AGAINST THE GODS: THE REMARKABLE STORY OF RISK
Peter Bernstein
FINANCE is a small word, but it covers a huge territory that includes markets, banking, corporate finance, the art of forecasting, accounting , taxation and more. In this universe, financial markets are the sun, a dazzling creation around which all the other activities rotate. I set the scene in this short essay, therefore , with some observations about markets before turning to the rest of the subject. Markets are places where buyers and sellers come together to do business; financial markets deal in money and risk. Financial markets are in the first instance a vehicle for financing governments and enterprises that need money.
Beyond that, financial markets are a place where owners of outstanding assets can convert those assets into cash, or where owners of cash can find longer-term uses for their money. Financial markets thus give holders of assets with future cash flows the option of realising the discounted value of those future cash flows in the present . In short, financial markets give investors the opportunity to change their minds, to reverse earlier decisions, at a cost and with a degree of immediacy that direct investment cannot provide. Reversibility of decisions is the key element in risk. The reversibility provided by financial markets is their most important attribute. Financial markets are a kind of time machine that allows investors to compress the future into the present. Without financial markets, all assets would be buy-and-hold .
Friday, July 24, 2009
Sunday, July 19, 2009
TAXING SMALL BUSINESSES
LESS TAXING DAYS AHEAD
A new Budget proposal on simplifying the income tax code comes as a breather for over 10 million small businesses. Ravi Teja Sharma explains
The small business community is usually a discontented lot when it comes to budget announcements by the government. This time though was a little different. The UPA government took significant measures in Budget 2009 to simplify the direct tax code for individuals , entrepreneurs and small businessmen. Under the proposed changes, businesses with revenues of up to Rs 40 lakh will now have the option to declare income at 8% of their turnover (see illustration) and also be exempt from compliance procedures such as maintaining books of accounts. Moreover, they will be allowed to pay the entire tax liability from their businesses only at the time of filing tax returns , and not in advance. Over 10 million MSMEsthat fall in the sub-Rs 40 lakh turnover bracketstand to gain from this announcement , which is being seen as a boost to entrepreneurship in the country. It will rid a large number of businesses from harassment by income tax authorities and reduce paperwork to a great extent, says Anil Bhardwaj, secretary general of the Federation of Indian Micro and Small & Medium Enterprises (FISME). In a recent poll by FISME across 60 such firms, two-thirds of the respondents believed that the new proposal would benefit them. The government understands that there is a need to ease pressure on small businesses, agrees Vikas Vasal executive director, KPMG. Most small entrepreneurs get caught in a vicious cycle of non-compliance due to a number of reasons, which in turn hinders growth. For instance, when a small business owner needs funding to grow his business, he turns to his bank. If he hasnt been filing tax returns, his loan application is rejected. To file a tax return, he needs to maintain books of accounts, get them audited and pay advance tax, all of which comes at a considerable cost. To save on these costs, if he defers these regulatory requirements, hes strapped for bank lending. Thats where the new proposal could help. The idea behind this proposal is to expand the tax net by encouraging voluntary compliance by small businesses, says Aseem Chawla, tax partner at Amarchand Mangaldas. According to an estimate, only 10% of the Indian population pays direct taxes. Targeting the rest of the population is very difficult and so voluntary compliance is the only way out. If the government keeps the tax rate to a bare minimum and the compliance also to a minimum, there is a possibility that these non-taxpaying entities might come forward to file their tax returns, says Vasal. The proposed new section 44AD in the Income Tax Act seeks to estimate the income of a business assessee whose total turnover does not exceed Rs 40 lakh, at 8% of the total turnover or gross receipts in the previous year. The amendment will take effect from 1st April, 2011 and will apply only to an individual , Hindu undivided family and partnership firm and not a limited liability partnership firm. There are a number of businesses under Rs 20 lakh turnover for whom the income (at 8% of turnover) does not fall in the tax bracket, yet they must maintain books of accounts. But if they subscribe to the new regime, they could easily file their tax returns without having to maintain books of accounts. Also, when entering into a partnership, tax returns add to the credibility of the business. Anil Gupta, proprietor of Lakhnavi Chiken Art, a clothing store in Delhis Dilshad Garden area is only too happy to exercise this option. With a turnover of Rs 12 lakh, Gupta spends close to Rs 15,000 a year to maintain his books of accounts and towards chartered accountant (CA) fees. Given this option of paying at the rate of 8% of turnover, will rid us of a lot of the headache and expense, says Gupta. Chawla cautions that this proposal will work only if the income tax assessee does not face harassment from tax authorities like before. The financials declared by firms under section 44AD should be accepted by the tax authorities without any questions. The governments intention is fair but this can work only if implementation is honest, says Chawla. There are other apprehensions too. Some of the small business owners ET spoke with contend that assuming income at 8% of turnover may not be practical since in these recessionary times profits levels have dropped to the 3-5 % range. So while very small businessesthose below the Rs 20 lakh bracketmay take the option those with higher revenues say 8% is cutting it too close. The 8% rate takes into account all the cost savings accruing from not having to maintain books of accounts and not paying advance tax, says Vasal.
ravi.sharma4@timesgroup .com
A new Budget proposal on simplifying the income tax code comes as a breather for over 10 million small businesses. Ravi Teja Sharma explains
The small business community is usually a discontented lot when it comes to budget announcements by the government. This time though was a little different. The UPA government took significant measures in Budget 2009 to simplify the direct tax code for individuals , entrepreneurs and small businessmen. Under the proposed changes, businesses with revenues of up to Rs 40 lakh will now have the option to declare income at 8% of their turnover (see illustration) and also be exempt from compliance procedures such as maintaining books of accounts. Moreover, they will be allowed to pay the entire tax liability from their businesses only at the time of filing tax returns , and not in advance. Over 10 million MSMEsthat fall in the sub-Rs 40 lakh turnover bracketstand to gain from this announcement , which is being seen as a boost to entrepreneurship in the country. It will rid a large number of businesses from harassment by income tax authorities and reduce paperwork to a great extent, says Anil Bhardwaj, secretary general of the Federation of Indian Micro and Small & Medium Enterprises (FISME). In a recent poll by FISME across 60 such firms, two-thirds of the respondents believed that the new proposal would benefit them. The government understands that there is a need to ease pressure on small businesses, agrees Vikas Vasal executive director, KPMG. Most small entrepreneurs get caught in a vicious cycle of non-compliance due to a number of reasons, which in turn hinders growth. For instance, when a small business owner needs funding to grow his business, he turns to his bank. If he hasnt been filing tax returns, his loan application is rejected. To file a tax return, he needs to maintain books of accounts, get them audited and pay advance tax, all of which comes at a considerable cost. To save on these costs, if he defers these regulatory requirements, hes strapped for bank lending. Thats where the new proposal could help. The idea behind this proposal is to expand the tax net by encouraging voluntary compliance by small businesses, says Aseem Chawla, tax partner at Amarchand Mangaldas. According to an estimate, only 10% of the Indian population pays direct taxes. Targeting the rest of the population is very difficult and so voluntary compliance is the only way out. If the government keeps the tax rate to a bare minimum and the compliance also to a minimum, there is a possibility that these non-taxpaying entities might come forward to file their tax returns, says Vasal. The proposed new section 44AD in the Income Tax Act seeks to estimate the income of a business assessee whose total turnover does not exceed Rs 40 lakh, at 8% of the total turnover or gross receipts in the previous year. The amendment will take effect from 1st April, 2011 and will apply only to an individual , Hindu undivided family and partnership firm and not a limited liability partnership firm. There are a number of businesses under Rs 20 lakh turnover for whom the income (at 8% of turnover) does not fall in the tax bracket, yet they must maintain books of accounts. But if they subscribe to the new regime, they could easily file their tax returns without having to maintain books of accounts. Also, when entering into a partnership, tax returns add to the credibility of the business. Anil Gupta, proprietor of Lakhnavi Chiken Art, a clothing store in Delhis Dilshad Garden area is only too happy to exercise this option. With a turnover of Rs 12 lakh, Gupta spends close to Rs 15,000 a year to maintain his books of accounts and towards chartered accountant (CA) fees. Given this option of paying at the rate of 8% of turnover, will rid us of a lot of the headache and expense, says Gupta. Chawla cautions that this proposal will work only if the income tax assessee does not face harassment from tax authorities like before. The financials declared by firms under section 44AD should be accepted by the tax authorities without any questions. The governments intention is fair but this can work only if implementation is honest, says Chawla. There are other apprehensions too. Some of the small business owners ET spoke with contend that assuming income at 8% of turnover may not be practical since in these recessionary times profits levels have dropped to the 3-5 % range. So while very small businessesthose below the Rs 20 lakh bracketmay take the option those with higher revenues say 8% is cutting it too close. The 8% rate takes into account all the cost savings accruing from not having to maintain books of accounts and not paying advance tax, says Vasal.
ravi.sharma4@timesgroup .com
Friday, July 17, 2009
DANGEROUS MARKETS
DANGEROUS MARKETS
Dominic Barton
CONVENTIONAL wisdom and the bulk of academic literature lead many executives to believe that financial crises are difficult to predict. Conventional wisdom also argues that strategies for survival are hard to pre-plan , since the reasons for these financial meltdowns are specific to a nation , its culture and its politics. Those conclusions would lead managers to believe that the elements of a financial storm are impossible to understand, prevent and manage until the storm actually hits. We disagree . Based on our experience, we believe that the warning signs of trouble are common from nation to nation. To be sure, there are some regional and national variations. Yet, there are also common patterns of buildup and meltdown.
For this reason, we also believe that financial crises can be foreseen, their magnitude can be estimated, precautionary steps can be taken to prevent crises, strategic options can be devised and implemented , and corrective measures can be taken to lessen the storms ultimate impact. Leaders with the foresight to observe and react effectively can manage a crisis strategically before, as well as after, it hits. Given the likely increasing frequency, the unacceptable socioeconomic costs, and the heightened danger of rapid global contagion from one crisis to the next, it is imperative that we take a step back and evaluate the true causes of these events and what executives can do to manage them. Only through such a systematic understanding of financial crises can solutions be found and problems managed effectively.
Dominic Barton
CONVENTIONAL wisdom and the bulk of academic literature lead many executives to believe that financial crises are difficult to predict. Conventional wisdom also argues that strategies for survival are hard to pre-plan , since the reasons for these financial meltdowns are specific to a nation , its culture and its politics. Those conclusions would lead managers to believe that the elements of a financial storm are impossible to understand, prevent and manage until the storm actually hits. We disagree . Based on our experience, we believe that the warning signs of trouble are common from nation to nation. To be sure, there are some regional and national variations. Yet, there are also common patterns of buildup and meltdown.
For this reason, we also believe that financial crises can be foreseen, their magnitude can be estimated, precautionary steps can be taken to prevent crises, strategic options can be devised and implemented , and corrective measures can be taken to lessen the storms ultimate impact. Leaders with the foresight to observe and react effectively can manage a crisis strategically before, as well as after, it hits. Given the likely increasing frequency, the unacceptable socioeconomic costs, and the heightened danger of rapid global contagion from one crisis to the next, it is imperative that we take a step back and evaluate the true causes of these events and what executives can do to manage them. Only through such a systematic understanding of financial crises can solutions be found and problems managed effectively.
DANGEROUS MARKETS
DANGEROUS MARKETS
Dominic Barton
CONVENTIONAL wisdom and the bulk of academic literature lead many executives to believe that financial crises are difficult to predict. Conventional wisdom also argues that strategies for survival are hard to pre-plan , since the reasons for these financial meltdowns are specific to a nation , its culture and its politics. Those conclusions would lead managers to believe that the elements of a financial storm are impossible to understand, prevent and manage until the storm actually hits. We disagree . Based on our experience, we believe that the warning signs of trouble are common from nation to nation. To be sure, there are some regional and national variations. Yet, there are also common patterns of buildup and meltdown.
For this reason, we also believe that financial crises can be foreseen, their magnitude can be estimated, precautionary steps can be taken to prevent crises, strategic options can be devised and implemented , and corrective measures can be taken to lessen the storms ultimate impact. Leaders with the foresight to observe and react effectively can manage a crisis strategically before, as well as after, it hits. Given the likely increasing frequency, the unacceptable socioeconomic costs, and the heightened danger of rapid global contagion from one crisis to the next, it is imperative that we take a step back and evaluate the true causes of these events and what executives can do to manage them. Only through such a systematic understanding of financial crises can solutions be found and problems managed effectively.
Dominic Barton
CONVENTIONAL wisdom and the bulk of academic literature lead many executives to believe that financial crises are difficult to predict. Conventional wisdom also argues that strategies for survival are hard to pre-plan , since the reasons for these financial meltdowns are specific to a nation , its culture and its politics. Those conclusions would lead managers to believe that the elements of a financial storm are impossible to understand, prevent and manage until the storm actually hits. We disagree . Based on our experience, we believe that the warning signs of trouble are common from nation to nation. To be sure, there are some regional and national variations. Yet, there are also common patterns of buildup and meltdown.
For this reason, we also believe that financial crises can be foreseen, their magnitude can be estimated, precautionary steps can be taken to prevent crises, strategic options can be devised and implemented , and corrective measures can be taken to lessen the storms ultimate impact. Leaders with the foresight to observe and react effectively can manage a crisis strategically before, as well as after, it hits. Given the likely increasing frequency, the unacceptable socioeconomic costs, and the heightened danger of rapid global contagion from one crisis to the next, it is imperative that we take a step back and evaluate the true causes of these events and what executives can do to manage them. Only through such a systematic understanding of financial crises can solutions be found and problems managed effectively.
Thursday, July 16, 2009
Creating engines for future growth
Creating engines for future growth
In looking for sunrise sectors, the government must not merely be a facilitator or partner, but often an initiator. It cannot abdicate this responsibility and pass it on to the private sector, says Kiran Karnik.
POST-1991 , Indias economic landscape has witnessed huge changes. From 1.2% and 3% in the two earlier decades, the per capita GDP growth has increased to about 4% in the decade after liberalisation (1992-2002 ) and to 6% in the last six years. A more personal and human way of appreciating these figures is to look at the time required to double the income of an average Indian: this decreased from 60 years (a full life-time ) in the 1970s to 12 years now. Another facet of economic change has been the emergence of yetsmall but rapidly growing sectors based on knowledge and technology. A particularly visible example is the information and communication technology (ICT) sector.
Through the last two decades, the Indian IT software and services industry has seen explosive growth. An industry that was seen as a natural monopoly of developed countries was given a make-over with Indias innovative and disruptive business model outsourcing with a combination of on-site and off-shore work low costs and an abundance of high-quality talent. While India is but a bit player yet in the overall IT industry, it is firmly centre-stage as far as cross-border outsourcing is concerned: more than half of all inter-country outsourcing comes to India. As a result, Indias IT-BPO industry has grown from $5 billion in 2000 to about $60 billion in 2009. It is Indias biggest earner of forex, with exports of almost $50 billion. Equally important, it provides direct employment to some two million and indirect employment to almost four times that number.
The communications sector too has seen phenomenal growth in the country. FM radio, cable TV and DTH are basically developments of the last two decades. Together , they have revolutionised communications . Radio, considered a terminal case, has seen a huge revival thanks to FM, privatisation and competition . Imaginative and interactive programme formats have contributed to radios resurgence as have traffic jams. As for the profligate choice of TV channels , drinking from the fire-hose would probably be the most apt description especially for the pre-1990 s generation, which grew up on one TV channel. Even this impressive growth pales before what has happened in mobile communication, where we have moved from almost nothing to over 425 million mobiles in the space of a dozen years.
Already the single most widely owned item in India, it is probably but five years before mobiles cross the billion mark; an annual growth percentage in the 20s is taken for granted. The IT-BPO industry has grown at an unbelievable 33% annual compounded rate over the last 10 years, even as the base has grown. Projections in a NASSCOM-McKinsey study indicate that the industry could be as large as $360 billion in 2020, with exports of over $300 billion, if we play our cards right. The point of this piece, though, is not the huge success of Indias ICT sector; it is the lessons that might be drawn and the factors that may be emulated.
Despite the many constraints and intense global competition in the case of IT-BPO the ICT sector has maintained a track-record of hyper-growth . While it is necessary to discuss what policy and other initiatives are needed to sustain this growth, it is more interesting and important to understand how one might identify and nurture other such opportunities. Which areas can provide a stimulus to development through a 30+% annual growth rate, while creating jobs and secondary benefits What public policy measures will help in locating and developing such opportunities
THE present global economic situation aside, if the country is to have a sustained double digit growth in GDP, it will need high-growth sectors that scale rapidly . Ideally, these new opportunities should also be employment-intensive , so as to absorb the growing numbers in the working-age group and surplus labour from the agricultural sector.
It is not necessarily a matter of finding such opportunities, like locating a gold mine: the opportunity may have to be created. A more appropriate analogy is planting seeds not one, but many, and of different varieties in the right soil, at the right time, and then nurturing them in the expectation that at least one will grow and bear fruit that can be regularly harvested. There are many contenders vying to become the most appropriate seed : bio-technology , renewable energy , healthcare, education, housing, value-added services on mobile phones, travel and tourism services. Any of these could be the next IT sector in terms of growth and potential size; so could many others. While bets on which ones win are best left to investors and entrepreneurs , there is a role for government.
Let us not forget that the genesis of Indias IT success story lies in the IITs and engineering colleges, in English-based higher education, in the special attention given to technology-based industry and R&D : all part of the broad Nehruvian vision , and all initiated many decades ago. In later years, government policies on low/no customs duty on software, tax exemption for export profits, foreign investments in IT sector, and partnership with the private sector, all contributed greatly to the growth of this sector.
Therefore, in looking for sunrise sectors , the government must not be merely a facilitator or partner, but often an initiator . It cannot abdicate this responsibility and pass it on to the private sector. The government must look ahead not to next year or the next election, but to the next generation. Most new opportunities will tend to be technology-intensive ; hence, investment in R&D is the key to creating these new growth industries. Many will depend upon the cross-domain use of technology (e.g., ICT in healthcare or education); therefore, rigid regulatory and bureaucratic boundaries will have to be dismantled. Tax and regulatory ambience conducive to risk-taking by entrepreneurs and funders must be created. Only then can we hope to create more high-growth sectors that act as the engines for development.
(The author is a policy and
strategy analyst)
In looking for sunrise sectors, the government must not merely be a facilitator or partner, but often an initiator. It cannot abdicate this responsibility and pass it on to the private sector, says Kiran Karnik.
