairying activities in a scientific and holistic manner to meet the increasing demand for milk in the country.

    Components of the scheme

    NPBBDD has the following three components.

    • National Programme for Bovine Breeding (NPBB)
    • National Programme for Dairy Development (NPDD) and
    • Rashtriya Gokul Mission.

    Differences between all these schemes:

    1) National Programme for Bovine Breeding

    It aims-

    • To arrange quality Artificial Insemination services at farmers’ doorstep
    • To bring all breedable females under organized breeding through Artificial Insemination or natural service using germplasm of high genetic merits

    2) National Programme for Dairy Development

    It aims-

    • To create and strengthen infrastructure for the production of quality milk including cold chain infrastructure linking the farmer to the consumer
    • To strengthen dairy cooperative societies/Producers Companies at the village level
    • To increase milk production by providing technical input services like cattle-feed, and mineral mixture etc.

    3) Rashtriya Gokul Mission

    It aims-

    • To undertake breed improvement programme for indigenous cattle breeds so as to improve the genetic makeup and increase the stock.
    • To enhance milk production and productivity of indigenous bovines.
    • To upgrade non-descript cattle using elite indigenous breeds like Gir, Sahiwal, Rathi, Deoni, Tharparkar, Red Sindhi.

  • Purified Terephthalic Acid (PTA)

    • During her Budget speech, FM Mrs. Sitharaman said that the government was abolishing in “public interest” an anti-dumping duty that was levied on imports of a chemical called PTA.
    • Domestic manufacturers of polyester have called the move a huge relief for the industry, claiming they had been fighting to remove the duty for four-and-a-half years.

    What is PTA?

    • Purified Terephthalic Acid (PTA) is a crucial raw material used to make various products, including polyester fabrics.
    • PTA makes up for around 70-80% of a polyester product and is, therefore, important to those involved in the manufacture of man-made fabrics or their components, according to industry executives.
    • This includes products like polyester staple fibre and spun yarn.
    • Our cushions and sofas may have polyester staple fibre fillings. Some sportswear, swimsuits, dresses, trousers, curtains, sofa covers, jackets, car seat covers and bed sheets have a certain proportion of polyester in them.

    What led to the government decision?

    • There has been persistent demand that they should be allowed to source that particular product at an affordable rate, even if it means importing it.
    • She had said easy availability of this “critical input” at competitive prices was desirable to unlock “immense” potential in the textile sector, seen as a “significant” employment generator.
    • The duty had meant importers were paying an extra $27-$160 for every 1,000 kg of PTA that they wanted to import from countries like China, Taiwan, Malaysia, Indonesia, Iran, Korea and Thailand.
    • Removing the duty will allow PTA users to source from international markets and may make it as much as $30 per 1,000 kg cheaper than now, according to industry executives.

  • [op-ed snap] No rescue in sight

    Context

    The disconnect between Budget and Economic Survey is much greater this year.

    Background of the economy as the budget is introduced

    • The 2020 Budget was presented against the background of-
      • Slowing economy.
      • Poor investment climate.
      • Declining consumption demand and
      • Stagnant exports.
      • The steady deceleration in growth, which registered at 4.5 per cent in the second quarter of the current fiscal — the lowest in the last 26 quarters — presented a challenge as well as an opportunity.

    Infrastructure investment

    • The hope of substantial increase in allocation for infra: The hope was that there will be a substantial increase in infrastructure investment, which in turn will trigger investment demand, but the actual allocations are not promising.
      • This was particularly surprising in the wake of the recent announcement that there will be an investment of Rs 103 trillion in the next five years to leapfrog India to a $5-trillion economy.
      • Private sector expected to contribute: Much of the investment for this will have to be made by the private sector and it is hoped that the allocation of Rs 20,000 crore in equity in specified infrastructure finance companies will help them to leverage more than Rs 1 lakh crore of investment support.

