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Subject: Economics

  • [op ed of the day] Stay with stimulus

    Context

    The stimulus needs to continue and the reforms will help to keep the economy going. If gross savings and investment rates keep on falling it is difficult to revive the economy.

    What was expected in the last budget?

    • Increase in pubic investment: The first thing, it said, was to increase public investment and not play statistical or token announcement games.
    • The upswing in manufacturing growth, from negative to slightly less than 3 per cent (not industrial growth, because that includes mining and electricity), needed consolidation.
    • Real outlays in infra did not go up: Real outlays on the infrastructure needed to go up, but they did not.
      • So the push to private demand and a virtuous cycle of growth was missed.
      • The implicit numbers in the Budget math comprise growth of around 7 per cent, assuming a 5 per cent inflation rate.

    Prospects of the Agri-sector

    • A good sign in Agri in midterm: For agriculture, in the medium-term, we are alright. Kharif grain production was 6.4 per cent higher than the previous five-year average output.
      • Kharif oilseeds output around eleven lakh tonnes above the earlier year.
      • This was, however, based on a delayed monsoon which caused problems and anxieties in the second quarter of this year.
    • Nightmare of government unloading grain in the market: Foodgrains are doing well and we have huge food stocks.
      • But, instead of a blessing, the government turned public operations in grain into a nightmare by announcing that FCI will unload grain at a reserve price less than MSP.
      • Rabi acreage recovered and is now 8 per cent more than last year, but the policy of government operations to reduce the market price of grain by its intervention is a nightmare.
    • This is bound to affect input growth in the expanded acreage in the winter crops.

    Wrong policy in Agriculture

    • Terms of trade against agriculture: The terms of trade are going against agriculture, according to CACP (Commission for Agricultural Costs & Prices) estimates, and selling of the grain will make it worse.
    • While the fundamentals are alright, to wallop the farmer with a “cut in the reserve price” would harm the farmers.
    • The rabi report of CACP will say that the terms of trade have gone down more.

    Conclusion

    The Government should continue with the stimulus and opt for the reforms in the economy only to keep the economy going. If the gross savings and investment rates keep falling it would be difficult to revive the economy. If savings keep up, the government will have actual space to divert some real resources to infrastructure investment.

     

     

     

     

  • Explained: Fiscal Responsibility and Budget Management (FRBM) Act

    Context

    • As the years have rolled by, fiscal deficit has become a key factor to watch out for in every Budget presentation.
    • It is considered the most important marker of a government’s financial health.
    • A government that abides by the FRBM rules enjoys greater credibility among the rating agencies and market participants – both national and international.

    FRBM Act

    • The FRBM is an act of the parliament that set targets for the Government of India to establish financial discipline, improve the management of public funds, strengthen fiscal prudence and reduce its fiscal deficits.
    • It was first introduced in the parliament of India in the year 2000 by Vajpayee Government for providing legal backing to the fiscal discipline to be institutionalized in the country.
    • Subsequently, the FRBM Act was passed in the year 2003.

    Features of the FRBM Act

    • It was mandated by the act that the following must be placed along with the Budget documents annually in the Parliament:
    1. Macroeconomic Framework Statement
    2. Medium Term Fiscal Policy Statement and
    3. Fiscal Policy Strategy Statement

    Fiscal Indicators

    It was proposed that the four fiscal indicators be projected in the medium-term fiscal policy statement viz.

    1. Revenue deficit as a percentage of GDP,
    2. Fiscal deficit as a percentage of GDP,
    3. Tax revenue as a percentage of GDP and
    4. Total outstanding liabilities as a percentage of GDP

    Why FRBM is back in debate?

    • Not letting the fiscal deficit go completely out of control has been one of the standout achievements of the incumbent NDA government.
    • However, as India’s economic growth has decelerated, there have been growing pressures on the government to breach the FRBM orthodoxy and spend in excess of fiscal deficit targets to reboot domestic growth.
    • Others, however, continue to caution that the “real” fiscal deficit is already far more than the official number, and as such, there is no room for further increasing the expenditure by the government.

    Which of these narratives is true?

    • Actually, neither. But to understand that one has to first understand what are the different types of deficits and why does it matter to limit them.

