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.
Monday, June 29, 2009
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
Transition from service tax to GST
Transition from service tax to GST
S MADHAVAN LEADER, INDIRECT TAX PRACTICE, PRICEWATERHOUSECOOPERS
THE CURRENT SCHEME OF TAXATION OF services in India is likely to be substantially revised under the much-awaited dual goods and service tax (GST). Services which are at present only taxed at the federal level would be taxed under the GST both at the federal and state level, resulting in a paradigm shift in the taxation of services. This shift will be with regard to coverage and scope, the manner of charge of the tax, its levy and collection and so on.
At present, what is sought to be taxed is defined in elaborate fashion. As opposed to this, it is likely that under the GST scheme of things, the internationally accepted principle of taxing all services, with a small negative list of services which will either not be taxed or will be exempt from the tax, will be adopted. Thus, all services with the possible exception of essential public services such as education, basic healthcare and public transport could be brought within the ambit of the GST. Indeed, activities which are typically not understood as services at all will also be covered. An example is that of refraining from doing something i.e. contractually choosing to be inactive for a consideration , as is the case with fees paid for non compete.
One significant benefit of such manner of coverage would be to substantially reduce disputes on categorisation and classification of services. Presently, a significant amount of vexatious litigation is centred around interpretation of the various complex definitions of taxable services. To reduce classification disputes, it would be essential that all Indian states adopt a uniform statute on taxation of services along the aforesaid lines.
One contentious issue under the proposed dual GST is with regard to framing of the place of supply rules so as to identify the place where the tax will be paid. As for the federal GST, this is unlikely to pose a problem since regardless of these rules, the Central government would be in a position to collect the tax from the service provider located in any part of the country. However, in the absence of clear place of supply rules, serious problems could arise as to which particular state would be eligible to charge the tax in relation to the cross border (inter-state ) supplies of services.
In this connection, it would be worthwhile to consider the rules as are typically in force in the European Union (EU). Although the EU member countries have uniformly implemented a unified GST, as opposed to the dual GST model, these rules are in force in relation to inter- country supplies of services and could hence easily form the basis for a similar model to tax inter-state services in the Indian context. Typically, the EU rules envisage the place of supply to be the place where the service recipient is located, on the principle that the tax ought to apply at the place of consumption of the services. However, there are situations where services are taxable at the place where the supplier is established as a business. Other parameters which are relevant in order to determine the place of supply are in regard to place of performance of the services and place of effective use or enjoyment of the services. The rules also change based on whether the services are rendered by businesses to consumers (B2C) or from businesses to businesses (B2B). Consequently, the place of taxation of services would also depend on the characteristics and the nature of services. Industries such as telecommunications, insurance, banking, software and the like could face serious challenges in regard to determining the place of supplies of services in relation thereto. The challenge would be to ensure that the place of supply rules are reasonably simple.
Another important dimension to the discussion on transition of services taxation from the present model to the GST is with regard to exclusions and exemptions. This aspect becomes doubly important considering that the aggregate rate of service tax needs to be a moderate one, notwithstanding that it would be taxed at both federal and state levels. If this objective, and the allied and equally important objective of having one single rate is to be achieved, it is important that exemptions and exclusions from the tax, which have the effect of narrowing the base of the tax, are minimised. It is therefore entirely possible that the numerous exemptions that are currently in place will be discontinued.
Another aspect of the transition is about the problem of double taxation of a single transaction to both the goods tax and the service tax. With the advent of the GST, the statute on services, as also that for goods, will be so framed that mutual exclusivity will obtain and hence the problem of double taxation will be obviated. This will come about if services are deemed to be as all those which are not treated as goods and it is only goods which will be individually categorised and classified, possibly as per the well known HSN. Internationally, the GST has indeed precluded the possibility of double taxation on the above basis and it is hoped that it will be the case in the Indian context as well.
To summarise, the taxation of services going into the GST is scheduled to undergo fundamental changes and hopefully for the better. The expectation under the GST is for a simpler and more transparent scheme of services taxation, with less attendant complexity. It is also the expectation that the aggregate incidence of service tax under the GST, albeit comprising both the federal and the state services tax, as opposed to the present singular federal tax, will nevertheless be a moderate one. The country will soon know whether these expectations have been met.
S MADHAVAN LEADER, INDIRECT TAX PRACTICE, PRICEWATERHOUSECOOPERS
THE CURRENT SCHEME OF TAXATION OF services in India is likely to be substantially revised under the much-awaited dual goods and service tax (GST). Services which are at present only taxed at the federal level would be taxed under the GST both at the federal and state level, resulting in a paradigm shift in the taxation of services. This shift will be with regard to coverage and scope, the manner of charge of the tax, its levy and collection and so on.
At present, what is sought to be taxed is defined in elaborate fashion. As opposed to this, it is likely that under the GST scheme of things, the internationally accepted principle of taxing all services, with a small negative list of services which will either not be taxed or will be exempt from the tax, will be adopted. Thus, all services with the possible exception of essential public services such as education, basic healthcare and public transport could be brought within the ambit of the GST. Indeed, activities which are typically not understood as services at all will also be covered. An example is that of refraining from doing something i.e. contractually choosing to be inactive for a consideration , as is the case with fees paid for non compete.
One significant benefit of such manner of coverage would be to substantially reduce disputes on categorisation and classification of services. Presently, a significant amount of vexatious litigation is centred around interpretation of the various complex definitions of taxable services. To reduce classification disputes, it would be essential that all Indian states adopt a uniform statute on taxation of services along the aforesaid lines.
One contentious issue under the proposed dual GST is with regard to framing of the place of supply rules so as to identify the place where the tax will be paid. As for the federal GST, this is unlikely to pose a problem since regardless of these rules, the Central government would be in a position to collect the tax from the service provider located in any part of the country. However, in the absence of clear place of supply rules, serious problems could arise as to which particular state would be eligible to charge the tax in relation to the cross border (inter-state ) supplies of services.
In this connection, it would be worthwhile to consider the rules as are typically in force in the European Union (EU). Although the EU member countries have uniformly implemented a unified GST, as opposed to the dual GST model, these rules are in force in relation to inter- country supplies of services and could hence easily form the basis for a similar model to tax inter-state services in the Indian context. Typically, the EU rules envisage the place of supply to be the place where the service recipient is located, on the principle that the tax ought to apply at the place of consumption of the services. However, there are situations where services are taxable at the place where the supplier is established as a business. Other parameters which are relevant in order to determine the place of supply are in regard to place of performance of the services and place of effective use or enjoyment of the services. The rules also change based on whether the services are rendered by businesses to consumers (B2C) or from businesses to businesses (B2B). Consequently, the place of taxation of services would also depend on the characteristics and the nature of services. Industries such as telecommunications, insurance, banking, software and the like could face serious challenges in regard to determining the place of supplies of services in relation thereto. The challenge would be to ensure that the place of supply rules are reasonably simple.
Another important dimension to the discussion on transition of services taxation from the present model to the GST is with regard to exclusions and exemptions. This aspect becomes doubly important considering that the aggregate rate of service tax needs to be a moderate one, notwithstanding that it would be taxed at both federal and state levels. If this objective, and the allied and equally important objective of having one single rate is to be achieved, it is important that exemptions and exclusions from the tax, which have the effect of narrowing the base of the tax, are minimised. It is therefore entirely possible that the numerous exemptions that are currently in place will be discontinued.
Another aspect of the transition is about the problem of double taxation of a single transaction to both the goods tax and the service tax. With the advent of the GST, the statute on services, as also that for goods, will be so framed that mutual exclusivity will obtain and hence the problem of double taxation will be obviated. This will come about if services are deemed to be as all those which are not treated as goods and it is only goods which will be individually categorised and classified, possibly as per the well known HSN. Internationally, the GST has indeed precluded the possibility of double taxation on the above basis and it is hoped that it will be the case in the Indian context as well.
To summarise, the taxation of services going into the GST is scheduled to undergo fundamental changes and hopefully for the better. The expectation under the GST is for a simpler and more transparent scheme of services taxation, with less attendant complexity. It is also the expectation that the aggregate incidence of service tax under the GST, albeit comprising both the federal and the state services tax, as opposed to the present singular federal tax, will nevertheless be a moderate one. The country will soon know whether these expectations have been met.
Will Indian industry engage Bharat
Will Indian industry engage Bharat
Indian entrepreneurs are talented and have emerged from the pains of globalisation with confidence and competence. But they are not trusted and cared for, as of now, by the government, NGOs and the public, says Tarun Das.
THE people of India have given Mrs Sonia Gandhi, Prime Minister Manmohan Singh and his team the baton to tackle the multiple challenges of India. And, there is confidence that 2009-14 will be far more meaningful than 2004-09 in regard to inclusive development. But the government alone cannot solve all the problems of India. The voluntary sector does credible work with limited resources and will add their mite. However, the real value add can come from Indian industry especially the private sector which is engaged in social development activity but far below its resources and true potential.
If the private sector takes its social and national responsibilities truly seriously, 2009-14 can witness a paradigm change in development. Social responsibility is still a marginal, limited activity for industry in India. Not only that, the private sector is still apparently unconscious of the enormous poverty surrounding its island of affluence. Wealth creation and wealth accumulation continue to be of overriding importance rather than wealth sharing and much higher resource allocation to developmental activity . One unfortunate aspect is the ostentation in the private sector display of wealth through expenditure on homes, family celebrations (especially birthdays/weddings) and personal priorities such as travel/vacations.
By doing all of this, trust in the private sectors commitment to, and caring for, society is largely non-existent and entrepreneurs are seen as selfish, self-centred and self-absorbed . Lack of trust and alienation are then two sides of the same coin. How to change all of this and help build and sustain public trust in industry Through action, not words. In the same vein, why is there so much red tape in India Because India has a mistrust-based society and system. Red tape is supposed to safeguard against misuse and abuse and, of course, does no such thing. Government has its own trust dilemma and resorts to red tape as an insurance policy, knowing fully well that this is not a medicine which cures.
Indian entrepreneurs are capable and talented the best in the world and have emerged from the pains of competition and globalisation with confidence and competence. They are the envy of most countries and are the pride of India. They can also be respected, trusted, and cared for but, they are not, as of now by government, NGOs and the public.
And, this is sad because Indian corporates have, and are, contributing to social development through affirmative action; skills development; micro-finance programmes ; women empowerment; primary education initiatives in rural areas; supporting healthcare; building infrastructure in villages; setting up low-cost housing ; reconstructing villages ravaged by natural calamities; planting trees and helping the environment agenda, etc. India is the only country where industry has set up care and treatment centres for HIV/AIDS affected persons (ART Centres) this is an outstanding example of social action.
But compared to the size of India, the extent of poverty and deprivation, industrys contribution is only a drop in the ocean. What is the common perception of Indian industry That they evade taxes (so, the finance ministry mistakenly tries to plug loopholes through more complex laws and rules), they underinvoice or overinvoice (depending on the transaction ), they pay themselves exorbitantly (and pay their employees, much much less), they assure themselves of security (but not to those who serve them), they keep money abroad in private banks, etc. In essence, they are not to be depended upon to be truly national or to be placing public interest above all.
MUCHof the private sector are educated , enlightened people, the best education money could buy. With education comes understanding and enlightenment. But, it appears as though the educated and enlightened really do not care or care very little. It will be great if this were not true.
