Revisiting India's Growth - A Flip Flop Story

India’s growth A flip flop story:
B. Yerram Raju
India was the cynosure of the rest of the world when it clocked an average annual growth of 8.5% during 2005-10. When it fell precipitously to less than 5% expectation this fiscal it equally became a point of discussion. The bubble of growth got pricked with scams, scandals and charges of corruption among the rulers and ruling gentry. Supreme Court said over 30% of the Members of Parliament are tainted and cannot afford to be in the ruling galleries based on the Right to Information Act petition. While all the progressive legislations aimed at further reforms to the economy are waiting in the corridors of the Parliament, the RTI Act was amended to provide reprieve to the affected Members and also allowing even those in Jails to contest the elections. Why in any case India should interest the world in the first place? It has 350mn Middle Class and around 300mn the poor and not-so-poor providing a huge domestic market for any FII seeking entry. The present Government has been very accommodative to the FDIs, FIIs to come into the retail markets and bending backwards for the hitherto barred defense sector. In order to balance the social and economic forces, the Food Security Act has been brought into position that involved a huge subsidy flow that could easily up set its fiscal deficit calculations.
IMF and World Bank also downsized their growth expectation to 3.5 from 3.7 percent during the current fiscal. Emerging economies in general have been steadily slowing with India and China in the lead. Not long ago the IMF said that global growth would be driven by the emerging economies growth and there is a sudden volte face. It is this contextual reference that would make the flip flop of India’s growth story interesting for the rest of the world to take note of.
Inflation continues to be a major worry with the country’s topmost economic advisor Dr Rangarajan warning of the likely stagflation. Domestic savings are not growing at sustainable rate any longer and this is a serious cause for worry. Banks’ short term deposits are on the increase but the medium and long term deposits are on decline whereas the demand for long term credit is increasing with housing, real estate, infrastructure denting the AML of Banks. Decline in savings rate is loss of fundamentals of the economy. There is keenness to do all that is necessary to let it grow to no less than 28-30 percent and this can be done in two ways: incentivize savings through fiscal policy and protect the deposit rates against rising prices. Raghuram Rajan, the new Governor, Reserve Bank in his first Monetary Policy statement on the 20th September 2013 confirmed that controlling inflation and improving the savings and pushing financial inclusion agenda are critical to the economy by raising the rate by 25 basis points contrary to the expectation of pushing the interest rates down. Markets were in fact shocked.
The Flop Side:
Post-liberalization trended towards a sustainable growth in the services sector while the country has to look for investors from developed countries for growth in infrastructure not supported by right policies.
Even to stay where they are in growth trajectory, India needs multiple times of investments in school buildings (most public school buildings in villages and towns are in dilapidated state: some with collapsing roofs; some with no basic amenities like safe drinking water and wash rooms for children; no play grounds; no teaching aids etc.); primary health clinics; safe drinking water; drainage and sewerage systems; sanitation; highways – both central and state; repairs to rail tracks and replacement of train compartments at galloping speed to catch up with the new trains and emerging demands on rail traffic; goods transport coaches; airport maintenance etc., most of which are with the governments, State and Centre. The resources have to be found either through public borrowing or increase in taxes. If it has to borrow, it will be of long term nature as all such assets have no prospect of returning either the principal or interest. Its capacity to indulge in fiscal deficit is peaking. The virtuous moves of right to employment, right to education and food security have their loopholes in the systems that were created to result in their effectiveness.
The country’s natural resources are declining in productivity: rivers are silting more at the nose-end where they join the sea; minerals like coal to generate the thermal energy are inferior although the stocks are assured till 2050 but these are environmentally hostile; the country has very little natural gas, fossil fuels and has to depend on such of these depleting resources of the West and Middle East; soils are also depleting in energy with regeneration requiring huge organic resources; nuclear and solar energy are proving to be highly expensive.
Agriculture production though has potential still left in the virgin soils of Bihar and eastern UP on the Ganges plains, frequent flooding of rivers and mismanagement of rivers does not leave enough hope for sustainable growth here. Forest wealth is also degenerating. Animal and bird population to maintain ecological balance in the biosphere suffers from disease and malnutrition due to wanton neglect in most cases and in others due to the ravages of nature like floods, cyclones, tsunamis and earthquakes. Claims just keep growing while resources keep depleting – and real prices of energy and commodities have begun looking to north with little prospect of looking south. It would appear as though we are peaking limits of growth if we would like to measure growth only by the GDP figures.
Gross Domestic Product is something we need to look at: Is this the right measure? GDP defined as the market value of all goods and services produced in one year by the labour and property in a geographic space – the country. It is therefore more space related than ownership related. If the number went up economists consider that all was well whereas the decline meant that something was going wrong somewhere. GDP does not distinguish between waste, luxury and satisfaction at fundamental levels and there is no accounting for the costs and benefits. It builds inequalities and the glaring examples: the more the rich accumulate riches the GDP increases and takes for granted that this would lead to the poor reducing in numbers; the companies may invest and grow but the employment may go down with every unit of increase in production and the market index rises with no guarantee that employees would have their share equal to their contribution. There is no guarantee that there would be happiness around with growth measured by GDP increases. It was a tiny neighbor Bhutan that first thought of Gross National Happiness has to be measured and now the UN Human Development Index is taking this into account but the nations like ours still find it difficult to move to such measure.
Let me hasten to mention here that we are not alone in this journey of stagnation. There are concerns about the sustainability of economic recovery both in the US and Europe, still worse. In the recent G-20 meet Indian leaders made successful noise that US should not hasten to withdraw the stimulus measures and resort to the threatened Quantitative Easing. This means that the capability of developed nations to come to the aid of India or other developing nations in the midst of their own problems would be on the wane. Indian economy basically is domestic market driven rather than export-driven. Its neighbor China though recovered from the shocking decline is not to see the earlier double-digit growth.