POST-1991 , Indias economic landscape has witnessed huge changes. From 1.2% and 3% in the two earlier decades, the per capita GDP growth has increased to about 4% in the decade after liberalisation (1992-2002 ) and to 6% in the last six years. A more personal and human way of appreciating these figures is to look at the time required to double the income of an average Indian: this decreased from 60 years (a full life-time ) in the 1970s to 12 years now. Another facet of economic change has been the emergence of yetsmall but rapidly growing sectors based on knowledge and technology. A particularly visible example is the information and communication technology (ICT) sector.
Through the last two decades, the Indian IT software and services industry has seen explosive growth. An industry that was seen as a natural monopoly of developed countries was given a make-over with Indias innovative and disruptive business model outsourcing with a combination of on-site and off-shore work low costs and an abundance of high-quality talent. While India is but a bit player yet in the overall IT industry, it is firmly centre-stage as far as cross-border outsourcing is concerned: more than half of all inter-country outsourcing comes to India. As a result, Indias IT-BPO industry has grown from $5 billion in 2000 to about $60 billion in 2009. It is Indias biggest earner of forex, with exports of almost $50 billion. Equally important, it provides direct employment to some two million and indirect employment to almost four times that number.
The communications sector too has seen phenomenal growth in the country. FM radio, cable TV and DTH are basically developments of the last two decades. Together , they have revolutionised communications . Radio, considered a terminal case, has seen a huge revival thanks to FM, privatisation and competition . Imaginative and interactive programme formats have contributed to radios resurgence as have traffic jams. As for the profligate choice of TV channels , drinking from the fire-hose would probably be the most apt description especially for the pre-1990 s generation, which grew up on one TV channel. Even this impressive growth pales before what has happened in mobile communication, where we have moved from almost nothing to over 425 million mobiles in the space of a dozen years.
Already the single most widely owned item in India, it is probably but five years before mobiles cross the billion mark; an annual growth percentage in the 20s is taken for granted. The IT-BPO industry has grown at an unbelievable 33% annual compounded rate over the last 10 years, even as the base has grown. Projections in a NASSCOM-McKinsey study indicate that the industry could be as large as $360 billion in 2020, with exports of over $300 billion, if we play our cards right. The point of this piece, though, is not the huge success of Indias ICT sector; it is the lessons that might be drawn and the factors that may be emulated.
Despite the many constraints and intense global competition in the case of IT-BPO the ICT sector has maintained a track-record of hyper-growth . While it is necessary to discuss what policy and other initiatives are needed to sustain this growth, it is more interesting and important to understand how one might identify and nurture other such opportunities. Which areas can provide a stimulus to development through a 30+% annual growth rate, while creating jobs and secondary benefits What public policy measures will help in locating and developing such opportunities
THE present global economic situation aside, if the country is to have a sustained double digit growth in GDP, it will need high-growth sectors that scale rapidly . Ideally, these new opportunities should also be employment-intensive , so as to absorb the growing numbers in the working-age group and surplus labour from the agricultural sector.
It is not necessarily a matter of finding such opportunities, like locating a gold mine: the opportunity may have to be created. A more appropriate analogy is planting seeds not one, but many, and of different varieties in the right soil, at the right time, and then nurturing them in the expectation that at least one will grow and bear fruit that can be regularly harvested. There are many contenders vying to become the most appropriate seed : bio-technology , renewable energy , healthcare, education, housing, value-added services on mobile phones, travel and tourism services. Any of these could be the next IT sector in terms of growth and potential size; so could many others. While bets on which ones win are best left to investors and entrepreneurs , there is a role for government.
Let us not forget that the genesis of Indias IT success story lies in the IITs and engineering colleges, in English-based higher education, in the special attention given to technology-based industry and R&D : all part of the broad Nehruvian vision , and all initiated many decades ago. In later years, government policies on low/no customs duty on software, tax exemption for export profits, foreign investments in IT sector, and partnership with the private sector, all contributed greatly to the growth of this sector.
Therefore, in looking for sunrise sectors , the government must not be merely a facilitator or partner, but often an initiator . It cannot abdicate this responsibility and pass it on to the private sector. The government must look ahead not to next year or the next election, but to the next generation. Most new opportunities will tend to be technology-intensive ; hence, investment in R&D is the key to creating these new growth industries. Many will depend upon the cross-domain use of technology (e.g., ICT in healthcare or education); therefore, rigid regulatory and bureaucratic boundaries will have to be dismantled. Tax and regulatory ambience conducive to risk-taking by entrepreneurs and funders must be created. Only then can we hope to create more high-growth sectors that act as the engines for development.
(The author is a policy and
strategy analyst)
Sunday, July 5, 2009
BUDGET JARGON
Words are important
The governments budget exercise may seem similar to that of a household, but for its intimidating jargon. Heres making sense of all those words in the budget speech which may defy your intelligence
READING THE BALANCE SHEET
The lines and figures that reveal the receipts and expenditure of the year
ANNUAL FINANCIAL STATEMENT
This is the last word on the states receipts and expenditure for the financial year, presented to Parliament by the government. Divided into three parts Consolidated Fund, Contingency Fund and Public Account it has a statement of receipts and expenditure of each. Expenditure from the Consolidated Fund and Contingency Fund requires the mandatory nod of Parliament.
CONSOLIDATED FUND
The governments life line: it is a consortium of all revenues, money borrowed and receipts from loans it has given. All state expenditure is made from this fund.
CONTINGENCY FUND
As the name suggests, any urgent or unforeseen expenditure is met from this Rs 500-crore fund, which is at the disposal of the President. The amount withdrawn is returned from the Consolidated Fund.
PUBLIC ACCOUNT
When it comes to this account, the governments nothing more than a banker, as this fund is a collection of money belonging to others, like public provident fund.
REVENUE VS CAPITAL
The budget has to distinguish revenue receipts/expenditure on revenue account from other expenditure. So all receipts in, say, the consolidated fund, are split into Revenue Budget (revenue account) and Capital Budget (capital account), which includes non-revenue receipts and expenditure.
REVENUE RECEIPT/EXPENDITURE
All receipts like taxes and expenditure like salaries, subsidies and interest payments that in general do not entail sale or creation of assets fall under the revenue account.
CAPITAL RECEIPT/EXPENDITURE
Capital account shows all receipts from liquidating (eg. selling shares in a public sector company) assets and spending to create assets (lending to receive interest).
REVENUE/CAPITAL BUDGET
The government has to prepare a Revenue Budget (detailing revenue receipts and revenue expenditure) and a Capital Budget (capital receipts and capital expenditure).
CREATING A HOLE IN THE POCKET
Taxes come in various shapes and sizes, but primarily fit into two little slots:
DIRECT TAX
This is the tax that you, I (and India Inc) directly pay the government for our income and wealth. So income tax, FBT, STT and BCTT are all direct taxes.
INDIRECT TAX
This ones a double whammy: Its essentially a tax on our expenditure, and includes customs, excise and service tax. Its not just you who thinks this isnt fair - governments too consider this tax regressive , as it doesnt check whether youre rich or poor. You spend, you pay. Thats precisely why most governments aim to raise more through direct taxes.
MAKING YOU PAY
The various taxes that the government levies
CORPORATION (CORPORATE) TAX
Its the tax that India Inc pays on its profits.
TAXES ON INCOME OTHER THAN CORPORATION TAX
Its income-tax paid by non-corporate assessees people like us.
FRINGE BENEFIT TAX (FBT)
No free lunches here. If you want the jam with the bread and butter, youd better pay for it. In the 2005-06 Budget, the government decided to tax all perks what is calls the fringe benefit given to employees. No longer could companies get away with saying ordinary business expenses and escape tax when they actually gave out club memberships to their employees. Employers have to now pay a tax (FBT) on a percentage of the expense incurred on such perquisites.
SECURITIES TRANSACTION TAX (STT)
If youre dealing in shares or mutual funds , you have to loosen those purse strings a wee bit too. STT is a small tax you need to pay on the total amount you pay or receive in a share deal. In the 2004-05 Budget, the government did away with the tax on profits earned on the sale of shares held for over a year (known as long-term capital gains tax) and replaced it with STT.
CUSTOMS
Anything you bring home from across the seas comes with a price. By levying a tax on imports, the governments firing on two fronts: its filling its coffers and protecting Indian industry.
UNION EXCISE DUTY
Made in India Either way, theres no escape. In other words, this is a duty imposed on goods manufactured in the country.
SERVICE TAX
If you text your friend a hundred times a day, or cant do with-out the coiffeured look at the neighbourhood salon, your monthly bill will show up a little charge for the services you use. It is a tax on services rendered.
MINIMUM ALTERNATE TAX (MAT)
Its known that a company pays tax on profits as per the Income-Tax Act. That just may not always be enough. If its tax liability is less than 10% of its profits, the company has to pay a minimum alternate tax of 10% of the book profits.
SURCHARGE
This is an extra bit of 10% on their tax liability individuals pay for earning more than Rs 10 lakh. Companies with a revenue of up to Rs 1 crore are spared this rod.
VAT AND GST
After a lot of discussion and brainstorming, the government levies what is called a value-added tax : a more transparent form of taxation . The tax is based on the difference between the value of the output and the value of the inputs used to produce it. The aim here is to tax a firm only for the value it adds to the manufacturing inputs, and not the entire input cost. Thus, VAT helps avoid a cascading of taxes as a product passes through different stages of production/value addition.
A GST, or goods and services tax, on the other hand, contains the entire element of tax borne by a good including a Central and a state-level tax.
MORE REVENUE
Of course, tax isnt the only way governments make money. Theres also nontax revenue
NON-TAX REVENUE
Any loan given to state governments, public institutions, PSUs come with a price (interests) and forms the most important receipts under this head apart from dividends and profits received from PSUs.
The government also earns from the various services including public services it provides. Of this only the Railways is a separate department, though all its receipts and expenditure are routed through the consolidated fund.
CAPITAL RECEIPTS
RECEIPTS in the capital account of the
consolidated fund are grouped
under three broad heads
public debt, recoveries of loans
and advances, and
miscellaneous receipts
PUBLIC DEBT
Dont mistake the phrase. Public debt is not something incurred by the public. In Budget parlance the difference between borrowings (public debt receipts) and repayments (public debt disbursals) during the year is the net accretion to the public debt.
Public debt can be split into two heads, internal debt (money borrowed within the country) and external debt (funds borrowed from non-Indian sources).
The internal debt comprises Treasury Bills, market stabilisation scheme, ways and means advance, and securities against small savings .
TREASURY BILL (T-BILLS )
These are bonds (debt securities) with maturity of less than a year. These are issued to meet short-term mismatches in receipts and expenditure . Bonds of longer maturity are called dated securities.
MARKET STABILISATION SCHEME (MSS)
The scheme was launched in April 2004 to strengthen Reserve Bank of Indias (RBI) ability to conduct exchange rate and monetary manage-ment . These securities are issued not to meet the governments expenditure but to provide the RBI with a stock of securities with which to intervene in the market to manage liquidity.
WAYS AND MEANS ADVANCE (WMA)
RBI is the big daddy of banks being the banker for both the Central and State governments. Therefore, the RBI provides a breather to manage mismatches in their receipts and payments in the form of ways and means advances.
SECURITIES AGAINST SMALL SAVINGS
The government meets a small part of its loan requirement by appropriating small savings collection by issuing securities to the fund.
MISCELLANEOUS CAPITAL RECEIPTS:
These are primarily receipts from disinvestment in public sector undertakings .
The capital account receipts of the consolidated fund public debt, recoveries of loans and advances, and miscellaneous receipts and revenue receipts make up the total receipts of the consolidated fund.
EXPENDITURE
Before we begin to examine the nitty gritty of where and how the government spends its money, we need to understand whats called the Central Plan. This is what every child in the country learns about in school; only, we all know it better as the Five-Year Plan. A Central Plan is the governments annual expenditure sheet, with a five-year roadmap. Heres where the government gets the money for the grand five-year exercise: The funding of the Central Plan is split almost evenly between government support (from the Budget) and internal and extra-budgetary resources of stateowned enterprises. The governments support to the Central Plan is called the Budget support.
PLAN EXPENDITURE
This is essentially the Budget support to the Central Plan. It also comprises the amount the Centre sets aside for plans of states and Union Territories. Like all Budget heads, this is also split into revenue and capital components.
NON-PLAN EXPENDITURE
All those bills the government has to pay, under the revenue expenditure head are bunched up here: interest payments, subsidies, salaries, defence and pension. The capital component, in comparison, is small; the largest chunk of this goes to defence.
DEFICIT
When governments expenditure exceeds its receipts it has to borrow to meet the shortfall. This deficit has material implication for the economy.
FISCAL DEFICIT
This is where the government feels the pinch. It often lives beyond its means, a lot like the situation mere mortals find themselves in. And then, the vicious circle is complete: it goes right back to the people for more money. Heres how that works out: The governments non-borrowed receipts revenue receipts plus loan repayments received by the government plus miscellaneous capital receipts, primarily disinvestment proceeds fall short of its expenditure. The excess of total expenditure over total nonborrowed receipts is called fiscal deficit . The government then has to borrow money from the people to meet the shortfall.
REVENUE DEFICIT
Its not just because its a deficit, but that its a revenue deficit makes it an important control indicator. All expenditure on revenue account should ideally be met from receipts on revenue account; the revenue deficit should be zero, else the government will be in debt.
PRIMARY DEFICIT
This is one primary indicator everyone likes to watch: when it shrinks, it indicates were not doing too badly on fiscal health. The primary deficit is the fiscal deficit less interest payments the government makes on its earlier borrowings. Its the basic deficit figure, if you will.
DEFICIT AND THE GDP
Its important to see where all this fits, in the larger economic picture. The Budget document mentions deficit as a percentage of GDP. In absolute terms, the fiscal deficit may be large, but if it is small compared to the size of the economy, then its not such a bad thing after all. Prudent fiscal management requires that government does not borrow to consume, in the normal course.
FRBM ACT
Enacted in 2003, the Fiscal Responsibility and Budget Management Act required the elimination of revenue deficit by 2008-09 . This means that from 2008-09 , the government was to meet all its revenue expenditure from its revenue receipts. Any borrowing was to be done to meet capital expenditure that is, repayment of loans, lending and fresh investment.
The Act also mandates a 3% limit on the fiscal deficit after 2008-09 one that allows the government to build capacities in the economy without compromising on fiscal stability. The financial crisis and the subsequent slowdown has forced the government to abandon the path of fiscal consolidation.
... AND THE REST
Some of the other important terms that figure in the Budget
BHARAT NIRMAN:
Bharat Nirman is UPAs unfulfilled dream of Build India, Build: irrigation , roads, water supply, housing, rural electrification and rural telecom connectivity. Though it couldnt meet the target of 2009, the government is still at it.
FINANCE BILL:
This, all important sheaf of papers, is all about taxes and is presented in time before the levy breaks.
FINANCIAL INCLUSION:
This is to ensure that everyone has a bank account and financial institutions are accountable. It sees to it the common denizen is not denied of timely and cheap credit and, more importantly, not intimidated by the facade of a modern bank. However, it has not fully got past the counter.
PASS-THROUGH STATUS:
Nothing can be more dreadful than having to pay twice for the same thing. This position is accorded to those investments which stands the danger of being taxed twice like mutual funds.
SUBVENTION:
This is how a government bears the loss that financial institutions incur when asked to give farmers loans below the market rates.
RESOURCES TRANSFERRED TO THE STATES
As we saw earlier, the Centre gives states a helping hand in two ways a part of its gross tax collections goes to state governments.
The Centre also transfers funds to states to support their plans. These are largely in the nature of grants, and include those given to states for managing Centrally-sponsored schemes.
The governments budget exercise may seem similar to that of a household, but for its intimidating jargon. Heres making sense of all those words in the budget speech which may defy your intelligence
READING THE BALANCE SHEET
The lines and figures that reveal the receipts and expenditure of the year
ANNUAL FINANCIAL STATEMENT
This is the last word on the states receipts and expenditure for the financial year, presented to Parliament by the government. Divided into three parts Consolidated Fund, Contingency Fund and Public Account it has a statement of receipts and expenditure of each. Expenditure from the Consolidated Fund and Contingency Fund requires the mandatory nod of Parliament.
CONSOLIDATED FUND
The governments life line: it is a consortium of all revenues, money borrowed and receipts from loans it has given. All state expenditure is made from this fund.
CONTINGENCY FUND
As the name suggests, any urgent or unforeseen expenditure is met from this Rs 500-crore fund, which is at the disposal of the President. The amount withdrawn is returned from the Consolidated Fund.
PUBLIC ACCOUNT
When it comes to this account, the governments nothing more than a banker, as this fund is a collection of money belonging to others, like public provident fund.
REVENUE VS CAPITAL
The budget has to distinguish revenue receipts/expenditure on revenue account from other expenditure. So all receipts in, say, the consolidated fund, are split into Revenue Budget (revenue account) and Capital Budget (capital account), which includes non-revenue receipts and expenditure.
REVENUE RECEIPT/EXPENDITURE
All receipts like taxes and expenditure like salaries, subsidies and interest payments that in general do not entail sale or creation of assets fall under the revenue account.
CAPITAL RECEIPT/EXPENDITURE
Capital account shows all receipts from liquidating (eg. selling shares in a public sector company) assets and spending to create assets (lending to receive interest).
REVENUE/CAPITAL BUDGET
The government has to prepare a Revenue Budget (detailing revenue receipts and revenue expenditure) and a Capital Budget (capital receipts and capital expenditure).
CREATING A HOLE IN THE POCKET
Taxes come in various shapes and sizes, but primarily fit into two little slots:
DIRECT TAX
This is the tax that you, I (and India Inc) directly pay the government for our income and wealth. So income tax, FBT, STT and BCTT are all direct taxes.
INDIRECT TAX
This ones a double whammy: Its essentially a tax on our expenditure, and includes customs, excise and service tax. Its not just you who thinks this isnt fair - governments too consider this tax regressive , as it doesnt check whether youre rich or poor. You spend, you pay. Thats precisely why most governments aim to raise more through direct taxes.
MAKING YOU PAY
The various taxes that the government levies
CORPORATION (CORPORATE) TAX
Its the tax that India Inc pays on its profits.
TAXES ON INCOME OTHER THAN CORPORATION TAX
Its income-tax paid by non-corporate assessees people like us.
FRINGE BENEFIT TAX (FBT)
No free lunches here. If you want the jam with the bread and butter, youd better pay for it. In the 2005-06 Budget, the government decided to tax all perks what is calls the fringe benefit given to employees. No longer could companies get away with saying ordinary business expenses and escape tax when they actually gave out club memberships to their employees. Employers have to now pay a tax (FBT) on a percentage of the expense incurred on such perquisites.