    Different types of deficits

    • Fiscal is the excess of what the amount the government plans to spend over what the government expects to receive.
    • Obviously, to make up this gap, the government has to borrow money from the market.But all government expenditure is not of the same kind.
    • For instance, if the expenditure is for paying salaries then it is counted as “revenue” expenditure but if it goes into building a road or a factory – that is, something that in turn increases the economy’s capacity to produce more – then it is characterized as “capital” expenditure.
    • The fiscal deficit is another key marker and it maps the excess of revenue expenditure over revenue receipts.
    • The difference between fiscal deficit and revenue deficit is the government’s capital expenditure.

    What FRBM says on deficits?

    • As a broad rule, it is considered fiscally imprudent for a government to borrow money for “revenue” purposes.
    • As a result, the FRBM Act of 2003 had mandated that, apart from limiting the fiscal deficit to 3% of the nominal GDP, the revenue deficit should be brought down to 0%.
    • This would have meant that all the government borrowing (or fiscal deficit) for the year would have funded only capital expenditure by the government.

    Why prefer capital expenditure over revenue expenditure?

    • In any economy, when the government spends money or cuts taxes it has an impact on the economic activity of the country.
    • But this impact (also called the “Multiplier” effect) is quite different for revenue expenditure and capital expenditure.
    • In other words, when the government spends Rs 100 on increasing salaries in India, the economy grows by a little less than Rs 100.
    • But, when the government uses that money to make a road or a bridge, the economy’s GDP grows by Rs 250.
    • The question then is: How to get governments to switch from revenue expenditure to capital expenditure? That’s where the FRBM Act comes in handy.

    What is the significance of an FRBM Act?

    • The popular understanding of the FRBM Act is that it is meant to “compress” or restrict government expenditure. But that is a flawed understanding.
    • The truth is that FRBM Act is not an expenditure compressing mechanism, rather an expenditure switching one.
    • In other words, the FRBM Act – by limiting the total fiscal deficit (to 3% of nominal GDP) and asking for revenue deficit to be eliminated altogether – is helping the governments to switch their expenditure from revenue to capital.
    • This also means that – again, contrary to popular understanding – adhering to the FRBM Act should not reduce India’s GDP, rather increase it.

    Here’s how: When you cut on revenue deficit – that is, reduce your borrowings for funding revenue expenditure – and instead borrow to only spend on building capital, you increase the overall GDP by 2.5 times the amount of money borrowed. So adhering to FRBM Act is a win-win.

    What has been India’s record on adhering to FRBM Act?

    • Between 2004 and 2008, the Indian government had made giant strides on reducing both revenue deficit and fiscal deficit.
    • But this process was reversed thereafter thanks largely to the Global Financial Crisis and a domestic slowdown.
    • Since then, there have been several amendments to the Act essentially postponing the targets.
    • But the worst development happened in 2018 when the Union government stopped targeting revenue deficit and instead focussed only on fiscal deficit.

    Way Forward

    • There is a need to revert back to the original FRBM Act if 2003 by recognising and prioritizing the reduction in revenue deficit.
    • Doing this will help the government boost the kind of expenditure that actually increases the GDP.

  • Economic Survey & its significance

    With the Indian economy in the doldrums, this year’s Economic Survey will be keenly watched. The Economic Survey for 2019-2020 will be tabled in Parliament today.

    What is the Economic Survey?

    • The Economic Survey is a report the government presents on the state of the economy in the past one year, the key challenges it anticipates, and their possible solutions.
    • One day before the Union budget, the Chief Economic Adviser (CEA) of the country releases the Economic Survey.
    • The document is prepared by the Economic Division of the Department of Economic Affairs (DEA) under the guidance of the CEA.
    • Once prepared, the Survey is approved by the Finance Minister.
    • The first Economic Survey was presented in 1950-51. Until 1964, the document would be presented along with the Budget.
    • For the past few years, the Economic Survey has been presented in two volumes.
    • For example, in 2018-19, while Volume 1 focussed on research and analysis of the challenges facing the Indian economy, Volume 2 gave a more detailed review of the financial year, covering all the major sectors of the economy.

