Saturday, February 18, 2012

AP Budget evokes mixed responses

AP State Budget 2012 evokes mixed response
The fourth largest State of the country, Andhra Pradesh has as many credits as discredits at the time of its Annual Budget 2012. It has a growth rate of 9.26% surpassing the National GDP 8.5% in the five-year period 20045-12. Over 40% of its geographical space is farm land and has 22% forest cover. 8744km river length and a coast line of offers scope for port development. It has tainted bureaucracy; Ministers and politicians deeply entrenched in corruption and controversies; though second in the country in mining, the growth of the sector is marred by unholy exploitation. The State saw the farmers queuing up for fertilizers; burning the crops like cotton and mirchi; throwing of onions in the streets for want of better price; crop holiday etc. Several of the recommendations of Jayati Ghosh Committee in the wake of farmer suicides and Mohan Kanda Committee Report in the wake of crop holiday have not seen light of the day. Liquor mafia in the State is under seize of the ACB and the estimated amount is Rs.5000cr and some informed sources place it ten times more.
The Rs.1.45lakhcrore budget of Andhra Pradesh Finance Minister in this backdrop is a hopeful estimate against the poor performance in 2011-12 both on tax revenue and capital receipts. Non-plan expenditure indicates a rise of around 15percent.
Sectorwise Allocation in regard to Economic Services (%) in Budget 2012-13
Sector RE.2012 BE 2012-13
Economic Sectors 36.46 37.99
Agriculture & Allied activities 3.56 4.04
Rural Development 5.93 6.48
Irrigation & Flood control 16.09 16.56
Energy 4.05 4.07
Industry & Minerals 0.70 0.70
Transport 3.05 3.04
Science, Technology & Environment 0.01 0.01
General Economic Services 3.08 3.09
Social Services 22.87 31.74
General Services 40.67 30.28

The tax buoyancy is seen in the expectation of nearly 20percent rise to Rs.66021crores in 2012. The growth euphoria of 9.26percent compared to the National GDP growth rate of 6.88% whittles down when one sees the number of farmers’ suicides and the lowest human development index ranking of the State (10th). Agriculture budget in a predominant agriculture State is a meager Rs. 3175crores (2.2% of the total budget or 3% of the revenue budget). There is no announcement of Market price stabilization fund the farmers have been seeking for the last five years. Regarding drought relief, except looking to central grant, nothing more could be seen.
The best part of the Budget is higher allocation to Education that touched 18% of the Revenue budget, the highest in the recent years. Allocation to Health dropped by a notch over the previous year from 4.16% to 4.04%. Allocation of just Rs.633crores in the backdrop of CII-organized Global conclave that promised investments of Rs.6.48lakhcrores would make the investors turn a nelson’s eye on the State.
Power sector is reeling under weekly power-off for the industry sector; farmers cry foul over the free power/seven hours a day; and severe voltage fluctuations speak of the quality of power. Investments seem trifle in this scenario for this sector too. Budget has long verbose where the allocations are least; the irrigation sector cleverly sticks to whatever was spent last time: it is actually Rs.8459crores against the allocation of Rs.15000croress. This helps in Fiscal Responsibility Budget Management of the State even in the year 2012 as releases are hinted only at the levels attained in 2011-12.
If the Social sector expenditure got a higher share it is only to be expected in the wake of by-elections in Telangana region and the impending General Elections a year after. The unsustaining sops would certainly cast a shadow on the growth prospects of the State. The Chief Minister’s keenness on sports led the Finance Minister to announce well-equipped sports stadia in each District. Legislature Constituency Fund of Rs.382crores goes for non-monitored investments/expenditure. The tiresome speech of the Finance Minister faces trying times in reaching the expected outcome.

Thursday, February 16, 2012

Budget Blues

Economic Survey prior to Union budget 2012-13 is slated for 15th March and the Finance Minister started losing sleep in the wake of huge subsidies required for food safety, agriculture, irrigation, and investments. Strangely, he did not batter his eye-lid even once while increasing the MPs’ salaries and the annual largesse from Rs.1crore to 2crore per annum that triggered of chain reaction in States and even Municipal Corporations. The Corporators of Hyderabad were allowed a similar largesse at its Februrary 9th meeting. This largesse has no accountability and responsibility attached to them. The fiscal deficit takes a dip – both States and Centre put together by avoidable percent. FRBM has already reached beyond the promised level of 4.5% this year, with revenues dipping from both direct and indirect taxes in the wake of anticipated modest growth of around 6.9% (this also is doubtful) and expenditure increasing with largesse announcements and fruitless expenditure due to elections in five leading States. These Elections have taken to the Caesar’s predicted death date – 15th March.

