AGAINST THE GODS: THE REMARKABLE STORY OF RISK
Peter Bernstein
FINANCE is a small word, but it covers a huge territory that includes markets, banking, corporate finance, the art of forecasting, accounting , taxation and more. In this universe, financial markets are the sun, a dazzling creation around which all the other activities rotate. I set the scene in this short essay, therefore , with some observations about markets before turning to the rest of the subject. Markets are places where buyers and sellers come together to do business; financial markets deal in money and risk. Financial markets are in the first instance a vehicle for financing governments and enterprises that need money.
Beyond that, financial markets are a place where owners of outstanding assets can convert those assets into cash, or where owners of cash can find longer-term uses for their money. Financial markets thus give holders of assets with future cash flows the option of realising the discounted value of those future cash flows in the present . In short, financial markets give investors the opportunity to change their minds, to reverse earlier decisions, at a cost and with a degree of immediacy that direct investment cannot provide. Reversibility of decisions is the key element in risk. The reversibility provided by financial markets is their most important attribute. Financial markets are a kind of time machine that allows investors to compress the future into the present. Without financial markets, all assets would be buy-and-hold .
Friday, July 24, 2009
Sunday, July 19, 2009
TAXING SMALL BUSINESSES
LESS TAXING DAYS AHEAD
A new Budget proposal on simplifying the income tax code comes as a breather for over 10 million small businesses. Ravi Teja Sharma explains
The small business community is usually a discontented lot when it comes to budget announcements by the government. This time though was a little different. The UPA government took significant measures in Budget 2009 to simplify the direct tax code for individuals , entrepreneurs and small businessmen. Under the proposed changes, businesses with revenues of up to Rs 40 lakh will now have the option to declare income at 8% of their turnover (see illustration) and also be exempt from compliance procedures such as maintaining books of accounts. Moreover, they will be allowed to pay the entire tax liability from their businesses only at the time of filing tax returns , and not in advance. Over 10 million MSMEsthat fall in the sub-Rs 40 lakh turnover bracketstand to gain from this announcement , which is being seen as a boost to entrepreneurship in the country. It will rid a large number of businesses from harassment by income tax authorities and reduce paperwork to a great extent, says Anil Bhardwaj, secretary general of the Federation of Indian Micro and Small & Medium Enterprises (FISME). In a recent poll by FISME across 60 such firms, two-thirds of the respondents believed that the new proposal would benefit them. The government understands that there is a need to ease pressure on small businesses, agrees Vikas Vasal executive director, KPMG. Most small entrepreneurs get caught in a vicious cycle of non-compliance due to a number of reasons, which in turn hinders growth. For instance, when a small business owner needs funding to grow his business, he turns to his bank. If he hasnt been filing tax returns, his loan application is rejected. To file a tax return, he needs to maintain books of accounts, get them audited and pay advance tax, all of which comes at a considerable cost. To save on these costs, if he defers these regulatory requirements, hes strapped for bank lending. Thats where the new proposal could help. The idea behind this proposal is to expand the tax net by encouraging voluntary compliance by small businesses, says Aseem Chawla, tax partner at Amarchand Mangaldas. According to an estimate, only 10% of the Indian population pays direct taxes. Targeting the rest of the population is very difficult and so voluntary compliance is the only way out. If the government keeps the tax rate to a bare minimum and the compliance also to a minimum, there is a possibility that these non-taxpaying entities might come forward to file their tax returns, says Vasal. The proposed new section 44AD in the Income Tax Act seeks to estimate the income of a business assessee whose total turnover does not exceed Rs 40 lakh, at 8% of the total turnover or gross receipts in the previous year. The amendment will take effect from 1st April, 2011 and will apply only to an individual , Hindu undivided family and partnership firm and not a limited liability partnership firm. There are a number of businesses under Rs 20 lakh turnover for whom the income (at 8% of turnover) does not fall in the tax bracket, yet they must maintain books of accounts. But if they subscribe to the new regime, they could easily file their tax returns without having to maintain books of accounts. Also, when entering into a partnership, tax returns add to the credibility of the business. Anil Gupta, proprietor of Lakhnavi Chiken Art, a clothing store in Delhis Dilshad Garden area is only too happy to exercise this option. With a turnover of Rs 12 lakh, Gupta spends close to Rs 15,000 a year to maintain his books of accounts and towards chartered accountant (CA) fees. Given this option of paying at the rate of 8% of turnover, will rid us of a lot of the headache and expense, says Gupta. Chawla cautions that this proposal will work only if the income tax assessee does not face harassment from tax authorities like before. The financials declared by firms under section 44AD should be accepted by the tax authorities without any questions. The governments intention is fair but this can work only if implementation is honest, says Chawla. There are other apprehensions too. Some of the small business owners ET spoke with contend that assuming income at 8% of turnover may not be practical since in these recessionary times profits levels have dropped to the 3-5 % range. So while very small businessesthose below the Rs 20 lakh bracketmay take the option those with higher revenues say 8% is cutting it too close. The 8% rate takes into account all the cost savings accruing from not having to maintain books of accounts and not paying advance tax, says Vasal.
ravi.sharma4@timesgroup .com
A new Budget proposal on simplifying the income tax code comes as a breather for over 10 million small businesses. Ravi Teja Sharma explains
The small business community is usually a discontented lot when it comes to budget announcements by the government. This time though was a little different. The UPA government took significant measures in Budget 2009 to simplify the direct tax code for individuals , entrepreneurs and small businessmen. Under the proposed changes, businesses with revenues of up to Rs 40 lakh will now have the option to declare income at 8% of their turnover (see illustration) and also be exempt from compliance procedures such as maintaining books of accounts. Moreover, they will be allowed to pay the entire tax liability from their businesses only at the time of filing tax returns , and not in advance. Over 10 million MSMEsthat fall in the sub-Rs 40 lakh turnover bracketstand to gain from this announcement , which is being seen as a boost to entrepreneurship in the country. It will rid a large number of businesses from harassment by income tax authorities and reduce paperwork to a great extent, says Anil Bhardwaj, secretary general of the Federation of Indian Micro and Small & Medium Enterprises (FISME). In a recent poll by FISME across 60 such firms, two-thirds of the respondents believed that the new proposal would benefit them. The government understands that there is a need to ease pressure on small businesses, agrees Vikas Vasal executive director, KPMG. Most small entrepreneurs get caught in a vicious cycle of non-compliance due to a number of reasons, which in turn hinders growth. For instance, when a small business owner needs funding to grow his business, he turns to his bank. If he hasnt been filing tax returns, his loan application is rejected. To file a tax return, he needs to maintain books of accounts, get them audited and pay advance tax, all of which comes at a considerable cost. To save on these costs, if he defers these regulatory requirements, hes strapped for bank lending. Thats where the new proposal could help. The idea behind this proposal is to expand the tax net by encouraging voluntary compliance by small businesses, says Aseem Chawla, tax partner at Amarchand Mangaldas. According to an estimate, only 10% of the Indian population pays direct taxes. Targeting the rest of the population is very difficult and so voluntary compliance is the only way out. If the government keeps the tax rate to a bare minimum and the compliance also to a minimum, there is a possibility that these non-taxpaying entities might come forward to file their tax returns, says Vasal. The proposed new section 44AD in the Income Tax Act seeks to estimate the income of a business assessee whose total turnover does not exceed Rs 40 lakh, at 8% of the total turnover or gross receipts in the previous year. The amendment will take effect from 1st April, 2011 and will apply only to an individual , Hindu undivided family and partnership firm and not a limited liability partnership firm. There are a number of businesses under Rs 20 lakh turnover for whom the income (at 8% of turnover) does not fall in the tax bracket, yet they must maintain books of accounts. But if they subscribe to the new regime, they could easily file their tax returns without having to maintain books of accounts. Also, when entering into a partnership, tax returns add to the credibility of the business. Anil Gupta, proprietor of Lakhnavi Chiken Art, a clothing store in Delhis Dilshad Garden area is only too happy to exercise this option. With a turnover of Rs 12 lakh, Gupta spends close to Rs 15,000 a year to maintain his books of accounts and towards chartered accountant (CA) fees. Given this option of paying at the rate of 8% of turnover, will rid us of a lot of the headache and expense, says Gupta. Chawla cautions that this proposal will work only if the income tax assessee does not face harassment from tax authorities like before. The financials declared by firms under section 44AD should be accepted by the tax authorities without any questions. The governments intention is fair but this can work only if implementation is honest, says Chawla. There are other apprehensions too. Some of the small business owners ET spoke with contend that assuming income at 8% of turnover may not be practical since in these recessionary times profits levels have dropped to the 3-5 % range. So while very small businessesthose below the Rs 20 lakh bracketmay take the option those with higher revenues say 8% is cutting it too close. The 8% rate takes into account all the cost savings accruing from not having to maintain books of accounts and not paying advance tax, says Vasal.
ravi.sharma4@timesgroup .com
Friday, July 17, 2009
DANGEROUS MARKETS
DANGEROUS MARKETS
Dominic Barton
CONVENTIONAL wisdom and the bulk of academic literature lead many executives to believe that financial crises are difficult to predict. Conventional wisdom also argues that strategies for survival are hard to pre-plan , since the reasons for these financial meltdowns are specific to a nation , its culture and its politics. Those conclusions would lead managers to believe that the elements of a financial storm are impossible to understand, prevent and manage until the storm actually hits. We disagree . Based on our experience, we believe that the warning signs of trouble are common from nation to nation. To be sure, there are some regional and national variations. Yet, there are also common patterns of buildup and meltdown.
For this reason, we also believe that financial crises can be foreseen, their magnitude can be estimated, precautionary steps can be taken to prevent crises, strategic options can be devised and implemented , and corrective measures can be taken to lessen the storms ultimate impact. Leaders with the foresight to observe and react effectively can manage a crisis strategically before, as well as after, it hits. Given the likely increasing frequency, the unacceptable socioeconomic costs, and the heightened danger of rapid global contagion from one crisis to the next, it is imperative that we take a step back and evaluate the true causes of these events and what executives can do to manage them. Only through such a systematic understanding of financial crises can solutions be found and problems managed effectively.