    Why is the Economic Survey significant?

    • The Economic Survey is a crucial document as it provides a detailed, official version of the government’s take on the country’s economic condition.
    • It can also be used to highlight some key concerns or areas of focus — for example, in 2018, the survey presented by the then CEA Arvind Subramanian was pink in colour, to stress on gender equality.

    Is it binding on the government?

    • The government is not constitutionally bound to present the Economic Survey or to follow the recommendations that are made in it.
    • If the government so chooses, it can reject all suggestions laid out in the document.
    • But while the Centre is not obliged to present the Survey at all, it is tabled because of the significance it holds.

    What are the expectations from Economic Survey 2020?

    • At a time when India’s growth has plummeted to a six-year low, the Economic Survey ahead of the Union Budget is expected to offer key insights into the path ahead for the government to revive growth.
    • The conundrum of remaining fixated on deficit targets or making a concerted push towards more expenditure to kickstart growth is one of the key challenges the government is facing.
    • The Survey is expected to shed light on the crucial gaps that the Budget will aim to fill in terms of unemployment, private investment, and a slump in consumption.

  • India’s first ‘fruit train’

     

    A ‘fruit train’, said to be the first of its kind in India, was flagged off from Tadipatri Railway Station in Anantapur district of Andhra.

    About the fruit train

    • This is the first time in India that an entire train is being sent to the gateway port (JNPT) for export.
    • This helps save both time and fuel as 150 trucks would have been required to send a consignment of this size by road to JNPT, which is over 900 km away, before the temperature-controlled containers are loaded on ships.
    • The bananas are being exported under the brand name ‘Happy Bananas’.
    • Farmers from Putlur region in Anantapur and Pulivendula in Kadapa district are exporting ‘Green Cavendish’ bananas to many international markets.

  •  [op-ed snap] Don’t be deterred by the ‘crowding out’ effect of the fisc

    Context

    Market borrowings of the government do not always squeeze credit for the private sector in India.

    What is ‘crowding out’ effect?

    • Increased government spending and borrowing: It refers to how increased government spending, for which it borrows more money, tends to reduce private spending.
      • Why does private spending reduce? This happens because when the government takes up the lion’s share of funds available in the banking system, less of it is left for private borrowers.
      • Relationship with interest rate: Higher borrowing by the government and subsequent crowding out also impacts interest rates in the economy.

    How the Government borrowing works and the role of RBI

    • Local borrowing local spending: Typically, the government funds its fiscal deficit by borrowing from the domestic bond market.
      • Its expenditure is also local in nature.
    • Overdraft from RBI: The Reserve Bank of India (RBI) is the official banker to the government-which spends money by first taking an overdraft from the central bank.
      • This overdraft gets repaid through bond market borrowings.
    • Why overdraft? The understanding is that any such government spending should ideally not affect the availability of funds to other borrowers in the market.
    • Excessive borrowing and effects on the interest rate: Excessive government borrowing from the bond market, many cautions, could lead to a rise in interest rates for the government itself and consequently for everyone else in the economy.

    Analysis of the effects of borrowing on other variables

    • Analysis of the data reveals the following trends.
    • No impact on other variables: Local borrowing and spending by the Indian government does not impact any other macroeconomic variables like-
      • The availability and cost of funds for other participants in the economy.
      • Inflation.
      • Deposit growth, at the current deficit level—that is, with the state and central combined figure above 6% of GDP.
    • What impacts the interest rate the most?
      • The two most important variables that impacted interest rates were inflation and the repo rate. Which tend to move together.
      • What does it indicate? This clearly indicates that RBI is extremely proactive in the way it manages interest rates.
    • Effects of funds on inflation: Such borrowings that are funded by the central bank could lead to inflation, the same is true for large external inflows to domestic money markets.
      • The foreign borrowings finally get reflected in the country’s foreign exchange reserves, which have a very strong relationship with inflation.
      • Effects on interest rates: Technically, any large inflow of a foreign currency sterilized by RBI does have the potential to move the inflation needle up, thus placing upward pressure on interest rates.
    • Relationship between borrowing and growth: It is clear that government borrowing and spending actually drives GDP growth.
      • Government borrowing should not impact bank lending to companies, as the sums borrowed return to the market almost immediately.
    • How RBI controls bond yield?
      • RBI ensures that bond yields don’t shoot up because of the excessive borrowing, by taking bonds onto its books to be released back into the market in good times.