SECURITIES TRANSACTION TAX (STT)
If youre dealing in shares or mutual funds , you have to loosen those purse strings a wee bit too. STT is a small tax you need to pay on the total amount you pay or receive in a share deal. In the 2004-05 Budget, the government did away with the tax on profits earned on the sale of shares held for over a year (known as long-term capital gains tax) and replaced it with STT.
CUSTOMS
Anything you bring home from across the seas comes with a price. By levying a tax on imports, the governments firing on two fronts: its filling its coffers and protecting Indian industry.
UNION EXCISE DUTY
Made in India Either way, theres no escape. In other words, this is a duty imposed on goods manufactured in the country.
SERVICE TAX
If you text your friend a hundred times a day, or cant do with-out the coiffeured look at the neighbourhood salon, your monthly bill will show up a little charge for the services you use. It is a tax on services rendered.
MINIMUM ALTERNATE TAX (MAT)
Its known that a company pays tax on profits as per the Income-Tax Act. That just may not always be enough. If its tax liability is less than 10% of its profits, the company has to pay a minimum alternate tax of 10% of the book profits.
SURCHARGE
This is an extra bit of 10% on their tax liability individuals pay for earning more than Rs 10 lakh. Companies with a revenue of up to Rs 1 crore are spared this rod.
VAT AND GST
After a lot of discussion and brainstorming, the government levies what is called a value-added tax : a more transparent form of taxation . The tax is based on the difference between the value of the output and the value of the inputs used to produce it. The aim here is to tax a firm only for the value it adds to the manufacturing inputs, and not the entire input cost. Thus, VAT helps avoid a cascading of taxes as a product passes through different stages of production/value addition.
A GST, or goods and services tax, on the other hand, contains the entire element of tax borne by a good including a Central and a state-level tax.
MORE REVENUE
Of course, tax isnt the only way governments make money. Theres also nontax revenue
NON-TAX REVENUE
Any loan given to state governments, public institutions, PSUs come with a price (interests) and forms the most important receipts under this head apart from dividends and profits received from PSUs.
The government also earns from the various services including public services it provides. Of this only the Railways is a separate department, though all its receipts and expenditure are routed through the consolidated fund.
CAPITAL RECEIPTS
RECEIPTS in the capital account of the
consolidated fund are grouped
under three broad heads
public debt, recoveries of loans
and advances, and
miscellaneous receipts
PUBLIC DEBT
Dont mistake the phrase. Public debt is not something incurred by the public. In Budget parlance the difference between borrowings (public debt receipts) and repayments (public debt disbursals) during the year is the net accretion to the public debt.
Public debt can be split into two heads, internal debt (money borrowed within the country) and external debt (funds borrowed from non-Indian sources).
The internal debt comprises Treasury Bills, market stabilisation scheme, ways and means advance, and securities against small savings .
TREASURY BILL (T-BILLS )
These are bonds (debt securities) with maturity of less than a year. These are issued to meet short-term mismatches in receipts and expenditure . Bonds of longer maturity are called dated securities.
MARKET STABILISATION SCHEME (MSS)
The scheme was launched in April 2004 to strengthen Reserve Bank of Indias (RBI) ability to conduct exchange rate and monetary manage-ment . These securities are issued not to meet the governments expenditure but to provide the RBI with a stock of securities with which to intervene in the market to manage liquidity.
WAYS AND MEANS ADVANCE (WMA)
RBI is the big daddy of banks being the banker for both the Central and State governments. Therefore, the RBI provides a breather to manage mismatches in their receipts and payments in the form of ways and means advances.
SECURITIES AGAINST SMALL SAVINGS
The government meets a small part of its loan requirement by appropriating small savings collection by issuing securities to the fund.
MISCELLANEOUS CAPITAL RECEIPTS:
These are primarily receipts from disinvestment in public sector undertakings .
The capital account receipts of the consolidated fund public debt, recoveries of loans and advances, and miscellaneous receipts and revenue receipts make up the total receipts of the consolidated fund.
EXPENDITURE
Before we begin to examine the nitty gritty of where and how the government spends its money, we need to understand whats called the Central Plan. This is what every child in the country learns about in school; only, we all know it better as the Five-Year Plan. A Central Plan is the governments annual expenditure sheet, with a five-year roadmap. Heres where the government gets the money for the grand five-year exercise: The funding of the Central Plan is split almost evenly between government support (from the Budget) and internal and extra-budgetary resources of stateowned enterprises. The governments support to the Central Plan is called the Budget support.
PLAN EXPENDITURE
This is essentially the Budget support to the Central Plan. It also comprises the amount the Centre sets aside for plans of states and Union Territories. Like all Budget heads, this is also split into revenue and capital components.
NON-PLAN EXPENDITURE
All those bills the government has to pay, under the revenue expenditure head are bunched up here: interest payments, subsidies, salaries, defence and pension. The capital component, in comparison, is small; the largest chunk of this goes to defence.
DEFICIT
When governments expenditure exceeds its receipts it has to borrow to meet the shortfall. This deficit has material implication for the economy.
FISCAL DEFICIT
This is where the government feels the pinch. It often lives beyond its means, a lot like the situation mere mortals find themselves in. And then, the vicious circle is complete: it goes right back to the people for more money. Heres how that works out: The governments non-borrowed receipts revenue receipts plus loan repayments received by the government plus miscellaneous capital receipts, primarily disinvestment proceeds fall short of its expenditure. The excess of total expenditure over total nonborrowed receipts is called fiscal deficit . The government then has to borrow money from the people to meet the shortfall.
REVENUE DEFICIT
Its not just because its a deficit, but that its a revenue deficit makes it an important control indicator. All expenditure on revenue account should ideally be met from receipts on revenue account; the revenue deficit should be zero, else the government will be in debt.
PRIMARY DEFICIT
This is one primary indicator everyone likes to watch: when it shrinks, it indicates were not doing too badly on fiscal health. The primary deficit is the fiscal deficit less interest payments the government makes on its earlier borrowings. Its the basic deficit figure, if you will.
DEFICIT AND THE GDP
Its important to see where all this fits, in the larger economic picture. The Budget document mentions deficit as a percentage of GDP. In absolute terms, the fiscal deficit may be large, but if it is small compared to the size of the economy, then its not such a bad thing after all. Prudent fiscal management requires that government does not borrow to consume, in the normal course.
FRBM ACT
Enacted in 2003, the Fiscal Responsibility and Budget Management Act required the elimination of revenue deficit by 2008-09 . This means that from 2008-09 , the government was to meet all its revenue expenditure from its revenue receipts. Any borrowing was to be done to meet capital expenditure that is, repayment of loans, lending and fresh investment.
The Act also mandates a 3% limit on the fiscal deficit after 2008-09 one that allows the government to build capacities in the economy without compromising on fiscal stability. The financial crisis and the subsequent slowdown has forced the government to abandon the path of fiscal consolidation.
... AND THE REST
Some of the other important terms that figure in the Budget
BHARAT NIRMAN:
Bharat Nirman is UPAs unfulfilled dream of Build India, Build: irrigation , roads, water supply, housing, rural electrification and rural telecom connectivity. Though it couldnt meet the target of 2009, the government is still at it.
FINANCE BILL:
This, all important sheaf of papers, is all about taxes and is presented in time before the levy breaks.
FINANCIAL INCLUSION:
This is to ensure that everyone has a bank account and financial institutions are accountable. It sees to it the common denizen is not denied of timely and cheap credit and, more importantly, not intimidated by the facade of a modern bank. However, it has not fully got past the counter.
PASS-THROUGH STATUS:
Nothing can be more dreadful than having to pay twice for the same thing. This position is accorded to those investments which stands the danger of being taxed twice like mutual funds.
SUBVENTION:
This is how a government bears the loss that financial institutions incur when asked to give farmers loans below the market rates.
RESOURCES TRANSFERRED TO THE STATES
As we saw earlier, the Centre gives states a helping hand in two ways a part of its gross tax collections goes to state governments.
The Centre also transfers funds to states to support their plans. These are largely in the nature of grants, and include those given to states for managing Centrally-sponsored schemes.
Friday, July 3, 2009
GROWTH PATH TAKES A U SHAPE
GROWTH PATH TAKES A U SHAPE
Increased globalisation, however, makes high growth challenges more complex
During the last two years, the Indian economy has been buffeted by three major challenges originating in its external sector. First, a surge in capital inflows, which reached a crescendo in the last quarter of 2007-08 . Second, an inflationary explosion in global commodity prices, which began even before the first challenge had ebbed, that hit us with great force in the middle of 2008. There was barely any time to deal with this problem before the third challenge, the global financial meltdown and collapse of international trade, hit the world with severity. Despite some difficult choices and ambiguities , arising from the rapid changes in the global situation, the short-term challenges arising from these global shocks have been met. Each of these, however, has implications for the medium term, that requires a considered and integrated response if our objective of sustained high growth is to be realized. An analysis of the impact of these shocks brings to the fore the importance of pursuing reforms, including in the financial sector, to make the economy more competitive and the economic regulatory and oversight system more efficient and sensitive to new developments.
The Economic Survey of 2007-08 (February 2008) had pointed out that There is now no doubt that the economy has moved to a higher growth plane, with growth in GDP at market prices exceeding 8 per cent in every year since 2003-04 . It had however warned that The new challenge is to maintain growth at these levels, not to speak of raising it further to double digit levels. Further, The challenges of high growth have become more complex because of increased globalization of the world economy and the growing influence of global developments, economic as well as non-economic . Ten months later, the Mid-Year Review (December 2008), noted that We should be prepared for growth in 2008-09 as a whole to be around 7 per cent. The experience of economic growth in a wide range of countries across the world and over different periods of history bears testimony to the fact that such setbacks are common . The experience of high growth economies (HGEs) suggests that these can be overcome by appropriate, pragmatic (nonideological) and expeditious action to address the problems that the shocks expose and by seizing the opportunities that they open up. This is what distinguishes the few economies that sustain growth over decades (by returning to high growth after a temporary setback) from the many that fall by the wayside (returning to slower growth after a temporary spurt of high growth).
The challenges that confronted the Indian economy in 2008-09 and continue to do so in 2009-10 fall into two parts. The short-term macroeconomic challenges of monetary and fiscal policy and the medium-term challenge of returning to the high growth path. The former covers issues such as the trade-off between inflation and growth, the use of monetary policy versus use of fiscal policy, their relative effectiveness and coordination between the two. The latter includes the tension between short- and long-term fiscal policy, the immediate longer term imperatives of monetary policy and the policy and institutional reforms necessary for restoring high growth. This chapter reflects on some aspects of these issues.
GLOBAL DEVELOPMENTS AND THE INDIAN
ECONOMY,2008-09
COMMODITY PRICES AND INFLATION
During the five-year period of high growth from 2003-04 to 2007-08 , WPI inflation has gone through two cycles. The first peak in August 2004 was followed by a trough in August 2005 and the second peak in March 2007 followed by a trough in October 2007. The subsequent upturn in prices therefore followed the upturn in total capital inflows during 2007, which peaked at nearly 13 per cent in the July- September quarter of 2007-08 . The focus of macro management in general, and monetary management in particular, has been on the implication of capital inflows on foreign exchange reserve accumulation, sterilization and the exchange rate. As capital inflows were far in excess of the current account financing requirements, and given the history of capital flow volatility into emerging markets, prudence required that a part of these excess inflows be accumulated as reserves. This also has the effect of moderating any potential volatility in exchange rates arising from capital flow reversals . However, the accumulation of foreign exchange reserves by increasing the monetary base also raised the issue of the degree to which the accumulation should be sterilized. The authority given to RBI to issue Market Stabilization Scheme (MSS) bonds backed by the Government of India was adjusted (in April and August 2007) to provide the required flexibility to RBI. The attempt to manage the build-up of liquidity over this period by running a cautious monetary policy, while balancing the liquidity requirements of a fast growing economy, bore fruit for most part of fiscal 2007-08 as the 52-week average WPI inflation remained at about 4.7 per cent and the GDP growth rate for the economy was 9 per cent. However, a sudden spurt in international commodity prices in the last quarter of calendar year 2007 started creating pressures on domestic prices of tradable goods, though an appreciation of the rupee during the last quarter of 2007-08 , partly dampened the pass through of global commodity price increases.
Crude oil prices rose from an average of 90.7 US$/bbl in January 2008 to a monthly average peak of 132.8 US$/bbl in July 2008, touching a high of 147 US$/bbl in this period. Similarly, among the imported edible oils, namely, palm and soyabean the prices rose from 1,059 US$/MT and 1,276 US$/ MT in January 2008 to a monthly average high of 1,213 US$/MT and 1,537 US$/MT in June 2008, respectively. Inflation, which had declined to less than 4 per cent in the middle of August 2007 and had remained so for 20 consecutive weeks thereafter, started firming up from December 2007. During December-March 2007-08 , there was an increase in the prices of coal, iron ore, iron and steel products and prices of petroleum products not covered under the administered price mechanism. The rising oil prices necessitated an upward revision in the administered prices of petrol, high-speed diesel and LPG in first week of June 2008. Together with a continued hardening of global commodity prices these developments led to a sharp increase in the headline WPI inflation rate, touching double digit level by the middle of June 2008. It persisted at that level for the next 21 weeks with a high of 12.9 per cent in early August 2008. Nearly two-thirds of this rise in inflation was due to three sets of commodities namely, edible oils (including oilseeds and oilcakes), iron and steel (including iron ore) and mineral oils and refinery products.
Given the global origins of this inflationary episode, a judgement had to be made about the relatively temporary versus the relatively permanent elements. Appropriate fiscal and monetary measures had to be introduced to meet these elements . Given the degree of uncertainty about the exact proportion of temporary and permanent elements, a perfect response would have been unrealistic. On the monetary side, given the lags in monetary policy , the primary objective had to be the moderation in inflationary expectations and to ensure that money supply did not accommodate the permanent elements of the global cost push.
On the fiscal side, the temporary elements had to be met by making temporary reductions in the import duties on tradable goods whose prices showed unprecedented increases. Import duties were consequently reduced on the three sets of commodities mentioned earlier. The fiscal management of agricultural commodities subject to higher duties and some elements of quantitative intervention in the domestic or international sphere was more complicated. This is particularly true of basic agricultural consumer goods like cereals and pulses that affect millions of poor consumers and small farmers (producers). A combination of import tariff reductions, export duties and changes in quantitative measures for import and/or export had to be used to manage the trade-off between poor consumers and the livelihood concerns of poor producers. Though the management proved largely successful, a rational long-term framework needs to be developed, which balances the concerns of poor consumers and producers to promote efficient growth and livelihood security . One possible approach is to have an announced price band for domestic prices (which could itself evolve gradually over time) within which imports and exports are freely allowed without any duties and controls. If international prices change beyond this band, domestic prices would be systemically dampened through imposition of variable import and export duties, depending on whether international prices fell below the lower band or rise above the upper band respectively. This along with targeted subsidies, such as the PDS, would help balance the interests of farmers who need a predictable price regime to plan their cropping patterns and those of low income households.
The rise in global oil price, along with the rise in prices of other imported commodities, had a strong adverse impact on the balance of trade. Oil imports are the predominant driver of total imports. Given the administered price mechanism for petrol and diesel, the sharp rise in oil, petrol and diesel prices required a decision on how much of this price could be passed through to users/consumers. Conceptually this too requires a judgement on how much of the rise is permanent. Ideally, the entire permanent element of the price rise should be passed through along with part of the temporary increase. With oil prices overshooting to double the long-term supply price of oil, the question of (directly or indirectly), temporarily taxing resource rents is also relevant. In practice, these issues were addressed somewhat imperfectly through a sharing formula that represented a mix of government subsidy, taxation of rents and some pass through. Consequently, the fiscal deficit, adjusted for below the line items, was negatively impacted by the global price developments. This also gave rise to a dilemma between two aspects of fiscal policy. From a macro perspective, the external shock could have been addressed by accommodating the short-term shock and tightening the fiscal policy to give a long-term signal that the one time (temporary) price increase would not be allowed to translate into inflation (a continuing rise in prices). However, the political constraints and social arguments for dampening price pass through necessitated an increase in the fiscal gap. This in turn put greater pressure on monetary and other policies to moderate inflation (e.g. temporary controls under the Essential Commodities Act) that had little to do with domestic factors. Monetary management was also complicated by the fact that capital flows changed course in the first quarter of 2008-09 and trended down throughout the year. This affected foreign exchange reserves, exchange rate expectations and reserve money accumulation.
GDP growth was also affected by these developments as the worsening of terms of trade arising primarily from the rise in oil prices acts as an implicit tax on the citizens of the country, thereby reducing private consumption demand in the first half of 2008-09 . Moreover, efforts to curb inflationary expectations necessitated a rise in interest rates and mopping up of liquidity in the economy, which influenced the growth rate, both from the demand side, as well as from the supply side.
The global financial meltdown resulted in a bursting of the commodity bubble, leading to a dramatic drop in most commodity prices. Crude prices dropped to around 40 US$/bbl by December 2008. Thus, the global cost push that was primarily responsible for raising WPI inflation to double digit levels during 2008-09 , went into reverse gear after July 2008. Consequently, by end-March 2009, the WPI Index was virtually back to the level that prevailed a year before.
FINANCIAL CRISIS AND THE GLOBAL SLOWDOWN
The global financial crisis surfaced around August 2007. Its origin lay in structured investment instruments (Collateralized Debt Obligations, synthetic CDOs) created out of subprime mortgage lending in the United States. The securitization process however was not backed by due diligence and led to large-scale default. The complexity of the instruments and the role of credit rating agencies played a contributory role. The high ratings assigned to certain CDO tranches, which were then quickly reversed with the onset of the crisis, created a panic situation among investors and precipitated the crisis.
While the initial effect of the crisis was profound on the US financial institutions and to a lesser extent on European institutions, the effect on emerging economies was less serious. In the initial stages, the capital flows to the emerging economies actually increased, giving rise to what is termed as positive shock and the decoupling debate. In the case of India , for example, the net FII flows during the five-month period from September 2007 to January 2008 was US$ 22.5 billion as against an inflow of US$ 11.8 billion during April-July 2007, which were the four months immediately preceding the onset of crisis.
The effect of the financial crisis on emerging economies thereafter was mainly through reversal of portfolio flows due to unwinding of stock positions by FIIs to replenish cash balances abroad. Withdrawal of FII investment led to stock market crash in many emerging economies and decline in the value of local currency vis--vis US dollar as a result of supply-demand imbalances in domestic markets. In the case of India, the extent of reversal of capital flows was US$ 15.8 billion during five months (February-June , 2008) following the end of positive shock period in January 2008.
