Can a Single Budget Solve the Most Serious Problems of the Indian Economy

8/2/2019 Can a Single Budget Solve the Most Serious Problems of the Indian Economy

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Can a single budget solve the most serious

problems of the Indian economy?

Finance Minister Pranab Mukherjee is UPA's man with the political

Midas touch. He needs to lend some of that magic to lift the economyout of its morass. By the Government's own estimate, the economy is

expected to grow by a mere 6.9 per cent in 2011-12, a sharp decline

from 8.4 per cent in 2010-11. Inflation remains uncomfortably high atover 7 per cent. Investor sentiment has been suffocated in the last one

year by policy paralysis and corruption. There is a real danger that the

Indian economy may get trapped in a middling growth trajectory of 6-7 per cent, instead of

raising the bar to 9-10 per cent.

Stringent labour laws force industry to employ machinesinstead of workers.

The stalling economy needs a kick-start immediately. Two

decisions could help boost sentiment-measures to liberalise

capital markets and a credible reduction in fiscal deficit. Itwill, however, take more than one Budget speech to push up

India's growth trajectory. The last time India grew at 9 per

cent in the mid-2000s, the global economy was booming. It

is unlikely to witness the same for the next five years.A serious reformist effort will have to be made on the

domestic front in solving fundamental bottlenecks which

prevent the Indian economy from achieving its truepotential. The challenges in labour-intensive industry,

agriculture, power, roads, skill gaps and food subsidieswill not be solved by budgetary allocations. Only radical

changes in policies, rules, incentives and delivery

mechanisms, a second wave of reforms after 1991, canextract these crucial sectors from the low equilibrium trap

they have been stuck in for many decades.

But the finance minister may himself be in a trap.The

political environment is not conducive to reform. The

Sonia Gandhi-led Congress party puts its weight behindpopulist spending schemes like the Mahatma Gandhi

National Rural Employment Guarantee Act (NREGA) and Right to Food, which may or may not

get votes, but certainly do nothing for the health of the ailing economy. At least one crucial ally

of UPA, the Trinamool Congress, has ruled out support for any reformist measures. There is littlechance that an arrogant Congress will reach out to bjp to help it pass pro-liberalisation

legislation. The economy will, more likely than not, remain mired in status quo for the remaining

length of the UPA Government's term.

Aman Rathee

SMART SOLUTIONS

ManufacturingEnsure manufacturing units get

uninterrupted supply of power

through the year. Reduce interestrates which are currently a huge

burden. Reduce land cost as it

raises cost of expansion plans.

Aman Rathee

Director, ASK

Automotive, Manesar


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The truth of our economy is only partly measured by statistics. Here's a look at ground reality.

Click here to Enlarge

PROBLEMS MADE IN INDIA

Misplaced policies have made labour-intensive industry

uncompetitive vis-a-vis China.In Jalandhar, a hub of small scale labour-intensive manufacturing in India's most prosperousstate, Punjab, the outlook is grim. Jalandhar's manufacturers, who specialise in sports goods,

industrial valves, hand tools and shoes, are mortally afraid of competition from China. The threat

has eased a bit because wages are finally rising in China. But according to Mukul Varma, 30,director of Savi International, India's largest manufacturer of footballs and rugby balls, "The

Chinese sell at prices at least 20-25 per cent less than ours." India's sports goods exports are

worth Rs.600 crore a year, which, says Varma, is less than 1 per cent of the global market. Indian

industry can be the world's best. Varma knows: His rugby balls were used at the Rugby WorldCup in 2011.

Anupam Khanna, 45, proprietor of Valvco International, a

small scale unit manufacturing industrial valves, is criticalof the UPA Government's pet NREGA which gets

additional funding in the Budget every year. This, he says,

has seriously impeded the availability of cheap labour."Till three or four years ago, we had no trouble getting

labour. Now, even if I offer wages well above the

minimum level, I get no migrant labour from Uttar

Pradesh and Bihar," says Khanna. He argues that if theGovernment has money to spend, it would be better

advised to train workers and give them necessary skills to

find factory jobs. Anuj Pasricha, 44, owner of sports

goods firm Soccer International, says he is willing to offera wage at which workers will choose him over NREGA,

but he is worried about productivity. "In China, 22

workers produce 500 footballs a day. In India, it takes 100people to produce the same number."