India’s slowdown in such context is not seen as a big worry while new-normal advocates see the alarm bells dinging in the ears. Inflation in terms of CPI is still a worry. Oil prices uncertainty also can throw the expectations bizarre.
The Flip Side:
Technology and innovation have shown the way, no doubt but have also been pointing to certain destructive dimensions. Coming to the Services sector, there has been a fall in growth rate on global cues. It is unlikely that this sector would deliver growth rates of the nature seen in the last decade and half. It would appear that we have to contend with lower growth rates in the next few years unless dramatic essentially Indian innovations surface. The innovations are taking place more in the mobile technology areas and they are all in countries other than India. Trade gap has lessened by 23% during last month. All the hope of rebound is contingent on oil prices not upsetting our import basket.
The big guess of agricultural sector pushing growth to the expected level would seem a bit hasty considering the time lag between production and its reach to the markets. Second, its estimate of manufacturing sector does not look realistic. The capital goods imports that have surged by75% the last eight years could be generating yields in the next six months. Its survey of 2841 companies reveals that the rupee depreciation had impacted only 6% of them. Therefore, it is just logical that CAD did not have adverse impact on the manufacturing sector as feared. However, what happened actually is the neglect of SME sector by the financial sector on one side and inadequate linkage from the large corporate sector on the other. If the capacity utilization of the capital goods sector improves with core sectors like coal, energy, oil and infrastructure showing a mark-up, it is possible that the growth of manufacturing sector could surge.
The key exports that have great potential are in readymade garments and pharmaceuticals. Wherever one goes in the world, we would find the Chinese and Bangladesh readymade garments with local brand linkages. Actually, this sector has been our forte historically. It is the curse of the sector that it did not have a stable encouraging policy for investments and appropriate incentives. This is an area that does not brook delay. Pharmaceuticals are already on the march and hopefully they would establish as global leaders in export markets.
The cabinet sub-committee has just cleared about $2bn of investments in infrastructure just on the eve of this report. The FDIs started looking up and the FIIs also started flowing in during the last ten days. The capital markets looked consistently buoyant during the last five days. If this trend continues, it is very likely, that the forex markets also stabilize. To expect FDIs and FIIs within the next six months to surge would be over-expectation considering the political scenario dancing on uncertainty with General Elections slated in February 2014, just about six months hence.
If demographic dividend that the country is likely to have till at least 2025 should give the advantage, it should invest more in education and health sectors and this would in turn help people think of rationalizing and practicing austerity led growth. The country has to learn the lessons of growth, even if they are the hard way.
In the short term, however, expectations seem to have been changing for the better.
Different agencies have raised varying growth expectations of the Indian economy at the end of the current fiscal. World Bank placed it at 4.5%; CRISIL in its latest analysis reports that the growth rate could at best stabilize at 4.8% at the end of the current fiscal and the rupee may rally back to Rs.60 a dollar. Prime Minister’s Economic Advisory Council has put it at 5.3% while the Reserve Bank of India in its monetary policy of July 30 placed it at 5.5%. Most estimates are on the basis of a rebound of growth of agricultural sector to more than 4% stabilizing the food prices and the CPI, a bizarre guess indeed for there would be certain time lag between the growths in farm production to reach the consumer windows!
The newly appointed Governor Raghuram Rajan would also seem to have anointed the economy a bit in a fortnight of his assumption of charge with the announcement of a slew of intentions to liberalize the banking sector. But his maiden monetary policy told it all.
But there is some hope on the horizon for the manufacturing sector, I am prepared to buy. The capital goods imports that have surged by75% the last eight years could be generating yields in the next six months. Its survey of 2841 companies reveals that the rupee depreciation had impacted only 6% of them. Therefore, it is just logical that CAD did not have adverse impact on the manufacturing sector as feared. However, what happened actually is the neglect of SME sector by the financial sector on one side and inadequate linkage from the large corporate sector on the other. If the capacity utilization of the capital goods sector improves with core sectors like coal, energy, oil and infrastructure showing a mark-up, it is possible that the growth of manufacturing sector could surge.
The key exports that have great potential are in readymade garments and pharmaceuticals. Actually, this sector has been our forte historically. It is the curse of the sector that it did not have a stable encouraging policy for investments and appropriate incentives. This is an area that does not brook delay. Pharmaceuticals are already on the march and hopefully they would establish as global leaders in export markets. Hopefully there would be corrections.
The cabinet sub-committee has just cleared about $2bn of investments in infrastructure just on the eve of this report. The FDIs started looking up and the FIIs also started flowing in during the last ten days. The capital markets looked consistently buoyant during the last five days. If this trend continues, it is very likely, that the forex markets also stabilize. To expect FDIs and FIIs within the next six months to surge would be over-expectation considering the political scenario dancing on uncertainty with General Elections slated in February 2014, just about six months hence. Fiscal profligacy cannot be ruled out.
Reminded of J.S. Mill (1806-73): “It must always have been seen, more or less distinctly, by political economists that the increase in wealth is not boundless: that at the end of what they term the progressive state lays the stationary state.”
Investors taking interest in India should look at the following sectors keenly:
Energy sector; Real Estate Sector; Pharmaceuticals; Ready Made Garments sector; Automobiles and Precision Instruments Industry and Financial Sector. These stocks have been showing less volatility lately and the trend is likely to continue.
The SME Exchange offers equally good scope for their stocks to expand because of support from Government in SME Markets and global tie-ups. The stocks that should be of interest would be in Automobile sector and Manufacturers of precision instruments and Ready Made Garments.
This is also on blog: http://seekingalpha.com/Yerram Raju/instablog.