CRISIL predicts a slow-down in the agriculture growth from 7.0 percent in 2010-11 to 2.5 percent in the current fiscal. Plagued by high interest rates and slowing economy, manufacturing sector would also decline and it may be less than the predicted decline to 3.9 percent. Mining sector anyway declined due to a spate of scams and Supreme Court directives on further exploration in key areas. Power sector is way behind the requirements of manufacturing and other sectors. The key thermal power in the wake of less explored coal reserves and choked supply channels would continue to shock the infrastructure sector. Equitable and sustainable development demand two essential conditions: respect for human rights and satisfying the basic needs of social development – health and education. The country’s HDI has declined even amidst a growing GDP (lowest in global rankings); there have been gross violation of human rights across the length and breadth of the country. There were anxious moments for the Government in setting its house in order in the shadow of series of scams of huge order. General Elections will be round the corner at the beginning of next year and wooing the electorate with largesse has to be countenanced by him. The challenges before the Union Finance Minister this year therefore are formidable.
Global economy casts its shadow:
According to the Global Economic Survey, both the World Bank and the UN predicted downward growth prospects:
• The global economy is expected to expand 2.5 and 3.1% in 2012 and 2013 using purchasing power parity weights
• High-income country growth is to be 1.4% in 2012 and 2.0% in 2013,
• Developing country growth has been revised down to 5.4 and 6%
• World trade, which expanded by an estimated 6.6% in 2011, will grow only 4.7% in 2012, before strengthening to 6.8% in 2013.
Post-UN and World Bank predictions during January 2012, the Central Statistical Organisation projected a further decline in India’s growth rate for the current year to 6.9%. It is not unlikely that even this figure may not realize when the actual measure ushers in at the end of the fourth quarter.

The fiscal deficit estimated to be around 6% of GDP would hardly find space for further doll-outs. The ray of hope is that the US economy promises a revival. The bail-out package to Europe also lends some credence to keep the balance swinging in favour of arresting unrest in the economy. However, the domestic undoing in the last two years unfolding scams after scams needs tackling firmly and this is where the infirmity lies.

Markets are not going to behave worse if the FM makes bold to increase the Share transaction tax to at least one percent. The advantage is that there are no tax administration costs as all the revenue goes to the treasury through payment gateways with no loss of time. The initial resistance and the drop in the index and the euphoria of pressures would be just a temporary phenomenon. The FM cannot any way bring back to the country even one fourth of the stashed blackmoney stored mostly by Politicians, to save the economy. Preventive measures lack the guts for implementation. There is no strong legislation to confiscate the properties of the corrupt politicians and bureaucrats. The Reforms may move only at snail space.

Stringent measures are the need of the hour to infuse capital in infrastructure development, agricultural production, storage, transportation and marketing. SME sector needs a boost and that is possible if a separate exchange set up is made functional involving banks and SIDBI.

Transaction tax for all high priced commodities like Diamond, Gold, silver and others needs to be introduced to augment the revenues of the government. Leakage of income by keeping a strict vigilance over Corporates and government institutions itself would give a boost to revenue.

It is time to revamp the whole system of data collection in the economy. More importantly, the farmers must be provided input subsidies of a larger scale than now but with laid out crop planning regionally acceptable; investments in drought proofing the economy; and finding resources for merit goods like education and health at double the rates prevailing now.
He has to rejig the incentives for investments in infrastructure in a manner that their delivery coincides with the actual grounding them. Capital flows would be governed by global financing conditions. It is hoped that the next policy announcement from the RBI may see a southward trend in basic rates. Against an otherwise discouraging year we had a job growth and it is hoped that this would continue, particularly in the manufacturing and services sector.

A slightly controversial measure can be the currency transaction tax mooted by the International Cooperation for Development and Solidarity in 1999 itself. Since this requires international agreement, the proposal can be taken to the G-20 for discussion and acceptance.
The other important area is refurbishing capital to the Nationalised Banks that constitute a little over 80 percent of the total global business. The NPAs have shown a phenomenal surge in the recent years not just because of global integration of financial markets and the recession, but due to lax credit risk assessments and monitoring. It is strange that Banks lent to companies like Rs.4500crores to an airline company should not have appointed a General Manager to monitor its cash flows on an on-going basis. The 2-G scam tainted monies pose another big dent into the public sector banks. If the Government keeps on refurbishing capital just because it happens to be the owner and the tier-1 capital needed increase due to implementation of Basel III migration, it is tax payer who has to take the burden and this is going to be huge in the wake of rising business in infrastructure and manufacturing sectors. The risks arising from lending to farm sector and SME sector seem to be a trifle compared to the risks in lending to the emerging sectors. Why should the tax-payer take the hit on these counts? It is time that the FM makes bold to do away with subsidies to the bureaucracy; fuel subsidies within the government itself – it is government vehicles that enjoy substantial fuel subsidy.
My sympathies are with the Finance Minister this year in the gigantic task ahead.