Equally important is management and organisation. The ability of Indian industry in this regard is truly amazing. To conceptualise , to plan and then to implement. What a difference this capability can make to India if it is available for public and social work. If the efficiency of the private sector can merge with the plans of government and the idealism of NGOs, India will be a different place. So, Indian industry can truly help make a difference to the future of India, and the majority of Indians , especially the poor, if it sets its mind to it. This does not mean that industry is the answer to Indias challenges of poverty but, in a sustained, stronger partnership with government and the voluntary sector, a new dimension can be added to development and growth, to efficiency and implementation.
The integration of industry into development tasks, thinking beyond its own self and imperatives would make a huge difference to the next five years and beyond . There is no better time than now. After several years of 9% plus GDP growth and a future of 8% annual growth for ten years and more, Indias industry will have the resources to make a qualitative and quantitative difference to dealing with Indias social challenges. A Rs 10,000-crore Industry Social Development Fund can be created and its value will be 100 times this amount.
Indian industry now needs to truly integrate into a public-private partnership which can transform India, wipe the tear from every eye and meet its destiny not necessarily of being a superpower but a peaceful, stable nation of all people who have a good life.
In April 2007, the prime minister, addressing CII, outlined a Social Charter for Industry . A 10-point Agenda. For over a month the media went to town, debating the PMs social charter especially his suggestion that there should be some moderation in emoluments. (Now, the US has appointed an Emoluments Czar!)
Its time, now, in 2009, to revisit the 2007 social charter and check how industry is faring on each of the ten points. Also, to see whether those ten points need to be added to or modified. Next five years can be a period of transformation for India and Indian industry can do outstanding work in the social development area. By its actions, industry needs to earn the respect of the likes of Aruna Roy. That will prove that Indias industry has engaged Bharat and made a real difference.
Indian entrepreneurs are talented and have emerged from the pains of globalisation with confidence and competence. But they are not trusted and cared for, as of now, by the government, NGOs and the public, says Tarun Das.
THE people of India have given Mrs Sonia Gandhi, Prime Minister Manmohan Singh and his team the baton to tackle the multiple challenges of India. And, there is confidence that 2009-14 will be far more meaningful than 2004-09 in regard to inclusive development. But the government alone cannot solve all the problems of India. The voluntary sector does credible work with limited resources and will add their mite. However, the real value add can come from Indian industry especially the private sector which is engaged in social development activity but far below its resources and true potential.
If the private sector takes its social and national responsibilities truly seriously, 2009-14 can witness a paradigm change in development. Social responsibility is still a marginal, limited activity for industry in India. Not only that, the private sector is still apparently unconscious of the enormous poverty surrounding its island of affluence. Wealth creation and wealth accumulation continue to be of overriding importance rather than wealth sharing and much higher resource allocation to developmental activity . One unfortunate aspect is the ostentation in the private sector display of wealth through expenditure on homes, family celebrations (especially birthdays/weddings) and personal priorities such as travel/vacations.
By doing all of this, trust in the private sectors commitment to, and caring for, society is largely non-existent and entrepreneurs are seen as selfish, self-centred and self-absorbed . Lack of trust and alienation are then two sides of the same coin. How to change all of this and help build and sustain public trust in industry Through action, not words. In the same vein, why is there so much red tape in India Because India has a mistrust-based society and system. Red tape is supposed to safeguard against misuse and abuse and, of course, does no such thing. Government has its own trust dilemma and resorts to red tape as an insurance policy, knowing fully well that this is not a medicine which cures.
Indian entrepreneurs are capable and talented the best in the world and have emerged from the pains of competition and globalisation with confidence and competence. They are the envy of most countries and are the pride of India. They can also be respected, trusted, and cared for but, they are not, as of now by government, NGOs and the public.
And, this is sad because Indian corporates have, and are, contributing to social development through affirmative action; skills development; micro-finance programmes ; women empowerment; primary education initiatives in rural areas; supporting healthcare; building infrastructure in villages; setting up low-cost housing ; reconstructing villages ravaged by natural calamities; planting trees and helping the environment agenda, etc. India is the only country where industry has set up care and treatment centres for HIV/AIDS affected persons (ART Centres) this is an outstanding example of social action.
But compared to the size of India, the extent of poverty and deprivation, industrys contribution is only a drop in the ocean. What is the common perception of Indian industry That they evade taxes (so, the finance ministry mistakenly tries to plug loopholes through more complex laws and rules), they underinvoice or overinvoice (depending on the transaction ), they pay themselves exorbitantly (and pay their employees, much much less), they assure themselves of security (but not to those who serve them), they keep money abroad in private banks, etc. In essence, they are not to be depended upon to be truly national or to be placing public interest above all.
MUCHof the private sector are educated , enlightened people, the best education money could buy. With education comes understanding and enlightenment. But, it appears as though the educated and enlightened really do not care or care very little. It will be great if this were not true.
Equally important is management and organisation. The ability of Indian industry in this regard is truly amazing. To conceptualise , to plan and then to implement. What a difference this capability can make to India if it is available for public and social work. If the efficiency of the private sector can merge with the plans of government and the idealism of NGOs, India will be a different place. So, Indian industry can truly help make a difference to the future of India, and the majority of Indians , especially the poor, if it sets its mind to it. This does not mean that industry is the answer to Indias challenges of poverty but, in a sustained, stronger partnership with government and the voluntary sector, a new dimension can be added to development and growth, to efficiency and implementation.
The integration of industry into development tasks, thinking beyond its own self and imperatives would make a huge difference to the next five years and beyond . There is no better time than now. After several years of 9% plus GDP growth and a future of 8% annual growth for ten years and more, Indias industry will have the resources to make a qualitative and quantitative difference to dealing with Indias social challenges. A Rs 10,000-crore Industry Social Development Fund can be created and its value will be 100 times this amount.
Indian industry now needs to truly integrate into a public-private partnership which can transform India, wipe the tear from every eye and meet its destiny not necessarily of being a superpower but a peaceful, stable nation of all people who have a good life.
In April 2007, the prime minister, addressing CII, outlined a Social Charter for Industry . A 10-point Agenda. For over a month the media went to town, debating the PMs social charter especially his suggestion that there should be some moderation in emoluments. (Now, the US has appointed an Emoluments Czar!)
Its time, now, in 2009, to revisit the 2007 social charter and check how industry is faring on each of the ten points. Also, to see whether those ten points need to be added to or modified. Next five years can be a period of transformation for India and Indian industry can do outstanding work in the social development area. By its actions, industry needs to earn the respect of the likes of Aruna Roy. That will prove that Indias industry has engaged Bharat and made a real difference.
Will Indian industry engage Bharat
Will Indian industry engage Bharat
Indian entrepreneurs are talented and have emerged from the pains of globalisation with confidence and competence. But they are not trusted and cared for, as of now, by the government, NGOs and the public, says Tarun Das.
THE people of India have given Mrs Sonia Gandhi, Prime Minister Manmohan Singh and his team the baton to tackle the multiple challenges of India. And, there is confidence that 2009-14 will be far more meaningful than 2004-09 in regard to inclusive development. But the government alone cannot solve all the problems of India. The voluntary sector does credible work with limited resources and will add their mite. However, the real value add can come from Indian industry especially the private sector which is engaged in social development activity but far below its resources and true potential.
If the private sector takes its social and national responsibilities truly seriously, 2009-14 can witness a paradigm change in development. Social responsibility is still a marginal, limited activity for industry in India. Not only that, the private sector is still apparently unconscious of the enormous poverty surrounding its island of affluence. Wealth creation and wealth accumulation continue to be of overriding importance rather than wealth sharing and much higher resource allocation to developmental activity . One unfortunate aspect is the ostentation in the private sector display of wealth through expenditure on homes, family celebrations (especially birthdays/weddings) and personal priorities such as travel/vacations.
By doing all of this, trust in the private sectors commitment to, and caring for, society is largely non-existent and entrepreneurs are seen as selfish, self-centred and self-absorbed . Lack of trust and alienation are then two sides of the same coin. How to change all of this and help build and sustain public trust in industry Through action, not words. In the same vein, why is there so much red tape in India Because India has a mistrust-based society and system. Red tape is supposed to safeguard against misuse and abuse and, of course, does no such thing. Government has its own trust dilemma and resorts to red tape as an insurance policy, knowing fully well that this is not a medicine which cures.
Indian entrepreneurs are capable and talented the best in the world and have emerged from the pains of competition and globalisation with confidence and competence. They are the envy of most countries and are the pride of India. They can also be respected, trusted, and cared for but, they are not, as of now by government, NGOs and the public.
And, this is sad because Indian corporates have, and are, contributing to social development through affirmative action; skills development; micro-finance programmes ; women empowerment; primary education initiatives in rural areas; supporting healthcare; building infrastructure in villages; setting up low-cost housing ; reconstructing villages ravaged by natural calamities; planting trees and helping the environment agenda, etc. India is the only country where industry has set up care and treatment centres for HIV/AIDS affected persons (ART Centres) this is an outstanding example of social action.
But compared to the size of India, the extent of poverty and deprivation, industrys contribution is only a drop in the ocean. What is the common perception of Indian industry That they evade taxes (so, the finance ministry mistakenly tries to plug loopholes through more complex laws and rules), they underinvoice or overinvoice (depending on the transaction ), they pay themselves exorbitantly (and pay their employees, much much less), they assure themselves of security (but not to those who serve them), they keep money abroad in private banks, etc. In essence, they are not to be depended upon to be truly national or to be placing public interest above all.
MUCHof the private sector are educated , enlightened people, the best education money could buy. With education comes understanding and enlightenment. But, it appears as though the educated and enlightened really do not care or care very little. It will be great if this were not true.
Equally important is management and organisation. The ability of Indian industry in this regard is truly amazing. To conceptualise , to plan and then to implement. What a difference this capability can make to India if it is available for public and social work. If the efficiency of the private sector can merge with the plans of government and the idealism of NGOs, India will be a different place. So, Indian industry can truly help make a difference to the future of India, and the majority of Indians , especially the poor, if it sets its mind to it. This does not mean that industry is the answer to Indias challenges of poverty but, in a sustained, stronger partnership with government and the voluntary sector, a new dimension can be added to development and growth, to efficiency and implementation.
The integration of industry into development tasks, thinking beyond its own self and imperatives would make a huge difference to the next five years and beyond . There is no better time than now. After several years of 9% plus GDP growth and a future of 8% annual growth for ten years and more, Indias industry will have the resources to make a qualitative and quantitative difference to dealing with Indias social challenges. A Rs 10,000-crore Industry Social Development Fund can be created and its value will be 100 times this amount.
Indian industry now needs to truly integrate into a public-private partnership which can transform India, wipe the tear from every eye and meet its destiny not necessarily of being a superpower but a peaceful, stable nation of all people who have a good life.
In April 2007, the prime minister, addressing CII, outlined a Social Charter for Industry . A 10-point Agenda. For over a month the media went to town, debating the PMs social charter especially his suggestion that there should be some moderation in emoluments. (Now, the US has appointed an Emoluments Czar!)
Its time, now, in 2009, to revisit the 2007 social charter and check how industry is faring on each of the ten points. Also, to see whether those ten points need to be added to or modified. Next five years can be a period of transformation for India and Indian industry can do outstanding work in the social development area. By its actions, industry needs to earn the respect of the likes of Aruna Roy. That will prove that Indias industry has engaged Bharat and made a real difference.
Indian entrepreneurs are talented and have emerged from the pains of globalisation with confidence and competence. But they are not trusted and cared for, as of now, by the government, NGOs and the public, says Tarun Das.
THE people of India have given Mrs Sonia Gandhi, Prime Minister Manmohan Singh and his team the baton to tackle the multiple challenges of India. And, there is confidence that 2009-14 will be far more meaningful than 2004-09 in regard to inclusive development. But the government alone cannot solve all the problems of India. The voluntary sector does credible work with limited resources and will add their mite. However, the real value add can come from Indian industry especially the private sector which is engaged in social development activity but far below its resources and true potential.