VITALINFO: How the money flows from banks

VITALINFO: How the money flows from banks

Growth Expectations Rebound

Growth Expectations rebound:

 CRISIL in its analysis reports that the growth rate could at best stabilise at 4.8% at the end of the current fiscal and the rupee may rally back to Rs.60 a dollar. This estimate is on the basis of a rebound of growth of agricultural sector to more than 4% stabilising the food prices and the CPI.

This is a big guess considering the time lag between production and its reach to the markets. Second, its estimate of manufacturing sector does not look realistic. The capital goods imports that have surged by75% the last eight years could be generating yields in the next six months. Its survey of 2841 companies reveals that the rupee depreciation had impacted only 6% of them. Therefore, it is just logical that CAD did not have adverse impact on the manufacturing sector as feared. However, what happened actually is the neglect of SME sector by the financial sector on one side and inadequate linkage from the large corporate sector on the other. If the capacity utilisation of the capital goods sector improves with core sectors like coal, energy, oil and infrastructure showing a mark-up, it is possible that the growth of manufacturing sector could surge. The key exports that have great potential are in readymade garments and pharmaceuticals. Wherever one goes in the world, we would find the Chinese and Bangladesh readymade garments with local brand linkages. Actually, this sector has been our forte historically. It is the curse of the sector that it did not have a stable encouraging policy for investments and appropriate incentives. This is an area that does not brook delay. Pharmaceuticals are already on the march and hopefully they would establish as global leaders in export markets.

The cabinet sub-committee has just cleared Rs.1.20lakh crores of investments in infrastructure just on the eve of this report. The FDIs started looking up and the FIIs also started flowing in during the last ten days. The capital markets looked consistently buoyant during the last five days. If this trend continues, it is very likely, that the forex markets also stabilise.

Coming to the Services sector, there has been a fall in growth rate on global cues. It is unlikely that this sector would deliver growth rates of the nature seen in the last decade and half. It would appear that we have to contend with lower growth rates in the next few years unless dramatic essentially Indian innovations surface. The innovations are taking place more in the mobile technology areas and they are all in countries other than India.  Trade gap has lessened by 23% during last month. All the hope of rebound is contingent on oil prices not upsetting our import basket.

I foresee that the growth in view of the above at the end of the year can stabilise at around above 5percent this fiscal – could be at what the Monetary Policy of last quarter predicted at 5.5percent

 Published in Business Digest September 10, 2013

Need Bank Branches that deliver Inclusive growth

Do we need more bank branches or branches that work for financial inclusion?

 Raghuram Rajan in his maiden policy brief mentioned that the banks would be free to open branches at places of their choice without seeking license within certain boundary commitments.  The predecessor policy has been that the private bank licenses would be with the condition that they open 25 percent of their branches in rural areas in the pursuit of financial inclusion. Both emphasise on the reach of the banks to enlarge.

Post liberalisation nationalised banks folded up un-remunerative branches in the rural areas first and the restructuring of RRBs, in two bouts, led to closure of branches in rural areas. In the name of viability, Primary Agricultural Cooperative Societies, the only outfits closer to the rural population, have been truncated in various States under the efficient guidance of the NABARD, a dedicated supervisory arm for RRBs and rural Cooperatives. This situation begs the question do we need more branches of commercial banks under a fully de-licensing regime or a co-ordinated lending system in rural areas for financial inclusion?

The option at the moment should weigh with the second: a co-ordinated lending system in rural areas for financial inclusion. Let me explain: PACS are age-old institutions capable of performing the dual role of extending credit and also take care of the backward and forward linkages to farming: supply of inputs and marketing of agricultural products and produce under a single roof. NABARD clearly acknowledged that the small and marginal farmers have been served better by the PACS than others. But they lack financial resources, managerial, technological and governance skills.

Commercial banks of all hues have resources but found the brick and mortar structure in rural areas not profitable. Earlier experiment of ceding some PACS to the Commercial Banks, and some of them still continue, has been partly successful. The Farmers’ Service Societies is their avatar. Those that are still functioning offer a role model for enlargement to bridge the gap of presence of bank with service in the rural areas through the rural cooperative credit system.

BCs performing as ambassadors of financial inclusion would seem to be meeting the same fate of earlier Janata or pigmy deposit schemes. There are issues of remunerative fees, prompt payment of it to the BCs and the BCs fulfilling their role to the point of expectations.

The role of BCs as mentioned in the 2012-13 first quarter monetary policy  emphasizes on quality of services, setting up ICT-based BC and proving as an intermediate brick and mortar structure  between the present base branch and BC locations so as to provide support to about 8-10 BC units at a reasonable distance of 3-4 km. The forms can vary but should have a minimum infrastructure such as a core banking solution (CBS) terminal linked to a pass book printer and a safe for cash retention for operating larger customer transactions leading in turn to efficiency in cash management, documentation, redressal of customer grievances and close supervision of BC operations.

The business correspondent model allows banks to do cash in-cash-out transactions at a location much closer to the rural population, thus addressing the last mile problem. As on March 31, 2013 banks have reported deploying 195,380 business correspondents that covered 221,341 villages, according to the latest available RBI data.

