governance, political economy, institutional development and economic regulation

Posts tagged ‘exports’

Recapturing growth with stability

jaitley make believe

All governments game their performance metrics. Smart governments guard against falling for the make-believe themselves. The BJP stumbled in believing that India had earned an entitlement to grow, faster than China, at eight per cent per year. Well-intentioned measures — to end black money, resolve the stressed bank loans and reform indirect taxes added to the crowded agenda and disrupted entrenched business interests. Growth was bound to suffer because India depends significantly on private entrepreneurship and capital.

Look for low hanging fruit

The government does not have the luxury to cry over spilt milk. It needs to keep delivering public services. Implementing structural reforms — making labour markets less rigid, reducing the regulatory overburden on business and improving poor infrastructure, cannot be done within this year. We must, instead, look for the low-hanging fruit to maintain macro-economic stability this year in the hope of higher, even possibly eight per cent growth, in 2018-19.

Depreciate the INR to real levels to boost exports

suresh prabhu 2

Suresh Prabhu, the new minister for commerce, just days into his job, is already evaluating possible incentives to kickstart export growth, which has languished since 2014. Realigning the Indian rupee to more realistic levels could be his best bet. INR was at Rs 63.90 per US dollar four years ago, in September 2013. Since then higher inflation in India versus the United States has eroded the real value of the rupee. The overvalued INR not only makes exports uncompetitive, it also makes imports cheap, which hurts domestic manufacturing, constrains new investment, inhibits growth and job creation.

Low inflation & oil prices mitigate the risk of imported inflation

Of course, there are negative consequences of depreciating the rupee. A weaker INR and a higher than targeted fiscal deficit might induce a flight of foreign, hot money, anticipating higher inflation. But with inflation at historically low levels — the consumer price index below two per cent — and oil prices relatively stable, high inflation does not appear to be a near-term risk. More important, any slack due to the flight of foreign hot money can be mitigated by domestic investors with idle savings, desperately in search for rewarding investments. A cheaper rupee also has the virtue of discouraging gold imports, which have surged in recent months, by making gold more expensive, relative to the returns on financial investments.

Imported oil and defence purchases will become more expensive

Another downside is that depreciating the rupee by nine per cent makes oil imports, consumed domestically, more expensive by around Rs 30,000 crores. Allowing this additional expense to pass through to retail prices can spur inflation. This means reducing the royalties, taxes and cess on petroleum.

Low growth will also reduce tax revenues

Also with slower GDP growth, the increase in the aggregate tax revenue will be lower. Growth was budgeted at 11.75 per cent (7.5 per cent real growth and 4.25 per cent inflation). The actual nominal growth may not exceed nine per cent (six per cent real growth and three per cent inflation). The shortfall against the target would be of around Rs 30,000 crores. This makes the total revenue shortfall around Rs 60,000 crores.

Wisely, GST glitches already factored into the budget

An additional uncertainty this year is that the Goods and Services Tax might reduce the net tax levels due to the new facility of netting-off taxes paid on inputs. This has caused a flutter in the first two month of July and August with 65 per cent of the GST revenue recorded being set off against input tax credit on pre-GST stock of goods. But fortunately, this possibility had been anticipated and factored into the rather conservatively targeted increase of 6.9 per cent for excise and service tax, whereas customs and income-tax revenue were budgeted to grow by 11 per cent and 20 per cent respectively over the previous year’s collections.  Consequently, the risk of GST collecting less than the targeted amount is minimal.

Relax marco indicators Revenue Deficit & Fiscal Deficit sparingly

The targeted revenue deficit (RD) is already 1.9 per cent of GDP versus the maximum permissible under the Fiscal Responsibility and Budget Management Act of 2 per cent of GDP. This limit reduces the scope for borrowing, to fill the revenue shortfall, to around Rs 16,000 crores. It would increase the fiscal deficit (FD) from the targeted 3.2 per cent of GDP to 3.3 per cent of GDP — not a very significant departure and still considerably better than the FD in 2014-15 of 4.1 per cent of GDP. Also, there is no shortage of liquidity in the domestic market, so the government can borrow without crowding out the private sector. But it would be unwise to waste the hard work of Arun Jaitley, Finance Minister to reign in the FD to 3.9 of GDP in 2015-16; 3.5 of GDP in 2016-17.

Find the money – cut non merit subsidy & fat revenue budgets, not additional debt.

Hefty cuts in revenue expenditure amounting to a Rs 60,000 crore will be needed to maintain the RD at two per cent of GDP.  A targeted approach could be to reduce non-merit subsidies. These include LPG and kerosene subsidy in urban areas. The differential between rural and urban wages should enable urban residents to pay for clean, commercial energy. Reducing the subsidy on urea (Rs 50,000 crores) is an environment-friendly option. The department of expenditure has expertise in identifying and cutting fat budgets. Barring defence, security, social protection, human development and infrastructure, significant reductions in budgeted revenue expenditure are possible to keep the revenue deficit at a maximum of two per cent of GDP.