Dominic Barton
CONVENTIONAL wisdom and the bulk of academic literature lead many executives to believe that financial crises are difficult to predict. Conventional wisdom also argues that strategies for survival are hard to pre-plan , since the reasons for these financial meltdowns are specific to a nation , its culture and its politics. Those conclusions would lead managers to believe that the elements of a financial storm are impossible to understand, prevent and manage until the storm actually hits. We disagree . Based on our experience, we believe that the warning signs of trouble are common from nation to nation. To be sure, there are some regional and national variations. Yet, there are also common patterns of buildup and meltdown.
For this reason, we also believe that financial crises can be foreseen, their magnitude can be estimated, precautionary steps can be taken to prevent crises, strategic options can be devised and implemented , and corrective measures can be taken to lessen the storms ultimate impact. Leaders with the foresight to observe and react effectively can manage a crisis strategically before, as well as after, it hits. Given the likely increasing frequency, the unacceptable socioeconomic costs, and the heightened danger of rapid global contagion from one crisis to the next, it is imperative that we take a step back and evaluate the true causes of these events and what executives can do to manage them. Only through such a systematic understanding of financial crises can solutions be found and problems managed effectively.
DANGEROUS MARKETS
DANGEROUS MARKETS
Dominic Barton
CONVENTIONAL wisdom and the bulk of academic literature lead many executives to believe that financial crises are difficult to predict. Conventional wisdom also argues that strategies for survival are hard to pre-plan , since the reasons for these financial meltdowns are specific to a nation , its culture and its politics. Those conclusions would lead managers to believe that the elements of a financial storm are impossible to understand, prevent and manage until the storm actually hits. We disagree . Based on our experience, we believe that the warning signs of trouble are common from nation to nation. To be sure, there are some regional and national variations. Yet, there are also common patterns of buildup and meltdown.
For this reason, we also believe that financial crises can be foreseen, their magnitude can be estimated, precautionary steps can be taken to prevent crises, strategic options can be devised and implemented , and corrective measures can be taken to lessen the storms ultimate impact. Leaders with the foresight to observe and react effectively can manage a crisis strategically before, as well as after, it hits. Given the likely increasing frequency, the unacceptable socioeconomic costs, and the heightened danger of rapid global contagion from one crisis to the next, it is imperative that we take a step back and evaluate the true causes of these events and what executives can do to manage them. Only through such a systematic understanding of financial crises can solutions be found and problems managed effectively.
Dominic Barton
CONVENTIONAL wisdom and the bulk of academic literature lead many executives to believe that financial crises are difficult to predict. Conventional wisdom also argues that strategies for survival are hard to pre-plan , since the reasons for these financial meltdowns are specific to a nation , its culture and its politics. Those conclusions would lead managers to believe that the elements of a financial storm are impossible to understand, prevent and manage until the storm actually hits. We disagree . Based on our experience, we believe that the warning signs of trouble are common from nation to nation. To be sure, there are some regional and national variations. Yet, there are also common patterns of buildup and meltdown.
For this reason, we also believe that financial crises can be foreseen, their magnitude can be estimated, precautionary steps can be taken to prevent crises, strategic options can be devised and implemented , and corrective measures can be taken to lessen the storms ultimate impact. Leaders with the foresight to observe and react effectively can manage a crisis strategically before, as well as after, it hits. Given the likely increasing frequency, the unacceptable socioeconomic costs, and the heightened danger of rapid global contagion from one crisis to the next, it is imperative that we take a step back and evaluate the true causes of these events and what executives can do to manage them. Only through such a systematic understanding of financial crises can solutions be found and problems managed effectively.
Thursday, July 16, 2009
Creating engines for future growth
Creating engines for future growth
In looking for sunrise sectors, the government must not merely be a facilitator or partner, but often an initiator. It cannot abdicate this responsibility and pass it on to the private sector, says Kiran Karnik.
POST-1991 , Indias economic landscape has witnessed huge changes. From 1.2% and 3% in the two earlier decades, the per capita GDP growth has increased to about 4% in the decade after liberalisation (1992-2002 ) and to 6% in the last six years. A more personal and human way of appreciating these figures is to look at the time required to double the income of an average Indian: this decreased from 60 years (a full life-time ) in the 1970s to 12 years now. Another facet of economic change has been the emergence of yetsmall but rapidly growing sectors based on knowledge and technology. A particularly visible example is the information and communication technology (ICT) sector.
Through the last two decades, the Indian IT software and services industry has seen explosive growth. An industry that was seen as a natural monopoly of developed countries was given a make-over with Indias innovative and disruptive business model outsourcing with a combination of on-site and off-shore work low costs and an abundance of high-quality talent. While India is but a bit player yet in the overall IT industry, it is firmly centre-stage as far as cross-border outsourcing is concerned: more than half of all inter-country outsourcing comes to India. As a result, Indias IT-BPO industry has grown from $5 billion in 2000 to about $60 billion in 2009. It is Indias biggest earner of forex, with exports of almost $50 billion. Equally important, it provides direct employment to some two million and indirect employment to almost four times that number.
The communications sector too has seen phenomenal growth in the country. FM radio, cable TV and DTH are basically developments of the last two decades. Together , they have revolutionised communications . Radio, considered a terminal case, has seen a huge revival thanks to FM, privatisation and competition . Imaginative and interactive programme formats have contributed to radios resurgence as have traffic jams. As for the profligate choice of TV channels , drinking from the fire-hose would probably be the most apt description especially for the pre-1990 s generation, which grew up on one TV channel. Even this impressive growth pales before what has happened in mobile communication, where we have moved from almost nothing to over 425 million mobiles in the space of a dozen years.
Already the single most widely owned item in India, it is probably but five years before mobiles cross the billion mark; an annual growth percentage in the 20s is taken for granted. The IT-BPO industry has grown at an unbelievable 33% annual compounded rate over the last 10 years, even as the base has grown. Projections in a NASSCOM-McKinsey study indicate that the industry could be as large as $360 billion in 2020, with exports of over $300 billion, if we play our cards right. The point of this piece, though, is not the huge success of Indias ICT sector; it is the lessons that might be drawn and the factors that may be emulated.
Despite the many constraints and intense global competition in the case of IT-BPO the ICT sector has maintained a track-record of hyper-growth . While it is necessary to discuss what policy and other initiatives are needed to sustain this growth, it is more interesting and important to understand how one might identify and nurture other such opportunities. Which areas can provide a stimulus to development through a 30+% annual growth rate, while creating jobs and secondary benefits What public policy measures will help in locating and developing such opportunities
THE present global economic situation aside, if the country is to have a sustained double digit growth in GDP, it will need high-growth sectors that scale rapidly . Ideally, these new opportunities should also be employment-intensive , so as to absorb the growing numbers in the working-age group and surplus labour from the agricultural sector.
It is not necessarily a matter of finding such opportunities, like locating a gold mine: the opportunity may have to be created. A more appropriate analogy is planting seeds not one, but many, and of different varieties in the right soil, at the right time, and then nurturing them in the expectation that at least one will grow and bear fruit that can be regularly harvested. There are many contenders vying to become the most appropriate seed : bio-technology , renewable energy , healthcare, education, housing, value-added services on mobile phones, travel and tourism services. Any of these could be the next IT sector in terms of growth and potential size; so could many others. While bets on which ones win are best left to investors and entrepreneurs , there is a role for government.
Let us not forget that the genesis of Indias IT success story lies in the IITs and engineering colleges, in English-based higher education, in the special attention given to technology-based industry and R&D : all part of the broad Nehruvian vision , and all initiated many decades ago. In later years, government policies on low/no customs duty on software, tax exemption for export profits, foreign investments in IT sector, and partnership with the private sector, all contributed greatly to the growth of this sector.
Therefore, in looking for sunrise sectors , the government must not be merely a facilitator or partner, but often an initiator . It cannot abdicate this responsibility and pass it on to the private sector. The government must look ahead not to next year or the next election, but to the next generation. Most new opportunities will tend to be technology-intensive ; hence, investment in R&D is the key to creating these new growth industries. Many will depend upon the cross-domain use of technology (e.g., ICT in healthcare or education); therefore, rigid regulatory and bureaucratic boundaries will have to be dismantled. Tax and regulatory ambience conducive to risk-taking by entrepreneurs and funders must be created. Only then can we hope to create more high-growth sectors that act as the engines for development.
(The author is a policy and
strategy analyst)
In looking for sunrise sectors, the government must not merely be a facilitator or partner, but often an initiator. It cannot abdicate this responsibility and pass it on to the private sector, says Kiran Karnik.
POST-1991 , Indias economic landscape has witnessed huge changes. From 1.2% and 3% in the two earlier decades, the per capita GDP growth has increased to about 4% in the decade after liberalisation (1992-2002 ) and to 6% in the last six years. A more personal and human way of appreciating these figures is to look at the time required to double the income of an average Indian: this decreased from 60 years (a full life-time ) in the 1970s to 12 years now. Another facet of economic change has been the emergence of yetsmall but rapidly growing sectors based on knowledge and technology. A particularly visible example is the information and communication technology (ICT) sector.
Through the last two decades, the Indian IT software and services industry has seen explosive growth. An industry that was seen as a natural monopoly of developed countries was given a make-over with Indias innovative and disruptive business model outsourcing with a combination of on-site and off-shore work low costs and an abundance of high-quality talent. While India is but a bit player yet in the overall IT industry, it is firmly centre-stage as far as cross-border outsourcing is concerned: more than half of all inter-country outsourcing comes to India. As a result, Indias IT-BPO industry has grown from $5 billion in 2000 to about $60 billion in 2009. It is Indias biggest earner of forex, with exports of almost $50 billion. Equally important, it provides direct employment to some two million and indirect employment to almost four times that number.
