governance, political economy, institutional development and economic regulation

Posts tagged ‘FM Jaitley’

Can GST make Hasmukh Adhia smile?

Hasmukh

Hasmukh Adhia, India’s revenue secretary, is finance minister Arun Jaitley’s chief aide for rolling out the Goods and Services Tax. Contrary to his first name, he never smiles, at least not in public. But even he can now take a break and smile. The GST juggernaut is careening ahead. In just over a week, India would have leapfrogged into the league of economies which have walked the talk on rationalising indirect taxes.

Noose tightens on black money generation

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Photo credit: Imagesbazar.com

So what will Mr Jaitley and the GST Council have achieved on July 1, 2017? First, this collegial team of finance ministers, across the Central and state governments, would have fired the first, potent salvo against black money. Demonetisation; tax raids; getting back overseas black money caches — all pale in significance, compared to the institutional impact of GST. Consider, that the most vocal protests against GST have come from dry fruit traders, cloth merchants and jewellery makers. These businesses have been traditionally cash heavy. Of course, the intrepid evader will still have tax leak holes left open. Agriculture, food items and the business in booze remain yawning gaps in the tax revenue security architecture. But the message is loud and clear: the rope is shortening. So watch out!

Lower net indirect tax, lower prices to spur demand

shopping

Photo credit: Imagesbazar.com 

Second, the massive discounts being offered on pre-GST clearance of the stock of consumer durables suggests that prices of these goods will reduce. An entity, empowered to investigate and ensure that net tax reduction benefits are passed on by manufacturers and dealers to consumers, is in the offing. The history of such clunky, intrusive executive action is not encouraging. Due to information asymmetry, determining the cost breakdown of products externally, is invariably inefficient. Either the enforcement agents get compromised or they end up harassing manufacturers and suppliers for trifling results.

But in truth, it really doesn’t matter. Inflation levels are at historic lows — below three per cent per annum; the monsoon is progressing well and global demand remains damp. Babus and their counterparts in the public sector — around 18 million households — have all either been given or will soon get pay revisions. They are itching to spend the windfall.

Clunky “inspector raj” to check price rise – a bad idea

Even if the entire tax rationalisation bonanza is retained by manufacturers and dealers, it will still generate surpluses for private investment — in debt servicing, realty and equity markets. Improving the revenue steam of corporate India is vital for getting over the gargantuan NPA problem, which is bad cholesterol for growth. The good news is that most product markets are competitive. Digital marketers have cut retail margins to the bone. Even the market for services is hyper competitive — think telecom. This makes it tough for corporates to retain extra normal profits.

SMEs & Trade pay the price for becoming accountable – high compliance cost

Also, undeniably, tax rationalisation has come at a cost. The actual transaction cost, for business, to comply with digital GST processes is unknown. But GST provides a huge opportunity to India’s IT developers to innovate low-cost compliance and oversight options — particularly for value segments produced by small and medium industries. These could be perfected at home and marketed worldwide as context-specific solutions for developing countries. In 2013, at a conference in Washington, the World Bank president asked Nandan Nilekani why he wasn’t rolling out Aadhaar across the globe? Mr Nilekani responded that he was too busy at home and had no time left for solving the problems of the world. This single statement projected India’s enormous domestic, digital market potential far better than the glossies, which international consultants and governments routinely produce touting themselves. These digital opportunities have multiplied by several degrees with GST.

Multiple rates align with multiple objectives 

Third, the agreed-upon somewhat clunky architecture for GST reflects compromises made to achieve the twin overriding concerns — protecting the poor and ensuring fiscal neutrality for all governments. In the absence of a direct cash transfer framework, continuing tax exemptions on mass consumption goods and services is a reasonable policy option. Given the federal structure and the plurality of our polity, there never was an option to the consensual approach adopted by the GST Council. Meeting the revenue concerns of state governments has inevitably led to six GST rates. The highest rate of 28 per cent is designed to be used for neutralising any revenue loss for state governments.

Multiple rates result in efficiency loss due to tax leakage from misclassification of goods to a lower tax rate. A good example is the amorphous classification of a storage battery as a computer peripheral (lower tax rate) versus use for backup lighting needs (higher tax rate). Multiple rates also increase the accounting load for keeping track of tax credits and debits. But the economic benefits from early implementation of a less than perfect solution far outweigh the opportunity lost from a prolonged wait for the BJP to come to power in all the states, thereby enabling a best practice single rate template to be imposed from above, China style.

Fourth, GST is good for jobs. It gives a boost to “Make in India” by withdrawing the tax advantage for imported manufacturers. Importers pay Central state tax at four per cent as special additional customs duty. But domestic products are taxed at the rates of state sales tax, which are generally higher. This disadvantage for domestic production will vanish with GST. Imports, in addition to customs duty, will pay additional customs duty at the GST rate applicable for domestic products.

