Effect of 'o9-10 Budjet on Economy

8/8/2019 Effect of 'o9-10 Budjet on Economy

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Budget 2009: Short on answers

The Economic Survey and the Budget do not analyse the sources of the decline in GDP growth.

The Finance Minister, Mr Pranab Mukherjee.

T. N. Srinivasan

The conventional Budget continues the deplorable practice of expanding existing handouts and

creating new ones and throwing money at problems, without providing any convincingexplanation of their rationale and any hard-headed social cost-benefit calculations.

There is no overall logic or a coherent pattern in the various tax proposals. For this reason andthe fact that only an extremely small proportion of Indias population pays any direct taxes to be

affected by the direct tax, evaluating individual proposals is of limited value. Indirect taxes doaffect almost the whole population to some extent, but their true incidence across various income

groups is unknown the available data from the National Sample Survey are woefullyinadequate for this purpose.

The Finance Minister (FM) laid out three challenges in his Budget speech: first, to lead the

economy back to a 9 per cent annual growth at the earliest; second, to deepen and broaden theagenda for inclusive development; and third, to re-energise government and improve delivery

mechanisms.

Growth slowdown


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TheEconomic Survey in its Chapter 2 elaborates on these challenges and includes a policyagenda with many diverse items and a superficial, and not an in-depth, analysis of the growth

slowdown. Without an in-depth analysis, it is impossible to suggest policies to meet the firstchallenge of the FM.

The analysis has to recognise that the slowdown had started even before the onset of the crisis the peak rate of growth of 9.7 per cent of GDP and 11.8 per cent for manufacturing were reachedin 2006-07 before the onset of the crisis. In every quarter since the last quarter of 2006-07,

growth of manufacturing GDP has been in steady decline, from 12.5 per cent annual rate ofgrowth over the corresponding quarter in the previous year, to minus 1.4 per cent in the last

quarter of 2008-09.

GDP growth also declined, with occasional reversals from 9.8 per cent to 5.8 per cent during thesame quarters. The global crisis, though it accelerated the decline, could not possibly be the

primary source of the decline that had started earlier.

The Survey and the Budget do not analyse the sources of this decline, breaking them intostructural and cyclical elements. Instead, they focus on the decline associated with the globalcrisis and even this analysis is by no means causal. My hypothesis is that the process of growth

acceleration until 2006-07 had run out of steam because of domestic, largely structural,infrastructural and institutional constraints and until these are addressed, even after the

temporary effects of the global recession are over, returning to the pre-2006-07 growth path andaccelerating further would be very difficult, if not altogether impossible.

I have not tested this structural hypothesis, along with its alternative that the decline in growth is

cyclical entirely due to temporary and reversible shocks, with a suitable empirical model.Needless to say that the policy response would be very different: it would depend on which of

the two hypotheses is supported by the empirical model.

Inclusive development

The mantra of inclusive development chanted once again in the second challenge of FM. It and

its other variants such as the concern foraam admi are nothing but slogans, reminiscent of thelate Mrs Gandhis slogan ofGaribi Hatao.

On the other hand, even before Independence, the National Planning Committee chaired by

Pandit Jawaharlal Nehru had argued cogently for rapid (at an annual rate of 7 per cent or more)and inclusive (that is, well-distributed) growth as instruments for poverty eradication.

What was missing in the development strategy since Independence was a concrete programme of

policy action, based on a sound analysis of the socio-political and economic determinants ofpoverty and how appropriate policies can address them.

Simply repeating the mantras ad nauseam without such a programme is unlikely to make futuredevelopment any more inclusive than it has been in the past. After all, until after GDP growth


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accelerated from the 1980s compared to the previous three decades of the Hindu rate ofgrowth, there was no decline in poverty.

Only the acceleration in growth that came about with the opening of the economy to external and

internal competition reduced poverty and not any specific policy action to make growth more

inclusive. Handouts through subsidies and myriad programmes addressed to the populationbelow the poverty line (BPL) are not long-term policy solutions for poverty eradication.