If the private sector takes its social and national responsibilities truly seriously, 2009-14 can witness a paradigm change in development. Social responsibility is still a marginal, limited activity for industry in India. Not only that, the private sector is still apparently unconscious of the enormous poverty surrounding its island of affluence. Wealth creation and wealth accumulation continue to be of overriding importance rather than wealth sharing and much higher resource allocation to developmental activity . One unfortunate aspect is the ostentation in the private sector display of wealth through expenditure on homes, family celebrations (especially birthdays/weddings) and personal priorities such as travel/vacations.
By doing all of this, trust in the private sectors commitment to, and caring for, society is largely non-existent and entrepreneurs are seen as selfish, self-centred and self-absorbed . Lack of trust and alienation are then two sides of the same coin. How to change all of this and help build and sustain public trust in industry Through action, not words. In the same vein, why is there so much red tape in India Because India has a mistrust-based society and system. Red tape is supposed to safeguard against misuse and abuse and, of course, does no such thing. Government has its own trust dilemma and resorts to red tape as an insurance policy, knowing fully well that this is not a medicine which cures.
Indian entrepreneurs are capable and talented the best in the world and have emerged from the pains of competition and globalisation with confidence and competence. They are the envy of most countries and are the pride of India. They can also be respected, trusted, and cared for but, they are not, as of now by government, NGOs and the public.
And, this is sad because Indian corporates have, and are, contributing to social development through affirmative action; skills development; micro-finance programmes ; women empowerment; primary education initiatives in rural areas; supporting healthcare; building infrastructure in villages; setting up low-cost housing ; reconstructing villages ravaged by natural calamities; planting trees and helping the environment agenda, etc. India is the only country where industry has set up care and treatment centres for HIV/AIDS affected persons (ART Centres) this is an outstanding example of social action.
But compared to the size of India, the extent of poverty and deprivation, industrys contribution is only a drop in the ocean. What is the common perception of Indian industry That they evade taxes (so, the finance ministry mistakenly tries to plug loopholes through more complex laws and rules), they underinvoice or overinvoice (depending on the transaction ), they pay themselves exorbitantly (and pay their employees, much much less), they assure themselves of security (but not to those who serve them), they keep money abroad in private banks, etc. In essence, they are not to be depended upon to be truly national or to be placing public interest above all.
MUCHof the private sector are educated , enlightened people, the best education money could buy. With education comes understanding and enlightenment. But, it appears as though the educated and enlightened really do not care or care very little. It will be great if this were not true.
Equally important is management and organisation. The ability of Indian industry in this regard is truly amazing. To conceptualise , to plan and then to implement. What a difference this capability can make to India if it is available for public and social work. If the efficiency of the private sector can merge with the plans of government and the idealism of NGOs, India will be a different place. So, Indian industry can truly help make a difference to the future of India, and the majority of Indians , especially the poor, if it sets its mind to it. This does not mean that industry is the answer to Indias challenges of poverty but, in a sustained, stronger partnership with government and the voluntary sector, a new dimension can be added to development and growth, to efficiency and implementation.
The integration of industry into development tasks, thinking beyond its own self and imperatives would make a huge difference to the next five years and beyond . There is no better time than now. After several years of 9% plus GDP growth and a future of 8% annual growth for ten years and more, Indias industry will have the resources to make a qualitative and quantitative difference to dealing with Indias social challenges. A Rs 10,000-crore Industry Social Development Fund can be created and its value will be 100 times this amount.
Indian industry now needs to truly integrate into a public-private partnership which can transform India, wipe the tear from every eye and meet its destiny not necessarily of being a superpower but a peaceful, stable nation of all people who have a good life.
In April 2007, the prime minister, addressing CII, outlined a Social Charter for Industry . A 10-point Agenda. For over a month the media went to town, debating the PMs social charter especially his suggestion that there should be some moderation in emoluments. (Now, the US has appointed an Emoluments Czar!)
Its time, now, in 2009, to revisit the 2007 social charter and check how industry is faring on each of the ten points. Also, to see whether those ten points need to be added to or modified. Next five years can be a period of transformation for India and Indian industry can do outstanding work in the social development area. By its actions, industry needs to earn the respect of the likes of Aruna Roy. That will prove that Indias industry has engaged Bharat and made a real difference.
Saturday, June 20, 2009
Chinese cities VERSUS Indian cities
Chinese cities streets ahead of ours
The disparities between Indian and Chinese urban development is quite glaring. The Chinese government may be seen as totalitarian and corrupt but it is highly efficient in providing urban infrastructure, says Kala Seetharam Sridhar.
MANY scholars and academics say that India and China are two large economies of the world which are comparable in many ways both are countries with a billion-plus population and large land area. In addition, the shares of GDP by sector are also similar, with agriculture contributing to 23% of GDP in the case of India, slightly less in China at 15%. While manufacturing contributes a greater proportion of Chinas GDP (52%), services contribute a much higher proportion of Indias GDP (at 53%). So there are many similarities and symmetries between the two large economies. However , the comparison ends there.
This writer recently visited China, primarily three cities located in the eastern part of that country Beijing, the political capital, Shanghai, the financial capital and Jinan, a city of about seven million population, which is home to Shandong University. Cities are quite important in China as they contribute to nearly 70% of the countrys GDP, quite similar to our cities which contribute nearly half of our GDP. Hence it must be the case that a large part of Chinas economic growth is attributable to the cities. Several features of Chinas urban development and their differences with Indian urban development are worth noting.
The urban density in terms of persons per hectare is much lower, being only 146 persons per hectare in Chinese cities (Beijing, Shanghai, Tianjin, Guangzhou, Hangzhou, and Ningbo) compared with nearly 204 persons per hectare in Indian cities such as Mumbai and Chennai. It is possible that this is directly an outcome of the household registration system in China the hukou system which restricts rural-urban migration by limiting the benefits of migrants into cities.
The total length of Chinas expressways , much the same as in the United States and Europe, was 60,300 km at the end of 2008, whereas the nearly 5,161 towns in India had a total of 224,352 km of both kaccha (27%) as well as pucca roads (73%) according to data from the Census of India town directory 2001. The national highways in India have a total length of 66,590 km. There are no expressways in India the Road Information System (http:// www.nhairis .org) at the NHAI website unfortunately does not work. While it is useful to note that expressways greatly increase the speed of travel and cut down on travel time significantly, their near conspicuous absence in Indias cities and towns testifies to the poor quality of public services citizens receive.
The average occupancy per public transport vehicle in Chinese cities is very high at 53 persons per vehicle on average, compared with 38 in low income Asian cities such as Mumbai. This is because public transport is very affordable, provides connectivity to various parts of the city, convenient and has high frequency in Chinese cities. For example, in Beijing, one can travel on a city bus from anywhere in the city to anywhere else for just 1 yuan. But this is not so in Indias context . For India, some research shows that the minimum cost of public transport use accounts for 20% to 30% of the family income for nearly 50% of the city population living in unauthorised settlements. With the exception of the Mumbai local train network, Delhi metro and Bangalore Metropolitan Transport Corporations volvo buses (there was only an experiment in Bangalore recently to allow commuters to use these buses at Re 1 which received an unprecedented response ), there are no examples of affordable public transport in Indian cities.
PROFAnthony Yeh of the University of Hong Kong at the closing session on urban development at Shanghai Forum 2009 (where this writer was present) pointed out that in China, there is intercity competition for investment such as Shenzhen competing with Guangzhou. However, this is something that has not been happening in India yet. Indian cities, while they are entrusted with responsibilities of planning for economic development by the 74th Constitutional Amendment Act, do not have many independent sources of revenue apart from the property tax. Nor have they been able to tap the capital market for long-term funds except a few cases such as Ahmedabad. The result is that the city governments are dependent on state governments for grants, based on recommendations made by state finance commissions, and on state and central programmes which provide earmarked funds for specific purposes.
While there are significant disparities between urban and rural areas in China, a large part of why and how China has been able to achieve its level of urban development is through its government which apparently is highly efficient (although corrupt) in providing necessary infrastructure and amenities for urban dwellers. In India, municipal governments lack any professionalism in their management of cities; practices are archaic ; their finances are in poor condition, quite similar to the county and township governments in China (for instance, the per capita fiscal revenue of Yunnan province is 11 times greater than the per capita revenue of the county governments ). However, the various levels of government in China, even with their totalitarianism are quite efficient. It must be the case that the leakages in the taxes paid by residents should be minimal. The ratio of local government revenues to GDP is 6% in China, when compared with 8% for the US and 9% for Canada, but only 0.75% of GDP for Indias ULBs. Otherwise , with poor sub-national finances, Chinese cities must have been similar to Indias cities. So governance must explain the disparities between Indian and Chinese urban development.
Hence the UPA should focus on governance and better administration of the tax money that is flowing into government coffers so that they are channelled to appropriate uses. Only then can we look forward to a resurgent urban India with the requisite infrastructure such as expressways, public transport and decent dwellings which would sustain our countrys macroeconomic growth on a higher trajectory.
The disparities between Indian and Chinese urban development is quite glaring. The Chinese government may be seen as totalitarian and corrupt but it is highly efficient in providing urban infrastructure, says Kala Seetharam Sridhar.
MANY scholars and academics say that India and China are two large economies of the world which are comparable in many ways both are countries with a billion-plus population and large land area. In addition, the shares of GDP by sector are also similar, with agriculture contributing to 23% of GDP in the case of India, slightly less in China at 15%. While manufacturing contributes a greater proportion of Chinas GDP (52%), services contribute a much higher proportion of Indias GDP (at 53%). So there are many similarities and symmetries between the two large economies. However , the comparison ends there.
This writer recently visited China, primarily three cities located in the eastern part of that country Beijing, the political capital, Shanghai, the financial capital and Jinan, a city of about seven million population, which is home to Shandong University. Cities are quite important in China as they contribute to nearly 70% of the countrys GDP, quite similar to our cities which contribute nearly half of our GDP. Hence it must be the case that a large part of Chinas economic growth is attributable to the cities. Several features of Chinas urban development and their differences with Indian urban development are worth noting.
The urban density in terms of persons per hectare is much lower, being only 146 persons per hectare in Chinese cities (Beijing, Shanghai, Tianjin, Guangzhou, Hangzhou, and Ningbo) compared with nearly 204 persons per hectare in Indian cities such as Mumbai and Chennai. It is possible that this is directly an outcome of the household registration system in China the hukou system which restricts rural-urban migration by limiting the benefits of migrants into cities.
The total length of Chinas expressways , much the same as in the United States and Europe, was 60,300 km at the end of 2008, whereas the nearly 5,161 towns in India had a total of 224,352 km of both kaccha (27%) as well as pucca roads (73%) according to data from the Census of India town directory 2001. The national highways in India have a total length of 66,590 km. There are no expressways in India the Road Information System (http:// www.nhairis .org) at the NHAI website unfortunately does not work. While it is useful to note that expressways greatly increase the speed of travel and cut down on travel time significantly, their near conspicuous absence in Indias cities and towns testifies to the poor quality of public services citizens receive.