Incentivise bureaucracy to be decisive & business friendly

tax admin

Balancing the budget judiciously merely manages the negative outcomes of low growth. Removing constraints on exports can add to growth. Similarly, addressing GST glitches and minimising the compliance burden can significantly improve business sentiment. Notwithstanding our administration being colonial in structure, it works quite well under stress with targeted, short-term deliverables. Achieving six per cent growth this year, with fiscal stability, is one such challenge.

Adapted from the authors article in The Asian Age, September 23, 2017 http://www.asianage.com/opinion/columnists/230917/recapturing-growth-what-govt-should-do.html

 

NitiAyog’s China style CEZs a big, bad idea

Bad ideas are as resilient as cockroaches — the only living being guaranteed to survive even a nuclear holocaust. Both have a tendency to resurface even after being squashed.

One such bad idea, originating from the Niti Aayog, is to revive the plan of special economic zones (SEZ) on a much larger scale as a carbon copy of SEZs in China. It’s called coastal economic zone (CEZ).

Shenzen

Shikao area, Shenzen at dusk. Photo credit: Xinhua

The ostensible drivers are the need to create more decent jobs- NitiAyog says these are generated only by large industries- and the desperation to revive exports. Both objectives are above reproach. It is the strategy to get there which is perverse.

India is not new to the concept of enclave development for export manufacture. Export processing zones (EPZ) have existed since 1965 when the first one was established in Kandla-Gujarat, followed by Santacruz electronics export processing zone in Maharashtra. These gave way in the 1980s to the stand-alone 100 per cent export oriented units. Next were SEZs with a legislation to support them in 2005.

Niti Aayog’s CEZ proposal focuses on coastal development. Nothing new here — 68 per cent of the 329 notified SEZs existing in 2015 were in eight coastal states. The only problem is that coastal states are far richer than the hinterland so CEZs will make them even richer enhancing spatial inequality.

The big change is that only two CEZs are envisaged, each of 2,000 to 3,000 sq km, to simulate the network benefits of regional development. Compare this with the 626 sq km notified for 390 SEZs, of which just 6 per cent or 25 SEZs exceed two sq km in size. But do we have excess land of this magnitude?

Consider, if Goa wants a CEZ. It must cede 50 per cent of its area of 4,000 square kilometers. With regulatory powers in the CEZ transferred from the chief minister to Union government appointed development commissioner, Goa would effectively revert to the status of a Union Territory.

goa beach

Goa. Photo: Wikipedia.

Should Kerala want a CEZ, it needs to convert 10 per cent of its land area into a “deemed foreign territory” managed from Delhi. How well this will go down with the fiercely combative citizens of Kerala is anybody’s guess. Contiguous states can join hands to reduce the area surrendered by each. But this could invite administrative complexity and delays in harmonising norms and work practices across states.

The NitiAyog paper says Shenzen in China before it became the first SEZ had just 300,000 people. Today 11 million people live there. Only problem, in coastal India the average density of population is around 940. In a 3000 square kilometer area there would already be 3 million living there.

So is the CEZ proposal just old wine in a new bottle? And is it pragmatic?

Tax havens are yesterdays means of boosting exports

The United Nations Conference on Trade and Development (UNCTAD) surveyed 100 developing country export zones in 2015. They concluded that islands of excellence, with special set of laws, rules and practices — as proposed in a CEZ — can create enormous political risk by excluding others from development. Political risk is not an issue in single-party, authoritarian China. But India cannot afford to segment development and exclude large swathes of the “cow belt” where a large number of the poor exist. Unlike China, we have an open domestic migration policy. This makes segmented development politically impractical, especially on the scale envisaged in the CEZs. In any case, in the emerging plurilateral international trade environment, it is questionable if tax breaks and investment incentives are the route to trade competitiveness or whether strategic membership of free trade agreements will be key.

Enclave development for exports are “walled gardens” of the real world

Indian SEZs were primarily tax arbitrage havens with the added sweetener of access to land. The relative export competitiveness of SEZ units versus exports from the domestic trade area, declined significantly in 2013, as soon as the exemption from Minimum Alternative Tax was withdrawn in 2012. This shows that state-driven market distortions do not boost exports in a sustained manner. Another reason why the SEZ scheme floundered was that import taxes and licenses got rationalized across the board and it became easier to import for export across the country. Coupled with the advatngaes of free access to the Indian market locating outside the SEZs became more attractive. SEZs remain a favourite for IT industries, which are mainly export driven and have a culture of enclaved bubbles.

Freedom_Park

Freedom – Bangalore style Photo; wikipedia

There is no alternative to maintaining a competitive exchange rate; managing inflation and broad based, deep administrative reform to enhance exports.

