Union budget FY15: Customary praise and misdirected criticism

Thought for the day

” The production of too many useful things results in too many useless people.”

-          Karl Marx (German, 1818-1883)

Word for the day

Tumultuary (adj)

Confused; disorderly; haphazard

(Source: Dictionary.com)

Teaser for the day

FIFA World Cup over. Let's catch up some sleep, markets permitting!

Union budget FY15: Customary praise and misdirected criticism

The first budget of Modi government has evoked mixed response from various quarters.

The views supporting the budget are customary and sound rather obliged to praise it. These voices have come mostly from large industrialists. Their views are mostly driven by hope. "It's only a beginning", "they had little time", "It is a trailer, big picture will emerge only in February" etc. are common refrains. I believe no one taking these views seriously; not even those expressing these views.

On the other hand the criticism has mostly come economists, analysts, political observers and political opponents. Their arguments are even more bizarre. "No big bang", "continuation of UPA policies", "straight from Chidambaram's book", "too ambitious" are the common headlines in this camp.

I have supported the budget statement because for the first time in couple of decades, I saw a government focusing on the intrinsic strengths of Indian economy rather than overemphasizing on the weaknesses. I have reasons to believe that this trend will continue till 2019 at the least. To me the taxation structure appears skewed in favor of the rich and might need correction to improve purchasing power of middle and lower middle class consumer.

Given the fragile state of Indian as well global economy, it is prudent to maintain status quo and not make too many experiments. I do not see anything wrong in this.

The UPA had shifted its stance towards fiscal prudence and monetary corrections in summer of 2013 with PC and Rajan both taking some serious measures. Almost everyone, including financial markets, recognized, lauded and supported the effort. I do not understand why people expected a material departure from this set course.

I have reiterated my views on "big bang reforms" rather frequently. I strongly believe that PMGSY (rural road program) has and will continue to bring more benefits to large corporate than multibillion dollar mega projects. These roads bring food and labor to them and take their produce back to the 60% of Indian populace. Trust me the quintessential "India Story" is all about rise in consumption at the bottom of the pyramid.

Insofar as the fiscal targets are concerned, I see little justification for the skepticism. I think 4.1% fiscal deficit is certainly achievable, if the government just maintains its current pace of fiscal tightening and moves ahead with long stalled sale of assets like Hindustan Zinc, Balco, and ONGC etc.

GAAR has been a contentious issue for couple of years now. While the retroactive implementation of these provisions (or any substantive tax provision) is not desirable, the ongoing litigation has queered the pitch for the government. I think the last word on this matter is still not out and a rational decision will be taken soon.

Inflation is a concern not just this parched summer but for next many years till the supply augmentation efforts of the government yield result. I guess a review would be in order only after the government completes half the term.

The third dimension

Thought for the day

”From each according to his abilities, to each according to his needs.”

-          Karl Marx (German, 1818-1883)

Word for the day

Shoat (n)

A young pig.

(Source: Dictionary.com)

Teaser for the day

We have heard numerous voices raising concern about money laundered out of India.

Has anybody spoken about the money laundered into India yet?

The third dimension

An annexure attached to the Union Budget outlines the Revenue foregone under the Central Tax System during Financial Years 2012-13 and 2013-14. I find this often ignored part of the budget document quite interesting and to an extent intriguing.

The statement highlights the extent of concentration of financial power in the hands of few top corporate and the tax disparities between smaller and larger tax payers. This also raises some doubts about potential misuse of corporate veil for wrongful purposes.

As the following table shows, about 46% of the sample 6.18.806 companies did not show any profit and therefore did not any tax. The bottom 95% companies' share in total income was a meager 7.35%. Top 272 companies accounted for 57% share in total income.

I appreciate that lot of these companies will be shell companies or holding companies which normally do not have any recurring income. Nonetheless, the disparities are so stark that it raises many doubts.

On the other hand the effective tax rate for large corporate is 20.97% where as smaller companies pay in excess of 26%. The average for unincorporated assesses (partnerships, AOP and BOIs) is also over 25%. This to my mind a reason for examining whether the tax concessions are promoting disparities or it is just incidental.

 

Dear FM ride a scooty on PMGSY road, bullet trains can wait

Thought for the day

”People who think they know everything are a great annoyance to those of us who do.”

