Forthcoming Budget 2011-12[1]

7/31/2019 Forthcoming Budget 2011-12[1]

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Expectations

Dr. Prem S. Vashishtha

School of Business Studies

Sharda University

Forthcoming Budget: 2011-12

Reforms


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Main Issues

Inflation.

Fiscal Consolidation.

Is there a Threat to India Growth Story?

Rising Subsidy Burden.

FDI in Multi-brand Retail.

Infrastructure/Core Sector.

Social Sector.

Black Money.

Incentives to Small Scale Factor.

Reviews of SEZ Policy.

Implementation of General Sale Tax (GST).

Implementation of Direct Tax Code (DTC).


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1. INFLATION

According to IMF Indias inflation has high inertia (i.e. once it startsrising; it has a tendency to go up or at least to remain at high level for

some years). It needs to be stopped early before it became entrenched.

General inflation of 1.5% pa may result due to high growth of 9% pa.

Inflation : Main Components

Food Items:(Onion, fruits & vegetables, milk andedible oil, etc.).The demand for these items is rising partly

due to structural factors.(i.e. shift in tastes and preferences due torising incomes and urbanization).

Energy:(Mainly crude oil 75 80% of Indias petroleumneeds is met with imports)

Current crude $111 per barrel. Oil price

Futures price $ 97. For 9% GDP growth Oil imports will increase.(if crude prices go beyond $160, very difficultto sustain 9% growth)

Domestic(fruits, factories,vegetables, milk)

Global Factors:(edible oil imports)


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The phenomenon of food inflation is taking place in at least threefast growing BRIC Countries.

Brazil

China India

Fig: 1


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Its nothing peculiar to India alone. The conditions in all the threecountries differ. Hence, strategy for each country to deal with inflationmay differ.

Knee-jerk reactions are counter-productive (ban on exports and dulycuts are short term measures often not advisable).

Crack down on all forms of hoardings (political mileage, adversebusiness reaction) measures like Good and bad Cholesterol (CEA).

What needs to be done to meet the rising demand of fruits, vegetables& milk?

Avoid wastage (40% waste in horticultural products)develop post harvest technology.

Enhance cold chain Cold storage (capacity).

Do not intervene in all commodities. Items may disappear from shelves.

Attract investment both private and FDI in these areas. This is in additionto desirability of enhancing public investment in creating more cold chain

facilities and cold storage. Allow FDI in retail (Fruits, vegetable & milk). FDI is a politically sensitive

issue.

They would deliver directly to the end-consumer. Farmers will also getbetter price.

Put more investment in rural infrastructure. Link mandis with villages/farmers.


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Overall Agricultural Growth Scenario

Agri Growth 0.4% 2009-10

5.4% 2010-11 If Agri Sector is to grow at 4% pa to maintain 9% + growth, agri must

grow at the rate of more than 8% pa. (8.53%) to meet the Plan target.(in this plan average growth has been 2.0% pa.). It is much below thetarget level.

Crop 1980-81 to 1989-90 2000-01 to 2009-10

Area Production Yield Area Production Yield

Total Pulses -0.09 1.52 1.61 1.17 2.61 1.64

Foodgrains* -0.23 2.85 2.74 0.29 1.96 2.94

Sugarcane 1.44 2.70 1.24 0.77 0.93 0.16

Oilseeds 1.51 5.20 2.43 2.26 4.82 3.79

Cotton -1.25 2.80 4.10 2.13 13.58 11.22

Table 1: Compound growth rates of area, production and yield

(in %)


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Highly volatile growth rate a matter of worry (although foodgraingrowth for 2000-01 to 2000-10 look impressive it is highly volatile)

Need long term solution.

Second Green Revolution. High productivity growth needed.

High capital formation (technological breakthrough only in cottondue to Bt cotton).

Attract private investment in agriculture Should corporate farming be encouraged? Not a straight forward

answer unless it is done on public-private partnership basis andthe farmers do not lose ownership of land. Proper frameworkneeded.

Exploit the potential of yield-gap in Eastern India. Raise investment in the Eastern Sector.