    Budgetary allocation for capital expenditure

    • 1.7% of GDP to 1.8 %: The budgetary allocation for capital expenditure for the current year, which is estimated at 1.7 per cent of GDP this year, is budgeted at 1.8 per cent in 2020-21.
    • Agriculture, irrigation and rural development: The Budget also contained 16 action points on agriculture, irrigation and rural development and the Rs 2.83 lakh crore allocation is higher than the budget estimate for the previous year by just 2.5 per cent and revised estimate by 13.2 per cent.
      • But the allocation looks impressive only because there was a massive cut (Rs 26,000 crore) in the budget estimate over the revised estimate.
    • Transport infrastructure: The allocation to transport infrastructure in the Budget- at Rs 1.7 lakh crore-is just 7.6 per cent higher than the revised estimate for 2019-20.
    • MGNREGA and PM-Kisan Samman Nidhi: The allocations to schemes like the MGNREGA has been cut from Rs 71,002 crore (RE) in the current year to Rs 61,500 crore in 2020-21.
      • PM Kisan Samman Nidhi: For schemes like PM Kisan Samman Nidhi, it is just as much as was budgeted for 2019-20.
      • As a consequence, not much is expected in terms of propping up the consumption demand.

    Slippage in fiscal deficit

    • Increase in fiscal deficit expected: The slippage in fiscal deficit from the target set in the budget estimate in 2019-20 was expected for the following reasons-
      • Below expected nominal GDP growth: Nominal GDP growth was 7.5 per cent as against the estimated 12 per cent in the budget.
      • Overestimation in the growth of tax revenue at 18.3 per cent over the pre-actuals of the previous year.
      • Missed disinvestment target: The slippage in achieving the disinvestment target of Rs 1.03 lakh crore.
    • Thus, it is not surprising that the fiscal deficit for the current year stands estimated at 3.8 per cent of GDP and for the next year at 3.5 per cent.
    • Off-budget financing: The major concern is that the reported off-budget financing is almost 0.85 per cent. This does not capture the bills and refunds payable by the government.

    Would the budgeted and revised estimates realise?

    • On disinvestment front: The disinvestment revenue is estimated at Rs 65,000 crore though the realisation so far has been just Rs 18,000 crore, which implies another Rs 47,000 crore will have to be mobilised in the next two months.
    • On tax revenue front: The RE of tax revenue for the current year is over 14 per cent higher than the actual for 2018-19.
      • This is perhaps predicated on the hope that the scheme, “Vivad se Vishwas”, which allows the settlement of disputed tax to be paid without interest and penalty.

    Tax reforms in the budget

    • DDT abolition: On tax reforms, the abolition of dividend distribution tax (DDT) was expected.
    • Complicating Income tax: The reforms in individual income tax complicates the tax by creating six brackets.
      • The best practice approach to tax reform is to broaden the base, reduce the rates and reduce the number of brackets to make it a simple tax.
    • What could have been done? The government could have simply-
      • Phased out the tax concessions.
      • Indexed the brackets for inflation and
      • Reduced the rates of tax with an appropriate adjustment in the brackets.

    Conclusion

    The impact of fiscal developments on the states’ finances is clearly adverse. The shortfall in tax devolution in 2019-20 from the budgeted amount works out to Rs 1.53 lakh crore and the total shortfall in transfers amounted to Rs 1.41 lakh crore. Besides starving funds for various projects, this has serious repercussions on budget management at the state level.

  • [op-ed of the day] A workmanlike account

    Context

    The Budget was a workmanlike exercise, more a statement of account, around which was woven many strands of intent and vision, which, read in its entirety and by connecting interlocking dots, framed a strategy of moving towards a $5 trillion economy over the next five years.