-          Isaac Asimov (American, 1920-1992)

Word for the day

Foofaraw (v)

A great fuss or disturbance about something very insignificant.

(Source: Dictionary.com)

Teaser for the day

PM's first overseas business visit may be fruitless. Germans would be too elated to talk business (Merkel may even not meet Modi) and Brazilians would be too depressed to talk business!

Dear FM ride a scooty on PMGSY road, bullet trains can wait

Scooty (e.g. Activa) and mobile phone have empowered women more than any policy initiative or legislation.

The recent statements made by some ministers, including the finance minister & prime minister himself, the rail budget, and the economic survey, have adequately hinted that -

(a)   The new government is willing to take the straight road to the economic revival. This road is long and exacting but the success is guaranteed. Along the way the resolve and grit of the government will be tested rather frequently. A ma breakdown will set BJP and economy back by another decade.

(b)   Administrative efficiency and ease of doing business will be initial fruits. The flowering should be visible within six months.

(c)   Enablement rather than provisioning will be the mantra for growth and development. Those accustomed to government patronage and largesse will certainly face an existential threat in next five year.

(d)   The governance and compliance deficit will be targeted on top priority basis to make a strong foundation for bridging other deficits like capital, fiscal, and trust.

In this backdrop I do not expect the finance minister to deliver any major concessions in today's speech. Though token concessions like hike in 80C, 80D or basic exemption is ok. It would be totally in order to increase taxes by way of specific cess (like road and higher education) to mobilize resources for specific purposes.

Insofar as reforms are concerned, I believe that the objective should be enablement of common people rather than benefit of few select.

Spending on social sector is not socialism in Indian context. It is hardcore capitalism. It is like the money spend on developing a coal mine that will fuel our power plants for many decades.

I would like to highlight some key reforms made in past that have made substantial difference to common man's life:

(a)   The social sector schemes have impacted the people lives more than the economic reforms, especially in rural areas. Despite frequent news of irregularities, schemes like mid day meal, girl child education, NRHM and MNREGA have positively impacted more lives. Financial inclusion (SHG, MFI, Banking Correspondents) has also impacted their lives directly.

(b)   PMGSY (the flagship rural roads scheme) has been a game changer.

(c)   Mobile connectivity has been the best technological evolution impacting the rural lives.

(d)   Metro rail has improved people's life significantly.

(e)   In rural areas of most states obtaining drinking water consumes 6-8 man hours. Electricity is still inadequate. Focusing on these two could enhance productivity and income potential in rural and semi-urban areas substantially.

(f)     We felt that strictly implemented prohibition legislation would bring more prosperity to states like Haryana, Uttrakhand and Punjab than any economic reform.

(g)   Education and health reforms are more critical than economic reforms for most citizens of India.

Rose day, Chocolate day, Kiss day... Budget day

Thought for the day

”Never let your sense of morals get in the way of doing what's right.”

-          Isaac Asimov (American, 1920-1992)

Word for the day

Previse (v)

To foresee; To forewarn

(Source: Dictionary.com)

Teaser for the day

By resolving to obstruct Parliament, Congress Party has only justified and legitimized all the misconduct of opposition parties in the Parliament during past 10years!

Rose day, Chocolate day, Kiss day... Budget day

I have never been in agreement with the convention of combining the announcement of government's socio-economic policies and programs with the announcement of annual budget speech. Especially, when this practice has often led to avoidable delay in implementation of critical programs and policy issues. There are many instances where some obvious mistakes in tax laws have to wait for next year's Finance Bill for necessary amendment, causing absolutely avoidable harassment to tax payers.

Moreover, more often than not budget speeches are used to make political statements and advance the political interests of the ruling party, usually at common man's expense.

I believe that the legislative work, including tax laws should be an ongoing business and not a discreet event. The annual budget should be just that  - "a budget", where the government presents its accounts and seeks parliamentary approval for the expenditure it wishes to incur on various heads.

The spread of satellite televisions reach has also led to "commercialization" of the budget event, just like various "days" that have secretly entered our social calendars. TV channels usually build a hype around it and sell to investors as "make or break" event.

I would like to seek the counsel of wise men (businessmen, fund managers, investors, analysts, economists and policy makers) who are seen regularly participating in this mega event in past decade - what strategic investment or business decision they have taken or advised others to take based on a particular Finance Bill provision? And whether such legislative provision could have been made in regular course of parliamentary business other than Finance Bill?

