Wednesday, January 16, 2013

Budget 2013-14 the tough lines

Budget 2013: Bold initiatives needed in a tough year ahead.

In the political context of the nation, it is difficult to expect the Budget 2013 would either be path breaking or reformist. General Elections are due in 2014 and the 2014 Budget would therefore be vote-on-account budget. The current budget is in the backdrop of low growth continuously for two years both in agriculture and manufacturing with no early hope of revival, unabated inflation albeit marginal fluctuations and rising current account deficit- the highest so far at 5.2%. Fiscal Budgetary Management has already been put on the backburner. RBI has put out a report on State Finances this month that dries up any further hope on States coming to the rescue of the Centre in containing the fiscal cliff we are nearing. FM started his discussions with the stakeholders to see where he can gain the corners.
One of the fundamental principles of taxation is: at the higher levels of income, the tax has to be progressive and at the lower level, regressive. The Direct Tax code kept this in view. It is not unlikely that as the system matures and cash economy gets lessened, the tax rates would be further rationalized from the existing three slabs of 10, 20 and 30 percent of the taxable income. All exemptions shall be withdrawn. But at the moment there seems to be remote possibility for any further rationalization of rates.
The recent hike in fuel and gas prices and the rationalization of related subsidies as also the rise in rail passenger fares leave no hope of inflation coming down. Monetary policy of the RBI towards the fag end of this month may at best make marginal changes bowing to pressures of the stakeholders and the government. Leaving to itself the RBI should prefer to keep the rates unchanged. Hence the fiscal measures are the only remedy.
Incentives for investments should come from the growth rather than through the exemptions and fiscal management. The measures to ensure growth need not necessarily come from patting the rich and an open invitation to the dollar economy to take over India. In the context of our poor rank in the league of nations at 97 out of 131 in the Economic Freedom Index, it is time to revisit the perverse incentives in health and education sectors and reverse them. If the FM tackles health and education sectors and increases investments to ensure good health, safe drinking water, universal free education up to class X, growth will emerge as a natural process due to enhanced people’s ability to work hard, save a good pie for productive consumption and healthy recycling of the economy.
My suggestion would be: let each corporate hospital provide 20% of every type of health service to the poor, women, and senior citizens on the basis of Aadhar and all such cost incurred by the Corporate should be qualified for exemption of tax. Similarly, all educational institutions that admit 20% of the students belonging to the poor for providing learning and learning tools, again on the basis of Aadhar information, not on the basis of caste or creed shall be also similarly exempt from tax. Universal education would be a goal nearer to achievement in the process.
In fact, I would venture to suggest that the best way to reduce imbalance and ensure growth is through increasing the share transaction tax from the current level of just 0.15% to 0.35% at both the ends of the transaction. There will be a hue and cry immediately after such increase but the dust would settle down eventually. The philosophy behind is that the buyer sells for a future gain and the seller sells for avoiding immediate loss (a loss of expected surplus). In a way both are gainers. The tax is paid out of only the surplus. The tax is not going to be regressive just because it is done at both ends of the transaction. The tax collection expenses is almost nil as the de-mat account generates the tax payable, deducts at source and immediately it gets into the Government Treasury. There is no tax collector or tax inspector here. The tax income so collected is available to the Government immediately for investment in either social expenditure like the pensions payable to the widows, physically handicapped and the like or for meeting the natural calamities immediately after their occurrence. Actually, to this extent even the corporate tax structure can be rationalized from the subsequent years. This would help the Fiscal Responsibility Budget Management significantly.