    The uniqueness of the Indian money market

    • Why is it unique? India market is a unique money market, different from the rest of the world, for the following reasons-
      • We have investors who are explicitly required to invest in government debt.
      • Banks, non-banking financial companies, insurers, provident funds, and pension funds are all forced to invest in government debt as a condition for their licence to operate in India.
      • We also find that RBI works towards aiding the government borrowing programme rather effectively, ensuring that interest rates do not change too adversely.

    Conclusion

    The government should not be excessively worried about the government living beyond its means at this juncture. Government spending being the main driver for the country’s GDP growth, it could be a good way to put the economy on a higher growth trajectory. Perhaps it is time to revisit the entire FRBM framework.

     

     

  • [op-ed snap] A road map for robust trade ties

    Context

    The challenge for India and Australia is to transform people-to-people ties into a trade relationship.

    People-to-people the two countries

    • Soft power: Soft power rather than hard economics has traditionally been the driving force behind India-Australia relations.
      • Cricket is a dominant theme that connects the two countries.
      • The Indian diaspora in Australia is a vibrant community that plays a robust role in connecting their country of adoption with their country of origin.

    Trade relationship scenario

    • $31 bn bilateral trade: The trade between the two countries has been at a modest $31 billion, largely composed of resources like coal and other minerals.
    • No progress on FTA: Negotiations on a Free Trade Agreement, which began in 2011, have not moved forward significantly.
    • No progress on coal mining projects in Australia: The problems faced by the Adani Group to begin work on a coal mining project in Queensland did not go down too well with investors from India.
    • India Economic Strategy 2035 by Australia: One of the most widely commended initiatives has been the Australian government’s release of an India Economic Strategy 2035 Report.
      • It observes that no single market over the next 20 years will offer more growth opportunities for Australia than India.
      • It lays down a comprehensive road map for strengthening Australia’s trade engagement with India.

    Development in digital technology and the role of youth

    • Development of new architecture: Meanwhile India-Australia trade has been steadily evolving into a new architecture underpinned by developments in digital technology.
      • There is a rise of a younger generation of entrepreneurs and a noticeable shift in the trade basket from resources to services.
      • Technology and young entrepreneurship make a formidable combination and should set the agenda for the future of bilateral trade relations.
      • About 80% of the Australian small and medium-sized enterprises are managed by young professionals.
      • The young can see issues like immigration and outsourcing with far more equanimity than the older generation.
      • An important role of young Australians: Young Australians are thus emerging as great champions of India-Australia trade relations.

    Scope for engagement in innovation and trade relations

    • Tech. expertise of  Australia: There is also recognition that Australia is a laboratory of ideas, innovation, technology-led growth and university-industry partnerships.
    • Scope for India in innovation and trade: India is a large and demographically young market with a love for innovation and an appetite for new products and services.
      • These synergies should add momentum to a growing engagement in trade relations.

    India’s weakness and Way forward

    • Weakest link and way forward: The weakest link in India’s exports to Australia is in merchandise. India needs to look at three broad areas.
    • First-Focus on Market Research:  Despite globalisation, markets are country-specific and culturally sensitive.
      • Indian companies will need to invest a little more in market research on Australian consumer expectations and lifestyles.
    • Second-Brand creation: Australia is a brand-conscious market while India has not created a single consumer brand of international acceptance.
      • Only when products are visible across the world’s shopping malls and supermarkets displaying their own brands that India will be recognised as a major player in the global markets.
    • Third-Innovation: Innovation is emerging as the single-most-important factor for sustained success in every sphere. Global trade cannot be different.

     

     

  •  [op-ed snap] How to protect trade in a tug of war between nations

    Context

    Developing countries have argued for decades that the rules governing international trade are profoundly unfair. But similar complaints are now emanating from the developed countries that established most of those rules.

    Why are developed countries complaining now?