The communications sector too has seen phenomenal growth in the country. FM radio, cable TV and DTH are basically developments of the last two decades. Together , they have revolutionised communications . Radio, considered a terminal case, has seen a huge revival thanks to FM, privatisation and competition . Imaginative and interactive programme formats have contributed to radios resurgence as have traffic jams. As for the profligate choice of TV channels , drinking from the fire-hose would probably be the most apt description especially for the pre-1990 s generation, which grew up on one TV channel. Even this impressive growth pales before what has happened in mobile communication, where we have moved from almost nothing to over 425 million mobiles in the space of a dozen years.
Already the single most widely owned item in India, it is probably but five years before mobiles cross the billion mark; an annual growth percentage in the 20s is taken for granted. The IT-BPO industry has grown at an unbelievable 33% annual compounded rate over the last 10 years, even as the base has grown. Projections in a NASSCOM-McKinsey study indicate that the industry could be as large as $360 billion in 2020, with exports of over $300 billion, if we play our cards right. The point of this piece, though, is not the huge success of Indias ICT sector; it is the lessons that might be drawn and the factors that may be emulated.
Despite the many constraints and intense global competition in the case of IT-BPO the ICT sector has maintained a track-record of hyper-growth . While it is necessary to discuss what policy and other initiatives are needed to sustain this growth, it is more interesting and important to understand how one might identify and nurture other such opportunities. Which areas can provide a stimulus to development through a 30+% annual growth rate, while creating jobs and secondary benefits What public policy measures will help in locating and developing such opportunities
THE present global economic situation aside, if the country is to have a sustained double digit growth in GDP, it will need high-growth sectors that scale rapidly . Ideally, these new opportunities should also be employment-intensive , so as to absorb the growing numbers in the working-age group and surplus labour from the agricultural sector.
It is not necessarily a matter of finding such opportunities, like locating a gold mine: the opportunity may have to be created. A more appropriate analogy is planting seeds not one, but many, and of different varieties in the right soil, at the right time, and then nurturing them in the expectation that at least one will grow and bear fruit that can be regularly harvested. There are many contenders vying to become the most appropriate seed : bio-technology , renewable energy , healthcare, education, housing, value-added services on mobile phones, travel and tourism services. Any of these could be the next IT sector in terms of growth and potential size; so could many others. While bets on which ones win are best left to investors and entrepreneurs , there is a role for government.
Let us not forget that the genesis of Indias IT success story lies in the IITs and engineering colleges, in English-based higher education, in the special attention given to technology-based industry and R&D : all part of the broad Nehruvian vision , and all initiated many decades ago. In later years, government policies on low/no customs duty on software, tax exemption for export profits, foreign investments in IT sector, and partnership with the private sector, all contributed greatly to the growth of this sector.
Therefore, in looking for sunrise sectors , the government must not be merely a facilitator or partner, but often an initiator . It cannot abdicate this responsibility and pass it on to the private sector. The government must look ahead not to next year or the next election, but to the next generation. Most new opportunities will tend to be technology-intensive ; hence, investment in R&D is the key to creating these new growth industries. Many will depend upon the cross-domain use of technology (e.g., ICT in healthcare or education); therefore, rigid regulatory and bureaucratic boundaries will have to be dismantled. Tax and regulatory ambience conducive to risk-taking by entrepreneurs and funders must be created. Only then can we hope to create more high-growth sectors that act as the engines for development.
(The author is a policy and
strategy analyst)
Sunday, July 5, 2009
BUDGET JARGON
Words are important
The governments budget exercise may seem similar to that of a household, but for its intimidating jargon. Heres making sense of all those words in the budget speech which may defy your intelligence
READING THE BALANCE SHEET
The lines and figures that reveal the receipts and expenditure of the year
ANNUAL FINANCIAL STATEMENT
This is the last word on the states receipts and expenditure for the financial year, presented to Parliament by the government. Divided into three parts Consolidated Fund, Contingency Fund and Public Account it has a statement of receipts and expenditure of each. Expenditure from the Consolidated Fund and Contingency Fund requires the mandatory nod of Parliament.
CONSOLIDATED FUND
The governments life line: it is a consortium of all revenues, money borrowed and receipts from loans it has given. All state expenditure is made from this fund.
CONTINGENCY FUND
As the name suggests, any urgent or unforeseen expenditure is met from this Rs 500-crore fund, which is at the disposal of the President. The amount withdrawn is returned from the Consolidated Fund.
PUBLIC ACCOUNT
When it comes to this account, the governments nothing more than a banker, as this fund is a collection of money belonging to others, like public provident fund.
REVENUE VS CAPITAL
The budget has to distinguish revenue receipts/expenditure on revenue account from other expenditure. So all receipts in, say, the consolidated fund, are split into Revenue Budget (revenue account) and Capital Budget (capital account), which includes non-revenue receipts and expenditure.
REVENUE RECEIPT/EXPENDITURE
All receipts like taxes and expenditure like salaries, subsidies and interest payments that in general do not entail sale or creation of assets fall under the revenue account.
CAPITAL RECEIPT/EXPENDITURE
Capital account shows all receipts from liquidating (eg. selling shares in a public sector company) assets and spending to create assets (lending to receive interest).
REVENUE/CAPITAL BUDGET
The government has to prepare a Revenue Budget (detailing revenue receipts and revenue expenditure) and a Capital Budget (capital receipts and capital expenditure).
CREATING A HOLE IN THE POCKET
Taxes come in various shapes and sizes, but primarily fit into two little slots:
DIRECT TAX
This is the tax that you, I (and India Inc) directly pay the government for our income and wealth. So income tax, FBT, STT and BCTT are all direct taxes.
INDIRECT TAX
This ones a double whammy: Its essentially a tax on our expenditure, and includes customs, excise and service tax. Its not just you who thinks this isnt fair - governments too consider this tax regressive , as it doesnt check whether youre rich or poor. You spend, you pay. Thats precisely why most governments aim to raise more through direct taxes.
MAKING YOU PAY
The various taxes that the government levies
CORPORATION (CORPORATE) TAX
Its the tax that India Inc pays on its profits.
TAXES ON INCOME OTHER THAN CORPORATION TAX
Its income-tax paid by non-corporate assessees people like us.
FRINGE BENEFIT TAX (FBT)
No free lunches here. If you want the jam with the bread and butter, youd better pay for it. In the 2005-06 Budget, the government decided to tax all perks what is calls the fringe benefit given to employees. No longer could companies get away with saying ordinary business expenses and escape tax when they actually gave out club memberships to their employees. Employers have to now pay a tax (FBT) on a percentage of the expense incurred on such perquisites.
SECURITIES TRANSACTION TAX (STT)
If youre dealing in shares or mutual funds , you have to loosen those purse strings a wee bit too. STT is a small tax you need to pay on the total amount you pay or receive in a share deal. In the 2004-05 Budget, the government did away with the tax on profits earned on the sale of shares held for over a year (known as long-term capital gains tax) and replaced it with STT.
CUSTOMS
Anything you bring home from across the seas comes with a price. By levying a tax on imports, the governments firing on two fronts: its filling its coffers and protecting Indian industry.
UNION EXCISE DUTY
Made in India Either way, theres no escape. In other words, this is a duty imposed on goods manufactured in the country.
SERVICE TAX
If you text your friend a hundred times a day, or cant do with-out the coiffeured look at the neighbourhood salon, your monthly bill will show up a little charge for the services you use. It is a tax on services rendered.
MINIMUM ALTERNATE TAX (MAT)
Its known that a company pays tax on profits as per the Income-Tax Act. That just may not always be enough. If its tax liability is less than 10% of its profits, the company has to pay a minimum alternate tax of 10% of the book profits.
SURCHARGE
This is an extra bit of 10% on their tax liability individuals pay for earning more than Rs 10 lakh. Companies with a revenue of up to Rs 1 crore are spared this rod.
VAT AND GST
After a lot of discussion and brainstorming, the government levies what is called a value-added tax : a more transparent form of taxation . The tax is based on the difference between the value of the output and the value of the inputs used to produce it. The aim here is to tax a firm only for the value it adds to the manufacturing inputs, and not the entire input cost. Thus, VAT helps avoid a cascading of taxes as a product passes through different stages of production/value addition.
A GST, or goods and services tax, on the other hand, contains the entire element of tax borne by a good including a Central and a state-level tax.
MORE REVENUE
Of course, tax isnt the only way governments make money. Theres also nontax revenue
NON-TAX REVENUE
Any loan given to state governments, public institutions, PSUs come with a price (interests) and forms the most important receipts under this head apart from dividends and profits received from PSUs.
The government also earns from the various services including public services it provides. Of this only the Railways is a separate department, though all its receipts and expenditure are routed through the consolidated fund.
CAPITAL RECEIPTS
RECEIPTS in the capital account of the
consolidated fund are grouped
under three broad heads
public debt, recoveries of loans
and advances, and
miscellaneous receipts
PUBLIC DEBT
Dont mistake the phrase. Public debt is not something incurred by the public. In Budget parlance the difference between borrowings (public debt receipts) and repayments (public debt disbursals) during the year is the net accretion to the public debt.
Public debt can be split into two heads, internal debt (money borrowed within the country) and external debt (funds borrowed from non-Indian sources).
The internal debt comprises Treasury Bills, market stabilisation scheme, ways and means advance, and securities against small savings .
TREASURY BILL (T-BILLS )
These are bonds (debt securities) with maturity of less than a year. These are issued to meet short-term mismatches in receipts and expenditure . Bonds of longer maturity are called dated securities.
