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Tuesday, February 10, 2015

Delhi State Election Results



The Delhi State election results, which swept the AAP to an unprecedented win in the Delhi State election are extremely interesting and can be interpreted at different levels:

(1) BJP's vote share was 32-33% around the same as in earlier State elections, but possibly on a mildly declining trajectory, while AAP jumped to an unprecedented 50-55%. This means that the vote bank of the Congress, BSP & other small parties switched en mass to it. Exit polls suggest that this switch was greatest among low income voters of the non-BJP parties.

(2) The common thread among AAP voters seemed to be disgust with conventional parties who were seen as part of an arrogant, corrupt, unresponsive local administrative system. Despite any other failings (that political/economic pundits often harped on) they hoped that a completely new party like the AAP would change the system, reducing corruption and force administration to serve the people instead of lording it over them.

(3) Though pundits focused on the negatives of the AAPs 49 day rule, the non-BJP voters focused on the signs of helpfulness that AAP workers had demonstrated at that time, on corruption related administrative problems. This impression may have been strengthened in low income areas if AAP workers continued to be helpful after it demitted office(as reported in the Hindu). The Delhi public is quite aware that all parties (including the AAP) promise all kinds of goodies and these promises have to be taken with a large pinch of salt. This applies to both the positive benefits and the negative side-effects of such "give-aways." Neither the potential beneficiaries nor the potential sufferers (higher cross tax-subsidies) gave this issue the importance that some analysts were giving  it (and continue to give it).

(4) Mr Kejriwal who turned from a very humble man to an arrogant one in nine months of 2013, when the pre (central) election pols projected 50-100 seats for AAP and the media crowned him a Prime Ministerial candidate, seemed to have learned his lesson from the CG election disaster. He appeared to have re-discovered his humility. This also helped restore his credibility with (temporarily) dis-illusioned potential voters. In my judgement (a high minded) arrogance also contributed in the rout of the Congress as it delayed corrective economic measures till it was too late and therefore provides a lesson to the leadership of all parties, including the BJP.

(5) Delhi voters have an idea of the difference between what the Central Govt. can do (macro economy, jobs opportunities across country etc.) and what State & local Govt. can do at the local level (public amenities, permissions and certificates). Thus the image of the Delhi BJP and its past performance (indifferent) was much more important than the performance or non-performance of the Central Govt., Though Shrimati Kiran Bedi was seen by some as an anti-corruption crusader, others saw her as a part of the high handed (rather than high minded) police fraternity of Delhi. So any potential advantage was negated.

(6) One interesting puzzle is what happened to 10-15% additional vote that Shri Narendra Modi added, during the General Election of 2014, to the core vote of the BJP in Delhi?  Though the point made at (5) above is part of the explanation, it is not sufficient. The second part has to be the unease created by what these swing voters believed to be disturbing manifestations of the (so called) "Sangh Parivars" social agenda. Many of these voters ("Right Liberals") support the economic program of the PM but not what they percieve to be the social agenda of the RSS/"Sangh Parivar". They are actively opposed to any use of violence and coercion to achieve social objectives and to an undermining of the economic agenda through divisive statements. The PM was unable to convey to these swing voters that he did not support such statements and actions. His credibility on this issue was therefore a factor that affected the swing voter, who had voted for him in the General election.

(7) The Delhi media helped greatly in conveying and magnifying these impressions and helped form firm judgment that brought people out to vote (when many may have been unsure and afraid to take a risky bet and stayed home). This included a general impression that the Congress was at least temporarily finished in the State and that the AAP could successfully challenge BJP in Delhi State to form a stable government. The prominence given to extremist voices in the Sangh Parivar and the violence of some fringe outfits under the Parivar umbrella played a role in helping consolidate the non-BJP vote behind AAP.  
          It is unclear whether the Delhi media (especially the English language media) has much influence outside the Delhi metropolitan region, even in parts of neighboring States like Haryana that lie beyond the Metro region.