Stringent laws are also a deterrent to hiring labour. India's labour laws date back to the 1940s and

1950s, and are carryovers from the British era. There is a fair degree of unanimity across the

Indian industry on the need to change the laws, particularly those sections which prevent hire and

fire. But the prospect of reform in labour laws is bleak. Yashwant Sinha was the only financeminister to talk about labour law reform in his Budget speech in 2002. He was forced to beat a

hasty retreat by his own party.

There are other government-induced distortions in the labour-intensive small and medium

enterprise sector. There is a perverse incentive to remain small rather than scale up to medium

and large. The Government offers excise tax exemption for units with an annual turnover of less

than Rs.1.5 crore. If a unit goes one rupee above that, it has to pay 10 per cent tax. The policyencourages uneconomical units and prevents a level-playing field.

K. Venkatesh

Smart Solutions

RoadsAppreciate site conditions

to ensure faster construction.

Ensure quick resolution for variousprojects facing difficulty in starting

up. Give longer concession period

so as to accommodate a lower tollrate.

K. Venkatesh

CEO of Larsen & Toubro

Infrastructure DevelopmentProjects, Delhi
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Small businesses are also hurt by harassment from the Government. Even if there is full

compliance, inspectors of pollution, electricity, labour still extract money. Says Amit Goswami,41, proprieter of Euroforge in Jalandhar, "I have to travel in India and abroad to find buyers.

Each time, I worry what will happen if a government inspector lands up at my factory."

In the absence of a strong labour-intensive manufacturing sector, it's no wonder that 52 per centof India's workforce continues to languish in the agriculture sector, contributing to only 15 per

cent of GDP.

The problem is not

production but timelydelivery to the

markets

In Assam, it has taken

the National

Highways Authority

of India (NHAI) almost seven years to construct a four-lane road across a 19-km stretch of National Highway 37.

The project is not complete yet. The location is not a

remote area: It's an economically and strategically vitalstretch between Guwahati and Sonapur which connects

Dispur with five North-eastern states. The project started

in September 2005 and was slated for completion by June2009. It is expected to be complete, as on January 31, by

May.

The Government says environment clearances are a problem. Critics say that the delay benefits

contractors at the expense of NHAI. The delay has serious economic costs for the private sector.Says Pulak Goswami, president, Assam Motor Transport Association, "The national average of

road construction is 12-13 km daily. But in Assam, not even 50 km is built in a year. Due to badroads, especially at exit points of Guwahati, the life of our vehicle tyres is reduced to 15,000 km,

while it should be at least 40,000 km." He adds, "The 96-km stretch from Guwahati to Shillong

should not take more than four hours. It takes us 8-10 hours."

Instead of focusing on building highways, the Government runs a Central Transport SubsidyScheme in the North-east that came into effect from July 15, 1971, and which is a classic

example of self-sustaining, misguided intervention that persists over a long period of time. Under

the policy, the Government reimburses between 50 and 90 per cent of the costs of transporting

goods across the North-east. Between July 15, 1971 and December 31, 2010, the Governmentspent Rs.2,810 crore on transport subsidy in the North-east. Between December 1 and December

31 in 2010, the subsidy amount was Rs.371.07 crore. According to NHAI, the average cost of

building one kilometre of a four-lane highway in India is Rs.10 crore. So, the transport subsidy

of just one month could have been used to build 37 km of a four-lane highway.

NHAI's woes are not confined to Assam. The 135-km-long Eastern Peripheral Expressway

around the national capital, Delhi, has not taken off almost six years after it was commissioned in

T.V. Sandeep Kumar

Reddy

Smart Solutions

PowerBuild cost-effective linkages to

coal pits for optimal use of

domestic supply. Bail out bankruptstate electricity boards. Make

environmental clearances available

quicker.T.V. Sandeep Kumar Reddy

Managing Director,

Gayatri Projects, Hyderabad


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2006. The project, which would decongest the Capital of vehicles simply using the city to transit,

has been caught in a war between the Planning Commission and the Ministry of Roads,Transport and Highways. Planning Commission insists that the toll charges on the road can be

one-and-a-half times the "normal" rate because it is a bypass. The roads ministry insists that it is

a regular highway so no extra toll can be charged. The

project languishes in the ongoing debate.