MARKET STABILISATION SCHEME (MSS)
The scheme was launched in April 2004 to strengthen Reserve Bank of Indias (RBI) ability to conduct exchange rate and monetary manage-ment . These securities are issued not to meet the governments expenditure but to provide the RBI with a stock of securities with which to intervene in the market to manage liquidity.
WAYS AND MEANS ADVANCE (WMA)
RBI is the big daddy of banks being the banker for both the Central and State governments. Therefore, the RBI provides a breather to manage mismatches in their receipts and payments in the form of ways and means advances.
SECURITIES AGAINST SMALL SAVINGS
The government meets a small part of its loan requirement by appropriating small savings collection by issuing securities to the fund.
MISCELLANEOUS CAPITAL RECEIPTS:
These are primarily receipts from disinvestment in public sector undertakings .
The capital account receipts of the consolidated fund public debt, recoveries of loans and advances, and miscellaneous receipts and revenue receipts make up the total receipts of the consolidated fund.
EXPENDITURE
Before we begin to examine the nitty gritty of where and how the government spends its money, we need to understand whats called the Central Plan. This is what every child in the country learns about in school; only, we all know it better as the Five-Year Plan. A Central Plan is the governments annual expenditure sheet, with a five-year roadmap. Heres where the government gets the money for the grand five-year exercise: The funding of the Central Plan is split almost evenly between government support (from the Budget) and internal and extra-budgetary resources of stateowned enterprises. The governments support to the Central Plan is called the Budget support.
PLAN EXPENDITURE
This is essentially the Budget support to the Central Plan. It also comprises the amount the Centre sets aside for plans of states and Union Territories. Like all Budget heads, this is also split into revenue and capital components.
NON-PLAN EXPENDITURE
All those bills the government has to pay, under the revenue expenditure head are bunched up here: interest payments, subsidies, salaries, defence and pension. The capital component, in comparison, is small; the largest chunk of this goes to defence.
DEFICIT
When governments expenditure exceeds its receipts it has to borrow to meet the shortfall. This deficit has material implication for the economy.
FISCAL DEFICIT
This is where the government feels the pinch. It often lives beyond its means, a lot like the situation mere mortals find themselves in. And then, the vicious circle is complete: it goes right back to the people for more money. Heres how that works out: The governments non-borrowed receipts revenue receipts plus loan repayments received by the government plus miscellaneous capital receipts, primarily disinvestment proceeds fall short of its expenditure. The excess of total expenditure over total nonborrowed receipts is called fiscal deficit . The government then has to borrow money from the people to meet the shortfall.
REVENUE DEFICIT
Its not just because its a deficit, but that its a revenue deficit makes it an important control indicator. All expenditure on revenue account should ideally be met from receipts on revenue account; the revenue deficit should be zero, else the government will be in debt.
PRIMARY DEFICIT
This is one primary indicator everyone likes to watch: when it shrinks, it indicates were not doing too badly on fiscal health. The primary deficit is the fiscal deficit less interest payments the government makes on its earlier borrowings. Its the basic deficit figure, if you will.
DEFICIT AND THE GDP
Its important to see where all this fits, in the larger economic picture. The Budget document mentions deficit as a percentage of GDP. In absolute terms, the fiscal deficit may be large, but if it is small compared to the size of the economy, then its not such a bad thing after all. Prudent fiscal management requires that government does not borrow to consume, in the normal course.
FRBM ACT
Enacted in 2003, the Fiscal Responsibility and Budget Management Act required the elimination of revenue deficit by 2008-09 . This means that from 2008-09 , the government was to meet all its revenue expenditure from its revenue receipts. Any borrowing was to be done to meet capital expenditure that is, repayment of loans, lending and fresh investment.
The Act also mandates a 3% limit on the fiscal deficit after 2008-09 one that allows the government to build capacities in the economy without compromising on fiscal stability. The financial crisis and the subsequent slowdown has forced the government to abandon the path of fiscal consolidation.
... AND THE REST
Some of the other important terms that figure in the Budget
BHARAT NIRMAN:
Bharat Nirman is UPAs unfulfilled dream of Build India, Build: irrigation , roads, water supply, housing, rural electrification and rural telecom connectivity. Though it couldnt meet the target of 2009, the government is still at it.
FINANCE BILL:
This, all important sheaf of papers, is all about taxes and is presented in time before the levy breaks.
FINANCIAL INCLUSION:
This is to ensure that everyone has a bank account and financial institutions are accountable. It sees to it the common denizen is not denied of timely and cheap credit and, more importantly, not intimidated by the facade of a modern bank. However, it has not fully got past the counter.
PASS-THROUGH STATUS:
Nothing can be more dreadful than having to pay twice for the same thing. This position is accorded to those investments which stands the danger of being taxed twice like mutual funds.
SUBVENTION:
This is how a government bears the loss that financial institutions incur when asked to give farmers loans below the market rates.
RESOURCES TRANSFERRED TO THE STATES
As we saw earlier, the Centre gives states a helping hand in two ways a part of its gross tax collections goes to state governments.
The Centre also transfers funds to states to support their plans. These are largely in the nature of grants, and include those given to states for managing Centrally-sponsored schemes.
The governments budget exercise may seem similar to that of a household, but for its intimidating jargon. Heres making sense of all those words in the budget speech which may defy your intelligence
READING THE BALANCE SHEET
The lines and figures that reveal the receipts and expenditure of the year
ANNUAL FINANCIAL STATEMENT
This is the last word on the states receipts and expenditure for the financial year, presented to Parliament by the government. Divided into three parts Consolidated Fund, Contingency Fund and Public Account it has a statement of receipts and expenditure of each. Expenditure from the Consolidated Fund and Contingency Fund requires the mandatory nod of Parliament.
CONSOLIDATED FUND
The governments life line: it is a consortium of all revenues, money borrowed and receipts from loans it has given. All state expenditure is made from this fund.
CONTINGENCY FUND
As the name suggests, any urgent or unforeseen expenditure is met from this Rs 500-crore fund, which is at the disposal of the President. The amount withdrawn is returned from the Consolidated Fund.
PUBLIC ACCOUNT
When it comes to this account, the governments nothing more than a banker, as this fund is a collection of money belonging to others, like public provident fund.
REVENUE VS CAPITAL
The budget has to distinguish revenue receipts/expenditure on revenue account from other expenditure. So all receipts in, say, the consolidated fund, are split into Revenue Budget (revenue account) and Capital Budget (capital account), which includes non-revenue receipts and expenditure.
REVENUE RECEIPT/EXPENDITURE
All receipts like taxes and expenditure like salaries, subsidies and interest payments that in general do not entail sale or creation of assets fall under the revenue account.
CAPITAL RECEIPT/EXPENDITURE
Capital account shows all receipts from liquidating (eg. selling shares in a public sector company) assets and spending to create assets (lending to receive interest).
REVENUE/CAPITAL BUDGET
The government has to prepare a Revenue Budget (detailing revenue receipts and revenue expenditure) and a Capital Budget (capital receipts and capital expenditure).
CREATING A HOLE IN THE POCKET
Taxes come in various shapes and sizes, but primarily fit into two little slots:
DIRECT TAX
This is the tax that you, I (and India Inc) directly pay the government for our income and wealth. So income tax, FBT, STT and BCTT are all direct taxes.
INDIRECT TAX
This ones a double whammy: Its essentially a tax on our expenditure, and includes customs, excise and service tax. Its not just you who thinks this isnt fair - governments too consider this tax regressive , as it doesnt check whether youre rich or poor. You spend, you pay. Thats precisely why most governments aim to raise more through direct taxes.
MAKING YOU PAY
The various taxes that the government levies
CORPORATION (CORPORATE) TAX
Its the tax that India Inc pays on its profits.
TAXES ON INCOME OTHER THAN CORPORATION TAX
Its income-tax paid by non-corporate assessees people like us.
FRINGE BENEFIT TAX (FBT)
No free lunches here. If you want the jam with the bread and butter, youd better pay for it. In the 2005-06 Budget, the government decided to tax all perks what is calls the fringe benefit given to employees. No longer could companies get away with saying ordinary business expenses and escape tax when they actually gave out club memberships to their employees. Employers have to now pay a tax (FBT) on a percentage of the expense incurred on such perquisites.
SECURITIES TRANSACTION TAX (STT)
If youre dealing in shares or mutual funds , you have to loosen those purse strings a wee bit too. STT is a small tax you need to pay on the total amount you pay or receive in a share deal. In the 2004-05 Budget, the government did away with the tax on profits earned on the sale of shares held for over a year (known as long-term capital gains tax) and replaced it with STT.
CUSTOMS
Anything you bring home from across the seas comes with a price. By levying a tax on imports, the governments firing on two fronts: its filling its coffers and protecting Indian industry.
UNION EXCISE DUTY
Made in India Either way, theres no escape. In other words, this is a duty imposed on goods manufactured in the country.
SERVICE TAX
If you text your friend a hundred times a day, or cant do with-out the coiffeured look at the neighbourhood salon, your monthly bill will show up a little charge for the services you use. It is a tax on services rendered.
MINIMUM ALTERNATE TAX (MAT)
Its known that a company pays tax on profits as per the Income-Tax Act. That just may not always be enough. If its tax liability is less than 10% of its profits, the company has to pay a minimum alternate tax of 10% of the book profits.
SURCHARGE
This is an extra bit of 10% on their tax liability individuals pay for earning more than Rs 10 lakh. Companies with a revenue of up to Rs 1 crore are spared this rod.
VAT AND GST
After a lot of discussion and brainstorming, the government levies what is called a value-added tax : a more transparent form of taxation . The tax is based on the difference between the value of the output and the value of the inputs used to produce it. The aim here is to tax a firm only for the value it adds to the manufacturing inputs, and not the entire input cost. Thus, VAT helps avoid a cascading of taxes as a product passes through different stages of production/value addition.
A GST, or goods and services tax, on the other hand, contains the entire element of tax borne by a good including a Central and a state-level tax.