The average occupancy per public transport vehicle in Chinese cities is very high at 53 persons per vehicle on average, compared with 38 in low income Asian cities such as Mumbai. This is because public transport is very affordable, provides connectivity to various parts of the city, convenient and has high frequency in Chinese cities. For example, in Beijing, one can travel on a city bus from anywhere in the city to anywhere else for just 1 yuan. But this is not so in Indias context . For India, some research shows that the minimum cost of public transport use accounts for 20% to 30% of the family income for nearly 50% of the city population living in unauthorised settlements. With the exception of the Mumbai local train network, Delhi metro and Bangalore Metropolitan Transport Corporations volvo buses (there was only an experiment in Bangalore recently to allow commuters to use these buses at Re 1 which received an unprecedented response ), there are no examples of affordable public transport in Indian cities.
PROFAnthony Yeh of the University of Hong Kong at the closing session on urban development at Shanghai Forum 2009 (where this writer was present) pointed out that in China, there is intercity competition for investment such as Shenzhen competing with Guangzhou. However, this is something that has not been happening in India yet. Indian cities, while they are entrusted with responsibilities of planning for economic development by the 74th Constitutional Amendment Act, do not have many independent sources of revenue apart from the property tax. Nor have they been able to tap the capital market for long-term funds except a few cases such as Ahmedabad. The result is that the city governments are dependent on state governments for grants, based on recommendations made by state finance commissions, and on state and central programmes which provide earmarked funds for specific purposes.
While there are significant disparities between urban and rural areas in China, a large part of why and how China has been able to achieve its level of urban development is through its government which apparently is highly efficient (although corrupt) in providing necessary infrastructure and amenities for urban dwellers. In India, municipal governments lack any professionalism in their management of cities; practices are archaic ; their finances are in poor condition, quite similar to the county and township governments in China (for instance, the per capita fiscal revenue of Yunnan province is 11 times greater than the per capita revenue of the county governments ). However, the various levels of government in China, even with their totalitarianism are quite efficient. It must be the case that the leakages in the taxes paid by residents should be minimal. The ratio of local government revenues to GDP is 6% in China, when compared with 8% for the US and 9% for Canada, but only 0.75% of GDP for Indias ULBs. Otherwise , with poor sub-national finances, Chinese cities must have been similar to Indias cities. So governance must explain the disparities between Indian and Chinese urban development.
Hence the UPA should focus on governance and better administration of the tax money that is flowing into government coffers so that they are channelled to appropriate uses. Only then can we look forward to a resurgent urban India with the requisite infrastructure such as expressways, public transport and decent dwellings which would sustain our countrys macroeconomic growth on a higher trajectory.
Friday, June 19, 2009
GOODS AND SERVICE TAX ( gst) REGIME
GST rollout faces many HURDLES ON THE WAY
TINA EDWIN
THE APRIL 2010 DEADLINE for goods and services tax (GST) implementation may need to be postponed, not because the political will to carry through the tax reforms is lacking but for want of adequate preparation in terms of legislative changes and gearing up the administrative machinery.
At the legislative level, two sets of changes are required. First of all a constitutional amendment is required to give the Centre and states the concurrent powers to levy tax on goods and services. This amendment will need to be passed by a special majority in Parliament and then ratified by at least half the states before it can become law. Then the Centre and every state will need enact a GST Act that will replace the Central Excise Act, 1944 and the law on service tax at the central level, and the Value Added Tax (VAT) Act and other local taxes at the state level.
To get the constitutional amendment through before the end of the current fiscal year, the Centre would need to introduce a bill in Parliament in the upcoming budget session and get it passed in the winter session, such that it can be sent to states for ratification. On the new GST Act, the empowered committee of state finance ministers and the Centre would need to agree on the goods and services that would be outside the tax net, tax rate as well as the threshold rate for application of the tax before a bill is introduced . They also need to decide the stage of transaction at which the tax would be collected and incorporate that in the law. At present, the excise is collected at the stage when goods leave the factory, the sales tax when the invoice is raised and service tax on receipt of money.
But that may be the least of the hurdles on the path of GST implementation , even though work on the bills is yet to begin.
To ensure that GST can be rolled out in a meaningful manner such that a common market is created for goods and services and credits are transferred for taxes paid at the state level, it is necessary that all states come on board. At the moment , several states have reservations about moving to the GST regime as they are apprehensive of the losses they may suffer under the new tax regime and the level of compensation they will get from the Centre. Unless a formula for compensation of losses is worked out quickly , the consensus to move to GST is inconsequential . The implementation of VAT at the state level and then the gradual phase-out of central sales tax (CST) was delayed on this account in the past. That apart, delayed transfer of compensation from the Centre, particularly in the instance of CST losses, have made states apprehensive about being adequately compensated for their losses. So much so that some like Sushil Kumar Modi, deputy chief minister and finance minister of Bihar, want the compensation to be part of the Thirteenth Finance Commission awards. While the Finance Commission has been given the mandate to consider the impact of implementing GST on states revenues while finalising the awards, it may not be possible to transfer compensation for GST losses through its awards.
The challenge lies at the implementation stage. The format of the challans for tax payment need to be redesigned and the government may need to allot new unique number under the GST system for better administration of the tax.
The under-developed IT system can pose a problem here, but perhaps not enough to derail the roll out of the new tax system. The Tax Information Exchange System (Tinxsys), a centralised exchange of all inter-state dealers spread across the various states and Union territories of India, set up around the time state VAT was introduced, has yet to be fully implemented by all states and updated with data on transactions regularly . Scaling up this system to capture inter-state transactions would take time.
But the biggest challenge to the transition to GST is the under-preparedness of the administrative machinery . The state tax officials, who are used to collecting tax on goods, need to be trained to collect service tax. That would take time. But that problem can be got around if the Centre continues to collect the service tax for the first 2-3 years of the GST regime and transfers the collection to the state.
Even if the GST rollout does not keep its April 2010 date, the Centre would do well to lay out a firm road map for its implementation, setting milestones for removing every hurdle in the path of the new tax regime.
TINA EDWIN
THE APRIL 2010 DEADLINE for goods and services tax (GST) implementation may need to be postponed, not because the political will to carry through the tax reforms is lacking but for want of adequate preparation in terms of legislative changes and gearing up the administrative machinery.
At the legislative level, two sets of changes are required. First of all a constitutional amendment is required to give the Centre and states the concurrent powers to levy tax on goods and services. This amendment will need to be passed by a special majority in Parliament and then ratified by at least half the states before it can become law. Then the Centre and every state will need enact a GST Act that will replace the Central Excise Act, 1944 and the law on service tax at the central level, and the Value Added Tax (VAT) Act and other local taxes at the state level.
To get the constitutional amendment through before the end of the current fiscal year, the Centre would need to introduce a bill in Parliament in the upcoming budget session and get it passed in the winter session, such that it can be sent to states for ratification. On the new GST Act, the empowered committee of state finance ministers and the Centre would need to agree on the goods and services that would be outside the tax net, tax rate as well as the threshold rate for application of the tax before a bill is introduced . They also need to decide the stage of transaction at which the tax would be collected and incorporate that in the law. At present, the excise is collected at the stage when goods leave the factory, the sales tax when the invoice is raised and service tax on receipt of money.
But that may be the least of the hurdles on the path of GST implementation , even though work on the bills is yet to begin.
To ensure that GST can be rolled out in a meaningful manner such that a common market is created for goods and services and credits are transferred for taxes paid at the state level, it is necessary that all states come on board. At the moment , several states have reservations about moving to the GST regime as they are apprehensive of the losses they may suffer under the new tax regime and the level of compensation they will get from the Centre. Unless a formula for compensation of losses is worked out quickly , the consensus to move to GST is inconsequential . The implementation of VAT at the state level and then the gradual phase-out of central sales tax (CST) was delayed on this account in the past. That apart, delayed transfer of compensation from the Centre, particularly in the instance of CST losses, have made states apprehensive about being adequately compensated for their losses. So much so that some like Sushil Kumar Modi, deputy chief minister and finance minister of Bihar, want the compensation to be part of the Thirteenth Finance Commission awards. While the Finance Commission has been given the mandate to consider the impact of implementing GST on states revenues while finalising the awards, it may not be possible to transfer compensation for GST losses through its awards.
The challenge lies at the implementation stage. The format of the challans for tax payment need to be redesigned and the government may need to allot new unique number under the GST system for better administration of the tax.
The under-developed IT system can pose a problem here, but perhaps not enough to derail the roll out of the new tax system. The Tax Information Exchange System (Tinxsys), a centralised exchange of all inter-state dealers spread across the various states and Union territories of India, set up around the time state VAT was introduced, has yet to be fully implemented by all states and updated with data on transactions regularly . Scaling up this system to capture inter-state transactions would take time.
But the biggest challenge to the transition to GST is the under-preparedness of the administrative machinery . The state tax officials, who are used to collecting tax on goods, need to be trained to collect service tax. That would take time. But that problem can be got around if the Centre continues to collect the service tax for the first 2-3 years of the GST regime and transfers the collection to the state.
Even if the GST rollout does not keep its April 2010 date, the Centre would do well to lay out a firm road map for its implementation, setting milestones for removing every hurdle in the path of the new tax regime.
Wednesday, June 17, 2009
Give a boost to reverse migration
Give a boost to reverse migration
SHUBHADA SABADE PROFESSOR OF ECONOMICS , SINHGAD BUSINESS SCHOOL , PUNE
AS SOON as the euphoria of the decisive political victory subsides, the new government must pull up their socks. The coming budget is likely to be populist , of the thanks-giving sort. But immediately thereafter, three tasks must be undertaken : one, fiscal expansion with a close watch on the deficit to maintain the FRBM target at least over the trade cycle. Two, an accommodative monetary policy that stops expansion at the right time, keeping in view its multiplier and lagged effect on the economy , and three, ensuring inclusive growth by extending infrastructure (read, roads, education , health and sanitation, irrigation, market, micro-finance , technology, teleconnectivity ) to rural India.
Huge deficits, followed by huge borrowings , crowd out private investment and raise interests, cascading slowly but surely into inflation and overheating. So averaging FRBM targets at least over a trade cycle is prudent. It is the quality of government expenditure that is more important than mere deficit numbers. Monetary policy, given its nexus with the fiscal policy, must accommodate fiscal expansion, but the present ample liquidity warrants instruments that encourage productive investment, and not just make cheap money available to all. Rates may be cut, but rather than across the board, more to the auto, infra, real estate sectors and indeed agriculture and agro-based industry. Even if 1% of the SLR is diverted towards timely loans to the rural sector, Rs 60,000 crore will be released into micro-finance . If government spends half the amount spent on farm loan waivers, with Rs 30,000 crore the whole country can have irrigation canals and farmers wont need loan-waivers !
The overall policy must never lose track of inclusive growth for three reasons. One, the new government must deliver what they have promised; two, given the high income elasticity of demand in the economically weaker sections, an infusion of money into this segment would spur demand which, in turn, will drive the economy out of the present recession. And three, most Indian cities are bursting at the seams with loads of rural migrants arriving for jobs every day. The city infrastructure never seems adequate to accommodate the rural exodus. But during recession , these rural migrants, rendered unemployed , would be more than happy to return to their native places if only they can get work and the city lifestyle in villages. The former can be promised by fiscal policy, government programmes like the National Horticulture Mission making agriculture profitable . The latter can be taken care of by industry, targeting the rural market for sales after the saturation of urban markets and given the growing purchasing power of the village folk. We will then be ready to witness a reverse migration, bliss for all. We have the example of thousands of diamond workers returning profitably to agriculture in Bhavnagar and Ahmedabad.
Good economics is often seen as bad politics , but these seem to be days of a paradigm shift with Indian political focus shifting from furthering urban prosperity towards rural development, as is evident from Rahul Gandhis highly publicised visits to rural habitations and policymakers statements. The prime ministers programme for the first 100 days emphasises insurance reforms, telecom consolidation and expanding NREGAs scope. President Pratibha Patil, in her first address to the joint session of Parliament , highlighted the need to build an inclusive society and inclusive economy. With five long years in hand, blissfully, the new finance minister too wont need to face tradeoff between short-run populism and long run growth with reforms.