Costly palliatives

When effective, which is not necessarily or often the case, they are palliatives that can at best

prevent poverty from rising. Palliatives can be costly and inefficient. The public distributionprogramme and a relatively more successful NREGA, both palliatives, may be necessary

politically, but pretending that they will raise the poor above poverty permanently is just that,pretence.

For example, studies show that for transferring a rupee to the hands of the poor, doing it throughPDS costs Rs 3 or more to the society. Instead of all the costly and ineffective programmes toreach the BPL population, a simple cash transfer to them would be more effective and is unlikely

to lead to any more misidentification of the BPL groups and leakages to the non-BPL groupsthan the current policies.

Of course, the leakages are not incidental but of deliberate design: in part they represent means

of patronage dispensation. The costly bureaucracy of the Food Corporation of India and theprocurement programmes are vehicles for dispensation of political patronage and sources of

corruption. For this and the reason that a cash transfer to the poor is not effective in patronisingparticular groups associated with each programme, the bureaucrats and politicians will resist the

adoption of the transfer scheme. The Budget makes no change in the handout and subsidy raj.On the contrary, the subsidies are budgeted to rise, and the Food Security Act to be enacted

promises to deliver 25 kg of rice or wheat to the BPL population!

Bangladesh, which is poorer than India, has managed to eliminate food and fertiliser subsidies to

a large extent. Its culture and political economy are not that different from Indias, yet it hasdone so not by dictates by military rulers that could have been reversed by elected governments.

I have not heard any politician or bureaucrat in India refer to the Bangladesh experience. Whyshould they? Eliminating them would eliminate their use as patronage dispensing vehicles. Alas,

there is no analysis in theEconomic Survey on the cost-effectiveness of the various BPL schemesand the political economy that sustains them.

Missing issues

I do not want to dismiss out of hand all the policy proposals in the Survey. Unfortunately they

resemble more a wish-list than a coherent, internally consistent, mutually re-enforcing oneemerging from identification of the crucial constraints on growth and poverty eradication andtheir political economy.


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The items missing from the list and the Budget are telling. There is no mention of repealing thedraconian labour laws, identified by Professor Mahalanobis, who was no reactionary, as

constraining growth and equity. There are no proposals for reforming bankruptcy laws either.

There is no mention of reform of access to land and creating efficient and competitive land

markets. There is no mention of alternative, less costly and more efficient delivery mechanismsalluded to in FMs third challenge.

Above all, there is absolutely no recognition in the Budget or the Survey of the fact that Indiasdevelopment and industrialisation strategies missed out on expanding labour intensive

manufacturing to supply growing domestic and export markets and thereby condemning millionsto be mired in poverty.

There is no recognition that merely imitating Chinas Special Economic Zones, without at thesame time doing what China did to ensure their success, is most unlikely to reproduce Chinese

success. Incidentally, that India is a vibrant participatory democracy is to be celebrated because

democratic values are intrinsic and, as such, cannot be weighed against the instrumentaldimensions of democracy in influencing economic development.

In any case, it is not Indias democratic system that has retarded development, but itsincreasingly dysfunctional political competition that is not inevitable in a democracy.

The Budget takes an ignorant stand-pat attitude on public ownership of enterprises, including

commercial banks and insurance companies, that produce commercial private goods and servicesand the limits on private (foreign and domestic).

Financial crisis

Until the middle of 2008, the presumption was that the impact of the emerging global financial

crisis on India would be small because the wise and omniscient RBI had imposed prudential

restrictions that prevented Indian financial sector investing in exotic financial instruments andderivatives from abroad and did not adopt a policy of making the rupee convertible.

The RBI adopts a preventive approach to regulations while the US Fed under Greenspan

adopted a curative approach. There are pluses and minuses to both except in the case of healthcare where Indias approach is largely curative, prevention is generally superior to cure.

Indias regulations in general and not just in the financial sector, basically imagine all kinds of

potentially risky actions and try to prevent them in advance from being taken regardless of thepossible high returns to some.

The result is that costly actions are taken by the private sector to avoid or evade regulations orvery few risky actions are taken if they are not avoided or evaded.