Flexible implementation arrangements – to muddle through the knots

Finally, the finance minister has consistently adopted a firm but nuanced, practical stance on the implementation schedule. Recognising that small-scale industry and traders are lagging in preparations, he has agreed to defer the filing of returns by two months. Assurances have also been given that the GST rates could be adjusted if the net tax burden gets distorted or gets unbearable. A government that is open to negotiating beneficial outcomes for all stakeholders and still retains the will to keep the national interest foremost is quite clearly operating at the tax-related good governance frontier. Smile, please.

Adapted from the author’s article in the Asian Age , June 23, 2017 http://www.asianage.com/opinion/columnists/230617/its-time-to-smile-gst-to-usher-in-a-new-era.html

Jaitley black money

Red flags for FM Jaitley

Finance Minister Arun Jaitley

The embattled Finance Minister Arun Jaitley – clearly aware that the knives are out for him

 

Finance minister Arun Jaitley will be fighting from a tight corner on February 1, 2017, boxed in by low domestic demand and the approaching international headwinds of a protectionist United States.

Fighting on the backfoot is new to this government, which had it easy over the first two years. The windfall from falling oil and commodity prices created fiscal space over the last two years to check the right boxes on fiscal deficit and inflation. High interest rates kept the rupee strong. Deft footwork also boosted GDP numbers since 2014 to signal a new age of high economic performance.

Here are six red flags, which track if the finance minister’s courtroom fighting abilities are still intact as he presents Budget 2017-18.

red-flagDoes the growth estimate triangulate?

The estimate for growth during the current year 2016-17 and 2017-18 will show whether the government recognises that it has a problem. Assumptions of unrealistically high growth have a domino effect. They reduce the credibility of the tax revenue projections and the size of the fiscal deficit both of which track GDP growth. GDP growth estimates above 10 per cent in current prices (corresponding to six per cent in constant prices) or a number higher than Rs 149.5 trillion for 2016-17 and above 10.5 per cent in current prices (corresponding to 6.5 per cent constant prices), for 2017-18 is a red flag showing the government is burying its head in the sand.

red-flagDo the tax revenue estimates sound real?

An estimate for gross tax receipts, including the share of the states in Centrally-levied taxes, higher than the 10.8 per cent of GDP budgeted for in 2016-17 is unrealistic. Sticking to this level may be termed not aggressive enough in the context of the hyped-up expectations from the attack on black money. But note that this level was previously last achieved seven years ago, in 2007-08 before the financial crisis. Now, with fresh uncertainties in demand and corporate profitability, it remains an aggressive target. Anything higher is dodgy.

Any incentives for tax compliance?

red-flagAssuming higher average revenue from increased indirect tax rates, when the Goods and Services Tax rates have still to be negotiated with the states, give the wrong signals for growth, business and private consumption. On direct tax, some fiscal courage is required. Dilute the disincentive to evade tax, inherent in high tax rates — currently between 10 to 30 per cent — for middle-income earners up to an annual income of Rs 24 lakhs. It is reasonable to expect that better compliance will compensate for the hit taken on lower tax rates. Not doing so flags low confidence in the responsiveness of the tax machine to broaden the tax base. Challenging the machine to do better can work. Try it.

red-flagAre there band aids for the victims of demonitisation? 

Economic shocks affect the poor the most. Eighty per cent of the poor live in rural areas. The bottom 40 per cent of the population are either poor — a constantly changing group averaging around 22 per cent of the population — or are non-poor but vulnerable to fall into poverty due to personal or systemic shocks.

The allocation for rural poverty alleviation in 2016-17 is Rs 0.6 trillion across four schemes. The ongoing National Rural Employment Guarantee Act (NREGA) is a second best but a practical, quick-start option to scale up income transfer to the poor to insulate them for the twin economic shocks.

NREGA operates in all the 707 districts of India. This is politically sensible but wasteful. Out of the 29 states there are nine states in which the proportion of the poor exceeds the national average of 22 per cent. These “stressed states” should be specifically targeted. Separately, the government should target 40 per cent of the poorest districts, using the “poverty gap/person equivalent” metric to ensure that there is an incentive to first transfer income to the poorest of the poor. Anything less than an enhanced outlay of Rs 1 trillion for poverty alleviation red flags an irresponsible development strategy.

red-flagHas the fiscal deficit become an unreal holy grail?

Mr Jaitley has been steadfast in lowering the fiscal deficit from the level of 4.3 per cent in 2013-14 — the terminal year of the previous government. He courageously embraced the daunting target of 4.1 per cent, naughtily left for him to deal with by P. Chidambaram in the interim Budget for 2014-15.

He succeeded in meeting the target against all expectations. But he was subsequently, practical enough, to retain a target of 3.5 per cent of GDP for 2016-17 instead of the planned three per cent. Inflation is currently low, at well under five per cent per year — the target level determined in the monetary policy framework. The US generated economic shocks to world trade; to growth and to world demand will keep commodity prices low.

It is good to recollect that the fiscal deficit peaked at 6.5 per cent in 2009-10 soon after the financial crisis of 2008. We are yet again in a perfect storm of domestic and external shocks. The need of the hour is to be practical not foolhardy. If the finance minister chooses valour over vision and sticks to a fiscal deficit target of three per cent for 2017-18, the red flag of fiscal cowardice should go up. The brave accept challenges and fight them openly.

red-flagHas public investment been provided for?

