India Budget 2013-14: Pre-budget Q&A

1.      Q: What do you believe are the most critical issues that the FM should be focusing on when he delivers the budget?

A: The critical issue is to restore economic growth. To do this, two central problems have to be addressed in the budget.  One is the Fiscal deficit and the other is revival of private investment.
 

2.      Q: This is the last full year budget before next year’s general elections. Do you worry about populist measures being announced?

 A: There is still time for another pre-election budget in 2014.  The 2013-14 budget should focus on the revival of investment and growth, leaving any “populist” measures to the next budget. 

3.      Q: The government finances are a mess. We’d be lucky if the fiscal deficit comes in at 5.3 per cent as the FM has promised it will.  The CAD is set to end this year at a record high. But would you say the progress made by the FM in the months since he took charge give you reason to believe that we are on the path to recovery?

A: The administered price changes announced by the government during the last four months are a good beginning, but they are just that a beginning.  The next critical step is the budget.  More important than the precise number for the current year (5.3% or 5.4% of GDP) will be the steps taken to put government consumption, subsidies and transfers on a firm trend to fiscal deficit reduction.  Further action will also need to be taken to reassure tax paying investors that a simple, broad based tax structure that promotes voluntary compliance is still the objective of the finance minister, and not “revenues at any cost.”

       For instance, measures introduced in the last budget to tax equity investment in new entrepreneurial ventures as hypothetical unrealized capital gains is against the logic and practice of capital gains taxation.  This should be completely and unambiguously removed for young, small scale entrepreneurs who are trying to obtain funding from venture capitalists.

4.      Q: High fiscal deficit has supported consumption but crowded out investment. Isn’t this growth composition a self-defeating one?

 A: Yes. The rate of growth of investment during 2008-9 has fallen dramatically from that attained during 2003-4 to 2007-8.  At the same time government consumption and government transfers and subsidies for private consumption have increased during 2008-09 to 2011-12.  Though the objective of the government was to promote inclusive growth and poverty alleviation the collateral damage caused to growth was insufficiently understood and appreciated by policy advisors, policy makers and even private industry (till 2011-12). The focus of expenditure needs to be reversed.

5.      Q: Has enough been done on addressing supply-side bottlenecks? What would you like to see as first steps by the government?

 A: Much more needs to be done to address supply-demand gaps in Agriculture (APMC, ExIm regime), Energy (pricing, subsidy), Minerals (Exploration, auctions), Land – Rural (LAA, R&R), Urban (land use, market) and skills (certification, training of trainers, rural youth).

6.      Q: What should be the more immediate priority – revenue enhancement or quality of expenditure?

A: Expenditure reduction has to be the immediate priority. It will allow an equivalent easing of monetary policy and thus support investment and growth.  In contrast revenue enhancement will add to and worsen the dis-incentives for investment.  This is particularly true of short term, “revenue at any cost” measures that have additional negative effects on sentiments and “animal spirits.” An improvement in the quality of both taxes and expenditures would enhance efficiency and growth, but the macro economic situation requires a sharp reduction in expenditures coupled with a dramatic easing of monetary policy.

7.      Q: India’s fiscal deficit one of the highest among high growth economies. Would you put this down to high government spending or weak revenues, especially our low tax base?

 A: India’s fiscal deficit has historically been among the highest in the world, not to speak of high growth economies.  However, by 2007-8, t he central (national) fiscal deficit was reduced to 2.5% (4%) of GDP in 2007-8, a highly creditable performance, even in a global perspective.  The global financial crisis of 2008, changed this trajectory, by necessitating a fiscal stimulus (of 2.5%) to offset the dramatic fall in private demand. 

      The V shaped recovery of growth to 8.2% in 2009-10 justified this stimulus but was also an argument for cutting back the deficit over the next two years to the 3% prescribed by the FRBM.  Unfortunately, the fiscal stimulus was increased, with little protest from economic experts by an additional 0.5% of GDP (to 6.5 % of GDP) in 2009-10, so it became impossible to bring it back to 3% by 2010-11.  This was driven by 2.2% of GDP increase in revenue expenditure and a 0.8% of GDP increase in subsidies. Restoring subsidies and other revenue expenditure -GDP ratios to those achieved in 2007-8 will help bring down the fiscal deficit and restore growth and tax revenues to earlier levels.

Changing Focus of Pakistan Army

On January 8, 2013 Pakistani soldiers crossed over the ‘Line of Control” in Mandhar sector of J&K and killed two soldiers, beheaded one of them and took the head back as a trophy.  Most of the discussion in the media has focused on the response that India has made or should make to this specific act. This note focuses on possible motives and motivation behind this act and how this should shape our response.