Recent history indicates that there would be global food shortages and high food prices in future. Adam Smiths invisible hand puts things right by balancing the mismatches in the marketplace by creating signals for economic actors to move in certain directions. Its quite likely that the present financial crisis in advanced countries and a rather lacklustre IT sector in India, together with high food prices would signal a movement of talent away from the service sector, into agriculture , if it is rendered profitable, leading to reverse migration. So, good economics would be good politics too for a change!
SHUBHADA SABADE PROFESSOR OF ECONOMICS , SINHGAD BUSINESS SCHOOL , PUNE
AS SOON as the euphoria of the decisive political victory subsides, the new government must pull up their socks. The coming budget is likely to be populist , of the thanks-giving sort. But immediately thereafter, three tasks must be undertaken : one, fiscal expansion with a close watch on the deficit to maintain the FRBM target at least over the trade cycle. Two, an accommodative monetary policy that stops expansion at the right time, keeping in view its multiplier and lagged effect on the economy , and three, ensuring inclusive growth by extending infrastructure (read, roads, education , health and sanitation, irrigation, market, micro-finance , technology, teleconnectivity ) to rural India.
Huge deficits, followed by huge borrowings , crowd out private investment and raise interests, cascading slowly but surely into inflation and overheating. So averaging FRBM targets at least over a trade cycle is prudent. It is the quality of government expenditure that is more important than mere deficit numbers. Monetary policy, given its nexus with the fiscal policy, must accommodate fiscal expansion, but the present ample liquidity warrants instruments that encourage productive investment, and not just make cheap money available to all. Rates may be cut, but rather than across the board, more to the auto, infra, real estate sectors and indeed agriculture and agro-based industry. Even if 1% of the SLR is diverted towards timely loans to the rural sector, Rs 60,000 crore will be released into micro-finance . If government spends half the amount spent on farm loan waivers, with Rs 30,000 crore the whole country can have irrigation canals and farmers wont need loan-waivers !
The overall policy must never lose track of inclusive growth for three reasons. One, the new government must deliver what they have promised; two, given the high income elasticity of demand in the economically weaker sections, an infusion of money into this segment would spur demand which, in turn, will drive the economy out of the present recession. And three, most Indian cities are bursting at the seams with loads of rural migrants arriving for jobs every day. The city infrastructure never seems adequate to accommodate the rural exodus. But during recession , these rural migrants, rendered unemployed , would be more than happy to return to their native places if only they can get work and the city lifestyle in villages. The former can be promised by fiscal policy, government programmes like the National Horticulture Mission making agriculture profitable . The latter can be taken care of by industry, targeting the rural market for sales after the saturation of urban markets and given the growing purchasing power of the village folk. We will then be ready to witness a reverse migration, bliss for all. We have the example of thousands of diamond workers returning profitably to agriculture in Bhavnagar and Ahmedabad.
Good economics is often seen as bad politics , but these seem to be days of a paradigm shift with Indian political focus shifting from furthering urban prosperity towards rural development, as is evident from Rahul Gandhis highly publicised visits to rural habitations and policymakers statements. The prime ministers programme for the first 100 days emphasises insurance reforms, telecom consolidation and expanding NREGAs scope. President Pratibha Patil, in her first address to the joint session of Parliament , highlighted the need to build an inclusive society and inclusive economy. With five long years in hand, blissfully, the new finance minister too wont need to face tradeoff between short-run populism and long run growth with reforms.
Recent history indicates that there would be global food shortages and high food prices in future. Adam Smiths invisible hand puts things right by balancing the mismatches in the marketplace by creating signals for economic actors to move in certain directions. Its quite likely that the present financial crisis in advanced countries and a rather lacklustre IT sector in India, together with high food prices would signal a movement of talent away from the service sector, into agriculture , if it is rendered profitable, leading to reverse migration. So, good economics would be good politics too for a change!
Monday, June 15, 2009
EMPOWERING THE FARMER
Think Outside The Box
India needs a socially inclusive budget
Bina Agarwal
We have a new government. We await a new budget. Here is a chance to think outside the box for a socially inclusive budget. Five schemes suggested here would mean taking a less-beaten path.
First, laws can be empowering only with legal awareness and legal access. We need to build a countrywide network for this purpose. In 2005, the UPA government passed more propeople laws in one year than most previous ones did in five: the Right to Information Act, the National Rural Employment Guarantee Act (NREGA), the Hindu Succession (Amendment) Act and the Domestic Violence Act. Potentially all provide major benefits for the vulnerable. Yet unlike laws like NREGA which translate directly into policy, those promising rights have little impact since people lack legal information and advice, especially in villages.
We should create a mobile legal camp service with a lawyer and a local NGO member visiting each panchayat for a full day, on a fixed day each month. This team would create awareness on new laws through written and visual materials in the local language; advise those coming to the camp with particular problems; and provide a referral system about legal services and legal aid if people want to file a case. It could cost as little as Rs 1.2 lakh per year per panchayat at Rs 10,000 per team visit. We could cover 20 per cent of our 2.3 lakh panchayats in the first year with only about Rs 550 crore, and cover 100 per cent over five years with about Rs 2,750-3 ,000 crore. This would be an important step towards legally empowering villagers, especially the poor and women.
Second, we need housing support for single mothers. Divorce and widowhood as well as domestic violence leave women with children especially vulnerable. Even most middle class single mothers cannot afford the two- or threebedroom flats typical in government housing schemes, but many could afford studio flats with one room, a kitchen and toilet, with low interest loans. Thirty per cent of all government flats should be studio flats, sold at under Rs 2 lakh each. Only single mothers should be eligible to buy them. Resale should be barred to prevent speculative buying, but bequests to daughters or female relatives could be allowed.
Third, we need a new approach to vocational training. Technology and vocational institutes (TVIs) should be set up for students after class VIII (when large numbers drop out). The TVI curriculum could have two components: a vocational component to teach a job-oriented trade such as carpentry, car mechanics, plumbing and so on; and a general education component for learning, say, English, basic accounting and computers as well as learning about legal rights, civic duties, environmental awareness and gender sensitisation. Those passing a test held after two years would get a certificate. The qualifying person could have three options: a two-year apprenticeship with pay with the private sector, with placement help from TVIs; a two-year teaching assistantship within TVI; or entry into a higher level vocational institution recognising the TVI certificate . This could be a public-private partnership for linking vocational education with employment, and building a middle-level cadre with skills in great demand in construction and other sectors.
Fourth, we need to promote a group approach to farm investment and cultivation, for both higher productivity and economic security for the rural poor. The Indian farmer today is small and increasingly female: 70 per cent of farmers operate 1 hectare (ha) or less. A feminisation of agriculture is also occurring: relative to 51per cent of male workers, 71per cent of women workers are in agriculture. Women form 39 per cent of our agricultural workers and are growing, but individually they cannot easily access land or technology for productive farming.
We should introduce a grant-cum-subsidised loan scheme with two components. One would be for marginal farmers (men or women) owning 1 ha or less who form a group of 8-10 to jointly invest in irrigation wells, bulky farm equipment, etc. The group would own the asset. The other component would allow groups of landless women to buy land jointly and farm it collectively . Half the fund could be a grant and half a low interest loan repayable over five years. Funds would be conditional to forming a group. If 10 women jointly buy 10 acres, an acre each could be registered in each ones name, but cultivation would need land pooling.
Self-help groups of the poor should be eligible. As a group, women farmers could take advantage of economies of scale, share risks and labour, afford crop insurance, get better terms in contract farming and improve access to credit , infrastructure and technology. Poor Dalit women in Andhra Pradesh have successfully done land purchase and joint farming in many villages, taking advantage of a state government scheme. We need a similar countrywide central scheme.
Finally, all states should be advised to budget for a womens component plan in their panchayati raj institutions (PRI), as Kerala has done, setting aside 10 per cent of the grant-inaid in PRI budgets at all tiers: district, block and gram. It is hoped that the finance minister will take up these five suggestions.
The writer is professor, Institute of Economic Growth, Delhi.
India needs a socially inclusive budget
Bina Agarwal
We have a new government. We await a new budget. Here is a chance to think outside the box for a socially inclusive budget. Five schemes suggested here would mean taking a less-beaten path.
First, laws can be empowering only with legal awareness and legal access. We need to build a countrywide network for this purpose. In 2005, the UPA government passed more propeople laws in one year than most previous ones did in five: the Right to Information Act, the National Rural Employment Guarantee Act (NREGA), the Hindu Succession (Amendment) Act and the Domestic Violence Act. Potentially all provide major benefits for the vulnerable. Yet unlike laws like NREGA which translate directly into policy, those promising rights have little impact since people lack legal information and advice, especially in villages.
We should create a mobile legal camp service with a lawyer and a local NGO member visiting each panchayat for a full day, on a fixed day each month. This team would create awareness on new laws through written and visual materials in the local language; advise those coming to the camp with particular problems; and provide a referral system about legal services and legal aid if people want to file a case. It could cost as little as Rs 1.2 lakh per year per panchayat at Rs 10,000 per team visit. We could cover 20 per cent of our 2.3 lakh panchayats in the first year with only about Rs 550 crore, and cover 100 per cent over five years with about Rs 2,750-3 ,000 crore. This would be an important step towards legally empowering villagers, especially the poor and women.
Second, we need housing support for single mothers. Divorce and widowhood as well as domestic violence leave women with children especially vulnerable. Even most middle class single mothers cannot afford the two- or threebedroom flats typical in government housing schemes, but many could afford studio flats with one room, a kitchen and toilet, with low interest loans. Thirty per cent of all government flats should be studio flats, sold at under Rs 2 lakh each. Only single mothers should be eligible to buy them. Resale should be barred to prevent speculative buying, but bequests to daughters or female relatives could be allowed.
Third, we need a new approach to vocational training. Technology and vocational institutes (TVIs) should be set up for students after class VIII (when large numbers drop out). The TVI curriculum could have two components: a vocational component to teach a job-oriented trade such as carpentry, car mechanics, plumbing and so on; and a general education component for learning, say, English, basic accounting and computers as well as learning about legal rights, civic duties, environmental awareness and gender sensitisation. Those passing a test held after two years would get a certificate. The qualifying person could have three options: a two-year apprenticeship with pay with the private sector, with placement help from TVIs; a two-year teaching assistantship within TVI; or entry into a higher level vocational institution recognising the TVI certificate . This could be a public-private partnership for linking vocational education with employment, and building a middle-level cadre with skills in great demand in construction and other sectors.
Fourth, we need to promote a group approach to farm investment and cultivation, for both higher productivity and economic security for the rural poor. The Indian farmer today is small and increasingly female: 70 per cent of farmers operate 1 hectare (ha) or less. A feminisation of agriculture is also occurring: relative to 51per cent of male workers, 71per cent of women workers are in agriculture. Women form 39 per cent of our agricultural workers and are growing, but individually they cannot easily access land or technology for productive farming.
We should introduce a grant-cum-subsidised loan scheme with two components. One would be for marginal farmers (men or women) owning 1 ha or less who form a group of 8-10 to jointly invest in irrigation wells, bulky farm equipment, etc. The group would own the asset. The other component would allow groups of landless women to buy land jointly and farm it collectively . Half the fund could be a grant and half a low interest loan repayable over five years. Funds would be conditional to forming a group. If 10 women jointly buy 10 acres, an acre each could be registered in each ones name, but cultivation would need land pooling.