    • Competition: A simple but inadequate explanation is “competition.”
      • Turning tide: In the 1960s and 1970s, industrialized countries focused on opening foreign markets for their goods and set the rules accordingly.
      • Since then, the tide has turned.
    • Left behind communities in developed countries
      • Cheap labour-an advantage: One reason why emerging-market producers are competitive is that they pay workers less.
      • Job creation in services by developed countries: To replace lost manufacturing jobs, developed economies have been creating jobs in services.
      • Not everyone has moved to the service sector job: Unfortunately, not everyone in developed countries has been able to move to good service jobs.
      • Efforts by the left-behind bring back the manufacturing job: The left-behind former manufacturing communities have a voice in the capital city now, and it wants to bring back manufacturing.
      • Yet this explanation, too, is incomplete. The ongoing US-China trade war is not about manufacturing, it is about services.
    • Services a reason behind US-China dispute: Much of the US dispute with China is not about manufacturing. It is about services.
    • Emerging market competition increasing in services: Although eight of the top ten service exporters are developed countries, emerging-market competition is increasing.
      • New services related rules: This increased competition from emerging markets is prompting a major push by advanced-economy firms to enact new service-related trade rules.
      • An opportunity to protect the developed country producers: The new rules will ensure continued open borders for services. But it will also be an opportunity to protect the advantages of dominant developed-country producers.

    Trade disputes- The combined effects of the two factors

    • There are no easy trade deals anymore.
      • Two conflicting factors: In sum, two factors have increased the uneasiness over international trade and investment arrangements.
      • First-Left behind community: Ordinary people in left-behind communities in developed countries are no longer willing to accept existing arrangements.
      • They want to be heard, and they want their interests protected
      • Second-emerging economy demanding access to service sector: At the same time, emerging-economy elites want a share of the global market for services and are no longer willing to cede ground there. So, there is no easy trade deal anymore.
    • Trade disputes-exercise in power politics
      • High tariffs and ram tactics: Threats of sky-high tariffs to close off markets, for example, and battering-ram tactics to force “fairer” rules on the weaker party.
      • The important difference from the past: One important difference is that the public in emerging markets is more democratically engaged than in the past.
      • Short timed victory: Any success that rich countries have in setting onerous rules for others today could prove pyrrhic.
      • No consensus on the rules: For one thing, it is unclear that there is a consensus on those rules even within developed countries. For example- rules to regulate social media.

    Way forward

    How should developed countries respond to domestic pressures to make trade fairer?

    • Demand lower tariffs from developed countries: For starters, it is reasonable to demand that developing countries lower tariffs steadily to an internationally acceptable norm.
    • Challenge the discriminatory barriers: Discriminatory non-tariff barriers or subsidies that favour their producers excessively should be challenged at the World Trade Organization.
    • Go for less intrusive treaties: To go much beyond these measures—to attempt to impose one’s preferences on unions, regulation of online platforms, and duration of patents on other countries—will further undermine the consensus for trade.
      • Less intrusive trade agreements today may do more for the trade tomorrow

  • [op-ed snap] Examining the slowdown

    Context

    Setting aside the gloomy projections based on short-term economic trends, the long-term and comparative evidence reveal interesting trends about the health of the Indian economy.

    Performance of the Indian economy after 1991

    • Higher growth plateau reached after 1991: After the 1991 economic reforms, the Indian economy reached a higher growth plateau of 7% compared to a prior rate of 3. 85%.
      • The high growth rate during 2003-2011: India witnessed a high growth momentum during 2003-04 and 2010-11 with a period average of 8.45% (GDP with base 2004-05) or 7% (base 2011-12).
      • Ups and downs after 2012: The momentum lost steam in 2011-12 and 2012-13, gradually picked up again gradually to reach the 8% mark in 2015-16, and then started falling consistently to reach 6.63% in 2018-19.
      • Structural dimension? This trend suggests that India’s current growth challenge has a structural dimension as it began in 2011-12.
    • Comparison with China and the world
      • Average at 7.07% after 2011-12: Despite these fluctuations from 2011-12, on average, India clocked a growth rate of  7.07% from 2011 to 2019, a decent figure compared to China’s and the world’s economic growth rates.
      • Whereas like India, the growth of the world economy was fluctuating since 2011, China’s growth declined consistently from 10.64% in 2010 to 6.60% in 2018.