In 2010, RBI allowed PACS to function as BCs but the takers are few. Recently, taking a cue from the Report of the RBI Expert Committee on restructuring of STCCS, NABARD advised the DCCBs/StCBs to separate the core and non-core functions of PACS and let only those PACS that take on the role of BCs to perform the core functions, for it defines the core function as lending for farming and rural activities. There would seem to be little realization that the core function would be ineffective without the accompanying non-core functions and it is members’ mandate for functioning that is crucial in the democratically run cooperatives.

While the States that continue to be the regulators of the PACS and the PACS themselves have expressed dissent openly over such intrusive instructions, the fact remains that the latter including the DCCBs lack financial muscle comparable to the commercial banks for taking up technology infusion and credit risk assessment abilities. Therefore, a hybrid model of allowing PACS to function but with effective and efficient linkages to both the licensed cooperative and commercial bank branch system would provide the best reach to the rural areas and deliver the financial inclusion initiative, with the required legal facilitation from the State Cooperative Laws. The existing under-performing BCs can be subsumed with such a system. Institutional inclusiveness is the need of the hour.

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Reforms Needed Most in Education Sector

Reforms to Governance in Education Imminent

Prime Minister Stephen Harper of Canada apologized to his Parliament for coming late by fifteen minutes and the reason adduced by him was that he had to drop his child in a government school on an intense rainy day with traffic snarls coming in the way in Ontario. President Obama’s daughter and his private secretary’s son study in the same school and sit side by side. There is no discrimination among the children of different classes of people in these parts of the world.

In India, we had an education system where the primary schools in villages and towns and high schools were all in the fold of government or Panchayat or Zilla Parishad (the old name District Boards)- the local bodies. But during the last three decades, private schools have come up at their places of choice, many a time with the munificence of the local politicians. The fees for admission in the name of quality started touching the roof and took the shape of donations. This has spread to the higher and technical education as well.

Public Schools, with the support of government came up. Most public servants and politicians started taking pride in putting their wards in such public schools using their influence. In several public schools it is not uncommon to find somebody from the education department in their Boards. The spouses of some of the civil servants get plum teacher posts in such schools. On the other hand, if these politicians and civil servants had sent their children to the government schools, they would have certainly ensured that enough budget releases for the improvement of infrastructure in schools. The uncared for attitude of bureaucrats and politicians is solely responsible for the dilapidated primary and high school buildings owned by the government and the related infrastructure.

Teachers of appropriate qualifications and interest became a rarity due to poor pay scales initially in this sector compared to the other sectors notwithstanding the primacy of this sector.  By the time the scales started improving, the quality of teachers and teaching deteriorated beyond repair. Qualification took precedence over quality and interest in profession. Dedicated teachers despite annual awards for best teachers announced by the Government have become a rare breed. Respect for teachers started declining with a few incidents of teachers beating up children, committing atrocities on the girls etc have been repeatedly surfacing and such incidents were unheard of in the past.

Teachers in the past, say up to 1960s at all levels viewed their profession as sacred and never participated in strikes and dharnas. They attached high values to their profession and concentrated on imparting noble values to the students. The tragedy in those days was that some of them suffered in penury until some of their students came to their rescue. Now, when the sailing is good, values have vanished. In fact, it should go to the credit of late Shri P. V. Narasimha Rao, when he was Minster of Human Resources, he introduced Navodaya Schools with good intentions, largely based on our traditional Gurukul. But his experiment was allowed to suffer at the hands of politicians and bureaucrats and the reforms, so called, concentrated on school drop-out reduction, that has become a number game, mid-day meal programme to ‘incentivise’ the poor to reach only the ill-equipped government schools – and the incentive ended up in badly cooked and badly delivered food resulting in a few kids sacrificing at the altar of mischief of the cooking ‘teachers’. 

Still, there is scope for resurrection. First, recognise this problem: find solution where the problem lies. Second, allocate liberal budgets for immediate improvement to the government school infrastructure. If the Government is prepared to be  transparent, there is enough interest in NRIs to adopt some schools for certain components in the infrastructure provided it is willing to create a learning environment; cancel registration of all schools that do not have play grounds and libraries;  change the curriculum in the primary and secondary schools to include games, library reading, project work and internship from ninth class for taking up social service and award marks for such assignments as part of the grades and more importantly, have some illustrious leaders autobiographies of freedom fighters like Madan Mohan Malaviya, Lok Manya Balagangadhara Tilak, Netaji Subhas Chandra Bose, Mahatma Gandhi, Ambedkar,  Lal Bahadur Shastri to site a few. Include a few chapters from the Glimpses of World History of Pandit Nehru in every standard from the 8^th onwards. Teachings of Swami Vivekananda, Ramakrishna Paramahamsa, Poems from Gitanjali of Rabindranath Tagore, should be part of cultural readings for all children right up to the College level. In each of the regional languages there is great wealth and morals that should essentially be part of learning from the childhood. The current day child has the sharpness and speed like none before. They are unfortunately being turned into scoring machines and this is happening sadly only in India.

Where is the need for transferring teachers? What is needed is proper assessment and involvement of parents in achieving the desired levels of excellence. Responsible teaching, responsive administration and unburdening the child of cart load of books but enabling him with knowledge load, flexible timings, audit and accountability, are the need of the hour. Competitively the young nation is losing its verve.   If we make available education free for all girl children up to XII standard there need be no specific reservations. The entire society would look up and grow culturally.