Sunday, January 6, 2013

Budget 2013-14 Suggestions

Dr Rangarajan's  proposal to put a surcharge on the higher income brackets progressively is a worthy suggestion at the right time; this can be at the threshold of Rs.10lakhs-20lakhs: 3%; >Rs.20lakhs-30lakhs: 5%; >Rs.30lakhs: 10%.
Another progressive measure could be raising the share transaction tax above the threshold level of transactions, say above Rs.2lakhs where the small investor gets incentive to invest and the large investor pays to the exchequer a STT of 1% instead of the present nominal STT. The third measure to reduce fiscal burden would be doing away with the Parliamentarians and legislators getting Rs.5crores to spend in their constituencies through the Constituency Development Fund as most of such spending has been ill-spent as revealed by a number of studies. The fourth area could be to reduce the personal security provided to the legislators only for the Z category. The fifth area could be taxing the Parliamentarians and legislators for non-attendance and for the non-participation in the various standing committees of the Government. These would certainly reduce the fiscal burden of the Government.
The other most important area where subsidies have to be re-engineered is farm sector: Restrict subsidies to the small and marginal farmers so far as input subsidies are concerned. Provide a market stabilisation fund and extend support whenever the prices for farm products fall below the cost of production plus a minimum profit for the farmer. The recommendations of CACP could hold good for this purpose.

Saturday, January 5, 2013

Bullock cart to Small car - growth story does not end here

Bullock cart to small car – growth story does not end here.

India’s bullock cart moved to motor cycle and small car economy. Most grooms in rural villages, tribal villages not excluded, demand motor cycle as part of the wedding gift from the in-laws. If this is a sign of growth, we did grow. Yet the farmers’ are committing suicides and still fight on the streets for their produce to reach markets and after reaching, for a fair price. All the predictions of rating agencies at the beginning of the year, CRISIL, CARE etc., that the economy would grow to 6percent in the least has been belied. That the economy would grow only by around 5.3-5.4 percent during the current fiscal remains a hard reality.
India’s economic growth is inextricably linked to growth in farm sector that constitutes around 14percent of GDP. This has slowed down to around 2.5percent. Manufacturing sector driven by poor farm supplies and global recession did not move up beyond 8.2 percent in the third quarter of this fiscal. Services sector that constitutes 56-58 percent is largely dependent on overseas markets that moved sluggishly throughout the year. We have to be content with 5.3 percent growth in the overall GDP in the third quarter, lower by four notches from the previous quarter.
Unabated inflation with no signs of easing in the next quarter has only exacerbated the weaknesses in the economy. Monetary authority could not accede to the demand for interest rate reduction to speed up credit for the lagging manufacturing and construction sectors.
Volatile capital markets, growing current account deficit at 4.3% of GDP and a budget deficit of 6%, dashed the hopes of revival of the economy, notwithstanding the ‘so called reform regeneration’ that was initiated amidst roaring corruption scandals and large scale bureaucratic inefficiency.
The policy paralysis hitting till the second quarter though relieved, action paralysis could not be overcome. The New Year has to less to cheer about with the weak law and order, reflected in the most concerned and agitating crowds forcing their way to the Rashtrapati Bhavan. 
Speaking of good governance is akin to smelling jasmine in fish and fowl market. There is brazen violation of the Constitution by even the UPA ruled State like Andhra Pradesh. The 97th Constitution Amendment Act 2012 dealing with Cooperative legal reforms and governance statutorily seeks a State Election Authority to conduct elections to cooperatives and the States are to carry out all the amendments required before February 14, 2013. The State that has been postponing elections to cooperatives for the last two years announced them hurriedly to have the last laugh on their subversive methods of winning the elections. The New Act would not allow non-active members to cast their vote. The ruling party is afraid of losing hold on the cooperative societies that hitherto formed the bedrock of State politics.
A Model Cooperative Liberal Act drafted by a well-meaning NGO and circulated to all the States did not even merit acknowledgement, demonstrating the indifference of States to correcting misgovernance and mismanagement, the two evils that prevented the growth of cooperatives, through the Constitution Amendment Act 2012.
The FM hopes that the Banking Regulation Act Amendments would pave the way for the foreign banks to open branches in India and that they would also contribute to financial inclusion while the Indian banks find branches to be expensive outfits and financial inclusion turning up as a ritual.
Cash subsidy linked to Aadhar trumpeted as ‘pure magic’ touching a fringe by the end of the fiscal 2013 in the experimental districts in the country would not take much time to be a cropper with the backing instrument yet to demonstrate its efficiency in content and delivery.
We have not been able to diversify our export markets significantly away from the US and Europe still fighting with recession woes. The sustained market is domestic market where the middle class is surging ahead fighting against odds. Youth continues to be the hope of the nation. These two green patches should leave some hope for revival. Nobel Lauriat Joseph Stiglitz sounded caution on growth model pursued by India with export markets as destination. On the other hand,  he wanted the rulers to concentrate on domestic markets and enhancing employment and enterprise promotion to drive the consumer spending.
A redirection of expenditures on education and health and continuous and responsible monitoring of investments in these two areas for prompt execution and conscious institution building efforts with the help of civil society organizations, sans foreign donations, could pave the way of quicker growth in 2013 and the small car economy gets the speed on smooth roads.
*The Author is an economist and Regional Director, Professional Risk Managers’ International Association, Hyderabad.