    Why couldn’t India’s growth momentum be sustained after 2010-11?

    • Analysis of five variables: To answer the above question, an in-depth analysis of trends in five key macroeconomic variables was done for two different periods: 2003-04 to 2010-11 and 2011-12 to 2018-19.
      • Consumption.
      • Investment.
      • Savings.
      • Exports.
      • Net foreign direct investment (NFDI) inflows.
    • What emerged from the analysis: The results reveal that compared to 2003-2011, investment and savings rates and exports-GDP ratio declined in the 2011-2019 period.
      • How much the investment declined? The investment rate declined from 34.31% of GDP in 2011-12 to 29.30% in 2018-19.
      • Household vs. corporate sector decline: The investment decline was caused mainly by the household sector and to some extent by the public sector, but not the corporate sector.
      • The decline in investment compensated by NFDI: The slump in the domestic investment rate in the 2011-2019 period was compensated by increased NFDI inflows.
      • On average, NFDI inflow was 1.31% of GDP during 2011-2019 compared to 0.89% during 2003-2011.

    Why tax-cut not help the economy

    • The justified policy of reviving the housing sector: The decline in household sector investment justifies the package of measures introduced by the Central government to revive the housing sector.
    • Why corporate tax cut won’t help much? The questionable policy, however, is the steep cut in the corporate income tax rate from 30% to 22%, aimed at boosting private investment.
      • Given that the corporate investment rate has not eroded severely during 2011-2019, the tax cut would help economic revival.
      • Lost opportunity to spur rural consumption: A part of the largesse offered to Corporate India could have been used to spur rural consumption.

    What the decline in saving rate mean?

    • Importance of savings: The savings rate declined almost consistently from 27% of GDP to 30.51% between 2011 and 2018.
      • This was also caused by a significant fall in the savings of the household sector in financial assets. Corporate savings did not fall.
      • Why the fall in household financial savings needs to be increased? The fall in household financial savings is alarming and needs to be arrested.
      • Savings are required to meet the requirements of those who want to borrow for their investment needs.
      • Saving-investment relation: Lower household savings imply lesser funds available in the domestic market for investment spending.
    • Economic growth powered by consumption: The decline in household savings has pushed up private final consumption expenditure consistently
      • Private final consumption rose from 56.21% of GDP in 2011-12 to 59.39% in 2018-19.
      • Consumption driven economic growth in 2011-19: The increase in private consumption suggests that economic growth during 2011-2019 was powered by consumption, not investment.
      • Investment driven growth during 2003-2011: In contrast, during 2003-2011, growth was powered by investments.
    • So, declining saving rate means a slowdown in the economy may not be due to structural issues.
      • Re-examination of popular view: Thus, the popular view that economic slowdown was caused due to a slowdown in consumption demand needs to be re-examined.
      • There is no concrete evidence to suggest that the economy is facing a structural consumption slowdown.

    Export-GDP ratio decline and what it means

    • Export-GDP decline from 24.54% to 19.74%: India’s exports-GDP ratio declined from 24.54% to 19.74% during 2011-2019.
    • A trend similar to the rest of the world: The decline started from 2014-15, coinciding with a similar trend in the world export-GDP ratio.
      • However, the drop in India’s exports was significantly larger than the world, a cause for concern.
      • The exports- and NFDI-GDP ratio has deteriorated sharply and consistently in China after 2006.
    • Indian economy doing better than China: Sharp decline in China’s export-GDP and NFDI-GDP, together with the consistent fall in China’s GDP growth after 2010, proves that the Indian economy is doing better than China.

    Conclusion

    The popular view that the slowdown in the Indian economy is due to the structural problems needs a re-examination in the view of the decline in investment in tandem with the world.

     

  • Explained: Fiscal Marksmanship

    Over the past few years, many have questioned the government’s fiscal marksmanship.

    What is fiscal marksmanship?