I visited the education system in Canada and was amazed to find that education up to secondary school higher grade is free. Children get report cards on their performance monthly and the report card contains details about how they fared in curriculum, character, punctuality, reading habits, project work (every student from the 4^th standard has to do project work in different fields), arts and crafts, games and sports, dance, drama etc., and where the student needs to improve and how they have come to such assessment. They are counseled right from the 8^th standard onwards as to how to help the parents at home, the suffering in the communities, how important it is to provide charity in one’s own affordable range etc. They are taught skills in cooking, carpentry, metal works as part of their project work and this is part of the curriculum. From the 10^th standard, they can enrol for internship to take up any voluntary service.  The elementary schools provide admission to the children of households in the distance of 5km. For a cluster of 3-5 elementary schools there is one middle school. No child can be denied admission without valid reason. There are no admission costs for any permanent citizen. School buses would be available at concessionary fares for children staying beyond 1k.m in elementary schools and for middle school children to those staying beyond 2.7km from the school. Once in a week, a mid-day pizza or burger is provided on nominal payment. All the schools have play grounds, gym and library.

In each school a break of 45 minutes is provided at 11.30a.m (the school starts at 9a.m) for children to play as they wish in the playground. The school closes at 2.30-3.30p.m. The schools work for five days in a week. Once in a year the middle school children are taken on excursion after obtaining parent’s written consent. All children have free health check-up and insurance. Why will not children develop in such environment? When do we in India get this happy environment for education of our children?

Governance of higher and technical education is a different ball game and needs different treatment.

 

 

 

Elephant Stops Dancing

Economy on rocks,  not necessarily, thinks the Finance Minister even when the Re breached 68. We are still at an inflexion point as Rupee is yet to touch the downslide to 70 a dollar, as predicted by Dr Tarapore a month and odd ago in the Business Line. The inflation differential between the two countries India and US has been steady over the last two decades at 3.6% notwithstanding the great recession since 2008.  This exchange rate adjustment, that is largely market driven, need not be seen as a weakness of the economy. There is a large domestic economy, if carefully nursed, could reverse the trend though not in the immediate future. We cannot very much alter our import basket governed by the crude oil that is rising, and edible oil whose consumption in India far outstrips the production necessitating its continuing import and the heavy capital equipment required for infrastructure sector, in the short run. In sluggish manufacturing sector intensity, expecting recovery in the short run would be a wild goose chase.

 

If we look at the emerging economies’ trends ever since Ben Bernanke announced the QE programme of unwinding bond purchases, global GDP all along etching its hopes on them, now looks tamed at 2.1% even in 2013. Chinese economy, though sent some shivers at the beginning of the year, started quick recovery and would seem to be steady on stabilising and may be at 7.7% growth. Among the BRICS, the other major, Brazil is looking for World Football Cup to come to its rescue. It is down from 3.5% to 2.5%. Unfortunately, India does not have an event like the Commonwealth or world tournament to milk the opportunity.  

After a long slumber on the policy front, India’s economic Czars announced a slew of reforms that would move like the wheels of Lord Jagannath’s chariot. They have been announced at a time when the sectors are not poised to respond. Now, the rating agencies that have been on a simmering hope would appear too keen to downgrade India’s sovereign rating. Although on some such hopefuls, the EIA predicted GDP growth at 6% for Asia and Afroasia (excluding Japan) in June 2013, is likely to shift it at 5.5-5.7%. Although the RBI in its July 30 Monetary Policy predicted a downtrend to settle at 5.5%, even the most optimistic projection does not now seem to cross 5%.

The silver lining in the cloud of despair is that the NRI deposits are growing with the downfall of Re. Even in the backdrop of double digit consumer inflation index, domestic savings have not fallen yet; and the employment rate also remaining steady. The core sectors grew by 1% last month. Electricity generation showed improvement by 6.2% with the rise in hydel power backed by steady inflows in the command projects. More than average rain fall also predicts a hopeful growth of the farm sector. There is enough money rolling in rural areas still, thanks to the MNREGS and a few rounds of State elections that fuelled free money make a merry go-round.

What is at danger, however, is the likely bourgeoning of fiscal deficit fuelled by the implementation agenda of Food Security Act 2013. The Centre’s expected funding of the order of Rs.900bn in 2013 on Food subsidies alone that has an embedded 40% leakage if we go by the CACP study, rings alarm bells of consequence. RBI’s Governor Subba Rao without mincing words said that the Act would ‘eat into the finances’; while the incumbent Raghuram Rajan said: “there is blatant flaw in the policy making.” While the tigers are mauled alright, the elephant would stop dancing and get chained in the cage.

Can also be seen on VITALINFO

  

 

 

National Food Securty Act 2013 - A commentary

Food Security Act 2013 and its Implications for the Future 

At the time when the book is about to be published, Lok Sabha passed the Food Security Act 2013 on the 27^th August 2013. I thought it appropriate to put this post script at the suggestion of the publisher’s editor.

The Act made its way in an otherwise turbulent political environment where the Government has been facing the House with explanations on various scandals; the fall of the rupee with the resultant deterioration in the current account deficit and on top of it,  the fiscal deficit set to reach an unsustainable level, if the Food Security Act were to get implemented. All the parties supported the bill as none would like to be dubbed as anti-poor with the impending General Elections. The purpose of this chapter is to discuss the pros and cons of the various provisions in the Act in terms of its implementation. 