Focus on efficiency of investment especially on the irrigationsector (canal administration), and not just on capital expenditure.


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Reform/Priority Agenda for Agri Sector

Focus on Stability (or minimizing Volatility) in Agricultural Productionand Raising Productivity.

Action: More investment in R&D.

More investment in the Eastern Sector Agri.

Attract private investment (model for public-privatepartnership in which farmers do not lose ownership Requisite reforms).

Bt Cotton yield break through confined to few (mainly Gujarat)state Encourage states to partner in technological breakthrough R&D important.

Encourage FDI in retail in agri. products - (to bridge the gapbetween producer price and end-consumer price).

Attract investment in cold storage and general storage (ware-house receipt model).

Bring pulses and edible oils also under PDS.


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2. FISCAL CONSOLIDATION

Fiscal Responsibility and BudgetManagement Act.(FRBMA)

- Mandate to maintain fiscaldeficit at 3.0% of GDP.

Financial Crisis 2008-09 (exciseduties reduced by 6 percentagepoints to boost demand in IndianEconomy).

- Fiscal deficit rose to 6%

Last Budget 2009-10 Excise duty

again raised. (Ranging from 2percentage points to 10 percentagepoints).

- Fiscal deficit 5.5%- Revenue deficit 4% GDP.

Finance Commission (FC) recommendation on Fiscal deficit asbelow:

As below, keeping macro-economic stability in view:

2010-115.7%

2011-124.8%

2012-13 4.2%


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What is the achievement?

Ok as per the recommendation of FC. Fiscal deficit as per

budget estimates was 5.5%. Now it is only 4.8% of GDP (goodamount of money received from Tele auction).

Government Dilemma:

To have fine balance on the trade-off between GROWTH and

INFLATION. If 9% Growth (or more) is to be achieved, inflation may go up (as

estimated by Economic Survey, Growth spurs 1.5% inflation).

Tight money policy may push interest rate cost of capital goesup credit squeeze adverse effect on investment by the Pvt.

Sector.

Should stimulus be withdrawn or reduced substantially? PMEACfavours it. It may be withdrawn gradually after watching theimpact at each step. Let us see if it is done in the budget.


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3. IS THERE A THREAT TO INDIA GROWTHSTORY?

Trade deficit on merchandise account (13% approx) leading to unstable current A/c deficit.

Danger from rising current A/c deficit See Box.

Why is a large current account deficit a worry?A current account deficit of over 1.5 2% of the GDP is undesirable as the

country needs to have stable capital flows to finance such deficit. Otherwise,there could be excessive reliance on foreign borrowings to finance theseshortfalls. Reliance on debt beyond this threshold level could push a countryinto a sovereign debt crisis like the way some European countries are nowfacing India too was on the brink of a sovereign debt crisis in 1991, butmanaged to avert a default.

How can this be addressed?Promoting policies conductive to stable long-term capital flows is one option.That would mean primacy to foreign direct investment and non debt creatinginflows. Policies which could encourage more remittance and other privatetransfers will also help besides promoting merchandise and servicesexports.

[Source: Economic Advisory Council: (See ET, Feb.24, 2001, p.1)]


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Fig.2


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Promote policies to stabilize long term capital flow (e.g. FDI). (Inflowwithout creating debt).

Imports rising without commensurate growth in exports

a matter ofconcern.

Have clear strategy to reduce current A/c Deficit.

Push exports substantially (double the exports in 3 years; otherwisepayment difficulty will emerge).

Even 22% export growth would leave a balance of trade (BOT) of 12-13% of GDP.

Focus on

High value exports.

Search for new markets.

Incorporate new technologies.

(See what is done in the Budget)


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4. RISING BURDEN OF SUBSIDYA. Petroleum Subsidy

Crude oil imports (upto 80% dependent on imports).

Subsidy

Subsidy sharing mechanism: 1/3 to be borne by the PublicSector up-stream oil marketing companies (ONCs): rest by theCentral Government.