The fate of highways in Assam and Delhi sum up UPA'spathetic record in building national highways. In a report

released in the first week of March 2012, Investment Bank

Pioneer Investcorp (PINC) said that NHAI would misstwo critical targets-for award of road construction and

completion of road construction for the financial year

2011-12. NHAI had wanted to award contracts for 7,300

km of national highways in this financial year. Accordingto the pinc report, it had only made awards for 4,285 km

until the end of December 2011. The rate of progress oncompletion is worse. Of the 2,500 km to be completedbetween April 2011 and March 2012, only 1,258 km hadbeen constructed until the end of December 2011. The

Government has failed to appoint a full-time chairman for NHAI since the last chairman left

office in the latter half of 2010. Coupled with a tussle between two key government bodies andserious problems with environmental clearances, the roads sector is caught in a vicious cycle of

mediocrity.


POWER TO PEOPLE

Subsidised consumers, bankrupt electricity boards, little investorinterest in power.

Uttar Pradesh, India's largest state with 200 million people, has a seriouspower crisis. In the eastern part of the state, consumers receive only five

to seven hours of electricity per day. The people of Bundelkhand get an

average supply of 12 hours a day. Western Uttar Pradesh is consideredblessed to have 14 hours of power supply a day.

This power situation is extracting a serious economic cost. Anand KumarDixit, 55, a sugarcane farmer of Sarenamall-Chapra in Kushinagar

district of eastern Uttar Pradesh, says that production could increase by

100 per cent if he was assured 15 hours of power supply every day. "Wehave learnt to live without electricity and depend on diesel generators forirrigation and other agricultural purposes. But the price of diesel has

increased from Rs.29 to Rs.43 per litre in the last few years, forcing us to

minimise the use of even generators. The power crisis is hitting the

services sector," he says.

Smart Solutions

Skill GapReform the Apprenticeship

Act of 1961 to increase the numberof youths who learn as they earn.

Increase employability in college

education. Make India's failed

1,400 state employment exchangesfunctional.

Manish Sabharwal

CEO, TeamLease,Bangalore


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Mayank Khare, an officer in the Life Insurance

Corporation of India and a resident of Banda town inBundelkhand, says that work efficiency goes down

dramatically during the summer. "I fail to understand how

the electricity department plans power supply distribution.

They shut down the electricity supply between 12 noonand 5 p.m., when most of the work is done in offices. This

brings down business by at least 25 per cent," he says.

Uttar Pradesh's crisis may be more acute than in other

states, but chronic shortages of power are common acrossIndia. For the country as a whole, the deficit between

supply and demand at its peak in the summer months is 10

per cent. Worse, 30 per cent of total power generated is

lost in transmission and distribution, mostly on account of theft. That exacerbates the deficitbetween demand and supply.

The Government has done little to bridge the power generation deficit in the last two decades.According to Planning Commission estimates, the Government achieved only 50 per cent of its

power generation targets over three Five Year Plans between 1992 and 2007. The target for the

12th Five Year Plan (2007-12) has already been cut by 20 per cent. The Government is likely tofall short of meeting even that reduced target.

The immediate concerns for the power sector are inadequate supply of coal-a key raw materialfor thermal power producers who produce two-thirds of the country's electricity supply-and

difficulty in getting environmental clearances. If it's willing, the Government could solve those

problems soon enough. However, there is a more fundamental problem in the power sector

which will take much longer to solve-it is simply not profitable enough for private sector playersto invest in power generation because the main buyers of electricity, state electricity boards, are

bankrupt.

The cumulative losses of the state electricity boards in 2011 were Rs.70,000 crore. The 13th

Finance Commission expects them to rise to Rs.1 lakh crore by 2014. Ninety-five per cent of the

boards are owned by the Government. They have little incentive to curb the transmission anddistribution losses because they know the Government will foot the bill.

But the reality is also that Indian consumers, on average, pay much less for a unit of electricity

than countries which are richer, both in terms of income and resources. In India, the average

tariff charged is eight US cents per unit compared to 12-15 cents in China, Canada, South Africa

and the US and 19-20 cents in much of Europe and the developing world. If India is to meet itspower targets, the Government needs to ask consumers to pay more, to privatise electricity

boards to reduce losses and then to incentivise private players to invest in power generation. On

current evidence, it will take populist governments a very long time to break out of the trap.

DEGREES TO NOWHERE

Lack of quality control has led to skilled labour shortages in a labour surplus country.

SMART SOLUTIONS

AgricultureTriple the Budget

allocation for agriculture

infrastructure and research and

development. Focus on transfer ofexisting knowledge to the farmer.

Rationalise and target policies andsubsidies.