Thursday, January 3, 2013

The Despair and the Hope 2013

The year ends on a note of despair. 
The NDA approved Twelfth Plan with a revised pragmatic growth of 8% for the plan period. From Kaushik Basu to Assocham predictions for growth of the economy this fiscal stay put at no more than 6%. European markets continue to destabilize global situation with less hope of revival than the US markets, where the fiscal cliff is addressed legislatively and affirmative action.
RBI is more pragmatic and makes it range bound 5-6 percent. All the Ministries involved in infrastructure development are bit by scandals galore and cases of corruption engulfing them. Welfare ministries have excess expenditure and ill-directed subsidies. Fiscal deficit has reached unsustainable levels. Public sector disinvestment takes a beating.
Poverty measured by the number of mobile users and the increase in the self-help groups though has declined; its definition from the altars of power created flutter and remains unresolved. No State can claim reliable statistics on the poor.
The so-called reverse of policy paralysis is caught in action paralysis at the end with the wasted days more than the functioning days of the Parliament.
For fifteen days, youth all over the country, are driven to streets with the most heinous rape incidents demanding legislative and judicial actions to remedy the gender crime.
RBI in its latest Financial Stability Report rings alarm bells. The non-performing assets of the public sector banks that occupy 80% of the country’s financial space are proving to be a perpetual worry in the backdrop of even extended start date for Basel III capital norms to come in from 1st April 2013 instead of 1st January 2013. Current Account deficit at 4.5% is at unsustainable levels.
Federal relationship has put the tax reforms on the edge. The Direct Tax reforms and the introduction of GST are in imbroglio.
Cash transfer scheme slated for 40 districts initially halved by the target date as the back-ended AADHAR has thrown up many data inconsistencies and corrections even in the districts that issued the ID cards to all the citizens. The schemes linked to PDS and gas distribution consuming more subsidies had to be put on hold for introduction till April 2013. Verification and validation of Aadhar card data is proving tough. Banks’ and Post Offices’ preparedness to introduce the scheme leaves much to be desired.
Inflation is still on the rise and measures to arrest gold imports to respond to demand pressures announced as though it is a New Year gift from the Finance Minister would hardly contribute to stabilization of the volatile commodity markets. Supply side issues have been addressed inadequately.
Both Health and Education sectors are bogged down with insufficient budget allocations and inefficient administration in most States.
States’ respect for the Constitution is on the wane demonstrated by the unresponsiveness to the only progressive legislation of the UPA Government in 2012- the 97th Constitution Amendment Act 2012 that targeted correction to mis-governance and mismanagement of the Cooperatives, the fourth economic pillar of the country.
Still the ethos of India built largely on optimism hopes for turning the tide in favour of value-driven growth and equity.
The basis of my hope is that the Federal Relations are under review by the veteran past Bank Regulator and a former civil servant, Dr Y.V.Reddy. second, the tough measures suggested by the RBI for arresting the concentration risk from NBFCs dealing with gold-based financial products, and the revised pricing mechanisms for fixing the gas and energy prices suggested by Dr Rangarajan in his latest Report awaiting clearance from the Governement. SEBI has already moved in for more reforms in the capital markets.
  I would certainly join the chorus of hopefuls at the beginning of 2013.