    Fiscal arithmetic of the Budget

    • A clearer picture of off-balance-sheet borrowings: To a large extent, the Budget has done this, giving a much clearer picture of the off-balance-sheet borrowings, which add to the government’s debt and its obligations to pay.
      • Increasing the credibility of government: This move will enhance credibility among the investor community while taking decisions on committing capital for India’s future.
    • Possibility of nominal 10 % growth: The nominal growth projected for 2020-21 at 10 per cent is feasible, with a stretch, given the expected rise in inflation, which will add around 4 per cent to a projected 6 per cent real growth.
      • Aggressive revenue projection: The revenue projections are more aggressive, assuming a buoyancy which can be attributed in large measure to checking evasion using data analytics.
    • Disinvestment and privatisation revenue: The major boost to revenues is expected from disinvestment and privatisation of central public sector enterprises, together with asset monetisation.
      • The target is up sharply to Rs 2.25 lakh crore.
      • This initiative has been one of the core focus areas of the government, has to be lauded for-
      • The effects of increasing efficiency in operations and-
      • Restricting the losses to the public balance sheet.
      • Disinvestment revenues are likely to be augmented with higher dividend receipts, including, from higher profits of the Reserve Bank of India.
    • Optical allocation by the Govt.: Spending, which depends on revenue collection, has also been optimally allocated, with capital expenditure budgeted to increase faster than revenue.
      • High revenue expenditure: Capital expenditure is still a much smaller fraction of total expenditure compared to the committed revenue spending on interest payments, salaries and pensions and subsidies.

    The slowdown in the economy and squeeze in the credit flow

    • Three aspects of the current slowdown that makes it different
    • First– Multiple engines of growth have synchronously decelerated-
      • Consumption, investment, exports and sporadically, government spending — compared to earlier ones when one or some of these drivers were still functioning
    • Second- Demand led slowdown:
      • This is more a demand-led slowdown, versus the earlier ones, which tended to originate with a supply shock, whether from oil or foreign capital.
    • Third– the trigger for this episode was a financial shock-
      • NBFC lending — which tipped the weaknesses building in the system into deep deceleration.
    • Squeeze in the credit flow of the banks
      • Drastic reduction in credit flows: A telling statistic released by the RBI shows that compared to Rs 8 lakh crore of loans provided to borrowers during April-September 2018, credit flow fell to Rs 90,000 crore in the six months of 2019.
      • MSMEs worst affected by the credit squeeze: Bank credit has continued to remain very weak. In the context of the broader slowdown, credit to micro, small and medium enterprises (MSMEs) has been one of the worst affected.

    Whether the slowdown is more cyclical or structural-conundrum for policymakers

    • If it is more cyclical, aggressive use of monetary and fiscal counter-cyclical policy could yield the desired result.
      • If not, then the wait is likely to be longer and will involve more sector-specific de-bottlenecking initiatives.
    • Signs of structural constraints: While there is certainly a cyclical component in the manufacturing segment- the proximate source of the slowdown- there are signs of deeper structural constraints.
    • Quintuple problem– This problem has now expanded into almost quintuple problems, encompassing the government, households, NBFCs along with the banks.
      • Overlaid on these structural impediments is a sharp weakening of consumer, investor and corporate confidence.

    Conclusion

    Implementation, as always, will be key to achieving the $5-trillion goal. The arena for the next set of reforms and actions for sustained growth is at the state level: Agriculture, land, electricity, and even labour. The Budget acknowledges this. A federal approach to tackling the slowdown, in a coordinated fashion, will probably be the most effective.

     

     

  • [op-ed snap] Falling short of aspirations

    Context

    The Budget can be judged in terms of its effect on rural demand, investment and private sentiments– all critical elements for recovery. While the Budget offers hope on the last count, it leaves much to be desired on several other parameters.

    Skill development allocation- 3000 Crore

    • Unmet Demand: There is a huge, unmet demand for teachers, paramedical staff and caregivers, and skilled workers.
      • Need for quality education and skills: Well-paying jobs are created in the organised services and industry but require candidates with quality education and skills.
      • Both elude India’s youth due to the poor quality of education and lack of opportunities to acquire practical skills.
      • Skilling will require massive investment and concerted efforts.
      • What could have been done? The Budget could have given tax incentives to companies to provide internships and on-site vocational training to unemployed youth.
      • The country cannot afford to let the world’s largest workforce waste this way.