While the probability of crises occurring through the prevention of inappropriate systemically

risky actions being taken that could have led to crises might have been reduced, on the other side


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were lost opportunities and blunting of innovation, neither of which are usually mentioned in themedia.

By October 2008 it was realised that the financial crisis would have an impact on external credit

for Indias trade and the decline in inflows of capital.

Moreover, India had become much more globalised in a financial sense than in real goods andservices sense, so that the adverse impact through the financial channel could not be avoided.

The impact through the real channel, through drastic falls in growth of Indias exports, was veryhard export growth declined from annual rates of growth of over 20 per cent to negative

growth in recent months.

The policy response to the crisis by the Government and the RBI was along predictable lines increase government expenditure, reduce policy rates and expand liquidity. I am not persuaded

that given the different sources of impact of global crisis on India than in the developed countries

and its different economic structure, adopting policies that are analogous to theirs has beennecessarily wise.

Size of stimulus

Counting every increase in expenditure as part of the stimulus and claiming that the entire

increase (of 3.5 per cent of GDP) in the Central Governments fiscal deficit from 2.7 per cent ofGDP in 2007-08 to 6.2 per cent of GDP in 2008-09 as the size of the stimulus defies economic

logic.

The true size of the stimulus is likely to be far less. Indias fiscal situation is worse than Chinas

and is unlikely to improve soon, notwithstanding the pious sentiments in the Budget of soonreturning to the FRBM regime. They are not credible. By some estimates, the consolidated fiscaldeficits of the Centre and States will be in double digits as a per cent of GDP when the accounts

of 2009-10 become available.

TheEconomic Survey contains a fairly conventional analysis of the global crisis. But I do notwish to blame the authors unduly for this. Even in the US, there is as yet no authoritative and

analytically persuasive analysis. In any case the crisis in the US is not over yet the housingprices whose collapse originated the crisis are yet to hit the bottom.

Lastly, turning to foreign capital inflows, rational investors take a long view in deciding whether

to invest in India directly (FDI) by establishing wholly-owned or joint ventures. From a longview, a single Budget is not that important, except for what it indicates, and what the FinanceMinister says about the medium to longer term.

Since the 1991 reforms, Indias growth is driven more by innovation and initiatives of the private

sector and not so much by government action or inaction, except in areas where the governmentownership continues to be dominant and in setting the longer-term policy environment.


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India has weathered the current global crisis well. The crisis is unlikely to affect the long-termprospects of the country as a destination for investment which continue to be bright and would be

even brighter, if the needed longer term reforms noted earlier are undertaken by the Government.

Portfolio investment, driven as it is by short-term volatilities in returns to equity, will continue to

be more volatile than FDI, even after the excess volatilities during the crisis come downsignificantly.

(The author is Samuel C. Park, Jr. Professor of Economics at Yale University.)Related Stories:

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Pranab borrows big to fund handouts

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The governments forecast of below-normal monsoon this year is likely to influence the financeministrys thinking on the broad policy thrust of the Union Budget for 2009-10.

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A special policy package for the rural economy to help it withstand the effects of delayed and

deficient rains is likely to be included in Finance Minister Pranab Mukherjees Budget speech onJuly 6. Details of the package are being finalised, according to government officials providing

inputs to the Budget team.

This is the first time in recent years that the Union Budget is being prepared in the backdrop of

deficient monsoon rains. A research report by Citigroup India has pointed out that a bad


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monsoon could take away 1 percentage point from Indias gross domestic product growth in thecurrent financial year. Agriculture has a weight of 17 per cent in the countrys total GDP.

Experts agree with the assessment that the Budget next month would respond to the predictions

of deficient monsoon rains with a policy package. According to them, rain-fed areas, which are

likely to be affected by a below normal monsoon, could see increase in allocation in terms ofhigher spending on public distribution system (PDS) and the National Rural EmploymentGuarantee Scheme (NREGS).

The National Rainfed Area Authority, which was set up in 2006, may be made more active

through higher allocation of funds. At present, this authority is not fully functioning because oflack of manpower and funding.