Following the collapse of Lehman Brothers in mid-September 2008, there was a full-blown meltdown of the global financial markets. It created a crisis of confidence that led to the seizure of interbank market and had trickle-down effect on trade financing in the emerging economies. Together with slackening global demand and declining commodity prices, it led to fall in exports, thereby transmitting financial sector crisis to the real economy. Countries with export-led model of growth, as in many South- East Asian countries, and that depended upon commodity exports, were more severely affected. The impact on Indian economy was less severe because of lower dependence of the economy on export markets and the fact that a sizeable contribution to GDP is from domestic sources. Indias trade reforms since 1991 have moved progressively towards a neutral regime for exports and imports, eschewing tax and other incentives for exports.
The direct impact of the crisis on financial sector was primarily through exposure to the toxic financial assets and the linkages with the money and foreign exchange markets. Indian banks however had very limited exposure to the US mortgage market, directly or through derivatives, and to the failed and stressed international financial institutions. The deepening of the global crisis and subsequent deleveraging and risk aversion however affected the Indian economy leading to slowing of growth momentum.
FISCAL SUSTAINABILITY AND TAX SIMPLIFICATION
FRBM-2 :
Examine the possibility of a new target of zero fiscal deficit on a cyclically adjusted basis.
Reform
of Petroleum (LPG, kerosene), fertilizer and food subsidies to reduce leakages and ensure targeting, so that all the needy get the intended benefit. Limit LPG subsidy to a maximum of 6-8 cylinders per annum per household. Phase out Kerosene supply-subsidy by ensuring that every rural household (without electricity and LPG connection) has a solar cooker and solar lantern.
Convert
fertilizer subsidy from a partproducer subsidy to a wholly farmer-user nutrient related subsidy, with freedom to producers to set prices of formulations with different mix of neutrients.
Auction
3G spectrum. The auctioned spectrum must be freely tradable, with capital gains on spectrum to be taxed under the Income Tax Act.
Revitalize
the disinvestment program and plan to generate at least Rs. 25,000 crore per year. Complete the process of selling of 5- 10 per centequity in previously identified profit making non-navratnas . List all unlisted public sector enterprises and sell a minimum of 10 per cent of equity to the public. Auction all loss making PSUs that cannot be revived. For those in which net worth is zero, allow negative bidding in the form of debt write-off .
Introduction
of the new Income Tax Code, that results in a neutral corporate tax regime.
Rationalize
Dividend Distribution Tax to ensure full single taxation of returns to capital in the hands of the receiver (i.e. neither double taxation nor zero effective taxation).
Review
and phasing out of surcharges, cesses and transaction taxes (such as commodities transaction tax, securities transaction tax and Fringe Benefit Tax). Incentivise states to do the same with respect to stamp duties.
Revise
specific duties in the textile sector to ensure that they approximate a similar ad valorem rate as originally intended. Reduce these gradually that they do not exceed 30 per cent ad valorem. Convert them to ad valorem rate once WTO negotiations are concluded.
Review
customs duty exemptions and move to a uniform duty structure to eliminated inverted duties.
Implementation
of GST from April 1, 2010 to be done in way to ensure long run fiscal sustainability.
National
ID card based on unique identification number. Rapid operationalization of the UID authority (3 months), issue of UID to all residents (6 months) and creation of an integrated data base of information on all actual and potential beneficiaries of government programmes, subsidies and transfers (one year). A Household ID (HHID) could be created simultaneously or in parallel by linking it to a set of UIDs of individuals constituting the household. These IDs will form the base of a multiapplication smart cards (MASC) system that can be used to empower the poor and insure that they get the full benefits of all programmes such as NREGA, PDS, publically provided education, skill development, health services, social security (to persons at special risk), fertilizer subsidy, solar lanterns, solar cookers, etc.
Convergence
of plan schemes with focus on outcomes. Thrust on quality of expenditure and systems of monitoring andevaluation to improve the productivity of public expenditure.
FINANCIAL MARKETS
FUNDS FOR DYNAMIC ENTREPRENEURS
Passage
of the Banking Regulations (Amendment) Bill, 2005.
Lift
the remaining ban on futures contracts to restore price discovery and price risk-management .
Bring
all financial market regulations under SEBI with a view to encourage integrated development. Broaden the longterm debt market by liberalizing the investment norms of insurance and pension funds and development of credit enhancement institutions. Government can consider a guarantee mechanism (fund) for credit enhancement of long-term infrastructure debt. Tax incentives for long-term debt markets can be considered.
Liberalize
and develop spot and futures currency markets (exchange traded). Raise position limits for domestic companies and allow trading in SDRs and SDR currencies.
Introduce/allow
repos and derivatives in corporate debt. Introduce exchange traded interest rate derivatives, such as interest rate swaps (IRS).
Introduce
standardized credit default swaps that can be traded on exchanges, subject to stricter than normal limits on eligible participants.
Extend
spot commodity trading in electronic form to agricultural markets by involving APMCs.
Auction
rights to commercial borrowing within the already defined limits, with in-built (designed) preference for longterm borrowing. Auction of rights to invest in government securities by FIIs (under sub-limit of ECB) has already been successfully carried out.
High Net
Worth Individuals (HNIs) should be allowed to register and invest directly through authorized Indian investment intermediaries. This will allow ban of indirect ways of investment such as P notes.
Align
voting rights in banks with equity holdings. Allow public to hold greater equity in public sector banks within the policy of maintaining social control of management. Phased increase in FDI limits in banks and greater entry of foreign banks with tighter regulation of investing foreign banks and other foreign entities.
Allow
trading of directed credit obligations among banks and other financial institutions. This will allow and encourage the development of financial institutions that can specialize in and exploit economies of scale and scope in unbanked/ low banked areas and sectors.
Link
small savings rates to government debt instruments or bank deposit rates of similar maturity. Make responsive to depositcredit market conditions.
Increased globalisation, however, makes high growth challenges more complex
During the last two years, the Indian economy has been buffeted by three major challenges originating in its external sector. First, a surge in capital inflows, which reached a crescendo in the last quarter of 2007-08 . Second, an inflationary explosion in global commodity prices, which began even before the first challenge had ebbed, that hit us with great force in the middle of 2008. There was barely any time to deal with this problem before the third challenge, the global financial meltdown and collapse of international trade, hit the world with severity. Despite some difficult choices and ambiguities , arising from the rapid changes in the global situation, the short-term challenges arising from these global shocks have been met. Each of these, however, has implications for the medium term, that requires a considered and integrated response if our objective of sustained high growth is to be realized. An analysis of the impact of these shocks brings to the fore the importance of pursuing reforms, including in the financial sector, to make the economy more competitive and the economic regulatory and oversight system more efficient and sensitive to new developments.
The Economic Survey of 2007-08 (February 2008) had pointed out that There is now no doubt that the economy has moved to a higher growth plane, with growth in GDP at market prices exceeding 8 per cent in every year since 2003-04 . It had however warned that The new challenge is to maintain growth at these levels, not to speak of raising it further to double digit levels. Further, The challenges of high growth have become more complex because of increased globalization of the world economy and the growing influence of global developments, economic as well as non-economic . Ten months later, the Mid-Year Review (December 2008), noted that We should be prepared for growth in 2008-09 as a whole to be around 7 per cent. The experience of economic growth in a wide range of countries across the world and over different periods of history bears testimony to the fact that such setbacks are common . The experience of high growth economies (HGEs) suggests that these can be overcome by appropriate, pragmatic (nonideological) and expeditious action to address the problems that the shocks expose and by seizing the opportunities that they open up. This is what distinguishes the few economies that sustain growth over decades (by returning to high growth after a temporary setback) from the many that fall by the wayside (returning to slower growth after a temporary spurt of high growth).
The challenges that confronted the Indian economy in 2008-09 and continue to do so in 2009-10 fall into two parts. The short-term macroeconomic challenges of monetary and fiscal policy and the medium-term challenge of returning to the high growth path. The former covers issues such as the trade-off between inflation and growth, the use of monetary policy versus use of fiscal policy, their relative effectiveness and coordination between the two. The latter includes the tension between short- and long-term fiscal policy, the immediate longer term imperatives of monetary policy and the policy and institutional reforms necessary for restoring high growth. This chapter reflects on some aspects of these issues.
GLOBAL DEVELOPMENTS AND THE INDIAN
ECONOMY,2008-09
COMMODITY PRICES AND INFLATION
During the five-year period of high growth from 2003-04 to 2007-08 , WPI inflation has gone through two cycles. The first peak in August 2004 was followed by a trough in August 2005 and the second peak in March 2007 followed by a trough in October 2007. The subsequent upturn in prices therefore followed the upturn in total capital inflows during 2007, which peaked at nearly 13 per cent in the July- September quarter of 2007-08 . The focus of macro management in general, and monetary management in particular, has been on the implication of capital inflows on foreign exchange reserve accumulation, sterilization and the exchange rate. As capital inflows were far in excess of the current account financing requirements, and given the history of capital flow volatility into emerging markets, prudence required that a part of these excess inflows be accumulated as reserves. This also has the effect of moderating any potential volatility in exchange rates arising from capital flow reversals . However, the accumulation of foreign exchange reserves by increasing the monetary base also raised the issue of the degree to which the accumulation should be sterilized. The authority given to RBI to issue Market Stabilization Scheme (MSS) bonds backed by the Government of India was adjusted (in April and August 2007) to provide the required flexibility to RBI. The attempt to manage the build-up of liquidity over this period by running a cautious monetary policy, while balancing the liquidity requirements of a fast growing economy, bore fruit for most part of fiscal 2007-08 as the 52-week average WPI inflation remained at about 4.7 per cent and the GDP growth rate for the economy was 9 per cent. However, a sudden spurt in international commodity prices in the last quarter of calendar year 2007 started creating pressures on domestic prices of tradable goods, though an appreciation of the rupee during the last quarter of 2007-08 , partly dampened the pass through of global commodity price increases.
Crude oil prices rose from an average of 90.7 US$/bbl in January 2008 to a monthly average peak of 132.8 US$/bbl in July 2008, touching a high of 147 US$/bbl in this period. Similarly, among the imported edible oils, namely, palm and soyabean the prices rose from 1,059 US$/MT and 1,276 US$/ MT in January 2008 to a monthly average high of 1,213 US$/MT and 1,537 US$/MT in June 2008, respectively. Inflation, which had declined to less than 4 per cent in the middle of August 2007 and had remained so for 20 consecutive weeks thereafter, started firming up from December 2007. During December-March 2007-08 , there was an increase in the prices of coal, iron ore, iron and steel products and prices of petroleum products not covered under the administered price mechanism. The rising oil prices necessitated an upward revision in the administered prices of petrol, high-speed diesel and LPG in first week of June 2008. Together with a continued hardening of global commodity prices these developments led to a sharp increase in the headline WPI inflation rate, touching double digit level by the middle of June 2008. It persisted at that level for the next 21 weeks with a high of 12.9 per cent in early August 2008. Nearly two-thirds of this rise in inflation was due to three sets of commodities namely, edible oils (including oilseeds and oilcakes), iron and steel (including iron ore) and mineral oils and refinery products.
Given the global origins of this inflationary episode, a judgement had to be made about the relatively temporary versus the relatively permanent elements. Appropriate fiscal and monetary measures had to be introduced to meet these elements . Given the degree of uncertainty about the exact proportion of temporary and permanent elements, a perfect response would have been unrealistic. On the monetary side, given the lags in monetary policy , the primary objective had to be the moderation in inflationary expectations and to ensure that money supply did not accommodate the permanent elements of the global cost push.
On the fiscal side, the temporary elements had to be met by making temporary reductions in the import duties on tradable goods whose prices showed unprecedented increases. Import duties were consequently reduced on the three sets of commodities mentioned earlier. The fiscal management of agricultural commodities subject to higher duties and some elements of quantitative intervention in the domestic or international sphere was more complicated. This is particularly true of basic agricultural consumer goods like cereals and pulses that affect millions of poor consumers and small farmers (producers). A combination of import tariff reductions, export duties and changes in quantitative measures for import and/or export had to be used to manage the trade-off between poor consumers and the livelihood concerns of poor producers. Though the management proved largely successful, a rational long-term framework needs to be developed, which balances the concerns of poor consumers and producers to promote efficient growth and livelihood security . One possible approach is to have an announced price band for domestic prices (which could itself evolve gradually over time) within which imports and exports are freely allowed without any duties and controls. If international prices change beyond this band, domestic prices would be systemically dampened through imposition of variable import and export duties, depending on whether international prices fell below the lower band or rise above the upper band respectively. This along with targeted subsidies, such as the PDS, would help balance the interests of farmers who need a predictable price regime to plan their cropping patterns and those of low income households.
The rise in global oil price, along with the rise in prices of other imported commodities, had a strong adverse impact on the balance of trade. Oil imports are the predominant driver of total imports. Given the administered price mechanism for petrol and diesel, the sharp rise in oil, petrol and diesel prices required a decision on how much of this price could be passed through to users/consumers. Conceptually this too requires a judgement on how much of the rise is permanent. Ideally, the entire permanent element of the price rise should be passed through along with part of the temporary increase. With oil prices overshooting to double the long-term supply price of oil, the question of (directly or indirectly), temporarily taxing resource rents is also relevant. In practice, these issues were addressed somewhat imperfectly through a sharing formula that represented a mix of government subsidy, taxation of rents and some pass through. Consequently, the fiscal deficit, adjusted for below the line items, was negatively impacted by the global price developments. This also gave rise to a dilemma between two aspects of fiscal policy. From a macro perspective, the external shock could have been addressed by accommodating the short-term shock and tightening the fiscal policy to give a long-term signal that the one time (temporary) price increase would not be allowed to translate into inflation (a continuing rise in prices). However, the political constraints and social arguments for dampening price pass through necessitated an increase in the fiscal gap. This in turn put greater pressure on monetary and other policies to moderate inflation (e.g. temporary controls under the Essential Commodities Act) that had little to do with domestic factors. Monetary management was also complicated by the fact that capital flows changed course in the first quarter of 2008-09 and trended down throughout the year. This affected foreign exchange reserves, exchange rate expectations and reserve money accumulation.
GDP growth was also affected by these developments as the worsening of terms of trade arising primarily from the rise in oil prices acts as an implicit tax on the citizens of the country, thereby reducing private consumption demand in the first half of 2008-09 . Moreover, efforts to curb inflationary expectations necessitated a rise in interest rates and mopping up of liquidity in the economy, which influenced the growth rate, both from the demand side, as well as from the supply side.
The global financial meltdown resulted in a bursting of the commodity bubble, leading to a dramatic drop in most commodity prices. Crude prices dropped to around 40 US$/bbl by December 2008. Thus, the global cost push that was primarily responsible for raising WPI inflation to double digit levels during 2008-09 , went into reverse gear after July 2008. Consequently, by end-March 2009, the WPI Index was virtually back to the level that prevailed a year before.
FINANCIAL CRISIS AND THE GLOBAL SLOWDOWN
The global financial crisis surfaced around August 2007. Its origin lay in structured investment instruments (Collateralized Debt Obligations, synthetic CDOs) created out of subprime mortgage lending in the United States. The securitization process however was not backed by due diligence and led to large-scale default. The complexity of the instruments and the role of credit rating agencies played a contributory role. The high ratings assigned to certain CDO tranches, which were then quickly reversed with the onset of the crisis, created a panic situation among investors and precipitated the crisis.
While the initial effect of the crisis was profound on the US financial institutions and to a lesser extent on European institutions, the effect on emerging economies was less serious. In the initial stages, the capital flows to the emerging economies actually increased, giving rise to what is termed as positive shock and the decoupling debate. In the case of India , for example, the net FII flows during the five-month period from September 2007 to January 2008 was US$ 22.5 billion as against an inflow of US$ 11.8 billion during April-July 2007, which were the four months immediately preceding the onset of crisis.
The effect of the financial crisis on emerging economies thereafter was mainly through reversal of portfolio flows due to unwinding of stock positions by FIIs to replenish cash balances abroad. Withdrawal of FII investment led to stock market crash in many emerging economies and decline in the value of local currency vis--vis US dollar as a result of supply-demand imbalances in domestic markets. In the case of India, the extent of reversal of capital flows was US$ 15.8 billion during five months (February-June , 2008) following the end of positive shock period in January 2008.
Following the collapse of Lehman Brothers in mid-September 2008, there was a full-blown meltdown of the global financial markets. It created a crisis of confidence that led to the seizure of interbank market and had trickle-down effect on trade financing in the emerging economies. Together with slackening global demand and declining commodity prices, it led to fall in exports, thereby transmitting financial sector crisis to the real economy. Countries with export-led model of growth, as in many South- East Asian countries, and that depended upon commodity exports, were more severely affected. The impact on Indian economy was less severe because of lower dependence of the economy on export markets and the fact that a sizeable contribution to GDP is from domestic sources. Indias trade reforms since 1991 have moved progressively towards a neutral regime for exports and imports, eschewing tax and other incentives for exports.
The direct impact of the crisis on financial sector was primarily through exposure to the toxic financial assets and the linkages with the money and foreign exchange markets. Indian banks however had very limited exposure to the US mortgage market, directly or through derivatives, and to the failed and stressed international financial institutions. The deepening of the global crisis and subsequent deleveraging and risk aversion however affected the Indian economy leading to slowing of growth momentum.
FISCAL SUSTAINABILITY AND TAX SIMPLIFICATION
FRBM-2 :
Examine the possibility of a new target of zero fiscal deficit on a cyclically adjusted basis.
Reform
of Petroleum (LPG, kerosene), fertilizer and food subsidies to reduce leakages and ensure targeting, so that all the needy get the intended benefit. Limit LPG subsidy to a maximum of 6-8 cylinders per annum per household. Phase out Kerosene supply-subsidy by ensuring that every rural household (without electricity and LPG connection) has a solar cooker and solar lantern.
Convert
fertilizer subsidy from a partproducer subsidy to a wholly farmer-user nutrient related subsidy, with freedom to producers to set prices of formulations with different mix of neutrients.
Auction
3G spectrum. The auctioned spectrum must be freely tradable, with capital gains on spectrum to be taxed under the Income Tax Act.
Revitalize
the disinvestment program and plan to generate at least Rs. 25,000 crore per year. Complete the process of selling of 5- 10 per centequity in previously identified profit making non-navratnas . List all unlisted public sector enterprises and sell a minimum of 10 per cent of equity to the public. Auction all loss making PSUs that cannot be revived. For those in which net worth is zero, allow negative bidding in the form of debt write-off .