Self-help groups of the poor should be eligible. As a group, women farmers could take advantage of economies of scale, share risks and labour, afford crop insurance, get better terms in contract farming and improve access to credit , infrastructure and technology. Poor Dalit women in Andhra Pradesh have successfully done land purchase and joint farming in many villages, taking advantage of a state government scheme. We need a similar countrywide central scheme.
Finally, all states should be advised to budget for a womens component plan in their panchayati raj institutions (PRI), as Kerala has done, setting aside 10 per cent of the grant-inaid in PRI budgets at all tiers: district, block and gram. It is hoped that the finance minister will take up these five suggestions.
The writer is professor, Institute of Economic Growth, Delhi.
Sunday, June 14, 2009
POVERTY ALLEVIATION VIA PDS AND AGRICULTURAL GROWTH.
First 100 days syndrome: A new deal for the poor
The success of the proposed National Food Security Act hinges on identifying the real poor and we must put a lot of effort to do it right
FRANKLIN D Roosevelt pushed 15 major pieces of legislation through Congress in his initial 100 days as part of the New Deal that pulled the US economy out of depression during 1930s and created much of the modern US social safety net. Since then, may new governments in the democratic world often show their commitment to the people by getting into high gear in the first 100 days, be it the Obama administration in the United States or the Manmohan Singh government in India.
With shackles of the Left gone, there is high expectation of reforms from the Manmohan Singh government that can get the economy back on the 8-10 % growth trajectory and also give a New Deal to the poor. The implementation of the promised National Food Security Act (NFSA) is high on the agenda, and so is putting agriculture on a 4% growth path, besides several other big ticket items like divestment in PSUs, reviving exports, and so on.
The big question is not whether the government can do it, but how best it can manage within the limited resources. Let me concentrate on two key issues NFSA and agriculture, that may fall within the purview of the ministry of agriculture and consumer affairs.
The President of India hinted in her speech to the joint session of Parliament on June 4, 2009, that the government will bring in NFSA that will entitle by law all below-poverty-line (BPL) families 25 kg of grain (wheat and rice) per month at Rs 3/kg. Many fear that this permanent commitment may cost the government more than Rs 50,000 crore, creating a big hole in the already precarious government finances. But I strongly feel if the government plays smart, it can easily fulfil this commitment with much less resources, and can take this major step towards a hungerfree India, giving it a huge political mileage. How Here is a back of the envelop calculation and common sense approach to do it in a smart way.
With the economic cost of grain to be around Rs 15/kg, the subsidy will be Rs 12/kg. The commitment of 25 kg per month to BPL families translates to Rs 3,600 food subsidy to BPL families per year. This can be given in the name of the woman in the BPL family in the form of food coupons, a sort of conditional cash transfer, to buy any of the, say, 10 listed food items from any shop. And these coupons can then be reimbursed to the shopkeeper through post offices or designated banks on a commission basis. The total bill for such a scheme will depend upon the number of BPL families in the country, and thats where there is a lot of confusion and bungling. Going by the Planning Commissions approach, as on March 2009, there are not more than 60 million BPL families. This means the total subsidy bill will come to Rs 21,600 crore.
But the BPL families are already getting grains at less than Rs 6/kg. If this is taken into account, the extra cost is only Rs 4,500 crore. The problem , however, is that the current number of BPL cards issued in the country under the PDS system is almost 107 million. In fact, in some states, like Andhra, almost the entire population is shown as BPL, whereas in other states where real poverty is much more, the majority does not have BPL cards. This is ridiculous and speaks of an utter failure of governance, leading to 30% to 40% leakage from the current PDS system, which needs to be corrected once for all, in a transparent, fool proof, and ingenious manner, if we really want to help the poor.
How can we do it We may have to think out of the box and combine new technology with desi (local) ways of identifying the real poor in the country. Can we say that all those who have motorised vehicles, or electricity bills above a minimum cut off, or a regular job in the organised sector, or a cell phone with some minimum bill, are not BPL All such people are registered at one place or another and can be scanned through computers and taken off the BPL list. Some of my colleagues tell me that even real BPL may also have a cell phone. Fine, but you combine this with a sort of social audit. Mr Naveen Jindal, MP from Haryana, tells me that they experimented with an idea to paint the outer wall of a BPL family with specific visible sign (may be a tri-colour with the number of the BPL family in the village on that). This acted as a powerful social audit and several families opted out of the BPL list as they wanted to graduate to non-BPL status. There could be many such innovative approaches that can be used along with modern ICT tools to identify the poor. The success of NFSA critically hinges on this identification process, and we need to put a lot of effort and creativity to do it right. The returns will be enormous, else it can prove to be another mismanaged flagship programme with high cost; and hunger will still continue to haunt several million people in this country.
But the long-term food security lies not just in food coupons, but in raising production of staples and augmenting farmers incomes through other agri-commodities , especially through high-value agriculture such as horticulture, livestock and fishery. This will dovetail with the 4% targeted rate of growth in agriculture. How does one achieve this
Foodgrain production needs a switch in strategy ; from the heavy reliance on north-west to a move to eastern India (Uttar Pradesh, Bihar, West Bengal, Assam, Orissa and Chhattisgarh). This is where water is, and this is where the future grain basket of India lies. But it needs large investments in controlling floods, building infrastructure of roads and markets, having electricity for shallow tubewells, and so on. The technologies are there, which can raise yields significantly by 50% to 100% in three to five years, but it needs the right policy environment and investments in basic infrastructure. The bill could be Rs 10,000 crore a year for the next three to five years, to ensure food security of the nation for the next 20 years.
Such a strategy will have high pay-offs , as the country can then get going aggressively on diversification towards high-value agriculture. And it is here that the future sources of growth in agriculture will come from. These high value commodities are perishable in nature and need a very different development strategy than has been the case in grains. The private sector will play a lead role linking production at farms to processing and organised retailing in compressed and efficient value chains. But the government has to create an enabling policy environment by changing the APMC Act on the lines of the Model Act, by freeing land lease markets, by encouraging food processing and removing all hurdles in the path of organised retailing by domestic and foreign players. A well integrated value chain will also help the infusion of new farming technologies and investments in logistics , helping the small and large farmers alike. Organised retail can also help in mainstreaming the kirana shops and other small vendors, if the policy suggests that 20% of their space has to be through the franchise route.
The target of achieving 4% rate of growth in agriculture is not an impossible task. During 2000-01 to 2007-08 , while the all-India agri-GDP growth rate was 2.9%, there are states like Gujarat where agri-growth rate was 9.6% p.a. It is time for many other states to show a similar stellar performance, and the Centres job is to encourage, enable, and reward such states!
(The author is Director in Asia for the International Food Policy Research Institute)
The success of the proposed National Food Security Act hinges on identifying the real poor and we must put a lot of effort to do it right
FRANKLIN D Roosevelt pushed 15 major pieces of legislation through Congress in his initial 100 days as part of the New Deal that pulled the US economy out of depression during 1930s and created much of the modern US social safety net. Since then, may new governments in the democratic world often show their commitment to the people by getting into high gear in the first 100 days, be it the Obama administration in the United States or the Manmohan Singh government in India.
With shackles of the Left gone, there is high expectation of reforms from the Manmohan Singh government that can get the economy back on the 8-10 % growth trajectory and also give a New Deal to the poor. The implementation of the promised National Food Security Act (NFSA) is high on the agenda, and so is putting agriculture on a 4% growth path, besides several other big ticket items like divestment in PSUs, reviving exports, and so on.
The big question is not whether the government can do it, but how best it can manage within the limited resources. Let me concentrate on two key issues NFSA and agriculture, that may fall within the purview of the ministry of agriculture and consumer affairs.
The President of India hinted in her speech to the joint session of Parliament on June 4, 2009, that the government will bring in NFSA that will entitle by law all below-poverty-line (BPL) families 25 kg of grain (wheat and rice) per month at Rs 3/kg. Many fear that this permanent commitment may cost the government more than Rs 50,000 crore, creating a big hole in the already precarious government finances. But I strongly feel if the government plays smart, it can easily fulfil this commitment with much less resources, and can take this major step towards a hungerfree India, giving it a huge political mileage. How Here is a back of the envelop calculation and common sense approach to do it in a smart way.
With the economic cost of grain to be around Rs 15/kg, the subsidy will be Rs 12/kg. The commitment of 25 kg per month to BPL families translates to Rs 3,600 food subsidy to BPL families per year. This can be given in the name of the woman in the BPL family in the form of food coupons, a sort of conditional cash transfer, to buy any of the, say, 10 listed food items from any shop. And these coupons can then be reimbursed to the shopkeeper through post offices or designated banks on a commission basis. The total bill for such a scheme will depend upon the number of BPL families in the country, and thats where there is a lot of confusion and bungling. Going by the Planning Commissions approach, as on March 2009, there are not more than 60 million BPL families. This means the total subsidy bill will come to Rs 21,600 crore.
But the BPL families are already getting grains at less than Rs 6/kg. If this is taken into account, the extra cost is only Rs 4,500 crore. The problem , however, is that the current number of BPL cards issued in the country under the PDS system is almost 107 million. In fact, in some states, like Andhra, almost the entire population is shown as BPL, whereas in other states where real poverty is much more, the majority does not have BPL cards. This is ridiculous and speaks of an utter failure of governance, leading to 30% to 40% leakage from the current PDS system, which needs to be corrected once for all, in a transparent, fool proof, and ingenious manner, if we really want to help the poor.
How can we do it We may have to think out of the box and combine new technology with desi (local) ways of identifying the real poor in the country. Can we say that all those who have motorised vehicles, or electricity bills above a minimum cut off, or a regular job in the organised sector, or a cell phone with some minimum bill, are not BPL All such people are registered at one place or another and can be scanned through computers and taken off the BPL list. Some of my colleagues tell me that even real BPL may also have a cell phone. Fine, but you combine this with a sort of social audit. Mr Naveen Jindal, MP from Haryana, tells me that they experimented with an idea to paint the outer wall of a BPL family with specific visible sign (may be a tri-colour with the number of the BPL family in the village on that). This acted as a powerful social audit and several families opted out of the BPL list as they wanted to graduate to non-BPL status. There could be many such innovative approaches that can be used along with modern ICT tools to identify the poor. The success of NFSA critically hinges on this identification process, and we need to put a lot of effort and creativity to do it right. The returns will be enormous, else it can prove to be another mismanaged flagship programme with high cost; and hunger will still continue to haunt several million people in this country.
But the long-term food security lies not just in food coupons, but in raising production of staples and augmenting farmers incomes through other agri-commodities , especially through high-value agriculture such as horticulture, livestock and fishery. This will dovetail with the 4% targeted rate of growth in agriculture. How does one achieve this
Foodgrain production needs a switch in strategy ; from the heavy reliance on north-west to a move to eastern India (Uttar Pradesh, Bihar, West Bengal, Assam, Orissa and Chhattisgarh). This is where water is, and this is where the future grain basket of India lies. But it needs large investments in controlling floods, building infrastructure of roads and markets, having electricity for shallow tubewells, and so on. The technologies are there, which can raise yields significantly by 50% to 100% in three to five years, but it needs the right policy environment and investments in basic infrastructure. The bill could be Rs 10,000 crore a year for the next three to five years, to ensure food security of the nation for the next 20 years.
