Budget 2016-17; Macro highlights

Introduction

   India's real economic growth  is projected by CSO at 7.6% for 2015-16.  This is a respectable growth rate, despite two specific sectors that do not appear to share this prosperity. The agriculture sector is clearly distressed given two contiguous drought years. The other sector that hasn't seen the increase in growth anticipated two years ago. The excess capacity and deflationary conditions in the global metals and commodity is a major reason for this low growth.  The global growth slowdown and heightened risks in the global environment form a critical background for the budget

Fiscal Consolidation

   The most important and critical part of the budget is the fiscal balance. Despite suggestions  by many economists,  business men and corporates to let the fiscal targets slip for another year to finance higher  government infrastructure investment in 2016-17, the FM has rightly decided to stick to the 3.5% of GDP, fiscal deficit targets for 2016-17, outlined in the 2015-16 budget.  This will also bring the Primary deficit down to 0.3% of GDP in 2016-17. This is the best insurance against heightened global uncertainty.  The pleasant surprise is that the Revised estimate(RE) for Revenue deficit is 0.3% point lower than projected in the BE for 2015-16. The revenue deficit is an approximate measure of the dis-saving of the Government.  A reduction in this deficit adds to National savings and thus provides the most effective way of raising the National saving rate and reducing dependence on foreign savings.

Subsidy

   The most important subsidy reform in the budget is the decision to introduce a bill to give statutory backing to the use of Aadhar for providing benefits, transfers and subsidies to the targeted population of the poor and needy. This disconnects the general problems of secrecy & confidentiality and connects it to the governments duty to ensure that government's social expenditures reach the intended beneficiaries without being lost in administrative waste or corruption. A few small administrative steps are also being taken to reform the subsidy system. One is the program to provide LPG to BPL women so as to eliminate the health hazards of wood fueled open Chulahs. The second is a proposed test in a few districts  of a shift in provision of fertilizer subsidy from the current wasteful approach to a Direct Benefit Transfer (DBT) system successfully tried in LPG. Reform of the food procurement continues to make very slow progress through greater use of online & digital technologies. Disappointingly there was no mention of reform of the kerosene subsidy based on the previously started  DBT experiment.

Infrastructure Investment

    The budget also remains firmly on track with the infrastructure investment programs announced in the last two budgets and in the interim periods. This includes roads, electricity, ports, waterways,  airstrips and digital connectivity. To this has been added a greater emphasis on irrigation and on infrastructure connecting rural areas to State highways. The attempt to provide an integrated program for development of agriculture and rural areas has attracted more focused attention to irrigation & other inputs and processing of agri products. There also three proposals related to PPPs: A Public Utility Resolution of Disputes Bill, Guidelines for PP renegotiations and Credit rating system for Infra projects, which will help in resolving legacy issues while imparting greater regulatory clarity to bidding for new projects.

Tax Reform

        The picture on the tax reform front also remains mixed as in the last budget. Budget takes the first steps to reform the Corporate Income tax, by giving notice of phasing out of some exemptions and lowering the tax rate for new manufacturing firms that opt out of use of remaining exemptions to 25%. There is also a commendable effort to expand the presumptive tax effort including to professionals. However there are also a number of small tax changes that are an irritant to tax payers and slow progress on simplifying tax administration, even though the intent is reflected in adoption/acceptance of Administrative Reform Committee & Justice Eswar committee recommendations.  Numerous changes in excise and customs duty also suggest a move back from simplification to industry specific (dis)incentives.

Policy Reform

    Policy reforms are essential for sustained fast growth. There are three or four  policy reforms that are noteworthy. One is a reform of the Motor Vehicles Act to open the passenger bus transport service sector to private competition. So far this sector has been a monopoly of the State Govts. The proposed reforms will allow private sectors and even State companies from other States to provide bus transport service. This will be a model law which can be adopted by the States.  The second reform is the permission of 100% FDI in the Food Processing sector, for processing and storage of Indian agricultural produce and manufactures based on these products. This is a very important opening, that one has recommended for many years, after trying many other schemes without achieving the desired result of reducing the wastage of Indian grown agricultural produce. The third important reform is the Financial Firms resolution Bill, and related reforms of ARCs plus the amendment of the RBI Act to formally set up a Monetary Policy Committee (MPC). Even though this has been expected, the formalization of monetry policy system in the RBI Act will enhance the global credibility of the monetary system.

Over all it was a good budget, because of the fiscal consolidation and the policy reforms discussed above.