(8) The above analysis throws up several lessons for the major political parties. How much of an effect is felt beyond Delhi will depend on how these parties learn the right or wrong lessons from it. For instance Delhi is a City State with the highest per capita income, low poverty, high average education & media exposure, and very high average growth rate (city of opportunity), but poor governance like every other City in India. Any implications drawn for the rural areas and for poor States and less educated regions are likely to be wrong. 

Budget 2015-16: Some Suggestions



Introduction

    This note makes suggestions on issues that either come directly under the purview of the Ministry of Finance or are closely related to it.  These include Fiscal Deficits, Taxation, Expenditures and Subsidies and Financial Sector.  Though “Big Bang budgets”  have sometimes had policy announcements outside these areas, this is only successful if there is a great deal of confidence that the policy announcements will reach fruition & implementation. Otherwise they can do more harm than good.

Fiscal Deficit & Revenue Deficit

    The budget needs to stick to the Fiscal deficit targets (glide path for reducing FD) outlined by FM Arun Jaitly in his maiden budget, or risk losing credibility. It is equally, if not more, important however to achieve the original FRBM target of zero Revenue Deficit by 2016-7. These two together imply an improvement in the quality of central government expenditures with a shift from subsidies and current expenditures to investment-capital expenditures: In other words the reduction in revenue expenditures can provide room to increase investment in infrastructure while meeting the old fiscal deficit targets.[1]
    This will also create the confidence in the RBI to move aggressively on Repo rate reductions an easing of monetary policy to complete the “Macro Pivot” that the Indian economy desperately needs to stimulate demand for consumer durables (like automobiles, housing & home goods).[2]
   As a reduction in the revenue deficit represents an increase in public savings, this will help increase national savings and thus help slow down the rapid accumulation of foreign liabilities [increasingly negative Net international Asset (NIA) position of India] that has occurred since 2010 and minimize the probability of sudden stops in capital inflows.

New FRBM & Credit Rating

  India’s high fiscal deficit has been the major reason for its marginal credit rating (lowest investment grade: Moodys Baa3/S&P’s BBB-). Government may consider targeting a further reduction in the Fiscal deficit to zero by 2019-20 with the objective of raising India’s global credit rating. FM could announce his objective of raising India’s global rating by three notches to upper medium investment grade [Moodys A3 or S&P’s A-] over the next five years or so.  This would also need to be supported by a new FRBM with new FRBM targets to establish credibility and ensure a credit rating upgrade of this magnitude.

Tax reform

Administration, Appeal & Settlement

       What has been called “Tax Terrorism” by some and “harassment” by others, has been one of the contributors to the collapse of economic growth from 2011 to 2014. There is an urgent necessity for a dramatic overhaul of the entire system of tax administration, tax procedures and tax rules and of the review, appeal and rectification mechanisms. Based on the recommendations of previous committees on tax administration reform and the Government’s  E-Governance ideas, the FM’s budget speech could outline a credible road map for reform of the revenue administration and speeding up of the appeallate system. For instance recording of every decision of each tax officer, including those relating to tax demands, success of legal cases and years spent, would help analysis of outcomes of these decisions with a view to continuous improvement.  It is important to demonstrate quick, fair & effective tax justice for all actual & potential tax payers.

Goods & Services Tax

  The FM can spell out a road map for GST and set in motion any changes in administrative structures/systems that will be required for the GST. He could also start modifying Central Excise/ VAT/ Service tax rates to close the gap with rates that will be required under GST.