    • Fiscal marksmanship essentially refers to the accuracy of the government’s forecast of fiscal parameters such as revenues, expenditures and deficits etc.
    • In other words, if the difference between what the government projected as the likely tax revenues in the Budget and the actual figures a year later is large then it reflects poor fiscal marksmanship.
    • In the Indian context, this term gained popularity after Raghuram Rajan, then India’s Chief Economic Advisor stressed on fiscal marksmanship in the Economic Survey for the year 2012-13.
    • He had defined fiscal marksmanship as “the difference between actual outcomes and budgetary estimates as a proportion of GDP”.

    Why does fiscal marksmanship matter?

    • The salience of Budget numbers lies in their credibility.
    • The central purpose of publicly disclosing the Budget or the annual financial statement in a democracy and seeking approval from the legislature is to make the policymaking and governance transparent and participatory.
    • Everyone knows that Budget numbers are forecasts and estimates, and as such, unlikely to tally exactly with the actual numbers a year later.
    • But there is an underlying belief among people that when the government states, say, that its revenues will grow by 12% or that its fiscal deficit will remain within the FRBM Act’s mandate as it is based on genuine calculations.
    • However, if these fiscal forecasts turn out to be way off the mark repeatedly, it will undermine the credibility of the Budget numbers and indeed the Budget presentation itself.

    Why is India’s fiscal marksmanship being questioned?

    Typically, the fiscal marksmanship tends to get dented every time the economy faces a bump during the financial year.

    • For instance, as a result of the extent of the Global Financial Crisis in 2008, budget forecasts in the ensuing years did take a hit.
    • The latest trigger has been the wide discrepancy between what the last couple of budgets — first the interim budget for 2019-20 (presented in February 2019) and then the full budget for 2019-20 (presented in July 2019).
    • It expected the nominal GDP growth to be in 2019-20 and what the First Advance Estimates (FAE), released by the Ministry of Statistics and Programme Implementation in January 2020.
    • For instance, the July 2019 Budget expected nominal GDP to grow by 12% in 2019-20 but the FAE expect the nominal GDP to grow by just 7.5% (which by the way is a 42-year low).
    • Since all budget calculations are based on the nominal GDP, it is expected that this wide variance in nominal GDP will reflect across the board in the coming Budget.

    Impact on revenue

    • The government’s revenues are unlikely to grow anywhere close to the last Budget’s expectation.
    • Indeed, the revenue shortfall is expected to be anywhere between Rs 2 lakh crore to Rs 5 lakh crore.
    • As a result, either the fiscal deficit will overshoot from the budgeted number or the expenditure numbers will be much lower than promised.

    Why has fiscal marksmanship worsened?

    • As mentioned earlier, when an economy’s growth slows down (or picks up) sharply within a year, it is possible that the fiscal forecasts for that year go down (or up) substantially.
    • However, such changes do not happen too often.
    • In the recent past, however, there is one structural change that appears to be contributing to poor fiscal forecasts by the government.
    • This structural change was the government’s decision in January 2017 to advance the presentation of the Union Budget by a whole month.
    • Accordingly, the Union Budget for 2017-18 was presented on February 1 instead of the last working day of February (28th or 29th), as was the norm till then.
    • It meant that the First Advance Estimates, which used to come by January end (after taking into account the economic activity of the first three quarters of the financial year), had to be brought out by the start of January.
    • This, in turn, essentially meant that the estimate of the key nominal GDP data for the current year — on the base of which next year’s nominal GDP and other estimates were to be made — had to be made using the first two quarters of the current fiscal year.

    Why didn’t the government course-correct and project slower economic growth in July 2019 when it presented the full Budget for 2019-20?

    • It is unclear why this was not done. But could be two or three possible reasons.
    • One, the FM may have favoured continuity over the Interim Budget estimates instead of providing a starkly different set of estimates.
    • Two, and a related reason, could be that the government did not have enough time to make the adjustment because it may have required redoing the whole Budget afresh.
    • Or third, because perhaps the government did not recognise the severity of the economic slowdown that has been underway.

  •  India’s imports of palm oil — dynamics of the trade with Malaysia

     

    India has cut import duty on crude palm oil (CPO) and refined, bleached and deodorized (RBD) palm oil, and also moved RBD oil from the “free” to the “restricted” list of imports.