World Food Summit (13–17 November 1996) defined Food Security as: “Food security exists when all people, at all times, have physical and economic access to sufficient, safe and nutritious food to meet their dietary needs and food preferences for an active and healthy life.” Although India could distance famines, it could not stall starvation deaths. Its lead in paddy and wheat production would seem to be at the cost of production in millets and other course cereals and pulses and oil seeds. Both calories and proteins remained below the recommended dietary levels. The country acquired the dubious distinction of housing 300mn poor, by whatever definition one defines the poor. There has been a multiplicity of schemes that targeted such poor only to ensure that they remain at that level for granting political largesse through bureaucratic extravaganza. This contextual frame helps one to look at the Food Security Act 2013 of Government of India that provided staple food grains to all the BPL families uniformly across the country. There has been a drubbing by the Supreme Court over the mounting food stocks in FCI warehouses and people reporting starvation deaths in one or the other part of the country that speeded up the legislative process.

The Right to Food as a fundamental right cannot be ensured by a series of intentions. In a country of diversities in both economic (size of the poorer sections of population and their identification differ across the States) and political spectrum, where the resources for taking care of the poor have to be provided by the States more than the Centre, a Central Act like the Food Security Act is more a political gimmick than economic tool. This Act, to quote K.R. Venugopal, “is like dropping a coin in the Bay of Bengal and searching for it in Indian Ocean.” Several fundamental needs like water, sanitation and power are as much essential as mere food and without them the food security could turn out as insecure. Even after 66 years of independence we have more than 40 percent of villages not having access to safe drinking water and secured health. 

It is unfortunate that the key observations of FAO in its paper on the State of Food Insecurity in the world 2011 have received only lip service: 

"A food-security strategy that relies on a combination of increased productivity in agriculture, greater policy predictability and general openness to trade will be more effective than other strategies;

Safety nets are crucial for alleviating food insecurity in the short term, as well as for providing a foundation for long-term development;

 

High food prices present incentives for increased long-term investment in the agriculture sector, which can contribute to improved food security in the longer term. (IFAD, WFP and FAO, 2011)." 

Schedule II of the Act contains provisions relating to reforms to the agricultural sector that needed attention. Assuring sustained increase in production consistent with the growing requirements of the Act and the resources that the States should provide for implementing the Act are vital components of the agenda but receive scant attention.  As the CACP points out “Assured procurement gives an incentive for farmers to produce cereals rather than diversify the production-basket…Vegetable production too may be affected—pushing food inflation further.” If these cereals do not find attractive prices and specific support prices for those that are part of the food security system, there would be serious consequences for the farm economy.

“Priority Category”: Definition of the poor has come into serious controversy lately. The criteria have to be fully in public knowledge. While the Act specified that the records have to be transparent and in the public domain, there is no timeframe for doing so by the States. So is the case for another requirement under the Act: “that the States shall put in place the needed information, communication and technology systems in place.”

The list of the eligible families should be displayed at the village Panchayat level and at the ward level in the urban municipalities. Any divergence of opinion has to be resolved at the village/ local level within one week of placing the list on notice. Such list could be prepared through a survey done by NGOs or educational institutions at the block/ Mandal levels.  

All those who are within the exempted income category for payment of income tax should become eligible for food entitlement under the food security provisions. 

All the tax-payers shall be the excluded category for two reasons: they have the ability to buy the food because they have regular income; they are also otherwise covered by some social security provision or the other.  

Nutrition security is the whole while food security is a part of that, and therefore the law that is being contemplated should really have been a food-cum-nutrition security law rather than a mere food security law.

It is also worth noting at the outset that an important strategy for defending and expanding the rights of the poor in any scheme that seeks to guarantee a particular right is to fine-tune it to the other related schemes in a manner that all related schemes pull together all the rights that govern all the participants in such schemes. Such a synergy will guarantee all rights essential to the poor, each right reinforcing the other. Food and nutrition security is no exception to such a synergy. In fact the most important paradigm that should govern a law that guarantees food-cum-nutrition security is to define such security as the sum total of the entitlement that a poor household would access through its entitlement in all the food and nutrition related schemes that the Government implements or proposes to implement and not merely through a single programme like the TPDS. Unfortunately, the Act failed to provide this comprehensiveness.

The Food Security Act 2013 guarantees 5 kg of rice, wheat and coarse cereals per month per individual at a fixed price of Rs 3, 2, 1, respectively, to nearly 75 percent of the rural and 50 percent of the urban population.

The government estimates suggest that food security will cost Rs 1,24,723 crore per year. But that is just one estimate. Andy Mukherjee, a columnist with Reuters, puts the cost at around $25 billion. The Commission for Agricultural Costs and Prices(CACP) of the Ministry of Agriculture in a research paper titled National Food Security Bill: Challenges and Options puts the cost of the food security scheme over a three-year period at Rs 6,82,163 crore. During the first year the cost to the government has been estimated at Rs 2,41,263 crore.

Economist Surjit Bhalla in a column in The Indian Express put the cost of the bill at Rs 3,14,000 crore or around 3 percent of the gross domestic product (GDP). Ashok Kotwal, Milind Murugkar and Bharat Ramaswami challenge Bhalla's calculation in a column in The Financial Express and write, “the food subsidy bill should...come to around 1.35 percent of GDP, which is still way less than the numbers he [ Bhalla] put out.”