Subsidy on petroleum has gone upto Rs.75,000 crore this fiscal.Hence, Government share is about Rs.50,000 crore.Government not planning to issue bonds to ONCs provision inbudget is to made.

Rise in price of crude oil increase in subsidy deterioration inbalance of payment of net oil importing countries downwardspresser on exchange rates.

Loss to ONCs

Diesel - Rs.10.74/ltr.

Kerosene - Rs.20.56/Ltr.

LPG Cylinder - Rs.376/ Cylinder of 14.21/ Kg. Petrol - Rs.2.5/Ltr. (in spite of decontrol of price entire

price hike not passed on to the consumer).


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Loss to state-owned oil marketing companies: more than 1 laccrore.

Issues?

Raising the price of these items? (Economics vs. Politics and

Populism). Link it with inflation.

B. Food Subsidy through PDS:

40 TO 55% grain meant for poor is diverted.

Food Security Act would need much more foodgrains and high subsidy(approx. 65 million tones of foodgrains would need to be procured). If itis implemented through PDS: it would lead to a massive leakage andsubsidy burden. Extreme shortage of storage capacity. PDS needsdrastic reform.

Suggested Measures:

Direct cash transfer to poor (the amount of subsidy). Use of SMART CARD.

(When UID comes in operation, it may be of tremendous help to

plug leakage).


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What do you do until the technology of SMART CARD/UID isimplemented? Problem in areas with poor infrastructure, without bank or

even post office facility.

Food Coupons? (try Bihar experiment Reform awaited).

Food coupons are printed with price and the entitlement.

Food coupons to be submitted to the PDS dealer only after gapping

grains/ration.PDS dealer can claim his quota from state food corporation only after

submitting the coupons received from the customers. Diversion ofquota for poor can be checked/reduced.

General awareness among the poor of their entitlement.

Correct identification of poor still remains. Committee at the villagelevel has reduced the identification error reduced the chances oferror in exclusion and inclusion


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5. FDI IN MULTI-BRAND RETAIL

Resent situation:

100% FDI in cash and carry wholesale trading.

Up to 51% FDI is single-brand retail since 2006.

(At present FDI in retail is just 0.21% of total FDI).

Allow FDI in multi-brand retail in a phased manner. Begin with metros.

Give incentive to existing retail shops to modernizehelp farmers.

Advantage: To bring technical-know how to set up efficient supply chain.

Act as a model of development.

(See what is in the Budget 2011-12)


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MNC Retailers Waiting in Queue to Enter India.

$ 25 billion: size of organized retail whereas Indian retail sector isestimated at $500 billion.

Arguments Against FDI: Deep discount sales by foreign retailerswill put at risk the livelihoods of kirana stores.

Retail FDI Status: India allows 100% foreign investment in

wholesale big and 51% FDI in single brand retail.

(Source: ET, 25.02.2011)

Note that some research findings do not support the fear

that kirana stores would necessarily be at disadvantage insmall towns and villages.

Notwithstanding the merits of FDI in retail, it remains politicallysensitive issue. Let us see what provision is made in the budget.


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6. INFRASTRUCTURE/CORE SECTOR

Coal Sector lagging far behind:

80% of Indias power generation uses coal as fuel. Why low growth in coal production? Environmental

regulation? (Forest areas).

Table 2: Infrastructure Sectors Drag on Growth

Percentage Growth: Core Industries

2007-08 2008-09 2009-10 2010-11(Apr-Nov)

Power 6.3 2.5 6.8 4.6Coal 6 8.2 8 0.6Freight 9 4.9 6.6 3.3Port Cargo 12 2.2 5.7 0.8Cement 7.8 7.6 10.1 4.1Crude Oil 0.4 1.8 0.5 11.5Natural Gas 2.1 1.4 44.8 19.8


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Under performance in road sector:

Target - 20 km play or 7000 km a year.

Achievement - 25%Why low achievement?

One reason Developers claim up front 40% of project cost assubsidy from Government.

Developers take interests in the beginning of the project makehuge profit do not take interest in project later.

Has the Public-Private partnership model failed? If nothing wrongwith the contract agreement? What kind of reform needed?