Objectives

                As far as the Pakistan Army is concerned the most important event that will shape its behavior in the next two years is the accelerated withdrawal of the US from Afghanistan.  This withdrawal provides it a golden opportunity to restore its hegemony in Afghanistan.  Ideally the Army would like to reestablish the dominant position it had before the Taliban driven out of Afghanistan and established its headquarters and operating bases in Pakistan (Queta Shura, Wazirstan et al).  Failing this it would be happy with a regime that subserves the Pakistan Army’s interests.  This is likely to be the central and most vital objective of the Pakistan Army and its primary operational instrument the ISI, during the next two-three years. 

The tantalizing hints of a change in Pakistan Army doctrine purportedly downgrading India’s unchallenged position as “sole enemy,” are likely diplomatic publicity designed to restore Western perceptions of Army led Pakistan as a “trusted ally”.  At the same time the Jehadis within the Army–ISI and the “Good Taliban” need to be reassured.  The following statement of Maj-Gen Asim Saleem Bajwa, DG, Inter-Services Public Relations (ISPR) keeps open the possibility of doing both: “Army prepares for all forms of threats. Sub-conventional threat is a reality and is a part of a threat matrix faced by our country. But it doesn’t mean that the conventional threat has receded (quoted in the Express Tribune).”

Signal to Who?

What then could be the motivation for this relatively small but aggressive action across the LOC?  Several commentators have asserted that this action is designed to send a signal to the Indian Army.  To buttress this argument they have pointed to the increase in cease-fire violations compared to a year ago.  It has been argued that with the resumption of military and civilian Aid to Pakistan, the Army is again emboldened to ratchet up hostile actions against India, without fear of a serious response from the Indian Government.  The factors mentioned by these analysts are certainly relevant for the assessment of the motivation and timing of specific actions of the Pakistan Army and ISI.  However, another possibility is that the hostile action is a signal to Pakistan’s own Jehadi’s , both within the army and outside it.

Pointers

One of the interesting pointers in this direction is the statement of LeT’s Hafiz Saeed, that this incident was part of the hostile and violent Indian actions across Pakistan and India’s repeated attempts to undermine peace!  When a terrorist wanted by the USA, with a reward on his head, a hate monger who gives vitriolic speeches against Indians, talks about “Peace” it is worth noting!  Not because it reflects a change of heart, but because it reflects what his handlers would like him to say.  The fact that newspapers report that he visited POK a few days before the aggressive act, and may have had a direct or indirect role, suggests that the Army wanted the Jihadists to be fully aware of this action, even if India downplayed it (as perhaps they mistakenly expected).  Subsequently he gave an interview to the Us press trying to portray himself as an ordinary person

The second pointer is how quickly Pakistan’s civilian government (EAM Rabani) responded by its diplomatic statement of willingness to refer the incident to the UN, knowing full well that with Pakistan currently chairing the UN security council, India would be more than usually reluctant to refer the incident to anyone outside established bilateral channels.  The civilian government has repeatedly faced demands from Pakistani Jihadists to take India to the UN on Kashmir.  This was followed by an appeal from the OIC for a fact finding team to J&K.  The Army knew beforehand that such an opportunity could arise and perhaps used it as an argument to obtain prior Civilian government approval for limited action on the LOC, that could be used to counter Jehadi criticism of the Army and government “inaction” on Kashmir.  A third pointer is the discovery of mines with Pakistani markings from the Maoist insurgents and reports of ISI activity in the troubled Rhongiya areas on the Myanmar-Bangladesh border.  The Huriyat leaders who visited Pakistan soon after the incident were reportedly told by the Army brass as well as the leaders of the LeT and the JeM not to participate in any Indian Govt peace initiative for the next year.  More recently the release of ‘Afghan Prisoners’ purportedly to meet the Afghan demand (for handover of Taliban leaders based in Pakistan) half way and to aid the Afghan peace process has been followed by reports that the released leaders are back fighting the US forces.  As the middle ranks of the Taliban fighters had been depleted by US drone strikes, the Pakistan Army as usual thought it could play both sides of the aisle by replenishing depleted Taliban ranks in Afghanistan while  presenting this as a peace gesture to the Afghan government (and the USA/UK).   

Conclusion

The hostile Pakistani army action across the LOC is a signal to the Pakistani jihadists (once referred to by a Pakistani friend in Washington as “Paltu Kuttas” – ‘Pet dogs’) that the Pakistan army and Government are not abandoning their anti-India policy, in their respective quests:  The Army for a dominant role in Afghanistan, financed and underwritten to the maximum extent possible by the USA and the civilian government for normalization of relations with India so as to remove the stigma of being dubbed “terrorist central” and to reduce the control of the Army over the political system and government.  The greater challenge for India is therefore to,

(a) Help stave off a fundamentalist takeover of Afghanistan, and (b) Prepare for a renewed threat to India (including J&K) from Pakistan controlled jihadists operating from fundamentalist (re-)controlled regions of Afghanistan.  This requires a multipronged Indian effort to increase the cost to the Pakistan Army of a policy of training, financing and directing jihadists and terrorists across the sub-content.