There have been demands to have differential treatment for rain-fed areas as policies for theseareas get sidelined by general agriculture policies and crops like millets, bajra and jowar dont

get focus, said Sukhpal Singh, professor with the Centre for Management in Agriculture, Indian

Institute of Management (IIM), Ahmedabad.

Experts said the government was likely to focus on managing the demand side by ensuring food

available through PDS. This will push up governments food subsidy bill as the issue price toPDS is substantially lower than the procurement price paid by state-run agencies like Food

Corporation of India (FCI).

The Budget could also look at supporting farmers directly through input credit or farm loanwaiver. But no quick measure can be taken now to increase the foodgrain production, said

Subrat Das, coordinator of Centre for Budget and Government Accountability (CBGA), aresearch institution focussed on government budgets.

The farmer is looking at the sky for rains more than budget-related measures. Some reliefmeasures for farmers are likely, but I do not know what those will be. The budget cannot create

rains, said M Govinda Rao, Director, National Institute of Public Finance and Policy (NIPFP).

Experts vouch for starting long terms measures so that India is able to cope better with less thannormal rainfall. There is need to promote techniques like Systemic Rice Intensification, which

uses 40 per cent less water. Budgetary provisions can give directions towards adoption of thesetechniques, said former agriculture secretary Bhaskar Barua.

However, availability of food grains is unlikely to be an issue because of sufficient stocks. India,

the worlds second-biggest producer of wheat, bought a record quantity of grain from farmersthis season to bolster its stocks. As on June 5, the central pool had wheat stocks of 24 million

tonnes and rice stocks of 30 million tonnes, up 18 per cent over the last year, making up a total of54 million tonnes. This is almost double the Food Corporation India (FCI) capacity of 24.18

million tonnes (owned & hired) in over 1,400 godowns all over India.

Though India Meteorological Department (IMD) has downgraded its monsoon forecast to

below normal, government officials are saying that it is too early to say that it would affect


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kharif ( summer) crops. We believe that it (monsoon) cant affect the crop. The main kharifseason starts in July (main crop is paddy) and by June end or early July, there would be rains,

said a senior official at the Indian Council of Agricultural Research (ICAR), a part of theministry of agriculture.

He added that contingency plans were being readied to deal with the situation. The cost of thiscontingency plan and time taken to execute these plans would be crucial, said the ICAR official,without giving details on what components this plan would have.

Also not all states will be affected in the same way. While southern states and peninsular areas

would experience a shortfall in rain, northern states like Punjab, UP, Haryana, West Bengalwould have normal rainfall, said an official with International Crops Research Institute for the

Semi-Arid Tropics (ICRISAT), a not-for-profit organisation involved in agricultural research.

Farmer leaders and policy experts suggest that the government should take this opportunity to

initiate long term sustainable measures for the farm sector, so that the Indian farming sector is

able to withstand contingencies.

Farmer leaders too have called for long-term interventions by correcting systemic problems but

do not expect any big-ticket measures in the budget. Food security of the nation at the momentis monsoon neutral. This is because of better use of technology like high-yield seeds and

fertilisers. Hence, I do not expect the government to support the agriculture in a big way in thecoming budget, said Maharashtra-based farmer leader Sharad Joshi.

According to P Chengal Reddy, secretary general of Consortium of Indian Farmers Associations,

short-term measures like making irrigation equipment tax-free or writing off loans are notefficient. Instead there should be a system that ensures that even the most marginal farmer has

access to loans, he said.