Between 2006 and 2014, 1.4 million jobs were created in SEZs — an impressive 50 per cent of the total increase of 3 million in private employment. But it is unclear if these were all new jobs or the result of existing domestic area export units simply shifting into a SEZ to avail tax advantages.

Land scams accompany if Union government usurps what should be done locally

Consider the 2014 report of the Comptroller and Auditor General (CAG): “Land appeared to be the most crucial and attractive component of the scheme (SEZ)”. In a replay of the coal mining scam, the regulatory gaps emanating from the constitutionally mandated division of oversight between the Union and the state government were exploited. The Union government notifies and de-notifies SEZ land. But it turns a blind eye to the responsibility of the state governments to ensure against scams in the acquisition and subsequent use of such land. Instances of inclusion of ineligible land for notification; allotment of land far in excess of need and protracted non-use of notified land by SEZs, all resulted in the diversion of SEZ land for more lucrative commercial exploitation.

The suspicion of mala-fide intentions is strengthened because state governments sold land, acquired for public purpose prior to 2007, to developers rather than giving it on lease, which would have retained their oversight over its use. Estimating the resultant undue benefits is tough without a forensic audit. It is telling that documents relating to 47 SEZs, including most of the biggest ones, were not provided to the CAG for audit by the Ministry of Commerce.  But even with what was handed over to CAG the results are shocking.

73 per cent of the land notified for nine SEZs in three states was for “restricted” use only – forest, defence and irrigated land, which was not eligible to be notified. Operations started only on 62 per cent of the 456 square kilometers of land notified till March 31, 2013. In eighteen SEZs, operating across eight states, only 17 percent of the 42 square miles notified was actually used for “processing” against the norm of using at least 50 per cent. With large amounts of unused land available, private developers successfully approached the government to de-notify SEZ land which could be used for more lucrative commercial purposes. Assuming that just 25 per cent of the 456 sq km, notified till 2013, was misused, the potential extra-legal earnings would have been to the tune of Rs 4,500 crore — minor pickings by the standards of contemporary scams.

Good policy is never backward looking and can benefit from past errors. If CEZs are to be headline-grabbers in the 2016 Budget, they must have caveats: No new land should be acquired for them. If land is needed the private developer should follow the negotiation route popularized in Punjab and now by Chief Minister Chandrababu Naidu in Andhra Pradesh; No fresh public finance should be available for CEZs; All additional infrastructure needs must be funded by the private developer; Instead of the Union government, the state governments should be in the driver’s seat; and, states should enact their own CEZ legislations (as was done by Rajasthan in labour laws) which could be approved by the President, if constitutionally required.

Adherence to the fiscal deficit targets requires conserving public finance. Developing the richer coastal areas runs contrary to the Prime Ministers vision of development for all. Most importantly, getting directly involved in land and urban development — both of which have been fertile ground for scams — is unwise for a reformist Union government. This high risk strategy is not the best option for sustainable gains in private investment, employment and exports.

port

The duality of Indian ports: Photo credit : alamy.com

Adapted from the authors  article in Asian Age March 17, 2015 http://www.asianage.com/columnists/z-coastal-economic-zones-590

 

Some more onions please

Onions comprise less than 1% by value of India’s agricultural production. The average Indian consumes less than 800 grams of the stuff per month. Onion is a seasonal fruit. Supply traditionally dips during July to September as only the stored winter crop, harvested around March, is available for consumption.

No dearth of onions

onions

photo credit: http://www.washingtonpost.com

India is the second largest producer of onions after China. We produce more than we need and export around 10% of production unless weather events adversely impact the crop. This year unseasonal rain, during harvesting, damaged the winter crop.

But demand is inelastic

Demand is relatively inelastic. Why don’t consumers say no when prices increase? First, onions are to palates in the North, Central and Western parts of India, what fish is to Bengal and curry patta and coconut is to the South. Food, chips even Uttapams taste better with onions. Onion, like Garlic, is also valued for its therapeutic value. Second, onions give a big bang for the buck. An average family spends around Rs 100 per month on the stuff. If price doubles, the burden is irksome but not a killer. Just economizing on pre-paid phone calls can make up the difference. But onion is the key savory for low income households.

It’s the politics stupid!

The fuss about onions is more about politics than economics. The political footprint of onions was established in the 1980 elections. Mrs. Indira Gandhi, on her comeback trail, after her post-emergency election debacle, shrewdly used the price rise in onions to drive home how uncaring of the ordinary person and how incompetent, the government of then Prime Minister Chaudhary Charan Singh had become. This clicked. The Congress won 67% of the Lok Sabha seats. In 1998, a sharp price rise in onions, dethroned the BJP government of Chief Minister, Madanlal Khurana in Delhi thereby establishing a new metric for good governance – the price of onions.