PS: An earlier version of this note was sent to a newspaper for consideration in mid-January, soon after the incident occurred.

India’s Problem is Malnutrition Not Food Security: Public Health (not Cereals) is the Solution

Background

Shri Rahul Gandhi has wisely noted that our society pays more attention to high position than to greater knowledge.  This has emboldened me to present some analysis that seems to go counter to the results expected by the Congress party at the center and BJP in the States, from their respective food security Acts.  In 2004-2005, 2% of households suffered from hunger at some point during the year and about 25% of people were below the poverty line, but as many as  45% of children below the age of 3 (5) years were malnourished. 

Logic vs. Ideology 

 A simple, non-ideological  examination of these facts suggest that,
 (a) As hunger affects only 8% of the poor generalized policies and anti-poverty programs are not the best way of reaching the hungry.  They have to be identified geographically and individually and reached directly. Once this is done it would not cost much to eliminate this hunger through direct cash or food transfers, depending on whether there are or are not competitive food markets in the area where they live.  Thus in remote or hilly areas it is probably necessary to supply food.  
 (b) Malnutrition is a much bigger problem than poverty and the causes are unlikely to be the same, even though there may be some overlap.  Anti-poverty measures/programs are unlikely to solve the malnutrition problem.

Research

Analysis of the state wise 2004-5 NSS and 2005-6 NFHS data led to the conclusion that the most important cause of malnutrition in India was the abysmal state of ‘public health’ in terms of sanitation, pure drinking water and public knowledge about the importance of cleanliness (al la germs in dirty water, dirt and grime) and nutrition (basic food groups etc.).  If this appears surprising, think about the simple act of eating and digesting food and absorbing energy and nutrition from it.  A child or adult who is sick with diahorea or dysentery can eat as much as (s)he wants but will not be able to absorb it effectively.  Recent medical research goes further, to show that even those children who are living in unsanitary conditions, but do not show any symptoms of gastro-intestinal disease, are infected with germs in their intestines that do not allow them to absorb nutrients from the food they eat.

Cross country analysis of malnutrition data confirms the conclusions of the India analysis.[i] The quality of public health, as measured by variables such as access to better sanitation and improved water sources, explains much of the cross-country variations in the prevalence of malnutrition and the high malnutrition in India relative to other countries with similar levels of per capita income and poverty.  Improvements in environmental sanitation are the clearest and most effective policy-program tool for the Central government to reduce if not eliminate the excessively high levels of malnutrition in India.  The cross country compliments the Indian Inter-state study by showing that female primary education, is an important factor in  reducing child malnutrition, by helping spread information and knowledge about personal hygiene, sanitation and nutrition.

Misleading Indices

The misnamed Global Hunger index (actually an average of calorie availability, poverty rates and child malnutrition) has been a major factor in misleading policy makers and advisers that Indians are hungry and starving and if we can assure them enough calories, the problem will be solved.  The World food Program’s single minded focus on cereals availability (and wheat and rice in India), has also contributed by arousing “liberal guilt,” about the declining average calorie intake.   
Those of us who have dealt with food issues for the last few decades, have often cautioned that easy availability of subsidized wheat and rice has driven out coarse cereals and other more nutritious local foods (e.g. wild berries, roots) from the diets of the poor and may thus have had a negative impact on nutrition.  In some cross state regressions the size of the PDS has an adverse effect on malnutrition, thus showing that the intuition s not completely wrong.  As the result is not statistically robust, it suggests that the PDS has had both positive and negative effects and in some cases the first and in others the second dominates.

Conclusion

     Here is my forecast:  The Food security Act will have little or no effect on malnutrition, poverty and hunger.   Hunger can be eliminated if and only if the government and/or NGOs identify the 40 lakh affected households and ensure that cash or food reaches (despite usual problems of leakage-corruption) the principle female (mother) of the household.  An, “Elimination of Hunger Act”, with severe penalties for officials in whose area a hungry family is found, could do this at a small fraction of the cost. 
     Child malnutrition can be dramatically reduced, if not eliminated within a decade, through a massive “public health” campaign: This would insure a modern sewerage and sanitation system in every urban, semi-urban and semi-rural area and pure drinking water, septic tanks and lavatories in rural areas.   The issue of Poverty requires a separate note.

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A version of the above post-appeared as an op ed article in the Economic Times, of February 4th, 2013, under the title, "Focus on Malnutrition, not hunger," http://m.economictimes.com/opinion/comments-analysis/focus-on-malnutrition-not-hunger/articleshow/18327041.cms

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[i] Virmani, Arvind (2012), “Under Nourishment in Children: Causes of Inter-country variation,”  Working paper number WsWp 4/2012, October 2012. http://sites.google.com/site/drarvindvirmani/working-papers.