MORE REVENUE
Of course, tax isnt the only way governments make money. Theres also nontax revenue
NON-TAX REVENUE
Any loan given to state governments, public institutions, PSUs come with a price (interests) and forms the most important receipts under this head apart from dividends and profits received from PSUs.
The government also earns from the various services including public services it provides. Of this only the Railways is a separate department, though all its receipts and expenditure are routed through the consolidated fund.
CAPITAL RECEIPTS
RECEIPTS in the capital account of the
consolidated fund are grouped
under three broad heads
public debt, recoveries of loans
and advances, and
miscellaneous receipts
PUBLIC DEBT
Dont mistake the phrase. Public debt is not something incurred by the public. In Budget parlance the difference between borrowings (public debt receipts) and repayments (public debt disbursals) during the year is the net accretion to the public debt.
Public debt can be split into two heads, internal debt (money borrowed within the country) and external debt (funds borrowed from non-Indian sources).
The internal debt comprises Treasury Bills, market stabilisation scheme, ways and means advance, and securities against small savings .
TREASURY BILL (T-BILLS )
These are bonds (debt securities) with maturity of less than a year. These are issued to meet short-term mismatches in receipts and expenditure . Bonds of longer maturity are called dated securities.
MARKET STABILISATION SCHEME (MSS)
The scheme was launched in April 2004 to strengthen Reserve Bank of Indias (RBI) ability to conduct exchange rate and monetary manage-ment . These securities are issued not to meet the governments expenditure but to provide the RBI with a stock of securities with which to intervene in the market to manage liquidity.
WAYS AND MEANS ADVANCE (WMA)
RBI is the big daddy of banks being the banker for both the Central and State governments. Therefore, the RBI provides a breather to manage mismatches in their receipts and payments in the form of ways and means advances.
SECURITIES AGAINST SMALL SAVINGS
The government meets a small part of its loan requirement by appropriating small savings collection by issuing securities to the fund.
MISCELLANEOUS CAPITAL RECEIPTS:
These are primarily receipts from disinvestment in public sector undertakings .
The capital account receipts of the consolidated fund public debt, recoveries of loans and advances, and miscellaneous receipts and revenue receipts make up the total receipts of the consolidated fund.
EXPENDITURE
Before we begin to examine the nitty gritty of where and how the government spends its money, we need to understand whats called the Central Plan. This is what every child in the country learns about in school; only, we all know it better as the Five-Year Plan. A Central Plan is the governments annual expenditure sheet, with a five-year roadmap. Heres where the government gets the money for the grand five-year exercise: The funding of the Central Plan is split almost evenly between government support (from the Budget) and internal and extra-budgetary resources of stateowned enterprises. The governments support to the Central Plan is called the Budget support.
PLAN EXPENDITURE
This is essentially the Budget support to the Central Plan. It also comprises the amount the Centre sets aside for plans of states and Union Territories. Like all Budget heads, this is also split into revenue and capital components.
NON-PLAN EXPENDITURE
All those bills the government has to pay, under the revenue expenditure head are bunched up here: interest payments, subsidies, salaries, defence and pension. The capital component, in comparison, is small; the largest chunk of this goes to defence.
DEFICIT
When governments expenditure exceeds its receipts it has to borrow to meet the shortfall. This deficit has material implication for the economy.
FISCAL DEFICIT
This is where the government feels the pinch. It often lives beyond its means, a lot like the situation mere mortals find themselves in. And then, the vicious circle is complete: it goes right back to the people for more money. Heres how that works out: The governments non-borrowed receipts revenue receipts plus loan repayments received by the government plus miscellaneous capital receipts, primarily disinvestment proceeds fall short of its expenditure. The excess of total expenditure over total nonborrowed receipts is called fiscal deficit . The government then has to borrow money from the people to meet the shortfall.
REVENUE DEFICIT
Its not just because its a deficit, but that its a revenue deficit makes it an important control indicator. All expenditure on revenue account should ideally be met from receipts on revenue account; the revenue deficit should be zero, else the government will be in debt.
PRIMARY DEFICIT
This is one primary indicator everyone likes to watch: when it shrinks, it indicates were not doing too badly on fiscal health. The primary deficit is the fiscal deficit less interest payments the government makes on its earlier borrowings. Its the basic deficit figure, if you will.
DEFICIT AND THE GDP
Its important to see where all this fits, in the larger economic picture. The Budget document mentions deficit as a percentage of GDP. In absolute terms, the fiscal deficit may be large, but if it is small compared to the size of the economy, then its not such a bad thing after all. Prudent fiscal management requires that government does not borrow to consume, in the normal course.
FRBM ACT
Enacted in 2003, the Fiscal Responsibility and Budget Management Act required the elimination of revenue deficit by 2008-09 . This means that from 2008-09 , the government was to meet all its revenue expenditure from its revenue receipts. Any borrowing was to be done to meet capital expenditure that is, repayment of loans, lending and fresh investment.
The Act also mandates a 3% limit on the fiscal deficit after 2008-09 one that allows the government to build capacities in the economy without compromising on fiscal stability. The financial crisis and the subsequent slowdown has forced the government to abandon the path of fiscal consolidation.
... AND THE REST
Some of the other important terms that figure in the Budget
BHARAT NIRMAN:
Bharat Nirman is UPAs unfulfilled dream of Build India, Build: irrigation , roads, water supply, housing, rural electrification and rural telecom connectivity. Though it couldnt meet the target of 2009, the government is still at it.
FINANCE BILL:
This, all important sheaf of papers, is all about taxes and is presented in time before the levy breaks.
FINANCIAL INCLUSION:
This is to ensure that everyone has a bank account and financial institutions are accountable. It sees to it the common denizen is not denied of timely and cheap credit and, more importantly, not intimidated by the facade of a modern bank. However, it has not fully got past the counter.
PASS-THROUGH STATUS:
Nothing can be more dreadful than having to pay twice for the same thing. This position is accorded to those investments which stands the danger of being taxed twice like mutual funds.
SUBVENTION:
This is how a government bears the loss that financial institutions incur when asked to give farmers loans below the market rates.
RESOURCES TRANSFERRED TO THE STATES
As we saw earlier, the Centre gives states a helping hand in two ways a part of its gross tax collections goes to state governments.
The Centre also transfers funds to states to support their plans. These are largely in the nature of grants, and include those given to states for managing Centrally-sponsored schemes.
Friday, July 3, 2009
GROWTH PATH TAKES A U SHAPE
GROWTH PATH TAKES A U SHAPE
Increased globalisation, however, makes high growth challenges more complex
During the last two years, the Indian economy has been buffeted by three major challenges originating in its external sector. First, a surge in capital inflows, which reached a crescendo in the last quarter of 2007-08 . Second, an inflationary explosion in global commodity prices, which began even before the first challenge had ebbed, that hit us with great force in the middle of 2008. There was barely any time to deal with this problem before the third challenge, the global financial meltdown and collapse of international trade, hit the world with severity. Despite some difficult choices and ambiguities , arising from the rapid changes in the global situation, the short-term challenges arising from these global shocks have been met. Each of these, however, has implications for the medium term, that requires a considered and integrated response if our objective of sustained high growth is to be realized. An analysis of the impact of these shocks brings to the fore the importance of pursuing reforms, including in the financial sector, to make the economy more competitive and the economic regulatory and oversight system more efficient and sensitive to new developments.
The Economic Survey of 2007-08 (February 2008) had pointed out that There is now no doubt that the economy has moved to a higher growth plane, with growth in GDP at market prices exceeding 8 per cent in every year since 2003-04 . It had however warned that The new challenge is to maintain growth at these levels, not to speak of raising it further to double digit levels. Further, The challenges of high growth have become more complex because of increased globalization of the world economy and the growing influence of global developments, economic as well as non-economic . Ten months later, the Mid-Year Review (December 2008), noted that We should be prepared for growth in 2008-09 as a whole to be around 7 per cent. The experience of economic growth in a wide range of countries across the world and over different periods of history bears testimony to the fact that such setbacks are common . The experience of high growth economies (HGEs) suggests that these can be overcome by appropriate, pragmatic (nonideological) and expeditious action to address the problems that the shocks expose and by seizing the opportunities that they open up. This is what distinguishes the few economies that sustain growth over decades (by returning to high growth after a temporary setback) from the many that fall by the wayside (returning to slower growth after a temporary spurt of high growth).
The challenges that confronted the Indian economy in 2008-09 and continue to do so in 2009-10 fall into two parts. The short-term macroeconomic challenges of monetary and fiscal policy and the medium-term challenge of returning to the high growth path. The former covers issues such as the trade-off between inflation and growth, the use of monetary policy versus use of fiscal policy, their relative effectiveness and coordination between the two. The latter includes the tension between short- and long-term fiscal policy, the immediate longer term imperatives of monetary policy and the policy and institutional reforms necessary for restoring high growth. This chapter reflects on some aspects of these issues.
GLOBAL DEVELOPMENTS AND THE INDIAN
ECONOMY,2008-09
COMMODITY PRICES AND INFLATION
During the five-year period of high growth from 2003-04 to 2007-08 , WPI inflation has gone through two cycles. The first peak in August 2004 was followed by a trough in August 2005 and the second peak in March 2007 followed by a trough in October 2007. The subsequent upturn in prices therefore followed the upturn in total capital inflows during 2007, which peaked at nearly 13 per cent in the July- September quarter of 2007-08 . The focus of macro management in general, and monetary management in particular, has been on the implication of capital inflows on foreign exchange reserve accumulation, sterilization and the exchange rate. As capital inflows were far in excess of the current account financing requirements, and given the history of capital flow volatility into emerging markets, prudence required that a part of these excess inflows be accumulated as reserves. This also has the effect of moderating any potential volatility in exchange rates arising from capital flow reversals . However, the accumulation of foreign exchange reserves by increasing the monetary base also raised the issue of the degree to which the accumulation should be sterilized. The authority given to RBI to issue Market Stabilization Scheme (MSS) bonds backed by the Government of India was adjusted (in April and August 2007) to provide the required flexibility to RBI. The attempt to manage the build-up of liquidity over this period by running a cautious monetary policy, while balancing the liquidity requirements of a fast growing economy, bore fruit for most part of fiscal 2007-08 as the 52-week average WPI inflation remained at about 4.7 per cent and the GDP growth rate for the economy was 9 per cent. However, a sudden spurt in international commodity prices in the last quarter of calendar year 2007 started creating pressures on domestic prices of tradable goods, though an appreciation of the rupee during the last quarter of 2007-08 , partly dampened the pass through of global commodity price increases.