Power Generation: Power generation growth : 4.0%

Demand for Power growth : 6.0%

(Widening gap -)


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Some States (Gujarat, MP, Maharashtra, West Bengal) aredeficient; other laggards.

Some states heavily subsidize electricity to farmers for lifting ofground water (Punjab..), state electricity boards in deficit little or

no money for investment.

Transmission Losses (including theft still very high 30 35%)

Reform Required:

Get electricity pricing right.

Improve regulation and distribution.

Create competition in power supply.

Financing of Infrastructure:

12th Plan will need investment of $ 1 trillion for infrastructure.Private Sector would contribute $500 million (Rs.4,50,000 crores).How about the rest?

FDI in infrastructure has declined. India not rated high oninvestment destination.

T bl 3 C h Fl i t I f t t S t


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Table 3: Cash Flow into Infrastructure Sectors(Rs. Crore)

2006-07 2007-08 2008-09 2009-10 2010-11(Apr-Nov)

Total Bank Credit 30286 62220 64636 109916 102301Power 12994 21947 29372 63394 52502Telecom 1164 18663 12044 9036 38367Roads & Ports 5352 9429 12584 26509 8790Others 10776 12179 10658 10956 2643FDI ($ million) NA 5156.8 5386.1 5659.6 3338.2Bank Credit into infrastructure has been robust with power getting the biggestshare. FDI inflows slowed down compared to the same period in the previous year.

Infrastructure Debt Find.(as suggested by the Planning Commission)

Infrastructure Debt Fund: Rs.50,000 crores (for long term debt

requirement of infrastructure projects). Public-private partnership.

Infrastructure fund will land only to projects that have started commercialoperations and create a secondary market for debt bonds.

Will Government allow External Commercial Borrowings (ECB) by theInfrastructure and Asset Finance Companies?


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7. SOCIAL SECTOR

(Reap the Benefits of Demographic Dividend) VISION

Focus on Health Education Poverty Employment

Reaping ofDemographicDividend

Growth Resource Generationfor infrastructure andhigh outlay on socialsector

(Discuss with view of Prof. Amartya Sen, Prof. Jagdish Bhagwatis and Prof. Arvind Panagariah)

Table 4: Expenditure on Social Sector

2006-07 2007-08 2008-09 2009-10 2010-11 (BE)Education 2.67 2.59 2.89 3.23 2.98Health 1.21 1.27 1.32 1.45 1.27Others 1.69 2.05 2.6 2.56 2.38Total Expenditure onSocial Sector 5.57 5.91 6.81 7.24 6.63


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Public Private Partnership in higher education.(Govt. could still maintain regulation). Reform details?

Improve MGNREGA.

(Mahatma Gandhi National Rural Employment Guarantee Act.)

Shift in emphasis in favour of permanent asset building andinfrastructure development.

Reduce transaction costs. Extend the scheme to urban areas also.

Significant Interventions

Implementation of MGNREGA should not be at the cost of labour

availability to the agricultural sector (discuss on research findingfrom field survey).

Seek convergence with other schemes of employment generationand poverty alleviation. Plethora of Schemes. This would avoidduplication and leakage


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8. BLACK MONEY

Amnesty: OECD countries experience shows that amnestyhelps bring out money from tax evaders.

Offer amnesty only to those who accumulated money by evading

taxes; rest should be treated as criminal offence.

Global Level: Tax Information Exchange Agreements (TIEAs)and bilateral agreements. G-20 is discussing it.

Land Market: Land transactions generate black money. Reducestamp duty. Encourages registration at market price. If servicesare to be provided by the Govt. for the poor, let it be subsidized


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9. INCENTIVES TO SMALL SCALE FACTOR(They demand level playing field)

10. REVIEWS OF SEZ POLICY.(Facility being mis-utilized scrutiny required)

11. IMPLEMENTATION OF GENERAL SALESTAX (GST).

12. IMPLEMENTATION OF DIRECT TAX CODE(DTC).


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THANK YOU

Documents

Forthcoming Budget 2011-12[1]