    On flagship welfare schemes

    • The MGNREGA is allocated â‚č61,500 crore, which is less than â‚č71,000 crore for the current fiscal year.
    • PM-KISAN: Going by the last year, disbursement under the PM-KISAN will also be less than budgeted, unless the beneficiary base is expanded.
    • Good schemes for increasing demand: These two schemes are good instruments for income transfers to small and marginal farmers, landless labour who spend most of their income and generate demand for a wide range of goods and services.
      • Higher disbursement under these schemes would have benefited most sectors of the economy. Budgetary allocations for health and education are also well below what is needed.
    • Micro-irrigation schemes for 100 water-stressed: Focus of schemes such as micro-irrigation schemes for 100 water-stressed districts is welcome and so is a modest increase in allocations for agriculture and rural development schemes.
    • Rural roads, cold storage, and logistical chains are crucial for the growth of income and employment in rural India, as the multiplier effects of rural infrastructure investment on growth and employment are large and extensive.
    • â‚č1.7 lakh crore for transportation infrastructure: The allocation of â‚č1.7 lakh crore for transportation infrastructure is also a welcome step. If the public investment infrastructure actually materialises, it will lend credence to the government’s stated commitment to revive the investment cycle –to spur job-creating growth.
    • To pull in private investment, public funding should be front-loaded in under-implementation projects.
    • Small irrigation and rural road projects are also relatively easy to complete and deliver immense benefits to several sectors.

     Bonds Market development  and startups

    • Need for the corporate bond market: The fundamental problem of infrastructure finance is the asset-liability mismatch which can be addressed only by developing a vibrant ‘corporate bond market.
    • No focus on the corporate bond market: The focus of the Budget is the multiple schemes for government bonds mainly through additional room for foreign portfolio investors and exchange-traded funds in government bonds.
      • Need for the well-developed market: Government’s moves are welcome but not enough. A well-developed bond market should draw upon-
      • Domestic insurance funds.
      • Pension funds and
      • Mutual funds-which are capable of investing in corporate bonds across different schemes.
    • Startups: The other leg of the “aspirational” Budget is the startups.
      • Some relief on the tax they have to pay and on taxation of the Employee Stock Option Plans is welcome.
      • Reluctance to abolish angel tax: But the reluctance to abolish the angel tax that results in harassment of start-ups and their investors is unfathomable.

    Scheme for NBFC

    • Allowing NBFCs into TReDS: Another welcome feature is the scheme to allow the non-banking financial companies into the Trade Receivables Discounting System (TReDS).
      • TReDS is an ecosystem that aims to facilitate the financing and settling of trade-related transactions of small entities with corporate and other buyers, including government departments and public sector undertakings.

    Changes in provisions for SMEs and their problems

    • Audit threshold increased to 5 crore: To reduce the compliance burden on small retailers, traders and shopkeepers who comprise the Small and Medium-sized Enterprises (SMEs) sector, the threshold for audit of the accounts has been increased from â‚č1 crore to â‚č5 crores for those entities that carry out less than 5% of their business transactions in cash.
    • Restructuring window increased: A provision in the budget extended the window for the restructuring of loans for micro, small and medium-sized enterprises till March 31, 2021.
    • Problems faced by the SMEs
      • Input tax rate higher for input than for the final goods: For many products produced by these enterprises, the tax rates are higher for inputs than the final goods.
      • High taxes on imports and exports: In addition, many SMEs suffer from high taxes on imports of raw material and exports of intermediary services by them.

    Other provision made to revive the private sector 

    • Recognising the need to revive the dying spirit of the private sector, several provisions have been made in the budget to revive the spirit of the private sector like-
      • Decriminalisation of several civil offences by firms under the Companies Act.
      • The abolition of dividend distribution tax (DDT).
      • The assurance that tax-related disputes will be considered with compassion.
      • The scheme to reimburse to exporters assorted duties, such as excise duty on transport fuels and electricity.

    Conclusion

    Everything considered the future of the economy will turn on whether the government delivers on the promises of public investment and the promises made to different sections of society including the taxpayer and companies. When it comes to reviving private sentiments, actions will speak much louder than the budgetary promises.

     

     

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