Crude oil prices rose from an average of 90.7 US$/bbl in January 2008 to a monthly average peak of 132.8 US$/bbl in July 2008, touching a high of 147 US$/bbl in this period. Similarly, among the imported edible oils, namely, palm and soyabean the prices rose from 1,059 US$/MT and 1,276 US$/ MT in January 2008 to a monthly average high of 1,213 US$/MT and 1,537 US$/MT in June 2008, respectively. Inflation, which had declined to less than 4 per cent in the middle of August 2007 and had remained so for 20 consecutive weeks thereafter, started firming up from December 2007. During December-March 2007-08 , there was an increase in the prices of coal, iron ore, iron and steel products and prices of petroleum products not covered under the administered price mechanism. The rising oil prices necessitated an upward revision in the administered prices of petrol, high-speed diesel and LPG in first week of June 2008. Together with a continued hardening of global commodity prices these developments led to a sharp increase in the headline WPI inflation rate, touching double digit level by the middle of June 2008. It persisted at that level for the next 21 weeks with a high of 12.9 per cent in early August 2008. Nearly two-thirds of this rise in inflation was due to three sets of commodities namely, edible oils (including oilseeds and oilcakes), iron and steel (including iron ore) and mineral oils and refinery products.
Given the global origins of this inflationary episode, a judgement had to be made about the relatively temporary versus the relatively permanent elements. Appropriate fiscal and monetary measures had to be introduced to meet these elements . Given the degree of uncertainty about the exact proportion of temporary and permanent elements, a perfect response would have been unrealistic. On the monetary side, given the lags in monetary policy , the primary objective had to be the moderation in inflationary expectations and to ensure that money supply did not accommodate the permanent elements of the global cost push.
On the fiscal side, the temporary elements had to be met by making temporary reductions in the import duties on tradable goods whose prices showed unprecedented increases. Import duties were consequently reduced on the three sets of commodities mentioned earlier. The fiscal management of agricultural commodities subject to higher duties and some elements of quantitative intervention in the domestic or international sphere was more complicated. This is particularly true of basic agricultural consumer goods like cereals and pulses that affect millions of poor consumers and small farmers (producers). A combination of import tariff reductions, export duties and changes in quantitative measures for import and/or export had to be used to manage the trade-off between poor consumers and the livelihood concerns of poor producers. Though the management proved largely successful, a rational long-term framework needs to be developed, which balances the concerns of poor consumers and producers to promote efficient growth and livelihood security . One possible approach is to have an announced price band for domestic prices (which could itself evolve gradually over time) within which imports and exports are freely allowed without any duties and controls. If international prices change beyond this band, domestic prices would be systemically dampened through imposition of variable import and export duties, depending on whether international prices fell below the lower band or rise above the upper band respectively. This along with targeted subsidies, such as the PDS, would help balance the interests of farmers who need a predictable price regime to plan their cropping patterns and those of low income households.
The rise in global oil price, along with the rise in prices of other imported commodities, had a strong adverse impact on the balance of trade. Oil imports are the predominant driver of total imports. Given the administered price mechanism for petrol and diesel, the sharp rise in oil, petrol and diesel prices required a decision on how much of this price could be passed through to users/consumers. Conceptually this too requires a judgement on how much of the rise is permanent. Ideally, the entire permanent element of the price rise should be passed through along with part of the temporary increase. With oil prices overshooting to double the long-term supply price of oil, the question of (directly or indirectly), temporarily taxing resource rents is also relevant. In practice, these issues were addressed somewhat imperfectly through a sharing formula that represented a mix of government subsidy, taxation of rents and some pass through. Consequently, the fiscal deficit, adjusted for below the line items, was negatively impacted by the global price developments. This also gave rise to a dilemma between two aspects of fiscal policy. From a macro perspective, the external shock could have been addressed by accommodating the short-term shock and tightening the fiscal policy to give a long-term signal that the one time (temporary) price increase would not be allowed to translate into inflation (a continuing rise in prices). However, the political constraints and social arguments for dampening price pass through necessitated an increase in the fiscal gap. This in turn put greater pressure on monetary and other policies to moderate inflation (e.g. temporary controls under the Essential Commodities Act) that had little to do with domestic factors. Monetary management was also complicated by the fact that capital flows changed course in the first quarter of 2008-09 and trended down throughout the year. This affected foreign exchange reserves, exchange rate expectations and reserve money accumulation.
GDP growth was also affected by these developments as the worsening of terms of trade arising primarily from the rise in oil prices acts as an implicit tax on the citizens of the country, thereby reducing private consumption demand in the first half of 2008-09 . Moreover, efforts to curb inflationary expectations necessitated a rise in interest rates and mopping up of liquidity in the economy, which influenced the growth rate, both from the demand side, as well as from the supply side.
The global financial meltdown resulted in a bursting of the commodity bubble, leading to a dramatic drop in most commodity prices. Crude prices dropped to around 40 US$/bbl by December 2008. Thus, the global cost push that was primarily responsible for raising WPI inflation to double digit levels during 2008-09 , went into reverse gear after July 2008. Consequently, by end-March 2009, the WPI Index was virtually back to the level that prevailed a year before.
FINANCIAL CRISIS AND THE GLOBAL SLOWDOWN
The global financial crisis surfaced around August 2007. Its origin lay in structured investment instruments (Collateralized Debt Obligations, synthetic CDOs) created out of subprime mortgage lending in the United States. The securitization process however was not backed by due diligence and led to large-scale default. The complexity of the instruments and the role of credit rating agencies played a contributory role. The high ratings assigned to certain CDO tranches, which were then quickly reversed with the onset of the crisis, created a panic situation among investors and precipitated the crisis.
While the initial effect of the crisis was profound on the US financial institutions and to a lesser extent on European institutions, the effect on emerging economies was less serious. In the initial stages, the capital flows to the emerging economies actually increased, giving rise to what is termed as positive shock and the decoupling debate. In the case of India , for example, the net FII flows during the five-month period from September 2007 to January 2008 was US$ 22.5 billion as against an inflow of US$ 11.8 billion during April-July 2007, which were the four months immediately preceding the onset of crisis.
The effect of the financial crisis on emerging economies thereafter was mainly through reversal of portfolio flows due to unwinding of stock positions by FIIs to replenish cash balances abroad. Withdrawal of FII investment led to stock market crash in many emerging economies and decline in the value of local currency vis--vis US dollar as a result of supply-demand imbalances in domestic markets. In the case of India, the extent of reversal of capital flows was US$ 15.8 billion during five months (February-June , 2008) following the end of positive shock period in January 2008.
Following the collapse of Lehman Brothers in mid-September 2008, there was a full-blown meltdown of the global financial markets. It created a crisis of confidence that led to the seizure of interbank market and had trickle-down effect on trade financing in the emerging economies. Together with slackening global demand and declining commodity prices, it led to fall in exports, thereby transmitting financial sector crisis to the real economy. Countries with export-led model of growth, as in many South- East Asian countries, and that depended upon commodity exports, were more severely affected. The impact on Indian economy was less severe because of lower dependence of the economy on export markets and the fact that a sizeable contribution to GDP is from domestic sources. Indias trade reforms since 1991 have moved progressively towards a neutral regime for exports and imports, eschewing tax and other incentives for exports.
The direct impact of the crisis on financial sector was primarily through exposure to the toxic financial assets and the linkages with the money and foreign exchange markets. Indian banks however had very limited exposure to the US mortgage market, directly or through derivatives, and to the failed and stressed international financial institutions. The deepening of the global crisis and subsequent deleveraging and risk aversion however affected the Indian economy leading to slowing of growth momentum.
FISCAL SUSTAINABILITY AND TAX SIMPLIFICATION
FRBM-2 :
Examine the possibility of a new target of zero fiscal deficit on a cyclically adjusted basis.
Reform
of Petroleum (LPG, kerosene), fertilizer and food subsidies to reduce leakages and ensure targeting, so that all the needy get the intended benefit. Limit LPG subsidy to a maximum of 6-8 cylinders per annum per household. Phase out Kerosene supply-subsidy by ensuring that every rural household (without electricity and LPG connection) has a solar cooker and solar lantern.
Convert
fertilizer subsidy from a partproducer subsidy to a wholly farmer-user nutrient related subsidy, with freedom to producers to set prices of formulations with different mix of neutrients.
Auction
3G spectrum. The auctioned spectrum must be freely tradable, with capital gains on spectrum to be taxed under the Income Tax Act.
Revitalize
the disinvestment program and plan to generate at least Rs. 25,000 crore per year. Complete the process of selling of 5- 10 per centequity in previously identified profit making non-navratnas . List all unlisted public sector enterprises and sell a minimum of 10 per cent of equity to the public. Auction all loss making PSUs that cannot be revived. For those in which net worth is zero, allow negative bidding in the form of debt write-off .
Introduction
of the new Income Tax Code, that results in a neutral corporate tax regime.
Rationalize
Dividend Distribution Tax to ensure full single taxation of returns to capital in the hands of the receiver (i.e. neither double taxation nor zero effective taxation).