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An version of this note appeared in the Economic Times, under the Banner, "Fiscal Balance best Insurance against global knocks," on  March 1, 2016 at,

http://economictimes.indiatimes.com/news/economy/finance/budget-2016-fiscal-balance-best-insurance-against-global-knocks-says-ficci-mentor-arvind-virmani/articleshow/51201750.cms

Poverty Elimination & Agriculture Reforms

Poverty Elimination

     Instead of periodic but endless efforts to define poverty, we should for the next 10-15 years adopt the globally accepted definitions of comparative poverty defined by the World Banks in terms of purchasing power parity, of $1.25 and $2 per person per day. The question of inter-state allocation for Centrally Sponsored schemes that remain should be addressed by use of Per Capita State GDP (as is done by Finance Commission).

Financial re-allocation

   1.       Calculations done by us using NSS 1999 data and by Surjit Bhalla using NSS 2004 and 2009 data showed that Indian poverty can be eliminated if the money spent on Poverty Alleviation was re-directed to cash transfers.[i]   NITI Ayog should redo these calculations using the 2011 NSS data and corresponding expenditures for 2011.  
     Based on studies done earlier, on asset based indicators for identifying the poor it should settle/agree on a system for identifying them. 

  To avoid controversies related to poverty line, calculate transfers needed to bring all below Rs x per capita to x using 2011. Add reasonable administrative cost (e.g. 10%) for identifying-locating them and delivering cash directly to them => Calculate Rs. Y per capita achievable.

    We must be clear that many of these will be land-less labor and marginal farmers in rural areas who get a substantial part of their income from agriculture, so that the issue of agricultural-rural poverty is addressed head-on instead of futilely through agriculture programs.

Cash Delivery System

   2.          Find the most effective & efficient delivery method (with UID/Aadhar) for delivering cash: Bank account, RuPay Debit/Credit card or Mobile (payment & use system), or combination of three depending on geographical location & characteristics (urban, rural, hilly, remote). Restrict ration shops to areas where there is none or few private outlets for cereals (i.e, a local retail monopoly).

Quality of Life: Public Goods

   3.          Identify a set of Social “Public Goods” or “Quasi public” goods & services (P&QP G&S)  that are critical for the bottom 40% of the population. Experience & analysis suggests that Sewage and sanitation systems complete chain), clean drinking water, village road side drainage, communicable & vector borne disease, Basic education (3Rs) and basic job skills (low to middle), public health education (germs, nutrition) are the most important ones for the lower half of the population. NITI Ayog should make detailed policy plans and training program (training the trainers) for achieving these goals and propagate to States, Nagarpalikas, Panchayats and public. Identify and disseminate (media, web sites et all) successful models for achieving each Public good.

Two key CG programs can be very helpful if redirected/developed in this direction:

Swach Bharat

   Should incorporate development of Sewerage, Drainage  & Sanitation systems & protocols for all villages and census towns of India. It should also include public health education relating spread of disease through germs and basic nutrition information.

Skill India

    The skill India mission can play an important role in standardization and certification of low to middle skills that are critical for the masses of rural youth and to training of trainers by the government.  It is important to give sufficient attention to skills that are relevant to the rural economy and to agriculture, including those skills related to the introduction of modern technology relevant to them.

Education & Health

   4.      The poor and less advantaged suffer the most from inferior quality of public & private education in rural areas. In India there is the additional problem of high absenteeism among (State) Government teachers, nurses and doctors posted in rural areas.  New ICT technologies provide a way to leap frog the historical evolution of educational improvement in the World’s rural areas, and bypass the problem of poor governance (absenteeism & inability to regulate quality): Make e-education/e-learning and e-health/e-medicine a key part of the Central Governments education and health effort, leaving “Brick and Mortar” approaches to States (who have the administrative set up to supply social services and whose responsibility it is to do so).

Digital India, E-governance

   These two CG missions can play a critical role in opening up rural areas to the modern world and in providing access to information and knowledge that was traditionally available only in urban agglomerations 

Agriculture 

    As a an overwhelming majority of poor live in rural areas or are recent migrants to urban areas from rural, agriculture and rural development is a significant element of poverty elimination, particularly in the Eastern States (or parts of States) with sufficient surface water for crops (eg. W Bengal, Jharkhand, Orissa, Chattisgarh, Bihar, C & E UP), but which need better systems of irrigation and drainage.[ii]

Reform Goals

   Governance systems relating to Agriculture, Irrigation (which are primarily at State level given it is a State subject) have deteriorated badly, with associated increase in leakages and corruption. The capacity of State governments to undertake prijects and programs is limited. Reforms must focus on removing the jungle of controls on farmers and on agriculture.

G1: This requires de-control all aspects of agriculture, rural infrastructure and services to allow competition.