Delhi CM Kejriwal fingers the BJP for price rise

Delhi Chief Minister, Arvind Kejriwal has fingered the Union government for failing to control hoarding and speculation leading to the current price rise. Delhi government flooded Delhi markets in mid-August with onions at Rs 30 per kg. It plans to hold the price line just below Rs 40 per kg through public sector retail supply versus a market retail price of Rs 70 to 80 per kg.

Union government on the back foot

But the Union government claims this is too little and too late. More nimble footwork by the state government could have prevented the steep rise in onion prices in Delhi. The Union government had made available a Price Stabilization Fund of Rs 500 crore in April 2015 which state governments could use by contributing an equal amount to buy onions for retail supply at reasonable rates.

On July 2, when wholesale prices were still around Rs 20 per kg in Lasalgaon, Maharashtra-India’s largest onion mandi, the Union government brought onion under the Essential Commodities Act, thereby enabling stock limits to be enforced on wholesale agencies. It also enforced a Minimum Export Price of Rs 30 per kg to discourage exports.

In todays’ intensely adversarial, no-holds-barred competitive politics no government can ignore a public challenge. The traditionally business friendly BJP government, at the center, is particular sensitive when “hoarders” are fingered for the price rise. Maharashtra, Madhya Pradesh, Gujarat, Haryana, Andhra Pradesh and Punjab- all BJP/allies governed states – account for more than 60% of national onion production.

Grow more onions, reduce trade margins & transaction costs

Per a NCAER 2014 paper selected productivity enhancement can boost roduction. Three big onion producing states- Maharashtra, MP and AP- account for 50% of production but produce less than 17 kilo gram per Hectare against 27 and 21.5 kg/Ha in Gujarat and Punjab respectively. Again all three are ruled by BJP/NDP. Increasing productivity in just these three states can boost production by 20% ensuring sustained exports and no domestic shortages. Doing more on reducing the trade margin (better storage, faster transportation, lower market fees) can also leave more of the money with farmers whilst lowering domestic prices.

Clearly the government needs an effective and transparent mechanism, which provides the right price signals and rationalizes expectations for both farmers and consumers.

Killing export or killing farmers

Increasing the Minimum Export Price, as the government has done again this year, is the standard response. But such intervention in the market, even as it helps consumers by diverting supply to the domestic market, robs farmers of the gains from export. It also disrupts any attempt to develop export markets. Similarly, importing onions to keep consumer price low reduces the incentives for farmers to grow onions.

The fall back-leaky public distribution

But both these options are less intrusive than using the public procurement and subsidized retail supply template used for food grain. Such publicly managed mechanisms are invariably highly inefficient and ineffective with cascading losses in procurement, storage, transportation, distribution and retail sale. Sometimes inept government managed imports flood the market after the seasonal supply dip has passed and just as the new crop arrives- with disastrous impact on farmers’ incomes.

Can private distribution agencies do better?

Why not appoint a private trading agency for marginal but politically sensitive food crops, mandated to import, export or arrange for domestic distribution to balance market led demand and supply and keeping retail prices within a pre-defined retail trading band, which meets the twin needs of both farmers and consumers. This is what the RBI does for our currency to avoid excessive volatility.

Private trading agencies would charge a hefty commission for their services but it would be considerably less than the cost of direct administrative action to purchase, stock and supply onions along the Food Corporation of India model.

Onion diplomacy anyone?

Alternatively, use onions as a vehicle for building bridges with our neighbours – particularly Pakistan, which loves the stuff almost as much Punjabis. Why not negotiate a stand- by, bilateral onion supply agreement to meet onion deficits in either country on preferential terms? A similar arrangement is possible with our larger northern neighbor- China whose onion productivity exceeds ours’s. Onions can add a savory flavor to Track 1.5 – B2B- diplomacy.

Say no to expensive onions

Isn’t it high time the government bit the political bullet and said no to being bullied about the price of onions? They are not a necessity, which the sovereign is obliged to supply. The Jains don’t even touch the stuff.

To show that onions are dispensable, the entire cabinet should voluntarily say no to fresh onions during the lean period. PM Modi could launch a social media campaign to entreat well-off folks to substitute fresh onions with dried ones or switch to other seasonings, during the lean period. This can reduce demand and hence prices for those, to whom onions are the only savory they can afford other than salt and chilies.

The core of sustainable living is to adapt to what is seasonally available locally, rather than store, pack, can or transport food compulsively to cater to a menu plan made universally available but at a high cost to the environment.

Politics trumps economics hands down

But the catch is that Bihar is a big consumer of onions. People are unlikely to be amused if they can’t get their daily fix of onion, before they go to vote in November. This is one election the BJP needs to win. Visible, strong, centrally managed administrative action to lower retail prices is therefore likely to win over better options – after all the metric of good governance has to be met.

Adapted from the authors article in Asian Age August 31, 2015

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