When we look at the Budgeted Receipts of the Government for 2013–14, presuming that such receipts would come even at the declining growth expectations, they are just Rs 11,22,799 crore. The government's estimated cost of food security comes at 11.10 percent (Rs 1,24,723 expressed as a percentage of Rs 11,22,799 crore) of the total receipts. The CACP's estimated cost of food security comes at 21.5 percent(Rs 2,41,263 crore expressed as a percentage of Rs 11,22,799 crore) of the total receipts. Bhalla's cost of food security comes at around 28 percent of the total receipts (Rs 3,14,000 crore expressed as a percentage of Rs 11,22,799 crore). Where do you find the money to implement the schemes?

The CACP estimates an expenditure of Rs 6,82,183 crore in the first three years of launching the scheme, with Rs 2,41,263 crore in the first year itself. If the scheme is initiated in 2013–14, the gross fiscal deficit of the Centre would substantially shoot-up to 6.7 per cent of GDP, a level not reached since 1993–94.[1] The States’ finances are moving at alarming debt rates.

Implementation is at the doorsteps of the State Governments while the stocks are with the Central Government and the coordination between the two would require to be non-partisan and wholehearted.

This apart, the administrative expenses for setting up the State Food Commission, District Grievance Cells, and the Vigilance Teams and for the implementation of ICT across the State right up to the village level and integrating with the entire distribution system cutting across panchayats, cooperatives, private licensed traders, etc. have to be incurred by the State Governments. CACP has also indicated that additional expenses have to be incurred for scaling up of operations, enhancement of production, investments for storage, movement, processing and market infrastructure, etc.”
There is no ballpark figure in the approach papers.

As against the NAC recommendation of 35kg of food grains per month, the Act provides for only 25 kgs in the PDS in one-fourth of the most disadvantaged districts or blocks in the country in the first year given the fact that an average household of 5 would need the energy equivalent of around 60 kg of food grains per month. Therefore the law should have specifically referred to all the food and nutrition-related schemes as also schemes where the potential exists for the use of essential commodities (like in the MGNREGA) together and examine how much a poor household would access through all these programmes through organically integrating them at the delivery level. Complementarities of the existing programmes require recognition and integration.

 

It is important to add that all these programmes need to be predicated on adequate, decentralized production of food grains which essentially means that India’s dry land agriculture must receive priority attention by way of a second green revolution in the vast areas of the country that do not have assured irrigation facilities. This emphasis is found missing in the Act.

It is essential to change the provision in the MNREGA in regard to this basic issue from guaranteeing just 100 days of employment to the entire household to guaranteeing 100 days of employment to every adult in a household.  While on this, a point has been made that the second most important objective of MNREGA, provision of livelihood opportunities has been almost forgotten goal. It is important to realize that people should be earning while contributing to production and not just for attendance. The skewed nature of MNREGA as voiced in the farm sector created serious imbalances in terms of availability of labour at the time when farmers require labour. Even the small and marginal farmers are now shifting to technology and such shift would also have long-term implications to soil fertility. The deeper the plough the larger would be the deprivation of soil fertility. The vicious cycle of productivity sets in. This should be avoided through appropriate policy intervention.  

The households living below the poverty line, identified through transparent and liberal criteria as such, through surveys conducted at the grassroots level by agencies of decentralized governance, with assistance from civil society groups, need a properly targeted, functioning, and affordable Public Distribution System (TPDS), in addition to a proper wage employment guarantee programme as described supra, to cope with their food security needs.  To ensure this, the price of food grains in a well-run TPDS should be determined on the basis of the employment levels and wage levels obtaining at the relevant time. The size of the family should be the unit to determine the food requirements of the household, ensuring interpersonal equity within the household concerning scales. Such requirement should be guaranteed to a poor household as its non-negotiable entitlement.

An average household needs to be supplied 720 kg of cereals per annum to ensure its cereals security (60 kg x 12). The bulk of it must come from the cereal wage component of the MGNREGA wage. At 200 days of employment the cereals that can be accessed will be 500 kg (200 x 2.5 kg). In such a scenario the TPDS should provide the balance. The law should have therefore calibrated what the cereals policy should be in the MGNREGA’s wage composition first before determining what it should be in the TPDS, for the vast unorganized labour that participates in the MGNREGA. If the MGNREGA would not provide for an optimum number of days of guaranteed employment or the cereal wage component, then the burden of cereals security would fall entirely on the TPDS to the extent of supplying 60 kg per household per month on an average or to the extent of non-provision of employment. Sixty kgs is mentioned as an average because household sizes would obviously differ but the overall national need will have to be calculated on the basis of the total poor households to be guaranteed food at this scale. Such planning for all poor households is essential since not all the poor would be participating in the MGNREGP.  

It need hardly be added that cereals alone do not mean food. To begin with, at least, pulses, edible oil and iodised salt need to be added to this basket, with emphasis on the supply of nutritious cereals like jowar, ragi, bajra and other “minor” millets. The quantity of entitlement and the affordable price fixed should be kept frozen for the period during which the household remains below the poverty line, the elimination of such poverty itself being the acid test of the quality and implementation of the development and anti-poverty strategies drawn up by the State.  

Anthyodaya Anna Yojana scheme being implemented through Anganwadis and the mid-day meal programme have been rightly clubbed with the provisions of the Act but the mechanisms are totally ill-equipped and we have in the recent past instances in Bihar, and elsewhere, the disasters of several children getting killed after swallowing the meal at mid-day in the school. 

The Targeted Public Distribution System (TPDS) should thus be looked upon as an alternate market for the poor, but it can function as a market relevant to the poor only when insulated from factors of violent fluctuations of supplies and price. It is also desirable to dispense the ration shops and introduce food coupons with the entitlements clearly indicated so that the poor can draw their entitlement when they have income in their hands and at any time during the day. There is merit in this argument for building into the new law. While the Act does provide for cash transfers, food coupons and other schemes, this would appear as an administrative protectionist window.