Such a strategy will have high pay-offs , as the country can then get going aggressively on diversification towards high-value agriculture. And it is here that the future sources of growth in agriculture will come from. These high value commodities are perishable in nature and need a very different development strategy than has been the case in grains. The private sector will play a lead role linking production at farms to processing and organised retailing in compressed and efficient value chains. But the government has to create an enabling policy environment by changing the APMC Act on the lines of the Model Act, by freeing land lease markets, by encouraging food processing and removing all hurdles in the path of organised retailing by domestic and foreign players. A well integrated value chain will also help the infusion of new farming technologies and investments in logistics , helping the small and large farmers alike. Organised retail can also help in mainstreaming the kirana shops and other small vendors, if the policy suggests that 20% of their space has to be through the franchise route.
The target of achieving 4% rate of growth in agriculture is not an impossible task. During 2000-01 to 2007-08 , while the all-India agri-GDP growth rate was 2.9%, there are states like Gujarat where agri-growth rate was 9.6% p.a. It is time for many other states to show a similar stellar performance, and the Centres job is to encourage, enable, and reward such states!
(The author is Director in Asia for the International Food Policy Research Institute)
For a comprehensive inflation index
For a comprehensive inflation index
There is an urgent need to establish a robust data collection mechanism for services, like we have for goods. Without it, the methodological error in inflation measurement will persist, say Rashmi Rastogi & Tanu M Goyal
THE Wholesale Price Index (WPI) is a broad-based measure of inflation , widely used for policy making in India. The index, however, has been acknowledged as incomplete since it includes only goods. In order to give a complete picture of inflation, the need for a services-based index has already been recognised among policymakers . It is important to note that the Producer Price Index (PPI) in the US, the near counterpart of WPI in India, introduced services in 1995 and has been regularly updated by the inclusion of new services. Against this backdrop, a team at ICRIER constructed a preliminary service-based inflation index which illustrates considerable variation with existing measures of inflation. The policy implication is clear. We need to fast-track a services database to prepare the basis for a comprehensive inflation index. This would dovetail precisely with the governments declared intention of launching a monthly measure of inflation. It is also an opportune time for the new government to correct this historical anomaly in inflation measurement.
Inflation is between 0 and 1% at present , but last year it was different. The highest recorded year-on-year inflation as measured by the WPI was in August 2008 at 12.81%. A number of economists however, felt that the actual increase was not as severe as recorded by the WPI. This is because it did not account for the price of services, which remained more or less constant over that period.
There are several reasons that prompt inclusion of services in the price index. First, over the years, share of services in the GDP has increased gradually, services now account for a little more than 60% of GDP. Second is the increasing contribution of services to international trade. Indias trade in services as a percentage of GDP stood at around 3.37% in 1990 which increased to around 15.37% in 2007. Third, services contribute to the government indirect tax collection via the service tax and this share has been steadily rising. Finally and most significantly, rising share of services in private final consumption expenditure (PFCE) mandates their inclusion in the basket. In 2007-08 , one third of the total PFCE was on services . It has gradually increased over the past few years from about 26% in 1990 to around 33% in 2007-08 . Non-inclusion of services therefore does not give a representative picture of inflation.
While the government has recognised the need for a comprehensive index including services, the proposal has been gathering dust in the ministry, due perhaps in large part to the immense resources it will need. The benefits that such an index will bring to bear on policy formulation, especially inflation targeting, will however more than justify its construction.
Our attempt to address this important issue revolved around creating a services index and merging it with the existing WPI to arrive at a composite price index. We recognise its infirmities, but take heart in the fact that our composite index usually predicts inflation to be in between the CPI (IW) and WPI, a dominant view amongst economists in government.
The services index has been constructed using weighted average method, where weights are assigned according to contribution of each service to PFCE in 2006-07 . Due to non-availability of data on certain services, the index includes services which are part of CPI (IW) and CPI (UNME). Services included in the index are housing, medical care, education, recreation and amusement and transport & communication.
IN ADDITION, prime lending rate, a proxy variable of financial institutions is also included. In order to obtain a comprehensive measure of inflation, the constructed service index is combined with WPI. Weighted average method was used to construct Composite Price Index where weights to services (33%) and WPI (67%) are based on consumer expenditure on goods and services, according to NSS 63rd round.
Inflation in composite price index shown in accompanying graph represents a comprehensive measure of inflation which is equivalent to national income deflator comprising goods as well as services. Divergence in two price indices Service Index and WPI explains the behaviour of inflation in the Composite Price Index. The reason for divergence in the period April 05 to December 05 was due to very high consumer expenditure on housing rentals and transportation & communication. Average inflation in housing rentals reached to 14.6% and in transport & communication inflation was 7.1%. During the period from March 08 to December 08, the Indian economy was influenced by external factors that resulted in the increase in WPI fuel and WPI primary. Average inflation in WPI primary and WPI fuel was 10.8% and 10.9%, respectively. Inflation in WPI primary goods touched to 12.4% in October 08 and WPI fuel reached to 17.2% in July 08 while the prices of services did not show much increase in the corresponding period.
This picture can be readily observed in the graph. The time period between September 06-May 07 and March 08-February 09, average inflation in service index is 4.6% and 4.1%, respectively, while average inflation in WPI is 5.9% and 8.9%. Low inflation in services index pushed down inflation in composite price index, i.e., 5.9% average inflation in September 06-May 07 and 7.3% in March 08-February 09. On the other hand, when the average inflation in service index is higher, i.e., 6.6% between April 05-December 05 and lower WPI inflation 4.6% pushed down the inflation in composite price index to 5.2%.
The results clearly suggest the need for a comprehensive price index that includes services in the measure of inflation. ICRIERs endeavour reinforces what we have known for a long time now, i.e., the current baskets in the WPI and CPI are obsolete and need to be updated and new weights assigned in the index. It is, therefore , recommended to establish a robust data collection mechanism for services, like we have for goods. Without it, the methodological error in inflation measurement will persist.
(Rashmi Rastogi is a research associate and
Tanu M Goyal is a research assistant
There is an urgent need to establish a robust data collection mechanism for services, like we have for goods. Without it, the methodological error in inflation measurement will persist, say Rashmi Rastogi & Tanu M Goyal
THE Wholesale Price Index (WPI) is a broad-based measure of inflation , widely used for policy making in India. The index, however, has been acknowledged as incomplete since it includes only goods. In order to give a complete picture of inflation, the need for a services-based index has already been recognised among policymakers . It is important to note that the Producer Price Index (PPI) in the US, the near counterpart of WPI in India, introduced services in 1995 and has been regularly updated by the inclusion of new services. Against this backdrop, a team at ICRIER constructed a preliminary service-based inflation index which illustrates considerable variation with existing measures of inflation. The policy implication is clear. We need to fast-track a services database to prepare the basis for a comprehensive inflation index. This would dovetail precisely with the governments declared intention of launching a monthly measure of inflation. It is also an opportune time for the new government to correct this historical anomaly in inflation measurement.
Inflation is between 0 and 1% at present , but last year it was different. The highest recorded year-on-year inflation as measured by the WPI was in August 2008 at 12.81%. A number of economists however, felt that the actual increase was not as severe as recorded by the WPI. This is because it did not account for the price of services, which remained more or less constant over that period.
There are several reasons that prompt inclusion of services in the price index. First, over the years, share of services in the GDP has increased gradually, services now account for a little more than 60% of GDP. Second is the increasing contribution of services to international trade. Indias trade in services as a percentage of GDP stood at around 3.37% in 1990 which increased to around 15.37% in 2007. Third, services contribute to the government indirect tax collection via the service tax and this share has been steadily rising. Finally and most significantly, rising share of services in private final consumption expenditure (PFCE) mandates their inclusion in the basket. In 2007-08 , one third of the total PFCE was on services . It has gradually increased over the past few years from about 26% in 1990 to around 33% in 2007-08 . Non-inclusion of services therefore does not give a representative picture of inflation.
While the government has recognised the need for a comprehensive index including services, the proposal has been gathering dust in the ministry, due perhaps in large part to the immense resources it will need. The benefits that such an index will bring to bear on policy formulation, especially inflation targeting, will however more than justify its construction.
Our attempt to address this important issue revolved around creating a services index and merging it with the existing WPI to arrive at a composite price index. We recognise its infirmities, but take heart in the fact that our composite index usually predicts inflation to be in between the CPI (IW) and WPI, a dominant view amongst economists in government.
The services index has been constructed using weighted average method, where weights are assigned according to contribution of each service to PFCE in 2006-07 . Due to non-availability of data on certain services, the index includes services which are part of CPI (IW) and CPI (UNME). Services included in the index are housing, medical care, education, recreation and amusement and transport & communication.
IN ADDITION, prime lending rate, a proxy variable of financial institutions is also included. In order to obtain a comprehensive measure of inflation, the constructed service index is combined with WPI. Weighted average method was used to construct Composite Price Index where weights to services (33%) and WPI (67%) are based on consumer expenditure on goods and services, according to NSS 63rd round.
Inflation in composite price index shown in accompanying graph represents a comprehensive measure of inflation which is equivalent to national income deflator comprising goods as well as services. Divergence in two price indices Service Index and WPI explains the behaviour of inflation in the Composite Price Index. The reason for divergence in the period April 05 to December 05 was due to very high consumer expenditure on housing rentals and transportation & communication. Average inflation in housing rentals reached to 14.6% and in transport & communication inflation was 7.1%. During the period from March 08 to December 08, the Indian economy was influenced by external factors that resulted in the increase in WPI fuel and WPI primary. Average inflation in WPI primary and WPI fuel was 10.8% and 10.9%, respectively. Inflation in WPI primary goods touched to 12.4% in October 08 and WPI fuel reached to 17.2% in July 08 while the prices of services did not show much increase in the corresponding period.
This picture can be readily observed in the graph. The time period between September 06-May 07 and March 08-February 09, average inflation in service index is 4.6% and 4.1%, respectively, while average inflation in WPI is 5.9% and 8.9%. Low inflation in services index pushed down inflation in composite price index, i.e., 5.9% average inflation in September 06-May 07 and 7.3% in March 08-February 09. On the other hand, when the average inflation in service index is higher, i.e., 6.6% between April 05-December 05 and lower WPI inflation 4.6% pushed down the inflation in composite price index to 5.2%.
The results clearly suggest the need for a comprehensive price index that includes services in the measure of inflation. ICRIERs endeavour reinforces what we have known for a long time now, i.e., the current baskets in the WPI and CPI are obsolete and need to be updated and new weights assigned in the index. It is, therefore , recommended to establish a robust data collection mechanism for services, like we have for goods. Without it, the methodological error in inflation measurement will persist.