Introduction
of the new Income Tax Code, that results in a neutral corporate tax regime.
Rationalize
Dividend Distribution Tax to ensure full single taxation of returns to capital in the hands of the receiver (i.e. neither double taxation nor zero effective taxation).
Review
and phasing out of surcharges, cesses and transaction taxes (such as commodities transaction tax, securities transaction tax and Fringe Benefit Tax). Incentivise states to do the same with respect to stamp duties.
Revise
specific duties in the textile sector to ensure that they approximate a similar ad valorem rate as originally intended. Reduce these gradually that they do not exceed 30 per cent ad valorem. Convert them to ad valorem rate once WTO negotiations are concluded.
Review
customs duty exemptions and move to a uniform duty structure to eliminated inverted duties.
Implementation
of GST from April 1, 2010 to be done in way to ensure long run fiscal sustainability.
National
ID card based on unique identification number. Rapid operationalization of the UID authority (3 months), issue of UID to all residents (6 months) and creation of an integrated data base of information on all actual and potential beneficiaries of government programmes, subsidies and transfers (one year). A Household ID (HHID) could be created simultaneously or in parallel by linking it to a set of UIDs of individuals constituting the household. These IDs will form the base of a multiapplication smart cards (MASC) system that can be used to empower the poor and insure that they get the full benefits of all programmes such as NREGA, PDS, publically provided education, skill development, health services, social security (to persons at special risk), fertilizer subsidy, solar lanterns, solar cookers, etc.
Convergence
of plan schemes with focus on outcomes. Thrust on quality of expenditure and systems of monitoring andevaluation to improve the productivity of public expenditure.
FINANCIAL MARKETS
FUNDS FOR DYNAMIC ENTREPRENEURS
Passage
of the Banking Regulations (Amendment) Bill, 2005.
Lift
the remaining ban on futures contracts to restore price discovery and price risk-management .
Bring
all financial market regulations under SEBI with a view to encourage integrated development. Broaden the longterm debt market by liberalizing the investment norms of insurance and pension funds and development of credit enhancement institutions. Government can consider a guarantee mechanism (fund) for credit enhancement of long-term infrastructure debt. Tax incentives for long-term debt markets can be considered.
Liberalize
and develop spot and futures currency markets (exchange traded). Raise position limits for domestic companies and allow trading in SDRs and SDR currencies.
Introduce/allow
repos and derivatives in corporate debt. Introduce exchange traded interest rate derivatives, such as interest rate swaps (IRS).
Introduce
standardized credit default swaps that can be traded on exchanges, subject to stricter than normal limits on eligible participants.
Extend
spot commodity trading in electronic form to agricultural markets by involving APMCs.
Auction
rights to commercial borrowing within the already defined limits, with in-built (designed) preference for longterm borrowing. Auction of rights to invest in government securities by FIIs (under sub-limit of ECB) has already been successfully carried out.
High Net
Worth Individuals (HNIs) should be allowed to register and invest directly through authorized Indian investment intermediaries. This will allow ban of indirect ways of investment such as P notes.
Align
voting rights in banks with equity holdings. Allow public to hold greater equity in public sector banks within the policy of maintaining social control of management. Phased increase in FDI limits in banks and greater entry of foreign banks with tighter regulation of investing foreign banks and other foreign entities.
Allow
trading of directed credit obligations among banks and other financial institutions. This will allow and encourage the development of financial institutions that can specialize in and exploit economies of scale and scope in unbanked/ low banked areas and sectors.
Link
small savings rates to government debt instruments or bank deposit rates of similar maturity. Make responsive to depositcredit market conditions.
FOOD SECURITY
Ghosts In The Machine
Improve quality and delivery of food security
Chaitanya Kalbag
Iremember standing in long queues at ration shops in Calcutta, Madras and Delhi when i was younger. Lines for food were a part of everyday life. You got substandard rice and dirty, large-grained sugar. The majority of Indians lived on rationed rice, sugar, kerosene , palmolein and even cloth. My children are the first generation to not experience food rationing.
It is interesting that you see fewer queues in India today. But dont think for a moment that we are a land of plenty. You see fewer queues because there are far more ghosts.
The Green Revolution did fend off famine, but the definition of famine is very subjective. I was reminded of the fragility of Indias food situation this past week as the clangour about the delayed monsoon began to get deafening. Agriculture minister Sharad Pawar assured the people that there were ample foodgrain stocks.
Probably very true and comforting if you are talking to real people, not ghosts. The trouble is that our ration shops (there are half a million of them) supply wheat, rice, sugar and kerosene to a lot of people who dont exist. The government estimates that there are 65.2 million people below the poverty line (BPL) and so entitled to rations of 20 kg of foodgrains a month at half the economic cost . But there are actually more than 80 million ration cards issued to BPL families. That is not all. The government has issued a total of 223 million ration cards against a total estimated 180 million households. In other words, there are at least 43 million ghost cards.
Reportedly, prisoners in one US state get only two square meals a day three days a week. This is inhumane, a newspaper editorial said. Over here in India, the government says blandly: A National Sample Survey Exercise points towards the fact that about 5 per cent of the total population in the country sleeps without two square meals a day . That is 60 million people.
The Antyodaya Anna Yojana aims to help the truly destitute by selling them up to 35 kg of foodgrains a month rice at Rs 2 and wheat at Rs 3 a kg. As of April 2008, the government had identified 2,42,755 poorest of the poor families.
The UPA government has taken power almost exactly midway through the 11five-year Plan. Next Monday, finance minister Pranab Mukherjee might want to address some of the concerns spelt out in the Plan documents.
There are large errors of exclusion and inclusion and ghost cards are common, the Planning Commission says, adding that leakages are common higher than 75 per cent in Bihar and Punjab. During 2003-04 , it estimates that eight million tonnes of foodgrains out of 14 million allotted to BPL families never reached them. For every 1kilogram that was delivered to the poor, Government of India had to issue 2.23 kilograms of foodgrains.
These figures have almost certainly worsened over the past year as the economy slowed down. And this is happening at a time when foodgrain prices have been rising steadily, despite misleading data that shows that Indias official measure of inflation, the wholesale price index (WPI), is now slightly negative. Although experts say the WPI is a more reliable, broader measure, the consumer price index, which takes in what the aam aadmi buys everyday, has put inflation at over 10 per cent in the 2008-09 fiscal year.
Higher prices hit the poor hardest. Statistics show that in rural India, the poor spend close to half their incomes on food, and higher food prices are deepening malnutrition.
Higher prices also mean changes in food habits. Cereal consumption has been falling steadily in rural India from 15.3 kg per capita per month in 1972-73 to 13.4 kg in 1993-94 and 12.12 kg in 2004-05 . This would not have been alarming if the poor were consuming more of other foods like milk, meat, vegetables and fruits. Over a 20-year period, the Planning Commission says, per capita consumption of calories and protein has steadily declined in India . The calorie norm for the rural poor was set at 2,400 calories a day, and rural Indias calorie consumption has dropped to 2,047 calories from 2,221. In urban India, cereal consumption has fallen less precipitously, from 11.3 kg in 1973-74 to 10.6 kg in 1993-94 and 9.94 kg in 2004-05 .
No wonder one-third of Indias adult population in 2005-06 had a body mass index below 18.5, the cut-off for malnutrition, or that India accounts for about half the developing worlds low-body-weight babies, and a very high rate of anaemia among women and girls.
The new government has said it will push a Food Security Act. What those 60 million forever-hungry people need is nutritious food, and clean drinking water. Pawar and Mukherjee have their work cut out for them.
Improve quality and delivery of food security
Chaitanya Kalbag
Iremember standing in long queues at ration shops in Calcutta, Madras and Delhi when i was younger. Lines for food were a part of everyday life. You got substandard rice and dirty, large-grained sugar. The majority of Indians lived on rationed rice, sugar, kerosene , palmolein and even cloth. My children are the first generation to not experience food rationing.
It is interesting that you see fewer queues in India today. But dont think for a moment that we are a land of plenty. You see fewer queues because there are far more ghosts.
The Green Revolution did fend off famine, but the definition of famine is very subjective. I was reminded of the fragility of Indias food situation this past week as the clangour about the delayed monsoon began to get deafening. Agriculture minister Sharad Pawar assured the people that there were ample foodgrain stocks.
Probably very true and comforting if you are talking to real people, not ghosts. The trouble is that our ration shops (there are half a million of them) supply wheat, rice, sugar and kerosene to a lot of people who dont exist. The government estimates that there are 65.2 million people below the poverty line (BPL) and so entitled to rations of 20 kg of foodgrains a month at half the economic cost . But there are actually more than 80 million ration cards issued to BPL families. That is not all. The government has issued a total of 223 million ration cards against a total estimated 180 million households. In other words, there are at least 43 million ghost cards.
Reportedly, prisoners in one US state get only two square meals a day three days a week. This is inhumane, a newspaper editorial said. Over here in India, the government says blandly: A National Sample Survey Exercise points towards the fact that about 5 per cent of the total population in the country sleeps without two square meals a day . That is 60 million people.
The Antyodaya Anna Yojana aims to help the truly destitute by selling them up to 35 kg of foodgrains a month rice at Rs 2 and wheat at Rs 3 a kg. As of April 2008, the government had identified 2,42,755 poorest of the poor families.
The UPA government has taken power almost exactly midway through the 11five-year Plan. Next Monday, finance minister Pranab Mukherjee might want to address some of the concerns spelt out in the Plan documents.
There are large errors of exclusion and inclusion and ghost cards are common, the Planning Commission says, adding that leakages are common higher than 75 per cent in Bihar and Punjab. During 2003-04 , it estimates that eight million tonnes of foodgrains out of 14 million allotted to BPL families never reached them. For every 1kilogram that was delivered to the poor, Government of India had to issue 2.23 kilograms of foodgrains.
These figures have almost certainly worsened over the past year as the economy slowed down. And this is happening at a time when foodgrain prices have been rising steadily, despite misleading data that shows that Indias official measure of inflation, the wholesale price index (WPI), is now slightly negative. Although experts say the WPI is a more reliable, broader measure, the consumer price index, which takes in what the aam aadmi buys everyday, has put inflation at over 10 per cent in the 2008-09 fiscal year.
Higher prices hit the poor hardest. Statistics show that in rural India, the poor spend close to half their incomes on food, and higher food prices are deepening malnutrition.
Higher prices also mean changes in food habits. Cereal consumption has been falling steadily in rural India from 15.3 kg per capita per month in 1972-73 to 13.4 kg in 1993-94 and 12.12 kg in 2004-05 . This would not have been alarming if the poor were consuming more of other foods like milk, meat, vegetables and fruits. Over a 20-year period, the Planning Commission says, per capita consumption of calories and protein has steadily declined in India . The calorie norm for the rural poor was set at 2,400 calories a day, and rural Indias calorie consumption has dropped to 2,047 calories from 2,221. In urban India, cereal consumption has fallen less precipitously, from 11.3 kg in 1973-74 to 10.6 kg in 1993-94 and 9.94 kg in 2004-05 .
No wonder one-third of Indias adult population in 2005-06 had a body mass index below 18.5, the cut-off for malnutrition, or that India accounts for about half the developing worlds low-body-weight babies, and a very high rate of anaemia among women and girls.
The new government has said it will push a Food Security Act. What those 60 million forever-hungry people need is nutritious food, and clean drinking water. Pawar and Mukherjee have their work cut out for them.
GOOD AND BAD FISCAL DEFICIT
Expect a Budget of roadmaps
T K ARUN
WILL Pranab Mukherjee present a Bumper Budget next Monday, or will he merely mark time, hemmed in by the twin constraints of having to sustain expenditure on inclusion and growth and having to reaffirm commitment to fiscal discipline and economic reform In all likelihood, he is likely to satisfy both expectations . He is likely to present a Budget that is long on vision and roadmaps to assorted reform but is short on immediate action on the fiscal front.
Roadmaps are required for fiscal consolidation the combined fiscal deficit of the Centre and the states together is well over 11% of GDP for phasing out the securities transaction tax, deregulation of diesel and petrol prices, transition to a goods and services tax, uniform taxation of long-term savings , disinvestment, etc.
Outlining cogent pathways to make the needed transition in each of these areas will satisfy the demand for reforms. At the same time, postponing any serious cutback in spending will satisfy those looking for sustained support for maintaining the growth momentum and widespread expectations of expanded social sector programmes to further inclusive growth.
Things are not that difficult on the fiscal deficit front, at least at the level of optics. One way to look clean is to stand next to something really dirty. The fiscal deficit for 2008-09 will look positively gory, if one brings into budget accounting the oil bonds and fertiliser bonds dished out by the government, respectively , to oil marketing and fertiliser companies in lieu of direct pay-out from the budget for selling fuels and fertiliser to consumers at prices significantly below cost. Right now, the Centres fiscal deficit has been contained at 6.2% of GDP by keeping these specific kinds of bonds, together worth over Rs 110,000 crore or 2% of GDP, outside the budget. This practice amounts to cooking the books. The forthcoming budget should incorporate these items of borrowings, meant to finance subsidies, into the fiscal deficit. And restate the 2008-09 fiscal deficit incorporating these bonds, pushing them up above 8% of GDP. Compared to that, the fiscal deficit for the current year would look positively benign.
Thanks to some fortuitous circumstances, oil and fertiliser subsidies in the 2009-10 Budget will look much slimmer and happier, much like the beaming face in a typical ad for weigh-loss programmes that display before and after pictures.
There are two factors that will help the government present a much lower subsidy burden on fuel and fertilisers. One is straightforward: on Wednesday, retail prices of petrol and diesel have been hiked, bringing down the oil marketing companies under-recoveries on the retail sales of these fuels . And if the government finds the political courage to deregulate petroleum prices altogether , retaining the right to intervene only when crude prices go above $100 per barrel or so, it would free itself altogether from the need to issue any more oil bonds. On the fertiliser front, the flow of gas from the Krishna-Godavari basin is helping a whole lot of producers to substitute natural gas for expensive naphtha, bringing down the cost of production and, therefore, the governments subsidy burden.
The reality is that the fiscal deficit does not really matter all that much in the current year. Such a proposition is, of course, heresy for many public finance experts. But much of this hostility would seem misplaced if one looks at what is really wrong with a fiscal deficit.
The fiscal deficit represents government borrowings to finance its expenditure. Now, all borrowings are a claim on the total pool of savings available in the system. If the governments claim on the savings does not exceed what the private sector has to spare after meeting its own investment requirement, there is no problem. But if the government tries to appropriate a larger share of societys savings than what is available to it, the result could be inflation and higher interest rates, and crowding out of the private sector from the market for credit.
In a situation of slack demand for capital by the private sector, such as in a slowdown when confidence is low, sustained investment by the government, even if it is through larger borrowings, only serves to encourage fresh investment by the private sector and boost growth.
The sensible perspective on the fiscal deficit has two dimensions, a quantitative one and a qualitative one. The quantitative one is that it is desirable to keep the fiscal deficit low over a business cycle, not at every point of it, certainly not when the economy is on the downswing. The qualitative part is that government borrowings that go to finance investment, say, in infrastructure or human development, are better than government borrowings that go to finance current expenditure, whether on interest payments on past debt or subsidies.
So having a large fiscal deficit to finance stepped up investment programmes should be seen as pro- rather than anti-reform .
The governments job on the fiscal front this year is less daunting than it appears There would be improvement, optical and real, by including oil and fertiliser bonds in the deficit for this year and the last Besides, maintaining a high fiscal deficit is a virtue, not a sin, when the economy is on the downswing of a business cycle
T K ARUN
WILL Pranab Mukherjee present a Bumper Budget next Monday, or will he merely mark time, hemmed in by the twin constraints of having to sustain expenditure on inclusion and growth and having to reaffirm commitment to fiscal discipline and economic reform In all likelihood, he is likely to satisfy both expectations . He is likely to present a Budget that is long on vision and roadmaps to assorted reform but is short on immediate action on the fiscal front.
Roadmaps are required for fiscal consolidation the combined fiscal deficit of the Centre and the states together is well over 11% of GDP for phasing out the securities transaction tax, deregulation of diesel and petrol prices, transition to a goods and services tax, uniform taxation of long-term savings , disinvestment, etc.
Outlining cogent pathways to make the needed transition in each of these areas will satisfy the demand for reforms. At the same time, postponing any serious cutback in spending will satisfy those looking for sustained support for maintaining the growth momentum and widespread expectations of expanded social sector programmes to further inclusive growth.
Things are not that difficult on the fiscal deficit front, at least at the level of optics. One way to look clean is to stand next to something really dirty. The fiscal deficit for 2008-09 will look positively gory, if one brings into budget accounting the oil bonds and fertiliser bonds dished out by the government, respectively , to oil marketing and fertiliser companies in lieu of direct pay-out from the budget for selling fuels and fertiliser to consumers at prices significantly below cost. Right now, the Centres fiscal deficit has been contained at 6.2% of GDP by keeping these specific kinds of bonds, together worth over Rs 110,000 crore or 2% of GDP, outside the budget. This practice amounts to cooking the books. The forthcoming budget should incorporate these items of borrowings, meant to finance subsidies, into the fiscal deficit. And restate the 2008-09 fiscal deficit incorporating these bonds, pushing them up above 8% of GDP. Compared to that, the fiscal deficit for the current year would look positively benign.
Thanks to some fortuitous circumstances, oil and fertiliser subsidies in the 2009-10 Budget will look much slimmer and happier, much like the beaming face in a typical ad for weigh-loss programmes that display before and after pictures.
There are two factors that will help the government present a much lower subsidy burden on fuel and fertilisers. One is straightforward: on Wednesday, retail prices of petrol and diesel have been hiked, bringing down the oil marketing companies under-recoveries on the retail sales of these fuels . And if the government finds the political courage to deregulate petroleum prices altogether , retaining the right to intervene only when crude prices go above $100 per barrel or so, it would free itself altogether from the need to issue any more oil bonds. On the fertiliser front, the flow of gas from the Krishna-Godavari basin is helping a whole lot of producers to substitute natural gas for expensive naphtha, bringing down the cost of production and, therefore, the governments subsidy burden.
The reality is that the fiscal deficit does not really matter all that much in the current year. Such a proposition is, of course, heresy for many public finance experts. But much of this hostility would seem misplaced if one looks at what is really wrong with a fiscal deficit.