Customs Tariffs & Duties

     Inverted duty structures arise whenever selected products are allowed below the average/median rate which is currently close to the general peak tariff rate of 10%. The IT zero agreement reduced tariffs on many electronics final goods to 0% and therefore created an inverted structure in electronics. To the extent it is legally possible an effort must be made in the budget to move to a uniform 10% tariff rate by raising import tariffs that are below this rate and lowering those which are higher than this rate. This is the best structure for the “Make in India objective”
    Textiles and Agriculture are two major sectors of the economy, for which customs duty reforms lagged far behind the others. Textiles still has a complex mix of Specific and Ad valorem import tariffs that is a source of enormous corruption. This undermines/defeats any objectives that such a complex structure was designed to achieve. It would be far better to drastically simplify these rates. The ideal solution would be to eliminate specific duties and unify Ad velorem rates at 10% (which is the general peak rate). The second best solution would be a uniform rate of 15% to be reduced to 10% in a few years. The third best would be to reduce the specific rates to 2-3 at most and eliminate them in next few years.
Agriculture is the only sector subject to Ad hoc bans on import and exports. I know from experience that these bans and their removal always come too late to benefit the farmer. These Ad Hoc changes usually benefit some favored intermediary. The consumer is usually saved from the worst excesses. The farmer can only benefit if there is a stable regime of import tariffs and export duties on the basis of which he can plan future crop patterns and investments for productivity improvement. The FM could announce his intention to eschew import-export bans (in future) and announce a committee to work out a structure of import tariffs & export duties that would balance the interests of farmers and consumers. If some reports/studies exist in the Ministry he could even announce some rationalization of tariffs & duties, for instance a move to reduce tariffs on all agricultural inputs (cotton, wool, silk etc) into manufacturing to 10%.

Income Taxes

   The Income tax law and rules are a ramshackle structure built over decades with new extensions added every year.  The original version of the new Direct Taxes Code, which I saw in 2009 as CEA, came fairly close to a simplified structure based on sound economic principles. There were a few minor items which could have easily been corrected. I understand it has lost some of its economic soundness and simplicity as it went through Parliament. However, the need for a new Income Tax law and simplified rules remains.  Some effort needs to be made to simplify the income tax on the basis of the principle of reducing ‘exemptions and deductions” and reducing marginal rates to produce revenue neutral change. 
The complexity and harassment is even greater with respect to business and corporate taxation, and a good budget must show some effort at simplification, particularly with respect to cross border entities and transactions.
One uniquely Indian anti-entrepreneur tax rule introduced in the last 3 years needs to be eliminated: That is to treat issue of shares of Start-ups to funders at a price above the face value (at which they are held by the start up entrepreneur) as short term capital gains on which a tax must be paid at time of issue.

Non-Tax Revenues

  Finance Ministry must continue to pursue the change in system for leasing national assets like spectrum, minerals, and land is done through transparent, competitive auctions. In the case of spectrum, this requires removal of artificial stipulations of minimum price (price of rural spectrum in many states is zero), freedom to trade or sub-let the spectrum to other qualified bidders and to ensure open access in areas where spectrum is surplus (e.g. many rural areas)

Expenditures

    With the abolition of National Planning and the Finance Commission recommended transfer of higher share of gross taxes, the Central Government should increasingly focus on subjects in the Central list and on public goods(& service) aspects of those in the Concurrent list. The division of expenditure into Plan & non-Plan should be re-classified into the economic categories of “consumption” and “investment”. These overlap broadly with the budgetary categories of “current” & “capital” with the major exception of expenditure on maintenance and repair of capital assets(which is a form of capital formation).  A serious effort must be made in this budget to change the expenditure mix from current to capital and thus reduce the revenue deficit.

Investment Expenditures

    The Central Government must focus its limited resources on classic “Public goods infrastructure”. These are parts of infrastructure in which social benefits far exceed private benefits or from which it is difficult or impossible to collect user or service charges on a sustained basis. Highways and roads, carefully selected rail lines & related signaling equipment and critical bottlenecks in Ports and waterways are already identified focus areas on which greater budgetary emphasis is needed. However, to successfully bring in complementary or supplementary private investment in “private goods infrastructure” the policy & regulatory environment must simultaneously be made more transparent and free of policy and regulatory risks.