(Rashmi Rastogi is a research associate and
Tanu M Goyal is a research assistant
Broadband for 99% Indians
| Broadband for 99% Indians | ||
| Pradip Baijal | ||
| April 16, 2009 | ||
| The outsourcing, call centre and BPO industries transformed India in the early ’90s giving millions jobs. Today, these businesses generate around 6 per cent of our GDP and 35 per cent of our exports. The reason for this revolution— the international leased line connection and the local connection was made available to the entrepreneurs cheaply. The moral of the story—if you want technology to reach out and touch the life of millions, then it must be made affordable to the masses. Take another example. Mobiles were in vogue all over the world in mid-80s. We wasted many years debating whether mobility services were really required in India. For a number of years, till aggressive telecom reforms started, India was at about number 100 in voice telephony/ICT (Information & Communication Technologies), in the list of nations. Today, our voice telecom network is second only to China’s and growing at a feverish pitch. It’s actually expanding at almost double the rate of growth that China ever achieved. We made up for lost time very quickly after a slow start. But remember, voice services did not grow when corporates bid huge entry fees leading to high tariffs. In fact, most telecom companies were on the verge of becoming sick as the number of subscribers stagnated due to high tariffs. If this had continued we would have seen companies like Bharti, Idea, Vodafone going belly up by now. The government soon realised the folly of a high entry fee and switched over to a revenue-sharing model. This led to huge initial losses to the government and it came under a lot of criticism. Luckily this did not deter the authorities from pushing ahead with crucial policy changes. In 2004, the government allowed operators to use technology of their choice under Unified Access Licensing. And the results are there for all to see. Over the next decade, an explosion in the subscriber base of the telecom companies meant that the revenues of the government also shot up. The government actually made much more under the new regime than it would have made by sticking to high entry fees. In the process, the government target of 15 per cent teledensity and 4 per cent rural teledensity by 2010 has already been exceeded. In all likelihood, the target could be overshot by as much as 300 per cent in 2010. Let’s extend this argument further. A recent INSEAD Global Technology Report has indicated that for ICT services, which run on our highly efficient telecom network, we are lagging way behind other countries. We are ranked at 50 right now. It is my very strong personal conviction that all this could change with the advent of 3G technology. It could serve as a unique opportunity for India to leapfrog from its existing state and come at par with the developed world by direct adoption of mobile-based access. Broadband penetration in the US and Europe started with the PC. This was largely because of the high percentage of people working in offices, which proved to be ideal training ground for the population at large to learn how to best use the Internet. In India, low PC penetration has hamstrung the spread of broadband services. All this could change soon. Indians have been more willing to adopt mobile-based services. Asians have typically been more adept at using the cell phone. With 3G, we can potentially obviate the need for households to have PCs and yet reach the same level of broadband access. Google recently reported that Internet searches on cell phones were catching up with the PCs in the US. 3G, then, is a chance to skip the entire PC penetration curve. But again, it is imperative to understand that this can only happen if 3G services can be afforded by the masses. I’ll explain how this can be achieved. Now, there may be a problem in giving Broadband Wireless Access (BWA) or 3G spectrum to all the operators we have licensed. Surely, the selection could be through non-monetary criteria by developing a transparent policy. If we insist on auctions in view of the large number of operators to bring in transparency in selection process, we must ensure that maximum 3G/BWA/EVDO spectrum is auctioned to ensure low bid prices. We could even have a revenue-sharing arrangement only (which would at least ensure that we do not have a front loaded tariff regime). It is important to ensure that broadband is affordable for over 99 per cent of our population which still cannot access it. This could be yet another revolution in the making. It would ensure that the common man can reap the benefits of e-governance, e-education, e-health, eagricultural extension, e-banking and much more. In our perception, if everyone will use broadband, there is no logic in charging entry fee for such spectrum. As the service grows, even a very low revenue share would give much more to the State in the long run than an initial entry fee. The initial revenue share also has to be low to enable operators to provide cheap services It would really be a big mistake to deny the vast majority of Indians access to broadband services by adopting wrong policies. It would also be wrong to use the money generated by auctions for other government schemes, knowing very well that investment in ICT services is the best and most productive investment for a developing country like India, given its poor communication facilities. If auctions take place, we must ensure that money generated in the auctions goes to the Universal Service Obligation Fund, which will ensure better ICT infrastructure in rural and low density urban areas. This is certainly preferable to diverting the funds to less profitable and sometimes unviable and wasteful government investment. The example of countries such as South Korea, Singapore, Estonia, and Israel has shown how ICT can be the enabler of a competitive transformation of the economy, allowing countries to leapfrog to more advanced stages of development. | ||
Saturday, June 13, 2009
How to end poverty in India
| How to end poverty in India | ||
| April 16, 2009 | ||
| India’s population in poverty declined from 55 per cent to 27.5 per cent between 1974 and 2004. Yet, the number of poor has remained at 300-320 million for 45 years because population grew steadily. Most Indians are unable to escape their financial, geographic or social disadvantages (or Ovarian Lottery: a term used by Warren Buffett to describe advantage by birth) because of non-inclusive labour markets. Reducing poverty needs four labour transitions: from farm to non-farm, from rural to urban, unorganised to organised and subsistence self-employment to decent wage employment. To allow these transitions, three sets of reforms are needed—involving Employment, Employability and Education. An important aspect of the proposed reforms is that there need not be a trade-off between protecting the rights of the employees and ensuring that employers have the flexibility to change with changing circumstances. Employment reforms The task of employment reforms concerns connecting supply to demand and can lead to the most instantaneous and perceptible impact on employment conditions. Why do we need employment reforms? The sector is ruled by a minority, organised labour, which accounts for just 7 per cent of the total. The organised sector values job preservation over job creation, and discriminates against labour market outsiders— the less skilled, the less educated, the people from small towns as well as women. Add to this, a poor legal regime that increases transaction costs, promotes corruption and creates incentives for government functionaries to exploit. The Way Forward: Reforms can begin at employment exchanges, which can be converted into career centres via public-private partnerships that offer assessment, counselling, jobs and certifications. The other institutions crying for reform are the Employees Provident Fund Organisation (EPFO) and the Employees’ State Insurance (ESI), whose poor service levels encourage evasion and breed unorganised employment. One way to reform them would be to separate their regulatory and delivery roles. After the institutions, the framework. The government should review the philosophy and plumbing of labour laws that encourage the substitution of labour by capital, and increase the skill intensity of employment. By plumbing we mean the need to harmonise definitions, reduce the number of statutes (there are over 45 statutes directly associated with labour) and write them down in simple language. At the policy level, labour should be removed from the Concurrent list and handed over to the states, clearing the political logjam that is holding up labour reforms at the Centre. Employability reforms This is the second-most important reform, given the complete absence of linkages between education/ training and the requirements of the job market. The biggest impact will be felt among those already in lowproductivity jobs or students who have completed their education but are unable to get a job. Training should have three values—a learning value, a signalling value, and a job value. Today, the system fails on all the three counts as there is no linkage of financing to outcomes, no separation of delivery from financing, no effective assessment entry gates, and no credible exit gates for certification, either. Then, there is a misalignment between assessment, curriculum, certification and jobs, among others. The Way Forward: Begin by enforcing the operating principles adopted by the National Skill Council for all government operated or funded skill programmes. Review the Apprentice Act of 1961 to ensure “learning by doing” and “learning by earning”. At the next stage, the government must provide incentives for setting up of state skill missions, since all delivery systems are in the hands of states. Concurrently, the government has to create a national framework and infrastructure for skill development that aligns occupation codes, entry gate assessment and exit gate certification. Immediate gains could be had by activating the National Skill Corporation to create project funding for corporate and individual ventures in skill development. Education reforms After the two short-term steps comes the most important one— preparing supply for demand, or reform of the education system. While India has bred a series of higher-education institutions that are among the world’s best, the elementary education system is in a mess. Instead of letting the poor fend for themselves at poorlyequipped and -run state schools, the government should create a voucherbased approach that enables parents to use government funding to pay for schools of their choice. Within the elementary education system, incentives and answerability are two critical requirements. Once this is in place, the curriculum has to be oriented towards “learning for earning”, with a better vocational content and stress on English language fluency. The Way Forward: The focus here has to be on outcomes—there has to be a performance management system for government-paid teachers with rewards and punishments for showing up and learning outcomes. The most urgent institutional change required is the need to create an Education Regulatory Authority for Higher Education that will substitute the current ones like the AICTE and the UGC. At the certification level, the government should create a National Qualification Framework that will allow two-way fungibility between vocational, college and school education with appropriate transfer of credits. — Excerpted from India Labour Report 2008 | ||
GOODS AND SERVICE TAX ( GST) REGIME
Prepare For Launch
India should keep its date with GST rollout
Finance minister Pranab Mukherjee has described a goods and services tax (GST) system as critical for economic reforms. Should India keep the date April 1, 2010 for GSTs launch, it would score high points on tax reform by imposing a single levy for goods and services. And it would align with a tried and tested practice in many nations. GST here would subsume excise duty and service tax at the Centre and VAT at the state level. It would operate as a dual system with two tax rates, one imposed uniformly at the state level and the other charged by the Centre.
GST has many virtues. Improving tax compliance, it will boost public finances. Taxes under the current labyrinthine and non-transparent system are separately administered by the Centre and states. The prevailing multiplicity of taxes often results in tax duplication. If a manufacturer is taxed twice while producing a commodity, the anomaly translates into higher prices. Reducing the tax component in product pricing will benefit consumers and give Indian firms a competitive edge. Also, varying state-level taxes prevent uniform pricing and seamless trade. GST will transform the countrys economic landscape by creating a common market. Greater business efficiency will result since attempts at tax avoidance a feature of the fragmented market will reduce.
But a lot remains to be done. First, consensus is required on a uniform tax rate. Second, some states have asked whether a GST-supporting IT and administrative infrastructure will be up and running in time. Third, states have to streamline their tax structure as a preparatory step while central sales tax on inter-state movement of goods will need abolishing if GST is to facilitate Indias economic integration. In addition, states will need reassuring on the issue of reimbursement for any revenue loss. Tamil Nadu has signalled that the Centre wont have it easy on this score, in view of still unfulfilled compensation claims related to VATs implementation.
Valid concerns on GSTs debut can be addressed provided theres genuine commitment to tax reform. It wont help if political parties dont resist the temptation to play to the gallery. Some BJP-ruled states have reportedly dubbed GST antipoor , a standard prettifying term for stalling tactics. GST fulfils all the criteria of a good tax: its easy to understand, not difficult to implement given political will and, in a triple feat, is good for tax collectors, consumers and business. Thats why it has till now been supported across the political board. It wont serve anyones interest if, in its home run, GST were to be tripped by political brinkmanship.
India should keep its date with GST rollout
Finance minister Pranab Mukherjee has described a goods and services tax (GST) system as critical for economic reforms. Should India keep the date April 1, 2010 for GSTs launch, it would score high points on tax reform by imposing a single levy for goods and services. And it would align with a tried and tested practice in many nations. GST here would subsume excise duty and service tax at the Centre and VAT at the state level. It would operate as a dual system with two tax rates, one imposed uniformly at the state level and the other charged by the Centre.
GST has many virtues. Improving tax compliance, it will boost public finances. Taxes under the current labyrinthine and non-transparent system are separately administered by the Centre and states. The prevailing multiplicity of taxes often results in tax duplication. If a manufacturer is taxed twice while producing a commodity, the anomaly translates into higher prices. Reducing the tax component in product pricing will benefit consumers and give Indian firms a competitive edge. Also, varying state-level taxes prevent uniform pricing and seamless trade. GST will transform the countrys economic landscape by creating a common market. Greater business efficiency will result since attempts at tax avoidance a feature of the fragmented market will reduce.
But a lot remains to be done. First, consensus is required on a uniform tax rate. Second, some states have asked whether a GST-supporting IT and administrative infrastructure will be up and running in time. Third, states have to streamline their tax structure as a preparatory step while central sales tax on inter-state movement of goods will need abolishing if GST is to facilitate Indias economic integration. In addition, states will need reassuring on the issue of reimbursement for any revenue loss. Tamil Nadu has signalled that the Centre wont have it easy on this score, in view of still unfulfilled compensation claims related to VATs implementation.
Valid concerns on GSTs debut can be addressed provided theres genuine commitment to tax reform. It wont help if political parties dont resist the temptation to play to the gallery. Some BJP-ruled states have reportedly dubbed GST antipoor , a standard prettifying term for stalling tactics. GST fulfils all the criteria of a good tax: its easy to understand, not difficult to implement given political will and, in a triple feat, is good for tax collectors, consumers and business. Thats why it has till now been supported across the political board. It wont serve anyones interest if, in its home run, GST were to be tripped by political brinkmanship.
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