G2: More imaginative use of Public-Private co-operation (PPC) to increase agricultural productivity & reduce income volatility, create supply chains, develop new markets and provide weather insurance. The Private sector’s desire to sell to rural markets and their interest in increasing size of that market, should be channeled into PPC.

G3: The government should focus more on planning & providing classic “public” goods and “quasi public goods(infrastructure externalities). A modernized version of “Agro-climatic zones” needs revival as basis for Government development planning. A modernized version would take account of issues like Ground water depletion (zones-red, orange, yellow, green) and effect of Climate change on volatility of weather (low, moderate, high).

Policy

   1.      Exim-Policy: Follow the successful model of moving from QRs to Tariffs and export duties, and then gradually lowering them. For a few agricultural commodities an variable/adjustable and transparent system of Tariffs and/or duties could be adopted, based on medium term trends in international and domestic prices.

   2.      Essential Commodities Act (ECA): Narrow in terms of crops (none on perishables) & restrict usage to very precisely defined conditions (e.g. in terms of acceleration in prices).

   3.      Agricultural Produce Marketing Act (APMA): De-license setting up of competitive markets (including E-markets). Help land acquisition for this purpose. De-control direct purchase of produce from farmers by publicly listed Agro-processing Companies (w/o going through agro market).

   4.      Land Policy: Remove all controls on private sale, purchase, leasing, mortgaging, renting in or out of land (except reserved forests & carefully defined tribal areas). Reduce stamp duties for registering tenanancy and mortgages. Identify & notify areas where large scale corporate farming will be freely allowed-decontrolled (e.g. Degraded, Fallow, water logged areas) 

   5.      Unsustainable levels of Central Minimum Support prices (MSP) and State advised Prices (SAP) that are even higher than MSP, have resulted in Indian inflation rates exceeding those across the World, instead of enhancing productivity or income security. Dis continue SAP & MSP and de-control cane prices and sugar industry so that farmers get competitive prices. Help provide self-insurance by diversification into livestock, fisheries and farm forestry. Partner with private insurers providing weather insurance.

    6.      Allow 100% FDI in Food retail, agricultural/weather insurance & rural banking and rural health insurance.

   7.      Subsidy: Replace incentive for soil destroying/polluting subsidies for fertilizer use by a combination of fertilizer & seed purchase linked cash (a la LPG), Insurance (income support) & subsidy for adoption of new technology/technology up-gradation to enhance land, water, energy productivity. Over time the first element could be replaced completely by the other two. De-control import and production of fertilizer and all inputs into fertilizer production.

   8.      Water Policy: Water use efficiency in China is two times that in India. Ground water is being rapidly depleted in many areas (Punjab, Haryana, Maharashtra). In these areas we need a depletion tax to be imposed (beyond a free allowance for every resident). This would be offset by a subsidy for adoption of technology for efficient water use (eg drip irrigation).

   9.      Productivity: Professional independent regulator for introduction of new crop varieties including GM crops. Expedite GM crop trials. Strengthen Central agricultural research institutions and encourage agro-industrial corporations to do co-operative research ad dissemination.

  10.  Completely de-control private, de-centralized, unconventional power supply networks for difficult/remote/hilly/tribal areas and regulated decontrol for other rural areas. Provide the same Govt. support for such systems as is done for conventional generation, transmission & distribution systems.

Expenditures, Programs, Projects

Some of the programs that Central government can and should focus on are,

 
    1.      Information: Telecom/Broadband (open access to wires; publicly funded fibre network), E-governance centers as hubs for Agro-climatic information (Rainfed, Ground water depleting, soil conditions/analysis), best Practices and Market information.

    2.      Knowledge/Technology: Agro technology (GM seeds, R&D, TOT/Extension) Farm management (water, soil, sowing,..).

   3.      Weather/Crop Damage Insurance, Human & health insurance. Technical development & Govt. co-insurance in high premium conditions.

    4.      Technical/Professional Services: Train the trainers/suppliers of all Agricultural, Animal husbandry, fishery & other services (including farm management consultants).

   5.      Road network as Development Drivers. State highways as (better) planned hubs of integrated rural, semi-urban development.  

    6.      Railway stations: Develop as Agro-processing/Information/commercial hubs in rural, semi-urban areas

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[i]  Arvind Virmani, “Poverty And Hunger In India: What is needed To Eliminate Them,” Working Paper No. 1/2006-PC, Planning Commission, February 2006. http://planningcommission.nic.in/reports/wrkpapers/rpwpf.htm.

[ii] Arvind Virmani, “The Sudoku of Growth, Poverty and Malnutrition: Lessons For Lagging States,” Working Paper No. 2/2007-PC, Planning Commission, July  2007. http://planningcommission.nic.in/reports/wrkpapers/rpwpf.htm .