Consumption Expenditures

        On the consumption side the focus has to be on the subsidy and other reforms already identified by the government should be pushed along by this budget: Drastic reform of Food Corporation of India and the entire procurement-PDS system can reduce wastage & corruption and make more funds available for investment. Initial steps could also be taken for shifting all metros/urban areas (given competitive supply of food grains) from physical supply to cash subsidies for food grain purchase.  Similarly, NREGA reforms to increase capital component and pay wages directly through Aadhar linked accounts could also change the mix.
        In Education and Health, Central Government should focus on preparing and propagating E-education and E-health systems and platforms that can be used in any/every State, it should focus on educating the educators, teaching the teachers, training the trainers and managers of (public & private) education and health systems across the country. It should focus much more on “Public health” & eradication of Communicable diseases and on “Public Education,” than on personal health & education. The “Swach Bharat” and “Beti Padhao, Beti Bacha” campaigns are good examples of this approach. The Skill Development Mission, including the need for Standardization and Certification of the thousands of certifiable skills, is another initiative that requires a much greater urgency and thrust to be imparted to it.

Subsidies

   The decision of the Govt. to increasingly transfer subsidies directly to intended recipients (without distorting prices of products and services) by linking them to the UID/Aadhar number is a very good one. Government has also accepted the advice to make the (cash) transfer payments through bank accounts.  If all subsidies including kerosene to the poor & fertilizer/Urea subsidies to farmers can be given directly, it will be a signal achievement of the government. The funds saved through reduced administrative costs and elimination of corruption can be used for job creating, productivity enhancing, infrastructure development.
The Aadhar authority needs to start analyzing all its records to eliminate duplicates and identify incomplete coverage. For the latter, one way is to compare with the digitized electoral roles with Election Commission. Second way is to aggregate UID Nos issued, by blocks and compare with population records from the last census, to identify areas that need special effort.
There are two non-conventional ideas that are worth considering & adopting. First is the use of cell phone based subsidy/transfer payment systems for reaching the poorest of the poor, given that 80-90% of the population has cell phones. In fact it would probably be cheaper to give all the ultra-poor a free cell phone than to ensure that they have usable bank accounts.[3]
Second, adopt a UID linked multi-application smart card (MASC) as a single unified platform for all subsidies, welfare and social schemes. Such a card can easily have slots for the poor’s entitlement to public education and government healthcare facilities or Govt. funded credit/debit limits for use in private facilities.[4]

Financial Sector

          The rise of NPAs in Public sector Banks (due to forced lending for infrastructure projects subject to Govt policy & regulatory risk) and the imminent necessity of introducing Basel III capital adequacy norms, makes capitalization of PSBs an urgent problem. The funding required has to be raised from the market. One possible solution is to set a dual limit: 51% for SBI and a few of the strongest & most profitable PSBs and 26% for the rest. Then sell shares in the latter to capatilise all PSBs to required levels (Many years ago a committee headed by Dr. Bimal Jalan had recommended lowering the limit for Govt. shareholding in PSBs to 26%).

Conclusion

    In his speech to the ET Global summit, the PM has laid out the elements of a New Development Paradigm, of Employment Generation and Empowerment of the Poor and Middle Classes.  The forthcoming budget should flesh this out and give it a more concrete shape.[5]

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[1] During 2005-2008  an argument was made that subsidies for health & education should be classified as “capital expenditures” (as “human capital”) contrary to the accepted budgetary practice all over the World. The result of this exercise was not better health & education but a large increase in consumption expenditures that helped create the 2010-11 bubble and subsequent bust in economic growth.
[5] A New Development Paradigm: Employment, Entitlement and Empowerment, Economic and Political Weekly, Vol. XXXVII No. 22, June 1-7, 2002, pp. 2145-2154. https://docs.google.com/viewer?a=v&pid=sites&srcid=ZGVmYXVsdGRvbWFpbnxkcmFydmluZHZpcm1hbml8Z3g6MjQ4ODc3YWI2ZDcxZmE5NQ