Review
and phasing out of surcharges, cesses and transaction taxes (such as commodities transaction tax, securities transaction tax and Fringe Benefit Tax). Incentivise states to do the same with respect to stamp duties.
Revise
specific duties in the textile sector to ensure that they approximate a similar ad valorem rate as originally intended. Reduce these gradually that they do not exceed 30 per cent ad valorem. Convert them to ad valorem rate once WTO negotiations are concluded.
Review
customs duty exemptions and move to a uniform duty structure to eliminated inverted duties.
Implementation
of GST from April 1, 2010 to be done in way to ensure long run fiscal sustainability.
National
ID card based on unique identification number. Rapid operationalization of the UID authority (3 months), issue of UID to all residents (6 months) and creation of an integrated data base of information on all actual and potential beneficiaries of government programmes, subsidies and transfers (one year). A Household ID (HHID) could be created simultaneously or in parallel by linking it to a set of UIDs of individuals constituting the household. These IDs will form the base of a multiapplication smart cards (MASC) system that can be used to empower the poor and insure that they get the full benefits of all programmes such as NREGA, PDS, publically provided education, skill development, health services, social security (to persons at special risk), fertilizer subsidy, solar lanterns, solar cookers, etc.
Convergence
of plan schemes with focus on outcomes. Thrust on quality of expenditure and systems of monitoring andevaluation to improve the productivity of public expenditure.
FINANCIAL MARKETS
FUNDS FOR DYNAMIC ENTREPRENEURS
Passage
of the Banking Regulations (Amendment) Bill, 2005.
Lift
the remaining ban on futures contracts to restore price discovery and price risk-management .
Bring
all financial market regulations under SEBI with a view to encourage integrated development. Broaden the longterm debt market by liberalizing the investment norms of insurance and pension funds and development of credit enhancement institutions. Government can consider a guarantee mechanism (fund) for credit enhancement of long-term infrastructure debt. Tax incentives for long-term debt markets can be considered.
Liberalize
and develop spot and futures currency markets (exchange traded). Raise position limits for domestic companies and allow trading in SDRs and SDR currencies.
Introduce/allow
repos and derivatives in corporate debt. Introduce exchange traded interest rate derivatives, such as interest rate swaps (IRS).
Introduce
standardized credit default swaps that can be traded on exchanges, subject to stricter than normal limits on eligible participants.
Extend
spot commodity trading in electronic form to agricultural markets by involving APMCs.
Auction
rights to commercial borrowing within the already defined limits, with in-built (designed) preference for longterm borrowing. Auction of rights to invest in government securities by FIIs (under sub-limit of ECB) has already been successfully carried out.
High Net
Worth Individuals (HNIs) should be allowed to register and invest directly through authorized Indian investment intermediaries. This will allow ban of indirect ways of investment such as P notes.
Align
voting rights in banks with equity holdings. Allow public to hold greater equity in public sector banks within the policy of maintaining social control of management. Phased increase in FDI limits in banks and greater entry of foreign banks with tighter regulation of investing foreign banks and other foreign entities.
Allow
trading of directed credit obligations among banks and other financial institutions. This will allow and encourage the development of financial institutions that can specialize in and exploit economies of scale and scope in unbanked/ low banked areas and sectors.
Link
small savings rates to government debt instruments or bank deposit rates of similar maturity. Make responsive to depositcredit market conditions.
Increased globalisation, however, makes high growth challenges more complex
During the last two years, the Indian economy has been buffeted by three major challenges originating in its external sector. First, a surge in capital inflows, which reached a crescendo in the last quarter of 2007-08 . Second, an inflationary explosion in global commodity prices, which began even before the first challenge had ebbed, that hit us with great force in the middle of 2008. There was barely any time to deal with this problem before the third challenge, the global financial meltdown and collapse of international trade, hit the world with severity. Despite some difficult choices and ambiguities , arising from the rapid changes in the global situation, the short-term challenges arising from these global shocks have been met. Each of these, however, has implications for the medium term, that requires a considered and integrated response if our objective of sustained high growth is to be realized. An analysis of the impact of these shocks brings to the fore the importance of pursuing reforms, including in the financial sector, to make the economy more competitive and the economic regulatory and oversight system more efficient and sensitive to new developments.
The Economic Survey of 2007-08 (February 2008) had pointed out that There is now no doubt that the economy has moved to a higher growth plane, with growth in GDP at market prices exceeding 8 per cent in every year since 2003-04 . It had however warned that The new challenge is to maintain growth at these levels, not to speak of raising it further to double digit levels. Further, The challenges of high growth have become more complex because of increased globalization of the world economy and the growing influence of global developments, economic as well as non-economic . Ten months later, the Mid-Year Review (December 2008), noted that We should be prepared for growth in 2008-09 as a whole to be around 7 per cent. The experience of economic growth in a wide range of countries across the world and over different periods of history bears testimony to the fact that such setbacks are common . The experience of high growth economies (HGEs) suggests that these can be overcome by appropriate, pragmatic (nonideological) and expeditious action to address the problems that the shocks expose and by seizing the opportunities that they open up. This is what distinguishes the few economies that sustain growth over decades (by returning to high growth after a temporary setback) from the many that fall by the wayside (returning to slower growth after a temporary spurt of high growth).
The challenges that confronted the Indian economy in 2008-09 and continue to do so in 2009-10 fall into two parts. The short-term macroeconomic challenges of monetary and fiscal policy and the medium-term challenge of returning to the high growth path. The former covers issues such as the trade-off between inflation and growth, the use of monetary policy versus use of fiscal policy, their relative effectiveness and coordination between the two. The latter includes the tension between short- and long-term fiscal policy, the immediate longer term imperatives of monetary policy and the policy and institutional reforms necessary for restoring high growth. This chapter reflects on some aspects of these issues.
GLOBAL DEVELOPMENTS AND THE INDIAN
ECONOMY,2008-09
COMMODITY PRICES AND INFLATION
During the five-year period of high growth from 2003-04 to 2007-08 , WPI inflation has gone through two cycles. The first peak in August 2004 was followed by a trough in August 2005 and the second peak in March 2007 followed by a trough in October 2007. The subsequent upturn in prices therefore followed the upturn in total capital inflows during 2007, which peaked at nearly 13 per cent in the July- September quarter of 2007-08 . The focus of macro management in general, and monetary management in particular, has been on the implication of capital inflows on foreign exchange reserve accumulation, sterilization and the exchange rate. As capital inflows were far in excess of the current account financing requirements, and given the history of capital flow volatility into emerging markets, prudence required that a part of these excess inflows be accumulated as reserves. This also has the effect of moderating any potential volatility in exchange rates arising from capital flow reversals . However, the accumulation of foreign exchange reserves by increasing the monetary base also raised the issue of the degree to which the accumulation should be sterilized. The authority given to RBI to issue Market Stabilization Scheme (MSS) bonds backed by the Government of India was adjusted (in April and August 2007) to provide the required flexibility to RBI. The attempt to manage the build-up of liquidity over this period by running a cautious monetary policy, while balancing the liquidity requirements of a fast growing economy, bore fruit for most part of fiscal 2007-08 as the 52-week average WPI inflation remained at about 4.7 per cent and the GDP growth rate for the economy was 9 per cent. However, a sudden spurt in international commodity prices in the last quarter of calendar year 2007 started creating pressures on domestic prices of tradable goods, though an appreciation of the rupee during the last quarter of 2007-08 , partly dampened the pass through of global commodity price increases.
Crude oil prices rose from an average of 90.7 US$/bbl in January 2008 to a monthly average peak of 132.8 US$/bbl in July 2008, touching a high of 147 US$/bbl in this period. Similarly, among the imported edible oils, namely, palm and soyabean the prices rose from 1,059 US$/MT and 1,276 US$/ MT in January 2008 to a monthly average high of 1,213 US$/MT and 1,537 US$/MT in June 2008, respectively. Inflation, which had declined to less than 4 per cent in the middle of August 2007 and had remained so for 20 consecutive weeks thereafter, started firming up from December 2007. During December-March 2007-08 , there was an increase in the prices of coal, iron ore, iron and steel products and prices of petroleum products not covered under the administered price mechanism. The rising oil prices necessitated an upward revision in the administered prices of petrol, high-speed diesel and LPG in first week of June 2008. Together with a continued hardening of global commodity prices these developments led to a sharp increase in the headline WPI inflation rate, touching double digit level by the middle of June 2008. It persisted at that level for the next 21 weeks with a high of 12.9 per cent in early August 2008. Nearly two-thirds of this rise in inflation was due to three sets of commodities namely, edible oils (including oilseeds and oilcakes), iron and steel (including iron ore) and mineral oils and refinery products.
Given the global origins of this inflationary episode, a judgement had to be made about the relatively temporary versus the relatively permanent elements. Appropriate fiscal and monetary measures had to be introduced to meet these elements . Given the degree of uncertainty about the exact proportion of temporary and permanent elements, a perfect response would have been unrealistic. On the monetary side, given the lags in monetary policy , the primary objective had to be the moderation in inflationary expectations and to ensure that money supply did not accommodate the permanent elements of the global cost push.
On the fiscal side, the temporary elements had to be met by making temporary reductions in the import duties on tradable goods whose prices showed unprecedented increases. Import duties were consequently reduced on the three sets of commodities mentioned earlier. The fiscal management of agricultural commodities subject to higher duties and some elements of quantitative intervention in the domestic or international sphere was more complicated. This is particularly true of basic agricultural consumer goods like cereals and pulses that affect millions of poor consumers and small farmers (producers). A combination of import tariff reductions, export duties and changes in quantitative measures for import and/or export had to be used to manage the trade-off between poor consumers and the livelihood concerns of poor producers. Though the management proved largely successful, a rational long-term framework needs to be developed, which balances the concerns of poor consumers and producers to promote efficient growth and livelihood security . One possible approach is to have an announced price band for domestic prices (which could itself evolve gradually over time) within which imports and exports are freely allowed without any duties and controls. If international prices change beyond this band, domestic prices would be systemically dampened through imposition of variable import and export duties, depending on whether international prices fell below the lower band or rise above the upper band respectively. This along with targeted subsidies, such as the PDS, would help balance the interests of farmers who need a predictable price regime to plan their cropping patterns and those of low income households.