To my ignorant mind, there is nothing that created or changed the business or investment opportunities in past one decade that could not have been done outside Finance Bill or Budget Speech.

Having recorded my dissent, now I would like play the sport and outline my expectations from the budget as sought by many readers.

Reading from yesterday's rail budget speech of rail minister and statement of the finance minister in Rajya Sabha on fiscal health of the country, three things are very clear:

(a)   This government is laying much greater emphasis on capital markets for resource mobilization. Asset sale and equity dilution of PSE will be a focus. I would however like to first see a policy framework for protection of minority shareholders in PSE before making any investment decision.

(b)   Revenue augmentation rather than expenditure curtailment may be the approach to fiscal discipline. Stricter tax compliance  and higher taxes would be the order of the day.

(c)   Administrative efficiency through e-governance which is one hallmark of Gujarat model, will be a priority.

...to be continued

Raise the bar

Thought for the day

”For rarely are sons similar to their fathers: most are worse, and a few are better than their fathers.”

-          Homer (Greek, time uncertain, most believe between 7^th and 8^th century BC)

Word for the day

Blithesome (adj)

Lighthearted; merry; cheerful.

(Source: Dictionary.com)

Teaser for the day

Should poverty line be absolute or relative?

Would it be appropriate to say anyone earning less than 2% of the average income of top 10% Indian tax payers is poor?

Or you think notwithstanding the state of broader economy the poor should be happy and content with their 2000kcl?

Raise the bar

Traversing through remote hills and forests of Kumaun region of Uttrakhand during past 8days was quite revealing. For the first time, in my numerous visits to the region over past three decades, I experienced a colossal surge in expectations; and it is not the youth alone. Everyone is conspicuously carrying enormous expectations - not only from the government, but in general too. The common people there who are generally poor and live a sub-standard life on all parameters, seriously believe that their life needs to improve substantially.

Back home and listening to the media debates, it occurs to me that the tiny part of population which is vociferously (in some cases rather ludicrously) "demanding" concessions and seeking provisions for themselves in the Union budget might perhaps be completely cut from the broader realties of Indian economy.

The debate over validity or otherwise of official poverty line also sounds hollow and unfractuous. Having lived with a family who earns less than Rs5000/month for a night, I can understand that Rs. 32 (per capita/day or Rs5000/month for a family of five) lets you survive, given health, education, and one meal for children are provided by the government; and you do not have to pay any taxes. Water is provided free by nature and electricity they have nothing to use for. The staple meal (rather obligingly) offered to me by the family was healthy and nutritious.

The basic needs of food, clothes and shelter apart, the life of our fellow countrymen, whom we prefer to call BPL, is far from dignified, which is their constitutional right. They lack basic civil amenities like sanitation and safe drinking water close to their homes. The healthcare available to them is really primitive and insufficient. The standard of education afforded to their children is far from satisfactory and abysmally inadequate for their children to break the vicious cycle of ignorance and poverty.

I am confident that the NDA government led by an erstwhile tea seller Narendra Modi is well aware of the ground realties. I therefore expect that the socio-economic policies of the government would be suited to uplift the bottom half of the population on priority basis. The middle class populism can wait for few more years.

To this end, I feel that the conventional paradigm of poverty alleviation needs to be radically redefined. I believe that the extant absolute measure of poverty in terms of minimum monthly per capita expenditure to obtain sufficient calories to survive is inappropriate, inequitable and in a way unconstitutional. Instead, the poverty line needs to be drawn on relative basis. In my estimates, defined as mere 2% of the average income of top 10% tax payers, will push over half the country below poverty line. This realistic assessment shall allow the government to redefine priorities and redraw the social welfare programs.

Over next three days I shall outline my views on the budget, which I sincerely believe is accorded undue importance by the community.

Entrepreneurship is not best always

Thought for the day

” God is not willing to do everything, and thus take away our free will and that share of glory which belongs to us.”

-          Niccolo Machiavelli (Italian, 1469-1527)

Word for the day

Peckish (adj)

Somewhat hungry; Rather irritable.

(Source: Dictionary.com)

Teaser for the day

Where is Rahul Gandhi and his youth brigade?