The fiscal deficit represents government borrowings to finance its expenditure. Now, all borrowings are a claim on the total pool of savings available in the system. If the governments claim on the savings does not exceed what the private sector has to spare after meeting its own investment requirement, there is no problem. But if the government tries to appropriate a larger share of societys savings than what is available to it, the result could be inflation and higher interest rates, and crowding out of the private sector from the market for credit.
In a situation of slack demand for capital by the private sector, such as in a slowdown when confidence is low, sustained investment by the government, even if it is through larger borrowings, only serves to encourage fresh investment by the private sector and boost growth.
The sensible perspective on the fiscal deficit has two dimensions, a quantitative one and a qualitative one. The quantitative one is that it is desirable to keep the fiscal deficit low over a business cycle, not at every point of it, certainly not when the economy is on the downswing. The qualitative part is that government borrowings that go to finance investment, say, in infrastructure or human development, are better than government borrowings that go to finance current expenditure, whether on interest payments on past debt or subsidies.
So having a large fiscal deficit to finance stepped up investment programmes should be seen as pro- rather than anti-reform .
The governments job on the fiscal front this year is less daunting than it appears There would be improvement, optical and real, by including oil and fertiliser bonds in the deficit for this year and the last Besides, maintaining a high fiscal deficit is a virtue, not a sin, when the economy is on the downswing of a business cycle
URBAN REFORMS
UPA-II faces a bigger urban agenda
The urban agenda cannot be delivered with a business-as-usual pace or strategy. What is done in the first 100 days will determine whether or not the JNNURM will be able to attain its goals, says Om Prakash Mathur.
THE Jawaharlal Nehru National Urban Renewal Mission (JNNURM ) represented the urban face of UPA-I ; indications are that the JNNURM will continue to be the urban hallmark of UPA-II . If the objective of UPA-II is to achieve the JNNURM goals as set at its launch in December 2005, then, there is no alternative but to change the pace and strategy of implementation of the JNNURM.
The JNNURM has served, in the first half of the tenure, an important purpose: it has brought much of the country on its platform. Many states and cities have responded enthusiastically to the JNNURM, taking advantage of its uniquely crafted reform-linked grant system for augmenting the city-based infrastructure. Some states and cities have lagged behind, but they are on the move. A few have backtracked , but unfortunately, continue to be fed with the JNNURM largesse.
From now on, i.e., in the second half of its tenure, the agenda of the Mission has to be different, and guided by just one single consideration: in what way should the JNNURM activities be reworked and reorganised in order that these are able to achieve the Mission goals and objectives and deliver the expected outcomes What strategy, what pace, and what more, to achieve the expected outcomes these are the sole mantras for the next three and a half years. Nothing less will deliver.
Let me elaborate first on the urban reforms which form the centrepiece of the JNNURM and, second on the JNNURM projects which are the Missions visible manifestations. In the main, there are four outcomes expected from the reforms: Empowered urban local bodies (ULBS): Empowering the ULBs is an integral and a sought-after objective of the Constitution (seventy-fourth ) Amendment , 1992 and now of the JNNURM. The ULBs in India have been an inferior tier: JNNURM seeks to dismantle this historical legacy. As we see the ground, we find the state of the ULBs in respect of functions, powers, and fiscal base is unmoved by the events of the past 17 years. The same dithering about the role of the ULBs in economic and social development , urban planning, poverty alleviation can the ULBs be trusted with these higher-order responsibilities, do they have the capacity, etc. Seldom have we recognised that the implementation of the 12th Schedule will impart to ULBs a role that has eluded them for more than a century, and put our ULBs at par with the Shanghai Municipal Corporation that we keep citing every time we discuss the economic role of cities. It is essential to take on this agenda upfront. Functioning land and property market: An important goal of the JNNURM is to set the land and property market right, and make it efficient and equitable. It is common knowledge that land does not enter urban markets; transactions in land and property are so inextricably bound in rules and procedures that most prefer not the formal but the informal routes for completing transactions; lands lie unused or used sub-optimally in the midst of a huge demand-supply gap. The JNNURM makes the boldest ever attempt to address the ills of the land and property market, and has put up a carefully-chosen reform agenda comprising (i) repealing of the Urban Land (Ceilings and Regulation) Act, 1976, (ii) reform of the rent control laws, (iii) reduction of stamp duties, (iv) streamlining the procedural frameworks for conversion of agricultural lands for urban usage, (v) introduction of property title certification system, (iv) revision of building bye laws, and (vii) simplifying the process of registration of land and property. At no time has such a comprehensive attempt been made to correct the land market inefficiencies and inequities. It is essential to push it hard: the potential gains are too high to be thrown away.
INCLUSIVE cities: Few initiatives of the Union government have addressed the issue of urban poverty with as much tenacity as the JNNURM. Years of experience with implementing urban poverty alleviation programmes show that reaching the urban poor is highly complex. The JNNURM aims to reach them with tenurial security, universalisation of services, and a land pool these being the high points of inclusive cities strategy. Tenurial security in the JNNURM protocol is an economic and not a political instrument for creating an asset base for the urban poor. Improved urban governance: An allembracing term for participation, transparency , and accountability, urban governance runs deep into the Mission. The JNNURM aims to bring in deepened democracy via the ward and area sabhas, and transparency and accountability via the reformed accounting system, e-governance , and disclosure laws. For the JNNURM , improved governance is a prerequisite to sustaining urban transformation.
Let me turn to projects the other activity under the JNNURM. The JNNURM projects require them to be JNNURM compatible, and projects to be so structured as to be able to attract private capital and management. Projects have come in, often with amazing speed, but with little regard to what the JNNURM mandates compatibility with JNNURM and ability to leverage private capital. A challenge thus lies ahead: a pool of quality projects that are able to open up to private capital and management.
The UPA thus faces an agenda that cannot be delivered with a business-asusual pace or strategy. What is needed is a fresh strategy and it is this that needs to occupy the UPA-II over the 100 days i.e., what must be done for generating quality projects with private capital or for fixing the land market or for making cities inclusive; what capacities should be in place and what alternatives, if the needed capacities are not available; can another form of management structure run JNNURM more effectively; how should we do away with the artificial divide between infrastructure, housing, and poverty alleviation ; what advance work should be undertaken for thinking about the second-generation reforms for which a demand has already surfaced
What is done in these 100 days will determine whether or not the JNNURM will be able to attain its goals.
The urban agenda cannot be delivered with a business-as-usual pace or strategy. What is done in the first 100 days will determine whether or not the JNNURM will be able to attain its goals, says Om Prakash Mathur.
THE Jawaharlal Nehru National Urban Renewal Mission (JNNURM ) represented the urban face of UPA-I ; indications are that the JNNURM will continue to be the urban hallmark of UPA-II . If the objective of UPA-II is to achieve the JNNURM goals as set at its launch in December 2005, then, there is no alternative but to change the pace and strategy of implementation of the JNNURM.
The JNNURM has served, in the first half of the tenure, an important purpose: it has brought much of the country on its platform. Many states and cities have responded enthusiastically to the JNNURM, taking advantage of its uniquely crafted reform-linked grant system for augmenting the city-based infrastructure. Some states and cities have lagged behind, but they are on the move. A few have backtracked , but unfortunately, continue to be fed with the JNNURM largesse.
From now on, i.e., in the second half of its tenure, the agenda of the Mission has to be different, and guided by just one single consideration: in what way should the JNNURM activities be reworked and reorganised in order that these are able to achieve the Mission goals and objectives and deliver the expected outcomes What strategy, what pace, and what more, to achieve the expected outcomes these are the sole mantras for the next three and a half years. Nothing less will deliver.
Let me elaborate first on the urban reforms which form the centrepiece of the JNNURM and, second on the JNNURM projects which are the Missions visible manifestations. In the main, there are four outcomes expected from the reforms: Empowered urban local bodies (ULBS): Empowering the ULBs is an integral and a sought-after objective of the Constitution (seventy-fourth ) Amendment , 1992 and now of the JNNURM. The ULBs in India have been an inferior tier: JNNURM seeks to dismantle this historical legacy. As we see the ground, we find the state of the ULBs in respect of functions, powers, and fiscal base is unmoved by the events of the past 17 years. The same dithering about the role of the ULBs in economic and social development , urban planning, poverty alleviation can the ULBs be trusted with these higher-order responsibilities, do they have the capacity, etc. Seldom have we recognised that the implementation of the 12th Schedule will impart to ULBs a role that has eluded them for more than a century, and put our ULBs at par with the Shanghai Municipal Corporation that we keep citing every time we discuss the economic role of cities. It is essential to take on this agenda upfront. Functioning land and property market: An important goal of the JNNURM is to set the land and property market right, and make it efficient and equitable. It is common knowledge that land does not enter urban markets; transactions in land and property are so inextricably bound in rules and procedures that most prefer not the formal but the informal routes for completing transactions; lands lie unused or used sub-optimally in the midst of a huge demand-supply gap. The JNNURM makes the boldest ever attempt to address the ills of the land and property market, and has put up a carefully-chosen reform agenda comprising (i) repealing of the Urban Land (Ceilings and Regulation) Act, 1976, (ii) reform of the rent control laws, (iii) reduction of stamp duties, (iv) streamlining the procedural frameworks for conversion of agricultural lands for urban usage, (v) introduction of property title certification system, (iv) revision of building bye laws, and (vii) simplifying the process of registration of land and property. At no time has such a comprehensive attempt been made to correct the land market inefficiencies and inequities. It is essential to push it hard: the potential gains are too high to be thrown away.
INCLUSIVE cities: Few initiatives of the Union government have addressed the issue of urban poverty with as much tenacity as the JNNURM. Years of experience with implementing urban poverty alleviation programmes show that reaching the urban poor is highly complex. The JNNURM aims to reach them with tenurial security, universalisation of services, and a land pool these being the high points of inclusive cities strategy. Tenurial security in the JNNURM protocol is an economic and not a political instrument for creating an asset base for the urban poor. Improved urban governance: An allembracing term for participation, transparency , and accountability, urban governance runs deep into the Mission. The JNNURM aims to bring in deepened democracy via the ward and area sabhas, and transparency and accountability via the reformed accounting system, e-governance , and disclosure laws. For the JNNURM , improved governance is a prerequisite to sustaining urban transformation.
Let me turn to projects the other activity under the JNNURM. The JNNURM projects require them to be JNNURM compatible, and projects to be so structured as to be able to attract private capital and management. Projects have come in, often with amazing speed, but with little regard to what the JNNURM mandates compatibility with JNNURM and ability to leverage private capital. A challenge thus lies ahead: a pool of quality projects that are able to open up to private capital and management.
The UPA thus faces an agenda that cannot be delivered with a business-asusual pace or strategy. What is needed is a fresh strategy and it is this that needs to occupy the UPA-II over the 100 days i.e., what must be done for generating quality projects with private capital or for fixing the land market or for making cities inclusive; what capacities should be in place and what alternatives, if the needed capacities are not available; can another form of management structure run JNNURM more effectively; how should we do away with the artificial divide between infrastructure, housing, and poverty alleviation ; what advance work should be undertaken for thinking about the second-generation reforms for which a demand has already surfaced
What is done in these 100 days will determine whether or not the JNNURM will be able to attain its goals.
Wednesday, July 1, 2009
Macroeconomic policy dilemmas
Macroeconomic policy dilemmas
The budget should present a credible path of fiscal consolidation, showing how government expenditure will shrink as private expenditure rises, says Ashima Goyal
INDIANmacroeconomic policy is battling peculiar dilemmas. CPI inflation has crossed double digits even as WPI inflation is negative! As if that were not enough, yellow patches abroad continue to cast a jaundiced eye on green growth shoots in India. So fiscal policy has to nurture these shoots, and yet control runaway deficits. Thinking about Indian structure in the context of globalisation is the way to find solutions for monetary and fiscal policy alone and in combination.
Retail inflation is high because food price inflation is high. This is due to a flawed procurement price policy, exchange rate depreciation further pushing up high border prices, and inefficient wholesaling. These are not factors that a compression of demand can cure. But since food continues to have a high share of average consumption baskets, food price inflation tends to push up wages and the general price level. Delicate balancing is required, therefore, to anchor inflationary expectations and yet stimulate a supply side response.
Inadequate attention to such structural factors has in the past triggered and prolonged slowdowns. The typical response to food and oil price shocks has been a monetary tightening, together with administrative interventions that created inefficiencies over time. Hidden charges raised costs making inflation sticky, while populist giveaways deteriorated government finances. So further tightening followed . More nuanced policies that shift down the supply curve are required. Short-term , such policies are changes in tax, tariff and exchange rates, while longterm policies would raise productivity.
The current crisis has made possible a break in the vicious cycle of loose fiscal and tight monetary policies. Post-Lehman , the US pushed for a global stimulus. The argument was with output below potential in most countries a concerted push was required . This was a big change from the normal pressure on emerging markets to tighten their belts in crisis times. For once they pushed us in the right policy direction since they were themselves involved. World output may be below potential today but it is always below potential in populous emerging markets in a catch-up phase. Supply bottlenecks, however, push up an elastic supply curve. Therefore, policy must act in a coordinated way to keep demand high but remove supply bottlenecks . If supply is elastic a demand tightening has a large output cost with little reduction in inflation.
The concerted boost, as the RBI adopted unusual policies and accommodated indulgent fiscal giveaways, has compensated somewhat for the fall in private demand and kept Indian growth rates at respectable levels. But this combination cannot continue indefinitely. The worst outcome will be a return to tight monetary policy while fiscal deficits continue to balloon.
The budget should present a credible path of fiscal consolidation, showing how government expenditure will shrink as private expenditure rises. It will be credible if, first, detailed expenditure planning gives expenditure caps and targets to ministries . Second, strict prior funding norms are instituted for populist transfers while productive expenditures that relieve supply bottlenecks are increased. Third, better accounting, reporting and management systems to ensure expenditures are actually made, with minimal delay and waste. Then impact on green shoots would be maximal and real improvement replace cosmetic compliance with the FRBM. This would be the best fiscal stimulus.
WHAT about monetary policy Lower interest rates reduce pressure on government borrowing. But there is little leeway for further cuts in short-term policy rates. Considering an average inflation rate, across components and time, real short-term interest rates are negative. The current structure of inflation is doubly unfortunate . High CPI inflation means savers face a negative real interest rate. Low WPI or producer price inflation means industry faces high positive real interest rates. But real loan rates are not that high since the negative inflation is just a statistical base effect. CPI has more lags but should reduce in future. Although high food price impact inflationary expectations, negative external demand shocks and lower commodity prices help to contain them.
The real action now has to be in coaxing cuts through the structure of interest rates. Loan rates are sticky but are slowly coming down. Leaving rates to banks, policy should focus on the tardy credit channel. Apart from general liquidity support, special schemes can alleviate blocks in credit flow to export firms and MSMEs. These should not force credit to unviable firms, but compensate for systemic fear-driven freezing. Talk of withdrawal of liquidity is dangerous until recovery is firmly established. The Great Depression was prolonged because of premature withdrawal of stimulus. Much of the liquidity is being re-absorbed in the daily LAF (liquidity adjustment facility).
The other important contribution the RBI can make is to clearly communicate its current support for the governments borrowing programme, to abate market pressure on medium-term interest rates. The traditional RBI stance always pointed to problems created by large government borrowings, thus enhancing market hysteria . But this is not the time for that. The RBI has many instruments such as OMOs available to lower rates through the term structure. The annual monetary policy, in a good beginning, made this clear and pointed out that market absorption of fresh government securities would actually be lower than in recent years of high inflows.
Some general lessons can be drawn for the interest rate channel. Banks pass on rate rises faster. So the tug on the string should be mild. Banks and markets will help push it through the system. A gradual rise can ameliorate a boom without causing a crash. While the mild policy rate rises over 2004-07 sustained high growth but moderated housing bubbles, the sharp rise in 2008 punctured industrial growth. But policy rate cuts should be fast in a downturn. If further cuts are expected, banks hold appreciating bonds rather than provide credit, consumers postpone purchases , and firms wait for lower loan rates. Banks moderate the spread of the cut, and therefore the shock of a large change in rates. Further marginal policy adjustments can depend on outcomes. Rate changes can be milder to the extent they are implemented in advance of the cycle.
The budget should present a credible path of fiscal consolidation, showing how government expenditure will shrink as private expenditure rises, says Ashima Goyal
INDIANmacroeconomic policy is battling peculiar dilemmas. CPI inflation has crossed double digits even as WPI inflation is negative! As if that were not enough, yellow patches abroad continue to cast a jaundiced eye on green growth shoots in India. So fiscal policy has to nurture these shoots, and yet control runaway deficits. Thinking about Indian structure in the context of globalisation is the way to find solutions for monetary and fiscal policy alone and in combination.
Retail inflation is high because food price inflation is high. This is due to a flawed procurement price policy, exchange rate depreciation further pushing up high border prices, and inefficient wholesaling. These are not factors that a compression of demand can cure. But since food continues to have a high share of average consumption baskets, food price inflation tends to push up wages and the general price level. Delicate balancing is required, therefore, to anchor inflationary expectations and yet stimulate a supply side response.
Inadequate attention to such structural factors has in the past triggered and prolonged slowdowns. The typical response to food and oil price shocks has been a monetary tightening, together with administrative interventions that created inefficiencies over time. Hidden charges raised costs making inflation sticky, while populist giveaways deteriorated government finances. So further tightening followed . More nuanced policies that shift down the supply curve are required. Short-term , such policies are changes in tax, tariff and exchange rates, while longterm policies would raise productivity.
The current crisis has made possible a break in the vicious cycle of loose fiscal and tight monetary policies. Post-Lehman , the US pushed for a global stimulus. The argument was with output below potential in most countries a concerted push was required . This was a big change from the normal pressure on emerging markets to tighten their belts in crisis times. For once they pushed us in the right policy direction since they were themselves involved. World output may be below potential today but it is always below potential in populous emerging markets in a catch-up phase. Supply bottlenecks, however, push up an elastic supply curve. Therefore, policy must act in a coordinated way to keep demand high but remove supply bottlenecks . If supply is elastic a demand tightening has a large output cost with little reduction in inflation.
The concerted boost, as the RBI adopted unusual policies and accommodated indulgent fiscal giveaways, has compensated somewhat for the fall in private demand and kept Indian growth rates at respectable levels. But this combination cannot continue indefinitely. The worst outcome will be a return to tight monetary policy while fiscal deficits continue to balloon.
The budget should present a credible path of fiscal consolidation, showing how government expenditure will shrink as private expenditure rises. It will be credible if, first, detailed expenditure planning gives expenditure caps and targets to ministries . Second, strict prior funding norms are instituted for populist transfers while productive expenditures that relieve supply bottlenecks are increased. Third, better accounting, reporting and management systems to ensure expenditures are actually made, with minimal delay and waste. Then impact on green shoots would be maximal and real improvement replace cosmetic compliance with the FRBM. This would be the best fiscal stimulus.