The rise in global oil price, along with the rise in prices of other imported commodities, had a strong adverse impact on the balance of trade. Oil imports are the predominant driver of total imports. Given the administered price mechanism for petrol and diesel, the sharp rise in oil, petrol and diesel prices required a decision on how much of this price could be passed through to users/consumers. Conceptually this too requires a judgement on how much of the rise is permanent. Ideally, the entire permanent element of the price rise should be passed through along with part of the temporary increase. With oil prices overshooting to double the long-term supply price of oil, the question of (directly or indirectly), temporarily taxing resource rents is also relevant. In practice, these issues were addressed somewhat imperfectly through a sharing formula that represented a mix of government subsidy, taxation of rents and some pass through. Consequently, the fiscal deficit, adjusted for below the line items, was negatively impacted by the global price developments. This also gave rise to a dilemma between two aspects of fiscal policy. From a macro perspective, the external shock could have been addressed by accommodating the short-term shock and tightening the fiscal policy to give a long-term signal that the one time (temporary) price increase would not be allowed to translate into inflation (a continuing rise in prices). However, the political constraints and social arguments for dampening price pass through necessitated an increase in the fiscal gap. This in turn put greater pressure on monetary and other policies to moderate inflation (e.g. temporary controls under the Essential Commodities Act) that had little to do with domestic factors. Monetary management was also complicated by the fact that capital flows changed course in the first quarter of 2008-09 and trended down throughout the year. This affected foreign exchange reserves, exchange rate expectations and reserve money accumulation.
GDP growth was also affected by these developments as the worsening of terms of trade arising primarily from the rise in oil prices acts as an implicit tax on the citizens of the country, thereby reducing private consumption demand in the first half of 2008-09 . Moreover, efforts to curb inflationary expectations necessitated a rise in interest rates and mopping up of liquidity in the economy, which influenced the growth rate, both from the demand side, as well as from the supply side.
The global financial meltdown resulted in a bursting of the commodity bubble, leading to a dramatic drop in most commodity prices. Crude prices dropped to around 40 US$/bbl by December 2008. Thus, the global cost push that was primarily responsible for raising WPI inflation to double digit levels during 2008-09 , went into reverse gear after July 2008. Consequently, by end-March 2009, the WPI Index was virtually back to the level that prevailed a year before.
FINANCIAL CRISIS AND THE GLOBAL SLOWDOWN
The global financial crisis surfaced around August 2007. Its origin lay in structured investment instruments (Collateralized Debt Obligations, synthetic CDOs) created out of subprime mortgage lending in the United States. The securitization process however was not backed by due diligence and led to large-scale default. The complexity of the instruments and the role of credit rating agencies played a contributory role. The high ratings assigned to certain CDO tranches, which were then quickly reversed with the onset of the crisis, created a panic situation among investors and precipitated the crisis.
While the initial effect of the crisis was profound on the US financial institutions and to a lesser extent on European institutions, the effect on emerging economies was less serious. In the initial stages, the capital flows to the emerging economies actually increased, giving rise to what is termed as positive shock and the decoupling debate. In the case of India , for example, the net FII flows during the five-month period from September 2007 to January 2008 was US$ 22.5 billion as against an inflow of US$ 11.8 billion during April-July 2007, which were the four months immediately preceding the onset of crisis.
The effect of the financial crisis on emerging economies thereafter was mainly through reversal of portfolio flows due to unwinding of stock positions by FIIs to replenish cash balances abroad. Withdrawal of FII investment led to stock market crash in many emerging economies and decline in the value of local currency vis--vis US dollar as a result of supply-demand imbalances in domestic markets. In the case of India, the extent of reversal of capital flows was US$ 15.8 billion during five months (February-June , 2008) following the end of positive shock period in January 2008.
Following the collapse of Lehman Brothers in mid-September 2008, there was a full-blown meltdown of the global financial markets. It created a crisis of confidence that led to the seizure of interbank market and had trickle-down effect on trade financing in the emerging economies. Together with slackening global demand and declining commodity prices, it led to fall in exports, thereby transmitting financial sector crisis to the real economy. Countries with export-led model of growth, as in many South- East Asian countries, and that depended upon commodity exports, were more severely affected. The impact on Indian economy was less severe because of lower dependence of the economy on export markets and the fact that a sizeable contribution to GDP is from domestic sources. Indias trade reforms since 1991 have moved progressively towards a neutral regime for exports and imports, eschewing tax and other incentives for exports.
The direct impact of the crisis on financial sector was primarily through exposure to the toxic financial assets and the linkages with the money and foreign exchange markets. Indian banks however had very limited exposure to the US mortgage market, directly or through derivatives, and to the failed and stressed international financial institutions. The deepening of the global crisis and subsequent deleveraging and risk aversion however affected the Indian economy leading to slowing of growth momentum.
FISCAL SUSTAINABILITY AND TAX SIMPLIFICATION
FRBM-2 :
Examine the possibility of a new target of zero fiscal deficit on a cyclically adjusted basis.
Reform
of Petroleum (LPG, kerosene), fertilizer and food subsidies to reduce leakages and ensure targeting, so that all the needy get the intended benefit. Limit LPG subsidy to a maximum of 6-8 cylinders per annum per household. Phase out Kerosene supply-subsidy by ensuring that every rural household (without electricity and LPG connection) has a solar cooker and solar lantern.
Convert
fertilizer subsidy from a partproducer subsidy to a wholly farmer-user nutrient related subsidy, with freedom to producers to set prices of formulations with different mix of neutrients.
Auction
3G spectrum. The auctioned spectrum must be freely tradable, with capital gains on spectrum to be taxed under the Income Tax Act.
Revitalize
the disinvestment program and plan to generate at least Rs. 25,000 crore per year. Complete the process of selling of 5- 10 per centequity in previously identified profit making non-navratnas . List all unlisted public sector enterprises and sell a minimum of 10 per cent of equity to the public. Auction all loss making PSUs that cannot be revived. For those in which net worth is zero, allow negative bidding in the form of debt write-off .
Introduction
of the new Income Tax Code, that results in a neutral corporate tax regime.
Rationalize
Dividend Distribution Tax to ensure full single taxation of returns to capital in the hands of the receiver (i.e. neither double taxation nor zero effective taxation).
Review
and phasing out of surcharges, cesses and transaction taxes (such as commodities transaction tax, securities transaction tax and Fringe Benefit Tax). Incentivise states to do the same with respect to stamp duties.
Revise
specific duties in the textile sector to ensure that they approximate a similar ad valorem rate as originally intended. Reduce these gradually that they do not exceed 30 per cent ad valorem. Convert them to ad valorem rate once WTO negotiations are concluded.
Review
customs duty exemptions and move to a uniform duty structure to eliminated inverted duties.
Implementation
of GST from April 1, 2010 to be done in way to ensure long run fiscal sustainability.
National
ID card based on unique identification number. Rapid operationalization of the UID authority (3 months), issue of UID to all residents (6 months) and creation of an integrated data base of information on all actual and potential beneficiaries of government programmes, subsidies and transfers (one year). A Household ID (HHID) could be created simultaneously or in parallel by linking it to a set of UIDs of individuals constituting the household. These IDs will form the base of a multiapplication smart cards (MASC) system that can be used to empower the poor and insure that they get the full benefits of all programmes such as NREGA, PDS, publically provided education, skill development, health services, social security (to persons at special risk), fertilizer subsidy, solar lanterns, solar cookers, etc.
Convergence
of plan schemes with focus on outcomes. Thrust on quality of expenditure and systems of monitoring andevaluation to improve the productivity of public expenditure.
FINANCIAL MARKETS
FUNDS FOR DYNAMIC ENTREPRENEURS
Passage
of the Banking Regulations (Amendment) Bill, 2005.
Lift
the remaining ban on futures contracts to restore price discovery and price risk-management .
Bring
all financial market regulations under SEBI with a view to encourage integrated development. Broaden the longterm debt market by liberalizing the investment norms of insurance and pension funds and development of credit enhancement institutions. Government can consider a guarantee mechanism (fund) for credit enhancement of long-term infrastructure debt. Tax incentives for long-term debt markets can be considered.
Liberalize
and develop spot and futures currency markets (exchange traded). Raise position limits for domestic companies and allow trading in SDRs and SDR currencies.
Introduce/allow
repos and derivatives in corporate debt. Introduce exchange traded interest rate derivatives, such as interest rate swaps (IRS).
Introduce
standardized credit default swaps that can be traded on exchanges, subject to stricter than normal limits on eligible participants.
Extend
spot commodity trading in electronic form to agricultural markets by involving APMCs.
Auction
rights to commercial borrowing within the already defined limits, with in-built (designed) preference for longterm borrowing. Auction of rights to invest in government securities by FIIs (under sub-limit of ECB) has already been successfully carried out.
High Net
Worth Individuals (HNIs) should be allowed to register and invest directly through authorized Indian investment intermediaries. This will allow ban of indirect ways of investment such as P notes.
Align
voting rights in banks with equity holdings. Allow public to hold greater equity in public sector banks within the policy of maintaining social control of management. Phased increase in FDI limits in banks and greater entry of foreign banks with tighter regulation of investing foreign banks and other foreign entities.
Allow
trading of directed credit obligations among banks and other financial institutions. This will allow and encourage the development of financial institutions that can specialize in and exploit economies of scale and scope in unbanked/ low banked areas and sectors.
Link
small savings rates to government debt instruments or bank deposit rates of similar maturity. Make responsive to depositcredit market conditions.
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