Entrepreneurship is not best always

In past two decades, since 1995, India’s economy has grown at an average rate of 6.9%. However, the total employment in economy during this period has grown at just 0.3% CAGR.

In this period the number of self entrepreneurs has certainly increased in the country. This has coincided with the sharp fall in public sector employment. The aggregate private sector employment level has not been able to compensate for fewer opportunities available in public and unincorporated private sector. Consequently, the total number of employees on live payrolls has fallen sharply since early 2000’s.

The combination of two – lower employment opportunities and liberal business rules – has perhaps forced people towards entrepreneurship that keeps them underemployed for most of the time.

The number of self owned enterprise has swelled in past one decade. As per 67^th round of NSSO survey (June 2011), there were 58million unincorporated enterprises in India (excluding agriculture, construction and those registered under Factories Act).

Over 85% of these enterprises are run by the owner himself, without any hired worker. 44% of these were run from the residence of the owner. These enterprises employed 108mn people against just 39mn on the live payroll in organized sectors, including 11mn in private sector. (Source: RBI, NSSO)

There has been a definite shift in employment away from agriculture towards manufacturing, construction and service activities. The share of agriculture has declined continuously from 59.9 per cent in 1999-00 to 48.9 per cent in 2011-12 whereas the share of construction sector has consistently risen from 4.5 per cent in 1999-00 to 10.6 per cent in 2011-12.

This highlights the popular myth that MNREGA has led to reverse migration of labor to rural economy and had adversely affected the availability of labor for manufacturing and construction sector….to continue on Monday

 

Capitalize on human capital

Thought for the day

”The new ruler must determine all the injuries that he will need to inflict. He must inflict them once and for all.”

-          Niccolo Machiavelli (Italian, 1469-1527)

Word for the day

Garboil (n)

Confusion

(Source: Dictionary.com)

Teaser for the day

Should government consider scraping degree as eligibility condition for all government jobs (including IAS)?

 Instead it may institute an exhaustive eligibility test followed by a 3-12 month orientation program for all new recruits.

 

Capitalize on human capital

In a recently published working paper the Reserve Bank of India highlighted many interesting facts about the status of employment and its elasticity to the GDP growth. I find it pertinent to highlight some of the observations made in the said working paper.

In particular the change in occupation structure of the economy in past 15years is worth noting; because it helps setting up the agenda for future growth. It is important to note that one of the key promise of incumbent government is to make growth job oriented (hence inclusive) as opposed to jobless growth (therefore exclusive) growth achieved during past few years.

The working paper finds that aggregate employment elasticity (change in employment due to economic growth) of Indian growth has fallen considerably in post 1991 period. In this period for every 10 per cent change in real GDP, there had been about 1.8-2 per cent change in employment. The current statistic is even poor.

Moreover, elasticity varies considerably across sectors. While agriculture has witnessed negative elasticity, services including construction have generally been employment intensive. Manufacturing employment elasticity has hovered in the range 0.29-0.33.

Within manufacturing, the employment elasticity for organized manufacturing sector based on various estimates seems to be higher, in the range 0.42-0.57 for 2000s and it has risen over the previous two decades. Given the huge productivity and wage differentials between organised and unorganised sectors, greater employment generation in organised manufacturing is crucial as it has larger multiplier effects.

Subsequent to 2011, India has seen significant moderation in its GDP growth rates, particularly during 2012-13 and 2013-14. While employment numbers are not yet available for these years, Labour Bureau quarterly surveys as well as various private agencies’ information point towards moderation in employment generation. If these data sources are any hint, then one might see some changes in employment elasticity depending upon the relative pace of moderation in employment generation vis-à-vis growth.

The working paper suggests that going forward, it is the relative cost of capital vis-à-vis labour and the nature of investment demand that will determine to what extent growth would be job-creating.

Increased capital to labour ratio in the organised sector for a labour abundant country like India is a concern that has been well-highlighted. I have also been highlighting this rather frequently and to the annoyance of some of my government readers.

If India has to meet the demographic dividend challenge, focus should be on industries where employment elasticity is higher. On a rough basis, about 10 million people would need a job every year for the next 15 years. Finding productive jobs for such huge numbers is a big challenge, and clearly the answer lies in stepping up growth, and importantly, stepping up the employment intensity of growth….to continue tomorrow