WHAT about monetary policy Lower interest rates reduce pressure on government borrowing. But there is little leeway for further cuts in short-term policy rates. Considering an average inflation rate, across components and time, real short-term interest rates are negative. The current structure of inflation is doubly unfortunate . High CPI inflation means savers face a negative real interest rate. Low WPI or producer price inflation means industry faces high positive real interest rates. But real loan rates are not that high since the negative inflation is just a statistical base effect. CPI has more lags but should reduce in future. Although high food price impact inflationary expectations, negative external demand shocks and lower commodity prices help to contain them.
The real action now has to be in coaxing cuts through the structure of interest rates. Loan rates are sticky but are slowly coming down. Leaving rates to banks, policy should focus on the tardy credit channel. Apart from general liquidity support, special schemes can alleviate blocks in credit flow to export firms and MSMEs. These should not force credit to unviable firms, but compensate for systemic fear-driven freezing. Talk of withdrawal of liquidity is dangerous until recovery is firmly established. The Great Depression was prolonged because of premature withdrawal of stimulus. Much of the liquidity is being re-absorbed in the daily LAF (liquidity adjustment facility).
The other important contribution the RBI can make is to clearly communicate its current support for the governments borrowing programme, to abate market pressure on medium-term interest rates. The traditional RBI stance always pointed to problems created by large government borrowings, thus enhancing market hysteria . But this is not the time for that. The RBI has many instruments such as OMOs available to lower rates through the term structure. The annual monetary policy, in a good beginning, made this clear and pointed out that market absorption of fresh government securities would actually be lower than in recent years of high inflows.
Some general lessons can be drawn for the interest rate channel. Banks pass on rate rises faster. So the tug on the string should be mild. Banks and markets will help push it through the system. A gradual rise can ameliorate a boom without causing a crash. While the mild policy rate rises over 2004-07 sustained high growth but moderated housing bubbles, the sharp rise in 2008 punctured industrial growth. But policy rate cuts should be fast in a downturn. If further cuts are expected, banks hold appreciating bonds rather than provide credit, consumers postpone purchases , and firms wait for lower loan rates. Banks moderate the spread of the cut, and therefore the shock of a large change in rates. Further marginal policy adjustments can depend on outcomes. Rate changes can be milder to the extent they are implemented in advance of the cycle.
Monday, June 29, 2009
GLOBAL FINANCIAL MANIPULATION
The Davos Man is back, back to his bad old ways
SUDESHNA SEN
WALL Street types, it seems, are back to their bad old ways. Hiring and poaching is back, astronomical salaries are being justified, bonuses have just been moved from one part of salary slips to another.
The word in the City is that most bankers are just sort of keeping their heads under the parapet, and planning to return to their profligate ways, sooner than later. Banking big shots are openly and actively pushing back against any attempt to regulate them, cut them down to size, or even change their compensation patterns. The same faces that were trashed last year, are popping up elsewhere, with mega salary deals.
Well. And nobody is noticing much, with everyone focused on every sign of economic recovery. Economists are busy squabbling about what shape the future is, and ever more obscure models, as if we care, tell us where the money and jobs are.
Meanwhile, theres a battle for world domination going on. This battle isnt about investment banks, or hedge funds, or economists or politicians. Its not even about the Swiss, Chinese or India. Its the battle between those who controlled the global economy, through the complex financial system, call him the Davos Man if you will, fighting for their survival if kings and Brahmins thought they had a divine right to rule, the Davos Man thinks so too.
From where I stand, looks like theyre winning, for now.
The unprecedented consensus forged among countries even as late as April at the G20 summit is slowly dissolving into various patterns of oblivion, like those funny screensavers.
The Davos Man isnt just a banker. Theyre the crony capitalists, with their insiders scattered through regulators, IMF, World Bank, investors, governments, economists, analysts, media in every country, including India. In India, its just that the status quo the privileged want to maintain is slightly different.
One banker (who hadnt lost his job) told me last winter, that after the shake-out , the financial services sector that emerged would not be stronger, more resilient, efficient or cleaner. It would just be dirtier, nastier and even greedier. Why, I asked. Because in the job purges that swept through the sector, many of the nicer , more ethical, less political people lost out. Theyre running ski resorts or pounding the streets now. The political animals survived, the ones, to quote another were, the worst sort of Hollywood villain types. And this time, they know that theres no penalty for failures, they can always fleece those taxpayer sheep any time. I didnt believe them then, but maybe the insiders had a point.
Take a look at where we are on various issues today. Global regulatory reforms. The opinion is split 20 different ways, not on how, but if at all. In UK, theres a strong lobby claiming that EU regulatory proposals are just some sort of continental land grab to topple Londons premier financial centre position. Theres no consensus within the EU itself. In the US, various lobbies are split right down the middle. Should banks be allowed to become too big to fail Should they be cut down to size The discussion has got bogged down in how to evaluate connectivity and risk taking. Not how to ensure that any corporate entity cannot, in future, hold an entire world to ransom.
Because thats precisely what happened.
The political class it seems, has been almost beaten into submission by a winter of, umm, blackmail. The financial sector just cut off global credit lines, choking the real economy, until first their own jobs, power bases, balance sheets and pay packets were saved. No politician , faced with monthly job loss figures and daily disasters, can withstand that kind of pressure for too long. Oh give em back their private jets, at least theyll start lending again. It is significant that the first rescue packages to have any immediate impact were the hugely complicated ones from Geithner that gave plenty of scope for private players to make money, in fees, commissions, deals.
Next, take compensation system. Even the Obama administration, after its initial ceiling on salaries, has backed down over executive pay. Investment banks and bankers, government funded or not, are back to the merry old bonus system. Its different, were told. Sure. This time its probably tax deductible.
Regulators, everywhere, are now divided, among themselves, on what needs to be done. Instead of getting on with the job, most central bankers and regulators are occupied in fighting off rising opposition from the lets not mess too much camp. A senior fellow, from London Business School no less, was actually quoted in public as saying the rush to do something is rather foolish. We have 59 years to get it right. Wow. In that time, lots of people will lose their homes, sink into poverty, lose their retirement nest eggs and suffer horribly and die, while we debate the zeros in a trillion. Thats the rush.
Were going through the same arguments again, after the financial sector has almost bankrupted economy after economy. Why bother with Da Vinci Codes , or Angels and Demons Real life is so much more sinister.
SUDESHNA SEN
WALL Street types, it seems, are back to their bad old ways. Hiring and poaching is back, astronomical salaries are being justified, bonuses have just been moved from one part of salary slips to another.
The word in the City is that most bankers are just sort of keeping their heads under the parapet, and planning to return to their profligate ways, sooner than later. Banking big shots are openly and actively pushing back against any attempt to regulate them, cut them down to size, or even change their compensation patterns. The same faces that were trashed last year, are popping up elsewhere, with mega salary deals.
Well. And nobody is noticing much, with everyone focused on every sign of economic recovery. Economists are busy squabbling about what shape the future is, and ever more obscure models, as if we care, tell us where the money and jobs are.
Meanwhile, theres a battle for world domination going on. This battle isnt about investment banks, or hedge funds, or economists or politicians. Its not even about the Swiss, Chinese or India. Its the battle between those who controlled the global economy, through the complex financial system, call him the Davos Man if you will, fighting for their survival if kings and Brahmins thought they had a divine right to rule, the Davos Man thinks so too.
From where I stand, looks like theyre winning, for now.
The unprecedented consensus forged among countries even as late as April at the G20 summit is slowly dissolving into various patterns of oblivion, like those funny screensavers.
The Davos Man isnt just a banker. Theyre the crony capitalists, with their insiders scattered through regulators, IMF, World Bank, investors, governments, economists, analysts, media in every country, including India. In India, its just that the status quo the privileged want to maintain is slightly different.
One banker (who hadnt lost his job) told me last winter, that after the shake-out , the financial services sector that emerged would not be stronger, more resilient, efficient or cleaner. It would just be dirtier, nastier and even greedier. Why, I asked. Because in the job purges that swept through the sector, many of the nicer , more ethical, less political people lost out. Theyre running ski resorts or pounding the streets now. The political animals survived, the ones, to quote another were, the worst sort of Hollywood villain types. And this time, they know that theres no penalty for failures, they can always fleece those taxpayer sheep any time. I didnt believe them then, but maybe the insiders had a point.
Take a look at where we are on various issues today. Global regulatory reforms. The opinion is split 20 different ways, not on how, but if at all. In UK, theres a strong lobby claiming that EU regulatory proposals are just some sort of continental land grab to topple Londons premier financial centre position. Theres no consensus within the EU itself. In the US, various lobbies are split right down the middle. Should banks be allowed to become too big to fail Should they be cut down to size The discussion has got bogged down in how to evaluate connectivity and risk taking. Not how to ensure that any corporate entity cannot, in future, hold an entire world to ransom.
Because thats precisely what happened.
The political class it seems, has been almost beaten into submission by a winter of, umm, blackmail. The financial sector just cut off global credit lines, choking the real economy, until first their own jobs, power bases, balance sheets and pay packets were saved. No politician , faced with monthly job loss figures and daily disasters, can withstand that kind of pressure for too long. Oh give em back their private jets, at least theyll start lending again. It is significant that the first rescue packages to have any immediate impact were the hugely complicated ones from Geithner that gave plenty of scope for private players to make money, in fees, commissions, deals.
Next, take compensation system. Even the Obama administration, after its initial ceiling on salaries, has backed down over executive pay. Investment banks and bankers, government funded or not, are back to the merry old bonus system. Its different, were told. Sure. This time its probably tax deductible.
Regulators, everywhere, are now divided, among themselves, on what needs to be done. Instead of getting on with the job, most central bankers and regulators are occupied in fighting off rising opposition from the lets not mess too much camp. A senior fellow, from London Business School no less, was actually quoted in public as saying the rush to do something is rather foolish. We have 59 years to get it right. Wow. In that time, lots of people will lose their homes, sink into poverty, lose their retirement nest eggs and suffer horribly and die, while we debate the zeros in a trillion. Thats the rush.
Were going through the same arguments again, after the financial sector has almost bankrupted economy after economy. Why bother with Da Vinci Codes , or Angels and Demons Real life is so much more sinister.
Time for the second wave of reforms
Time for the second wave of reforms
The next wave of investment policy reforms must focus on removing barriers to investment and providing effective investment promotion mechanisms, says Rajul Awasthi
THE world economy is going through one of its worst downturns since the Great Depression. The G8 economies are in recession, which means almost 60% of world GDP is contracting . Even the ever-fast-growing China has begun to show signs of slowing down. And the latest champion of the GDP growth race, India, is also having to do with 7% growth. The Economist has quoted the Institute of International Finance as predicting that world investment flows will see a rapid fall, by as much as 30%, in 2009.
In this scenario, only those economies which provide sure growth opportunities and present a dynamic, investor-friendly policy environment can expect investment flowing their way. Now, India is continuing to grow rapidly: the growth in FY 2009-10 is expected to be about 7%. But, China will also continue to grow at about the same rate or more, and so will the ASEAN region. These economies will offer tough competition to India in attracting FDI.
India needs huge amounts of investment to sustain and improve its growth performance . Indias mainstay of growth the last several years has been a phenomenal rise in investment: the investment- GDP ratio going up from 22.8% in 2001-02 to an estimated 37.5% in 2007-08 . The same growth in investment is almost impossible to sustain without a major policy initiative.
Given all this, India must embark on a second journey of economic reforms targeted at improving the investment climate , focused on fixing the policy environment and removing obstacles to business . India must, once again, as it did in 1992, send a powerful reformist signal to the world. It is time for unleashing a second wave of economic reforms.
Indias investment environment is beset with many problems. One key is, of course, the infrastructure deficit. We have large supply gaps in power, roads, ports and airports, railways, urban infrastructure and water. But, fortunately, infrastructure gaps are being addressed, both by government and through investments by the private sector. The crux of the problem is the investment environment.
The prevailing investment environment is characterised by a complex, burdensome tax structure, inflexible labour laws, bureaucratic delays, discretionary interpretation and vested interest, high cost of entry and exit, and ineffective/slow dispute resolution. There is no single agency to act as a facilitator for foreign investors. There is no investment law in place that could provide guarantees to investors. Given that labour laws are not within the jurisdiction of the central government, the focus of the government must be on microeconomic reform efforts in two key areas : tax and investment policy.
India did remarkably well from 2004 to 2008, under the stewardship of then finance minister P Chidambaram, to grow the central governments tax-GDP ratio from 9% to 13.5%. (Tax revenue has, of course, declined in 2009-10 due to the economic slowdown and the tax cuts initiated as part of a fiscal stimulus package.) However , the tax reforms concentrated on raising revenue and were not entirely investor friendly. An investor-focused approach would consider options to reduce compliance costs, attract new investment and reduce the size of the informal sector. The goal of raising tax revenue would be met by increasing the number of taxpayers.
It is now time for initiating just such tax reforms, reforms which reduce compliance costs and increase ease of doing business: create a simpler tax system so taxpayers can calculate their tax liability easily; provide easy options to pay taxes and file tax returns ; allow for taxpayer-friendly methods of tax verification and enforcement; afford taxpayers the opportunity to redress their grievances with limited costs.
SPECIFICALLY , the fringe benefit tax, which greatly increased the compliance burden on firms without contributing much to the revenue, must go. The goods and services tax, which would merge the central excise duty, service tax and the value-added tax in the states, while eliminating the central sales tax, must be implemented . The refund banker scheme, which has proved effective in providing quicker refunds and reducing corruption, must be extended. The tax return preparer scheme, which has been of help to small taxpayers in filing returns, must be strengthened. Efiling must be simplified and improved to make it accessible to individual taxpayers.
The annual information return should be broadened to cover more areas of investment and expenditure. Returns must be selected for scrutiny using objective, riskbased criteria through the computer aided scrutiny selection mechanism so that only evasion-prone taxpayers are scrutinised and honest taxpayers treated with respect. The ambit of large taxpayer units must be extended and they should be set up in more cities to provide world-class taxpayer service to the most valued clients of the revenue . The next wave of tax reforms must focus on taxpayer-friendly simplification measures that reduce costs of compliance.
On the investment policy, what is needed is a clearer statement of policy and a strong institutional mechanism that can attract and retain foreign investment. The Investment Commission pointed out that one of the most important reasons FDI remains lower than its potential is that some sectors that attract the most investment around the world, for e.g., finance, are relatively closed in India. There is a need to revisit the FDI regime. One suggestion is to remove sector caps and entry restrictions in all sectors other than those which are strategic . In sectors dominated by public sector units, there is a need to create a level playing field. In key sectors independent regulatory institutions must be established.
India must have a dedicated, single-window , high level investment promotion agency, which also looks into issues of investor after-care . Investors, both domestic and foreign, complain of lack of coordination between central and state governments , so, often, while their projects are accorded approvals, they do not take off on the ground. An effective Centre-state resolution mechanism, akin to the Empowered Committee for VAT implementation, could be set up to resolve foreign investor issues. A special high level fast track mechanism could be put in place for priority sector projects . The next wave of investment policy reforms must focus on removing barriers to investment and providing effective investment promotion mechanisms. Microeconomic reforms are the bedrock of an investment-oriented , high growth economy. Can we expect the UPA government unfurl the second wave of reforms
The next wave of investment policy reforms must focus on removing barriers to investment and providing effective investment promotion mechanisms, says Rajul Awasthi
THE world economy is going through one of its worst downturns since the Great Depression. The G8 economies are in recession, which means almost 60% of world GDP is contracting . Even the ever-fast-growing China has begun to show signs of slowing down. And the latest champion of the GDP growth race, India, is also having to do with 7% growth. The Economist has quoted the Institute of International Finance as predicting that world investment flows will see a rapid fall, by as much as 30%, in 2009.
In this scenario, only those economies which provide sure growth opportunities and present a dynamic, investor-friendly policy environment can expect investment flowing their way. Now, India is continuing to grow rapidly: the growth in FY 2009-10 is expected to be about 7%. But, China will also continue to grow at about the same rate or more, and so will the ASEAN region. These economies will offer tough competition to India in attracting FDI.
India needs huge amounts of investment to sustain and improve its growth performance . Indias mainstay of growth the last several years has been a phenomenal rise in investment: the investment- GDP ratio going up from 22.8% in 2001-02 to an estimated 37.5% in 2007-08 . The same growth in investment is almost impossible to sustain without a major policy initiative.
Given all this, India must embark on a second journey of economic reforms targeted at improving the investment climate , focused on fixing the policy environment and removing obstacles to business . India must, once again, as it did in 1992, send a powerful reformist signal to the world. It is time for unleashing a second wave of economic reforms.
Indias investment environment is beset with many problems. One key is, of course, the infrastructure deficit. We have large supply gaps in power, roads, ports and airports, railways, urban infrastructure and water. But, fortunately, infrastructure gaps are being addressed, both by government and through investments by the private sector. The crux of the problem is the investment environment.
The prevailing investment environment is characterised by a complex, burdensome tax structure, inflexible labour laws, bureaucratic delays, discretionary interpretation and vested interest, high cost of entry and exit, and ineffective/slow dispute resolution. There is no single agency to act as a facilitator for foreign investors. There is no investment law in place that could provide guarantees to investors. Given that labour laws are not within the jurisdiction of the central government, the focus of the government must be on microeconomic reform efforts in two key areas : tax and investment policy.
India did remarkably well from 2004 to 2008, under the stewardship of then finance minister P Chidambaram, to grow the central governments tax-GDP ratio from 9% to 13.5%. (Tax revenue has, of course, declined in 2009-10 due to the economic slowdown and the tax cuts initiated as part of a fiscal stimulus package.) However , the tax reforms concentrated on raising revenue and were not entirely investor friendly. An investor-focused approach would consider options to reduce compliance costs, attract new investment and reduce the size of the informal sector. The goal of raising tax revenue would be met by increasing the number of taxpayers.
It is now time for initiating just such tax reforms, reforms which reduce compliance costs and increase ease of doing business: create a simpler tax system so taxpayers can calculate their tax liability easily; provide easy options to pay taxes and file tax returns ; allow for taxpayer-friendly methods of tax verification and enforcement; afford taxpayers the opportunity to redress their grievances with limited costs.