Ajay Vir Jakhar

Chairman, BharatKrishak Samaj, Delhi


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Mohan Kumar, 22, in Chennai checks his email repeatedly, in case he has received a message

from a potential employer. Kumar graduated as an electronics and communication engineer fromES College of Engineering and Technology in Villupuram a year ago. He is one of many

engineers in Tamil Nadu, who after spending four years and Rs.4 lakh on a professional degree,

have no job.


In February 2012, Kiran Karnik, former Nasscom chairman

and member of Scientific Advisory Council to the Prime

Minister, told the media that only 25 per cent of freshengineering graduates in India are directly employable. A

survey of 1,000 recruiters conducted by jobs portal

Naukri.com in 2012 revealed 61 per cent of them faced a

talent crunch while hiring employees. The gap between whatrecruiters were looking for and what candidates offered was

big across all of India's booming sectors-66 per cent of

recruiters in it reported talent shortages, 57 per cent intelecom, 56 per cent in auto and 55 per cent in

pharmaceuticals sector reported a similar skill crunch. Many youngsters who have professional

degrees need re-training to be suitable for employment. That is a telling indictment of theeducation system which, barring a few elite institutions like the iits and iims, fails to provide a

decent education.

Says Karnik, affirming the point, "Why do I (a candidate)

need to go back and learn a bit of programming,mathematics and communication skills after spending so

many years and money in education? I must say the

education system, particularly in the last few decades, has

not quite succeeded." The reform of the higher educationsector was a priority for UPA 2 under the leadership of

Union Human Resource Development Minister Kapil

Sibal. However, three years on, the Government has failedto push new legislation through Parliament. The Foreign

Universities Bill, which would help raise quality of

education by attracting top universities from abroad, islanguishing. The crucial National Council for Higher

Education and Research Bill, which would revamp the

outdated regulatory structure for higher education, is yet

to see the light of day. The many radical suggestions of the Sam Pitroda-headed National

Knowledge Commission are in cold storage.

There has been some limited effort from the private sector to bridge the skill gap. IT BellwetherInfosys has started two programmes to re-train engineers for jobs. The first is a campus contact

programme contest for students in 500 engineering colleges via a portal, where they download

projects and compete to solve problems set in a realistic environment, while the second is re-training of their own employees at a residential complex in Mysore. Srikantan Moorthy, 49,

senior vice-president and group head, education and research of Infosys, pointed out that

SMART SOLUTIONS

SubsidiesNeed to start with

identifying the intended outcomes

of different subsidies. Strengthen

the role of local governments indelivery. Ensure greater

transparency in processes and fundflows.

Yamini Aiyar

Senior Research Fellowat Centre for

Policy Research,Delhi


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engineering students do understand concepts, but their ability to use them in the context of a

given problem is "very limited".


"The main focus of the education they receive is on examination. It tests

the definition of a concept rather than solving a problem," he told IndiaToday. About 1.4 lakh students have participated in the campus connectprogramme, but Infosys can only absorb a limited number of engineers.

The Government needs to re-orient the way professional courses are

taught in colleges so that re-training is not required.

The huge gap between the demand and supply of appropriate skills is notjust at the level of professional education. The lack of emphasis on

vocational training has meant massive shortages in skilled labour to work

in factories. The Government needs to invest in vocational training if

India is to avoid being a labour surplus country with a massive talent

shortage problem.

MARKET BOTTLENECKS

Holes in the supply chain harm farmers, lead to food inflation.In Jalgaon, Maharashtra, banana farmers are pleased with the fertiliser

subsidies provided by the Union Government. The farmers in the banana

capital of the country used 6.20 lakh tonne fertilisers in the last season,the highest in the state and third highest in the country after Guntur

(Andhra Pradesh) and Gurdaspur (Punjab). However, what the farmers

gain from fertiliser subsidies is ruined by the Indian Railways. The extraoutput that the farmers of Raver, Yawal, Muktai Nagar, Chopda and

Jalgaon talukas produce, courtesy cheap fertiliser, needs to be transported quickly to the biggestmarkets in Delhi and Uttar Pradesh. Farmers complain that absence of direct freight trains from

their region to major markets means that their perishable produce does not reach the market ontime. Says Sudhakar Patil, a banana farmer from Yawal, "Train is a cheaper mode of transport

than trucks. It saves money as well as time. But unfortunately, the railway ministry does not

ensure that the wagons available on time. The banana then ripens in the wagon instead of thefend market."