(Additional reporting: Rituparna Bhuyan and Niharika Chandola)

ON BUDGET 2009-10 (EXPECTATION AND IMPACT ON STOCKMARKETS)

Posted on 27 June 2009 by Admin


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Indian stock markets created history on May 18, 2009, when trading was halted for the day, after

the markets hit upper circuits twice within hours of opening. This happened for the first timesince the inception of the stock exchanges. The euphoria was due the results of the General

elections that saw the emergence of Indian National Congress as the single most party therebygiving UPA a clear mandate. It must have been heartening for the equity investors to see their

wealth appreciate rapidly in such a short span of time, especially after a painful and treacherous2008. The optimism clearly underlined the fact that investors want stability at the centre and

clarity on policy front.Markets always react in a big way to big events like the outcome of General elections, Budget,

Monetary policy, War etc. Therefore, as investors/traders, we all have somecuriosity/expectations from policies/guidelines issued by the people at the helm of affairs that

decide the course of the industries and economy as a whole.Even though Indian economy has been quite resilient compared to the overall gloom in the

global economy in the last one year or so, a lot needs to be done to keep the economy on growthpath. A lot of industries suffered heavily due to the financial crisis in the western economies.

There will, therefore, be expectations that government will offer soaps to various sectors and provide stimulus to keep the growth engines firing. Mr. Mukherjees budget is likely to be

against the back drop of UPA governments mantra of inclusive growth. Even though the focuswill be more on a number of programmes aimed at the poor section of the society, there will

definitely be something for the interested parties.Here are a couple of sectors and companies that are likely to be impacted by the Union Budget

2009-10.

Hospitality Industry


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The major concern in this sector has been the lack of entrepreneurship. The reasons attributed to

this are the larger gestation periods and inability to raise funds for hotels at cheaper rates.

Service tax is another issue which the industry would want Finance Minister to address.Repealing of service tax on various services provided by hotels will be a big boost for the sectoras a whole.

The stocks to watch out for: 1) Indian hotels 2) Asian hotels

Textile sector

Textile is the sector to watch out for in this budget. One of the biggest providers of jobs, the

industry was most affected because of recession in the west. With orders from US and UKfalling, the industrys demand for excise duty cut, extension of duty draw back and faster refund

from Technology Up gradation Fund will help them remain competitive. Considering the problems faced by this export oriented sector the finance minister will most likely provide

support for this sector in his budget on May 6.The stocks to watch out for: 1) Alok textiles 2) Gokaldas Exports


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Steel

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One of the sectors that has grown in leaps and bounds in the last couple of years has been the

Steel sector. Such has been the growth of this sector that Indias position, in terms of productionof steel, has improved from fifth to third in the world.

But of late Indian steel industry has been under pressure because of cheaper imports fromcountries that have built up unsold inventory and /or excess capacity. To safeguard the industry

government is expected to hike import duty on flat steel products to 15% from 5%. There is alsoa proposal to cut duty on Ferro nickel to 2% which will bring down prices of utensils and othersteel products by as much as 10% there by boosting demand.

The stocks to watch out for: 1) SAIL 2) JSW Steel

Infrastructure


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The UPA in its manifesto has emphasised infra as priority to tackle current slowdown. Thefinance minister is likely to issue statements in this regard in terms of low interest rates and

availability of funds.The stocks to watch out for: 1) GMR Infra 2) GVK power 3) Reliance infra 4) IRB Infra 5)

IVRCL Infra

Retailing, Aviation, Education and Media

The major boost in these sectors will likely come in the form of increase in FDI. With reforms

being initiated in the priority sectors especially Education, entry of FDI will augur well forcompanies in this sector.

The stocks to watch out for: 1) Everonn 2) Educomp 3) Pantaloon

Nuclear energy and Power

Government would encourage increased participation of private players especially Indian

companies in the area of nuclear energy. There will also be emphasis on faster implementation of power

The stocks to watch out for: 1) L&T 2) Suzlon 3) Power Grid 4) Areva T&D 5) HCC


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Real Estate

Increased benefits from SEZ policy, easing liquidity and emphasis on low-cost housing will

augur well for companies in this sector.The stocks to watch out for: 1) HDIL 2) DLF 3) LIC Housing

Agriculture and Rural

The government is expected to put more emphasis on these sectors.The stocks to watch out for: 1) Jain Irrigation 2) M&M 3) Hero Honda 4) SBI

Over all this budget will definitely have something for traders and investors to watch out for.Lets wait and see. Happy trading.

Article by Sachin Raut technical analyst from pune

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Effect of 'o9-10 Budjet on Economy