    A move against outspoken Malaysia

    • Curbing palm oil imports has been construed as retaliation against Malaysia’s PM Mahathir Mohamad, who has criticised India’s internal policy decisions such as the revocation of the special status for J&K and CAA.
    • Malaysia has also been sheltering since 2017 the Islamic preacher Zakir Naik who is wanted by India on charges of money laundering, hate speech, and links to terror.

    Has India banned import of Malaysian palm oil because of political reasons?

    • Not really. The import of RBD palm oil has been restricted, not banned — and this is from all countries, not just Malaysia. Also, CPO can still be imported freely.
    • Under the trade classification system that India follows, except for goods that can be imported only by state trading enterprises all goods whose import is not restricted or prohibited are traded freely.
    • Normally, a special licence is required to import a restricted good. The government has neither specified what the restrictions entail nor issued any licences.
    • However, it has been reported that vessels carrying RBD palm oil are stuck at several ports because buyers have been asked to shun the product.

    How much palm oil does India import?

    • India imported 64.15 lakh metric tonnes (MT) of CPO and 23.9 lakh MT of RBD in 2018-19, the bulk of which was from Indonesia.
    • India imported $10 billion worth of vegetable oil in 2019-20, making it the country’s fifth most valuable import after mineral oil ($141 bn), gold ($32 bn), coal ($26 bn), and telecom instruments such as cell phones ($17 bn).

    Why does India need so much palm oil?

    • It is the cheapest edible oil available naturally.
    • Its inert taste makes it suitable for use in foods ranging from baked goods to fried snacks.
    • It stays relatively stable at high temperatures, and is therefore suitable for reuse and deep frying. It is the main ingredient in vanaspati (hydrogenated vegetable oil).
    • However, palm oil is not used in Indian homes.
    • That, and the fact that CPO continues to be imported, makes it unlikely that the decision to restrict refined palm oil imports will impact food inflation immediately.

    Who will be impacted by the decision?

    • Indonesia and Malaysia together produce 85% of the world’s palm oil, and India is among the biggest buyers.
    • Both Indonesia and Malaysia produce refined palm oil; however, Malaysia’s refining capacity equals its production capacity — this is why Malaysia is keen on exporting refined oil.
    • Indonesia, on the other hand, can supply CPO, which would allow India to utilise its full refining capacity.

    Why import Crude Palm Oil?

    • The CPO that India imports contains fatty acids, gums and wax-like substances. Refining neutralises the acids and filters out the other substances.
    • The filtrate is bleached so that the oil does not change colour after repeated use. Substances that may cause the oil to smell are removed physically or chemically.
    • This entire process increases the value of a barrel of crude oil by about 4%.
    • Additionally, there are costs to transporting the crude, which makes it more cost-effective to import the refined oil.
    • But the refining industry has been demanding that the import duty on refined oil be increased, which would make importing crude oil cheaper than importing refined oil.
    • The decision to restrict imports of refined oil will benefit refiners, which include big-ticket names like the Adani Wilmar group.

    Will restricting imports of RBD palm oil help farmers?

    • Restricting refined oil imports will not help farmers directly, as they are not involved in the process of refining.
    • However, the restrictions have caused refined palm oil prices to increase. If prices continue to hold, farmers will get a better realization for their crop.
    • But the timeframe over which the changes in import policy will have an effect on domestic crop realization is fairly long, given that palm trees take over four years to provide a yield.
    • Also, if the demand is met entirely by importing and refining CPO, farmers will be left out of the picture.

    How will Malaysia be affected?

    • Malaysia has said that it cannot retaliate against India because it is “too small”.
    • With imports to its largest market restricted (India bought over 23% of all CPO produced by Malaysia in 2019), Malaysian palm oil futures fell by almost 10% in January, although it has recovered since then.
    • India and Malaysia signed a free trade agreement — Malaysia-India Comprehensive Economic Cooperation Agreement — in February 2011.
    • In 2018, Malaysia exported 25.8% of its palm oil to India.
    • If India does not issue licenses for importing refined oil, Malaysia will have to find new buyers for its product.