Wednesday, February 4, 2015

Southern Asian Partnership (SAP): New Economic Corridor



Introduction

    The Asian Land Transport Development Project (ALTD) has progressed in fits and starts since the early 1990s. Two important components were the Asian Highway Project or the Great Asian Highway and the Trans Asian Railway. The southern leg of this project, connecting South East Asia to South Asia and beyond has not progressed as rapidly as desirable.  The time may be ripe for giving much greater attention to this component in the context of a broader vision for the “Southern Asia” from Vietnam to Afghanistan, by creating a transport, trade and investment corridor.  At some point in the future this SE-NW corridor could extend from Afghanistan to the Northern tip of the Caspian Sea and also fork West from Afghanistan to Israel.
China, which constitutes the great land mass in the center of Asia,  has already built East-West corridors across its breadth and is actively engaged in extending these westward to Europe. Similarly Russia constitutes much of the Northern land mass of Asia and already integrates within its borders from its Asian East coast to its European part.  We need a similar initiative in the Southern land mass of Asia, stretching from Vietnam through Afghanistan to Israel.  This task is much more challenging than the one faced by Russia or China, because so many countries are involved.

A New Vision

   Much economic development in most Asian countries centers either around the national capital or around coastal cities. We need to move development to the interiors of Asian countries situated in the great land mass of Asia, by connecting isolated centers of economic  activity in each country with those in other countries physically or economically closer  to them but separated by historical boundaries and consequent infrastructural evolution. 
The 20th century vision of road and rail transport connectivity must be expanded in several dimensions to meet the challenges and opportunities in the 21st century. The new vision must cover several new dimensions: One, an integrated approach to transport of goods and services. This requires the development of an integrated plan for transport of goods, services and people using road, rail and river transport (Trans Asian Water way) to minimize transport costs.  Second,  is an exploration of the possibility of transferring energy (Trans Asian energy grid) and water along these corridors to reduce demand-supply mismatches. Third, is a communication network that includes broadband connectivity (trans Asian Internet), which could globalize their information and thinking.  Fourth is the standardization/harmonization of customs and other rules for trade, transport and transit of goods and services across borders and through these countries (Asian Carnet et al).  Fifth are visa and other rules for tourists and movement of persons for delivery of skills and for management of cross-border FDI enterprises.

Planning & Funding

      As Japan and the Asian Development Bank have been among the important supporters of ALTD connectivity projects and still have the required funds, it is time for them to take the lead, along with ASEAN and India, in expediting & expanding its ambit.  Though China has the funds and is looking actively for infrastructure projects, it seems primarily interested in North-South corridors connecting its Western interiors to the Indian Ocean, through trusted strategic allies like Pakistan(a 21st century Chinese version of 19th century Russian ambitions).

Conclusion

    Several initiatives in SAARC, BIMSTEC and ASEAN have helped in incremental but limited integration of the Southern Asian landmass from Afghanistan to Vietnam. In my judgment the time is now ripe for raising this to a higher level, by preparing a comprehensive Vision Statement and a detailed Action Plan for economic integration of the interior areas of South and South East Asia. At some point in the future this initiative could be extended Westward to the shores of the Mediterranean and North-West to the shores of the Caspian Sea.

Post Script

  The India-Japan joint vision statement  issued by the Prime Ministers of India and Japan on December 12, 2015 appears to take this proposal forward. It states among other things that,
 (1) "They underlined their determination to expand cooperation with other partners, to enhance connectivity in the Indo-Pacific region"
(2) Seeking the synergy between India’s "Act East” policy and Japan’s "Partnership for Quality Infrastructure”, the two Prime Ministers decided to develop and strengthen reliable, sustainable and resilient infrastructures that augment connectivity within India and between India and other countries in the region.