The Scheme is open-ended and has no specific directions to target the needy. It also does not have any specific deadlines for setting up various institutions mentioned in the Act like the District Grievance Cells, State Food Commission, Vigilance Committees and the setting up of ICT to cope with the tasks outlined in the Act for the related departments. 

The saving grace of the Act has been that the responsibility for “creating, maintaining, modern and scientific storage facilities at various levels shall vest with Central Government.” The open warehouses under the tarpaulins and the poorly maintained FCI warehouses amply demonstrate the inadequacies of the concerned departments to address this responsibility different from those that exist currently.  

This Act can have the dubious distinction of fixing no accountability for failure to implement any of the provisions of the Act excepting to state that malaises in implementation would be dealt with as per the criminal procedure code. We are aware as to how long would such proceedings take and the impunity with which the errand can move about until the cases are settled. The Act makes good politics and bad economics in one stroke. Who can love the poor more than the politicians of India for in them rests the vote bank still? Everybody wants food security but along with it think of providing safe drinking water as a couple of glasses of safe drinking water are as important as nutritious food. The lactating mothers need it all the more. This should join the mission mode for ensuring food security.  

References

1. K.R. Venugopal, A Comment on the NAC’s Innocence of Food Security Issue, EPW dated 27^th November 2010
2. K.R. Venugopal, The National Food Security Act, 2010, ‘Social Change’ (Journal of Council for Social Development), December 2010. 
3. Summary of Discussions of Round Table on the Draft Food Security Bill, September 2011 held under the auspices of APSA on the 9 October 2011.

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[1] Charan Singh, Food Security Bill, Where is the Money? The Hindu Business Line, 7 August 2013.

Rich Economist Debate over the poor

Rich economists debate over India’s poverty and food security at low levels.

B. Yerram Raju

Planning Commission estimates poverty before the passage of Food Security Ordinance at 37.2% and after the passage it gets an estimate of 24% of the population with an annual decline of 2 percent in the Eleventh Five Year Plan. These estimates need to be also viewed in the context of continuing rise of food inflation that hurts the poor more than the rich and the rising subsidy basket, the rising minimum wages, with MNREGS wages not excluded. While this being so, the two economists of consequence to India: one, a Noble Lauriat, Dr Amartya Sen, batting for the food security initiative and the other Jagadish Bhagavathi, a NL aspirant arguing on the other side spat at each other over the assessment of poverty and the incongruities of the Food Security Bill. The Financial Times not excluding, all the financial dailies have carried these items with alarming glare in the media. This context makes me read through the poverty prevalence in our country in this brief column.

It is obvious that both the economists did not visit even a single village during the last five years. There has been increasing monetization both through the subsidies that the governments doled out and the five windows of elections – to the panchayats (local bodies), cooperatives and the General Elections as also mid-term elections to the State and Central legislatures. Private monetization is more than the public monetization.

NCAER – CMER study commissioned by Financial Express in 2010 (FE dated 30^th June 2012) says: “The study finds that around a fourth of urban BPL households own a two-wheeler, a third own a colour TV and almost two-thirds a pressure cooker. Findings from rural India also throw stereotypes into the waste basket, with every one in ten BPL persons having a two-wheeler, every fifth BPL village kitchen having a pressure cooker and around 6% owning a colour TV. There is also interesting and upbeat news on the education and employment front. Almost one in five urban BPL households has at least one well-educated—graduate or above!—member and over 13% of them are led by a salaried chief wage earner (CWE). Only under a tenth of rural BPL households have an illiterate CWE. While these findings throw established formulas into a spin, others are along expected lines.” The position in 2013 has only improved and not deteriorated.

‘Poverty, politics and patronisation go together. Most villages do not suffer the agony of starvation or hunger. Most houses have electricity; most villagers have mobiles in their hands and those that have Business Correspondents even have cash in their hands. Statistics hide more than they reveal and more so that of the Planning Commission. Whatever are the measurement criteria that either the Planning Commission or some other agency adopts, quality of life in villages improved. Urban slums today are after the bottled water and are not content with the corporation water carriers.

While the Expert Committee (Dr Rangarajan – Chair) estimated a huge requirement of food subsidy to provide food security at the current level, the Costs and Agricultural Prices Commission estimated the food bill at an expenditure of Rs.6.8trillion the first three years of launching the scheme, with Rs.2.4trillion in the first year itself. This would take the fiscal deficit to the unsustainable level of 6.7% of the GDP during the current year surpassing the 1993-94 level. States have little inclination and capacity to support the food bill – particularly in States where poverty level even as per the suspect estimates is higher than the national average like Bihar, Orissa, Eastern UP and also in tribal tracts of the country. The States do not want to accept the poverty decline now announced by the Planning Commission, for their share in central resources would go down. Food Security Ordinance waiting to pass through both the Houses that ignores the requirements of millets, an essential ingredient to fight malnutrition, has no prospect to succeed in the current formula pattern, no matter how debasing the fight between the two world renowned economists reaches. It is a Good Governance action that enables reach of the poor to good health and good education at affordable cost far superior and better than the present that is the need of the hour. It is a resolve to fight endemic delays in implementation of well-intentioned schemes to reach at the lowest administrative cost that is very much required.
Published on Business Advisor , Digital Journal dated 10th August 2013.