SPECIFICALLY , the fringe benefit tax, which greatly increased the compliance burden on firms without contributing much to the revenue, must go. The goods and services tax, which would merge the central excise duty, service tax and the value-added tax in the states, while eliminating the central sales tax, must be implemented . The refund banker scheme, which has proved effective in providing quicker refunds and reducing corruption, must be extended. The tax return preparer scheme, which has been of help to small taxpayers in filing returns, must be strengthened. Efiling must be simplified and improved to make it accessible to individual taxpayers.
The annual information return should be broadened to cover more areas of investment and expenditure. Returns must be selected for scrutiny using objective, riskbased criteria through the computer aided scrutiny selection mechanism so that only evasion-prone taxpayers are scrutinised and honest taxpayers treated with respect. The ambit of large taxpayer units must be extended and they should be set up in more cities to provide world-class taxpayer service to the most valued clients of the revenue . The next wave of tax reforms must focus on taxpayer-friendly simplification measures that reduce costs of compliance.
On the investment policy, what is needed is a clearer statement of policy and a strong institutional mechanism that can attract and retain foreign investment. The Investment Commission pointed out that one of the most important reasons FDI remains lower than its potential is that some sectors that attract the most investment around the world, for e.g., finance, are relatively closed in India. There is a need to revisit the FDI regime. One suggestion is to remove sector caps and entry restrictions in all sectors other than those which are strategic . In sectors dominated by public sector units, there is a need to create a level playing field. In key sectors independent regulatory institutions must be established.
India must have a dedicated, single-window , high level investment promotion agency, which also looks into issues of investor after-care . Investors, both domestic and foreign, complain of lack of coordination between central and state governments , so, often, while their projects are accorded approvals, they do not take off on the ground. An effective Centre-state resolution mechanism, akin to the Empowered Committee for VAT implementation, could be set up to resolve foreign investor issues. A special high level fast track mechanism could be put in place for priority sector projects . The next wave of investment policy reforms must focus on removing barriers to investment and providing effective investment promotion mechanisms. Microeconomic reforms are the bedrock of an investment-oriented , high growth economy. Can we expect the UPA government unfurl the second wave of reforms
Slowdown KIT
Slowdown KIT
Weve learnt our lessons the hard way. But rather than wait for the next recession blow, one can play it safe. Sanjeev Sinha lists 10 points that can equip you to deal with similar situations
THE OVERALL impact of the financial meltdown, which is certainly huge, is now evident across the world. Particularly , the pain of job losses and drop in savings is being felt everywhere. This, in turn, has instilled a sense of fear and cynicism in the minds of investors globally. Still, while we are making vast efforts to extricate ourselves from the current crisis, little effort is being made to prevent the next one. Rather than wait, however , there are many things which can be done now to avoid another crisis, or at least cushion the blow when it comes. Listed below are 10 personal finance lessons we can and should learn from the meltdown:
CONTROL EXPENSES & STICK TO THE BUDGET
You are more likely to face financial problems, if you have been extravagant in your expenses. However, in a bid to tide over the current crisis and also avoid such crises in future, you need to adhere to some financial disciplines, and making a budget and sticking to it is one of them. Sticking to the discretionary budgets, in fact, can help you handle the uncertainty in the non-discretionary expenses.
DONT COUNT ON TOMORROWS INCOME
Counting on tomorrows income to spend today is one of our greatest mistakes, which has already been proved by the current crisis. In fact, up until the financial meltdown hit us, the spending levels of individuals, especially in the 25-35-year age group, have been almost equal to their income, if not more. With the easilyavailable loans and credit cards they were tempted to indulge even without being able to afford the expense. Now with pay cuts and job losses, they are facing the worse. However, even if you keep your job now, the prevalence of pay cuts makes it clear that you cant count on an ever-expanding paycheck to make up for your spending, says Lovaii Navlakhi, managing director & chief financial planner of International Money Matters.
MAINTAIN LOW DEBT
Prioritize your debts. Pay off your loans with the highest interest rate first. Basic advice, right The problem is that people have been reiterating this theory for years, but most do not put it into practice. This step requires one to plan out ones debts and then follow through by reducing it regularly and systematically. True, paying off debt can be a difficult task, but it can also be quite rewarding as it gives you peace of mind, says Navlakhi.
GO FOR STRATEGIC ASSET ALLOCATION
Time and again we will hear from the so-called experts that there is a paradigm shift in the market dynamics and that investors need to revise asset allocations more aggressively to meet the impending demands of their future lifestyles. But one should strictly avoid falling for such traps. Though temporarily the portfolio may appear underperforming, sticking to fundamentals of strategic asset allocation would always help investors come out of such temporary market mishaps, says Ramesh Patibanda , director financial planning, Advice America, worlds leading provider of financial advisor software solutions.
HAVE EMERGENCY FUND IN PORTFOLIO
Having an emergency fund in your portfolio is an ideal way to tide over a family crisis or meet unexpected expenses. Therefore, the need for maintaining emergency funds has always been emphasized by our forefathers. Even standard financial principles suggest that you should keep aside cash to cover three to six months of living expenses, which would also be able to cover most emergency expenses. Your emergency funds can also come handy in case of a job loss, says Ashish Kapur, CEO of Invest Shoppe.
ORGANIZE YOUR FINANCES
To those who are not used to monitoring and managing their finances closely, this may sound like a lot of work. But once you get a system in place, it should only take a bi-monthly monitoring to stay on top of everything. Ensure that you maintain sufficient liquid funds for emergencies. Also, monitor your loans and ensure that you make credit card payments before the due date.
LEARN TO PLAN AHEAD
Its no secret that poor planning contributed to why so many people are currently in weak financial situations. However, dont panic. Figure out where you are, where you want to be and put in place a realistic plan for getting there. Unique circumstances will come up and cause you to stray from your plans temporarily, but structure is necessary in order to monitor your progress and stay focused.
INVEST SLOWLY & SYSTEMATICALLY
The problem for many people is that they live month to month and dont develop healthy saving habits until they are in their thirties or forties. Contributions to a savings plan should be recognized as the first of your necessary monthly expenses, so that money saved will never be thought of as money that can be spent. Even if you start saving in small amounts now, you can always increase in the future, says Navlakhi.
TAKE CONTROL OF YOUR INVESTMENTS
The worst thing you can do in a slow economy Panic and pull all of your money out of your investments! Therefore, resolve to protect your finances as the market storm rages on. Take this time to build up your emergency fund, and set reminders to regularly review your portfolios asset allocation. Try to align the same with your mid-term and long-term goals. Do not get distracted by the usual city traffic jams when your final destination is miles away, advises Atul Surana, certified financial planner, Catalyst Financial Planning.
HAVE REALISTIC EXPECTATIONS
Theres nothing wrong with hoping for the best from your investments, but you could be heading for trouble if your financial goals are based on unrealistic assumptions. Therefore, when Warren Buffett says that earning more than 12% in stock is pure dumb luck and you laugh at it, youre surely in for trouble!
Weve learnt our lessons the hard way. But rather than wait for the next recession blow, one can play it safe. Sanjeev Sinha lists 10 points that can equip you to deal with similar situations
THE OVERALL impact of the financial meltdown, which is certainly huge, is now evident across the world. Particularly , the pain of job losses and drop in savings is being felt everywhere. This, in turn, has instilled a sense of fear and cynicism in the minds of investors globally. Still, while we are making vast efforts to extricate ourselves from the current crisis, little effort is being made to prevent the next one. Rather than wait, however , there are many things which can be done now to avoid another crisis, or at least cushion the blow when it comes. Listed below are 10 personal finance lessons we can and should learn from the meltdown:
CONTROL EXPENSES & STICK TO THE BUDGET
You are more likely to face financial problems, if you have been extravagant in your expenses. However, in a bid to tide over the current crisis and also avoid such crises in future, you need to adhere to some financial disciplines, and making a budget and sticking to it is one of them. Sticking to the discretionary budgets, in fact, can help you handle the uncertainty in the non-discretionary expenses.
DONT COUNT ON TOMORROWS INCOME
Counting on tomorrows income to spend today is one of our greatest mistakes, which has already been proved by the current crisis. In fact, up until the financial meltdown hit us, the spending levels of individuals, especially in the 25-35-year age group, have been almost equal to their income, if not more. With the easilyavailable loans and credit cards they were tempted to indulge even without being able to afford the expense. Now with pay cuts and job losses, they are facing the worse. However, even if you keep your job now, the prevalence of pay cuts makes it clear that you cant count on an ever-expanding paycheck to make up for your spending, says Lovaii Navlakhi, managing director & chief financial planner of International Money Matters.
MAINTAIN LOW DEBT
Prioritize your debts. Pay off your loans with the highest interest rate first. Basic advice, right The problem is that people have been reiterating this theory for years, but most do not put it into practice. This step requires one to plan out ones debts and then follow through by reducing it regularly and systematically. True, paying off debt can be a difficult task, but it can also be quite rewarding as it gives you peace of mind, says Navlakhi.
GO FOR STRATEGIC ASSET ALLOCATION
Time and again we will hear from the so-called experts that there is a paradigm shift in the market dynamics and that investors need to revise asset allocations more aggressively to meet the impending demands of their future lifestyles. But one should strictly avoid falling for such traps. Though temporarily the portfolio may appear underperforming, sticking to fundamentals of strategic asset allocation would always help investors come out of such temporary market mishaps, says Ramesh Patibanda , director financial planning, Advice America, worlds leading provider of financial advisor software solutions.
HAVE EMERGENCY FUND IN PORTFOLIO
Having an emergency fund in your portfolio is an ideal way to tide over a family crisis or meet unexpected expenses. Therefore, the need for maintaining emergency funds has always been emphasized by our forefathers. Even standard financial principles suggest that you should keep aside cash to cover three to six months of living expenses, which would also be able to cover most emergency expenses. Your emergency funds can also come handy in case of a job loss, says Ashish Kapur, CEO of Invest Shoppe.
ORGANIZE YOUR FINANCES
To those who are not used to monitoring and managing their finances closely, this may sound like a lot of work. But once you get a system in place, it should only take a bi-monthly monitoring to stay on top of everything. Ensure that you maintain sufficient liquid funds for emergencies. Also, monitor your loans and ensure that you make credit card payments before the due date.
LEARN TO PLAN AHEAD
Its no secret that poor planning contributed to why so many people are currently in weak financial situations. However, dont panic. Figure out where you are, where you want to be and put in place a realistic plan for getting there. Unique circumstances will come up and cause you to stray from your plans temporarily, but structure is necessary in order to monitor your progress and stay focused.
INVEST SLOWLY & SYSTEMATICALLY
The problem for many people is that they live month to month and dont develop healthy saving habits until they are in their thirties or forties. Contributions to a savings plan should be recognized as the first of your necessary monthly expenses, so that money saved will never be thought of as money that can be spent. Even if you start saving in small amounts now, you can always increase in the future, says Navlakhi.
TAKE CONTROL OF YOUR INVESTMENTS
The worst thing you can do in a slow economy Panic and pull all of your money out of your investments! Therefore, resolve to protect your finances as the market storm rages on. Take this time to build up your emergency fund, and set reminders to regularly review your portfolios asset allocation. Try to align the same with your mid-term and long-term goals. Do not get distracted by the usual city traffic jams when your final destination is miles away, advises Atul Surana, certified financial planner, Catalyst Financial Planning.
HAVE REALISTIC EXPECTATIONS
Theres nothing wrong with hoping for the best from your investments, but you could be heading for trouble if your financial goals are based on unrealistic assumptions. Therefore, when Warren Buffett says that earning more than 12% in stock is pure dumb luck and you laugh at it, youre surely in for trouble!
Wednesday, June 24, 2009
Suitcase with $134bn puts dollar on edge
Suitcase with $134bn puts dollar on edge
William Pesek
Its a plot better suited for a John Le Carre novel. Two Japanese men are detained in Italy after allegedly attempting to take $134 billion worth of US bonds over the border into Switzerland. Details are maddeningly sketchy, so naturally the global rumour mill is kicking into high gear. Are these would-be smugglers agents of Kim Jong II stashing North Koreas cash in a Swiss vault Bagmen for Nigerian Internet scammers Was the money meant for terrorists looking to buy nuclear warheads Is Japan dumping its dollars secretly Are the bonds real or counterfeit
The implications of the securities being legitimate would be bigger than investors may realize. At a minimum, it would suggest that the US risks losing control over its monetary supply on a massive scale. The trillions of dollars of debt the US will issue in the next couple of years needs buyers. Attracting them will require making sure that existing ones arent losing faith in USs ability to control the dollar.
The dollar is, for better or worse, the core of our world economy and its best to keep it stable. News thats more fitting for international spy novels than the financial pages wont help that effort. It is incumbent upon the US Treasury to get to the bottom of this tale and keep markets informed.
Think about it: These two guys were carrying the gross domestic product of New Zealand or enough for three Beijing Olympics. If economies were for sale, the men could buy Slovakia and Croatia and have plenty left over for Mongolia or Cambodia. Yes, they could have built vacation homes amidst Genghis Khans Gobi Desert or the famed Temples of Angkor. Bernard Madoff who These men carrying bonds concealed in the bottom of their luggage also would be the fourth-largest US creditors.
It makes you wonder if some of the time Treasury Secretary Timothy Geithner spends keeping the Chinese and Japanese invested in dollars should be devoted to well-financed men crossing the Italian-Swiss border. This tale has gotten little attention in markets, perhaps because of the absurdity of our times. The last year has been a decidedly disorienting one for capitalists who once knew up from down, red from black and risk from reward.
You can almost picture Tom Clancy sitting in his study thinking: Damn! Why didnt I think of this yarn and novelize it years ago He could have sprinkled in a Chinese angle , a pinch of Russian intrigue, a dose of Pyongyang and a bit of Taiwan-Strait tension into the mix. Presto, a sure bestseller. Daniel Craig may be thinking this is a great story on which to base the next James Bond flick. Perhaps Don Johnson could buy the rights to this tale. In 2002, the Miami Vice star was stopped by German customs officers as he was travelling in a car carrying credit notes and other securities worth as much as $8 billion. Now he could claim it was all, uh, research.
When I first heard of the $134 billion story, I was tempted to glance at my calendar to make sure it didnt read April 1. Lets assume for a moment that these US bonds are real. That would make a mockery of Japanese Finance Minister Kaoru Yosanos absolutely unshakable confidence in the credibility of the US dollar. Yosano would have some explaining to do about Japans $686 billion of US debt if more of these suitcase capers come to light.
Counterfeit $100 bills are one thing; two guys with undeclared bonds including 249 certificates worth $500 million and 10 Kennedy bonds of $1 billion each is quite another. The bust could be a boon for Italy. If the securities are found to be genuine, the smugglers could be fined 40% of the total value for attempting to take them out of the country. Not a bad payday for a government grappling with a widening budget deficit and rebuilding the town of LAquila , which was destroyed by an earthquake in April.
It would be terrible news for the White House. Other than the US, China or Japan, no other nation could theoretically move those amounts. In the absence of clear explanations coming from the Treasury, conspiracy theories are filling the void.
The last thing Geithner and Federal Reserve chairman Ben Bernanke need right now is tens of billions more of US bonds or even highquality fake ones suddenly popping up around the globe. BLOOMBERG
William Pesek
Its a plot better suited for a John Le Carre novel. Two Japanese men are detained in Italy after allegedly attempting to take $134 billion worth of US bonds over the border into Switzerland. Details are maddeningly sketchy, so naturally the global rumour mill is kicking into high gear. Are these would-be smugglers agents of Kim Jong II stashing North Koreas cash in a Swiss vault Bagmen for Nigerian Internet scammers Was the money meant for terrorists looking to buy nuclear warheads Is Japan dumping its dollars secretly Are the bonds real or counterfeit
The implications of the securities being legitimate would be bigger than investors may realize. At a minimum, it would suggest that the US risks losing control over its monetary supply on a massive scale. The trillions of dollars of debt the US will issue in the next couple of years needs buyers. Attracting them will require making sure that existing ones arent losing faith in USs ability to control the dollar.
The dollar is, for better or worse, the core of our world economy and its best to keep it stable. News thats more fitting for international spy novels than the financial pages wont help that effort. It is incumbent upon the US Treasury to get to the bottom of this tale and keep markets informed.
Think about it: These two guys were carrying the gross domestic product of New Zealand or enough for three Beijing Olympics. If economies were for sale, the men could buy Slovakia and Croatia and have plenty left over for Mongolia or Cambodia. Yes, they could have built vacation homes amidst Genghis Khans Gobi Desert or the famed Temples of Angkor. Bernard Madoff who These men carrying bonds concealed in the bottom of their luggage also would be the fourth-largest US creditors.
It makes you wonder if some of the time Treasury Secretary Timothy Geithner spends keeping the Chinese and Japanese invested in dollars should be devoted to well-financed men crossing the Italian-Swiss border. This tale has gotten little attention in markets, perhaps because of the absurdity of our times. The last year has been a decidedly disorienting one for capitalists who once knew up from down, red from black and risk from reward.
You can almost picture Tom Clancy sitting in his study thinking: Damn! Why didnt I think of this yarn and novelize it years ago He could have sprinkled in a Chinese angle , a pinch of Russian intrigue, a dose of Pyongyang and a bit of Taiwan-Strait tension into the mix. Presto, a sure bestseller. Daniel Craig may be thinking this is a great story on which to base the next James Bond flick. Perhaps Don Johnson could buy the rights to this tale. In 2002, the Miami Vice star was stopped by German customs officers as he was travelling in a car carrying credit notes and other securities worth as much as $8 billion. Now he could claim it was all, uh, research.
When I first heard of the $134 billion story, I was tempted to glance at my calendar to make sure it didnt read April 1. Lets assume for a moment that these US bonds are real. That would make a mockery of Japanese Finance Minister Kaoru Yosanos absolutely unshakable confidence in the credibility of the US dollar. Yosano would have some explaining to do about Japans $686 billion of US debt if more of these suitcase capers come to light.
Counterfeit $100 bills are one thing; two guys with undeclared bonds including 249 certificates worth $500 million and 10 Kennedy bonds of $1 billion each is quite another. The bust could be a boon for Italy. If the securities are found to be genuine, the smugglers could be fined 40% of the total value for attempting to take them out of the country. Not a bad payday for a government grappling with a widening budget deficit and rebuilding the town of LAquila , which was destroyed by an earthquake in April.
It would be terrible news for the White House. Other than the US, China or Japan, no other nation could theoretically move those amounts. In the absence of clear explanations coming from the Treasury, conspiracy theories are filling the void.
The last thing Geithner and Federal Reserve chairman Ben Bernanke need right now is tens of billions more of US bonds or even highquality fake ones suddenly popping up around the globe. BLOOMBERG
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