Farmers elsewhere in India have similar problems. Transportation is inadequate and slow. Cold

storage facilities don't exist. The Government could have made up for its own failing by allowing

fdi in retail. Big retail would have the necessary incentives to invest in cold storage and faster

transportation. But UPA caved in under political pressure. The average consumer pays theultimate price.


Other government policies also practice an implicit

discrimination against the farming of fruits and vegetables.The Government offers a minimum support price for the

procurement of wheat and rice. No such guarantees are
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available to fruit and vegetable farmers who are exposed to the vagaries of the market. That

lopsided procurement policy encourages farmers to grow rice and wheat even in regions wheregrowing fruits and vegetables would be more appropriate. That, in turn, reduces the supply of

fruits and vegetables, leading to an upward pressure on prices.

Farmers also tend to get a raw deal from policies such as the Agricultural Produce MarketsCommittee (APMC) Act which restricts access to mandis to a limited number of traders. The

traders, who often form a cartel, then extract produce at a lower price from farmers.

The only avenue for farmers to bypass local markets is to access export markets. The

Government's propensity to introduce export bans the moment the prices of a commodity rise (infavour of the farmer) robs them of potential windfall gains. The policy dice is loaded against

India's farmers. The Government needs to reverse its vision for agriculture if it is to become an

engine of growth for the economy in the future.

A deserted power project site in Allahabad is

symptomatic of delays.Click here to Enlarge

THE SYSTEM LEAKS

Pumping money into subsidies without reforming

distribution is a disaster.The residents of Kandakhal in Bolangir district, Orissa, are

upset with the Government because of irregular supply ofsubsidised rice, their primary means of subsistence.

Kandakhal is in the infamous Kalahandi-Borangir-Koraput

belt of Orissa which suffers from chronic poverty andmalnutrition. The rates of poverty in the region are almost

double the national average of around 35 per cent of the total population.

Kandhakal's villagers are entitled to 35 kg of rice every month at Rs.2 per kg under the

Government's Antyodaya Anna Yojana for families below the poverty line. They don't always

get it. Says Baishnab Mahanand, a BPL card-holder, "The supply is erratic. We know thatpolitical leaders and their henchmen eat up stocks meant for us." The villagers have only limited

demands. Abhi Bag, a BPL card-holder from Antarla in Bolangir's Titlagarh block says that

wheat and sugar are a luxury. "All we want is our quota of Rs.2 rice. Let the Government ensurewe get it."


The Government spends approximately Rs.60,000 croreevery year on subsidising food for the poor. The proposed

Food Security Bill, which may well be the only big-ticketlegislation announced in the Budget, will raise the annual food subsidy bill to Rs.90,000 crore. It

will not be radically different from the existing food subsidy schemes promising 35 kg of rice

and wheat at Rs.2 and Rs.3 per kg every month. The total expenditure will be more than fourtimes what the Government spends on Sarva Shiksha Abhiyan, its programme to universalise

school education.
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Unfortunately, as the experience of Bolangir's villagers proves, much of the Government's

money and grain are siphoned off by middlemen operating in a broken PDS. If the Governmentspends more money on subsiding food without reforming the distribution system, it is money

wasted. The Government does have a ready role model to emulate.

Many people with engineering degrees have to be trained

again to land a job.

In Chhattisgarh, the government of Chief Minister Raman

Singh has since November 2008 ensured that the PDS

system works. The state has 1,577 procurement centres forfoodgrain which are connected to each other and the

department of food in Raipur via the Internet. The

Government monitors the movement of grain from the

procurement centres to the fair price shops. It has involved

local communities in the monitoring process. So, when atruck is sent to a PDS shop, an SMS is sent to the village chief and local NGOs. In the SMS,

there are details of the amount of grain carried in the truck.

Despite food subsidies, residents of Bolangir, Orissa,languish in poverty.

Truck drivers have to record the unloading process on theirphone cameras and send it via MMS to the central server.

The trucks are also equipped with GPS devices. Any

deviation in their route is monitored. Pilferage has beenminimised. UPA must take a leaf out of Chhattisgarh's book

before it continues to waste money.

- With Shravya Jain, Kaushik Deka, Piyush Srivastava,

Kiran Tare, Lakshmi Kumaraswami, Sowmya Aji, Rakesh

Dixit, Santosh Kumar and Rajesh Sharma

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Can a Single Budget Solve the Most Serious Problems of the Indian Economy