Sluggish private investment requires that the slack be met by public investment. Banks are to be recapitalised, infrastructure developed and armaments upgraded. 2016-17 targeted 1.6 per cent of GDP for Central government investment expenditure. Budget allocations have always trailed actual investment expenditure so there is room for some bravado here. The investment red flag must be raised if targeted investment in 2017-18 is below two per cent of GDP.

To navigate the dragnet of stagnant tax income, lower growth and low demand, the finance minister must avoid raising any of the six red flags. To do so, he must systematically cut waste and pork to balance the Budget transparently.

green-flagPushing for doubling revenues from privatisation to a never-achieved estimate of Rs 1 trillion is one button he should press for increasing the fiscal leeway available to him. This will also signal that the reform process is alive and well. There is nothing like a resource constraint to separate the winners from the also ran.

Adapted from the author’s artcile in Asian Age, February 1, 2017 http://www.asianage.com/opinion/columnists/010217/red-flags-that-finance-minister-must-not-ignore.html

Fiscal courage needed on Feb 1, 2017

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In a welcome change of national focus, becoming rich is no longer enough unless the poor are taken along. Prime Minister Narendra Modi, who is very au fait with international headwinds, was prescient in his December 31 address. For the first time, it was not the youth, nor non-resident Indians, nor Hindus, that the PM was focusing on. His attention was primarily on the travails of the poor. He donned the mantle, first evoked by Prime Minister Indira Gandhi four and a half decades earlier in 1971, of a pro-poor proselytiser.

Recovering lost ground

Speaking in the shadow of the economic storm unleashed by the demonetisation of 86 per cent of the currency in November and December 2016, Mr Modi extolled the poor for their patience and resilience. They had shown, he said, “…even people trapped in poverty, are willing to… build a glorious India… through persistence, sweat and toil (they), have demonstrated to the world, an unparalleled example of citizen sacrifice.”

The finance minister would do well to gauge which way the wind is blowing when he rises to present the fiscal 2017-18 Budget on February 1. It is not as if the poor were ignored in the earlier three Budgets presented by him. But they only figured tangentially. Growth, macro-economic stability, infrastructure and jobs for the middle-class young, the usual Davos consensus, took pride of place.

A sombre 2017 ahead

woeful-2017

We face a sombre fiscal year ahead. The International Monetary Fund’s economic outlook — a source the finance minister has used previously to highlight India’s outlier growth performance since 2014 — has projected a growth of only 6.6 per cent in 2016 — one percentage point less than the 7.6 per cent estimated pre-demonetisation. Worse, even growth in 2017 at 7.2 per cent will suffer. Even this is dependent on the shock being temporary. The subtext is that if the ongoing jihad against corruption is extended indefinitely and indiscriminately, business sentiment will collapse. Corruption is a curse. But it must be tackled surgically by an army of savvy saints, who are hard to find.

Lower growth in 2017 would reduce tax revenues. Hopefully this can be compensated by taxing some of the Rs 4 trillion, suspected to be dodgy money, deposited in banks during demonetisation.

Sops only for revenue and economic return multipliers

This stash should also encourage the finance minister to take the risk of slashing income-tax rates to boost revenue through better tax compliance and boost demand. The maximum tax rate for an annual income between Rs 25 to Rs 50 lakhs should be 15 per cent (current rate 30 per cent), with suitably lower rates for lower income slabs. The tax on income between Rs 2.5 to Rs 10 lakhs should be broad-banded at five per cent (current rate 10 to 30 per cent). Tax studies show that the revenue dividend is more pronounced by reducing tax in the lower income slabs. This is probably because the proportionate cost of evasion reduces at higher income levels so it is tough to beat. High income wallahs tax arbitrage internationally via corporate earnings. So, they declare domestically only enough to justify their easily verifiable lifestyle and assets.

Lower growth also red flags the fiscal deficit as a percentage of GDP, which acts as a cap on public borrowing to spend. High fiscal deficits can lead to inflation and public indebtedness. But courtesy demonetisation money is cheap. Banks deposits have swelled by Rs 6 trillion since October 28, 2016. This is low-interest money waiting to be used by the government and its assorted entities. Inflation is well below the target five per cent. This presents the option for temporarily breaching the fiscal deficit target of three per cent for 2017-18 to infuse income into the poorest households.

Rich farmers, poor workers

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Sops for agriculture are falsely conflated with poverty-reduction objectives. Admittedly, investing in agricultural growth is an efficient strategy for reducing poverty. Eighty per cent of the poor live in rural areas. But this is too blunt an approach.

Fifty-four out of 180 million rural households (30 per cent) own no land and survive on manual labour. Benefits from agricultural growth are indirect for the poor. Scheduled Castes, Tribes and Muslims are overrepresented in this group. They need instant relief. Consumption loans of Rs 20,000 for each household, deposited into bank accounts, repayable by labour in village improvement schemes, can combine the advantages of a direct benefits strategy, coupled with the self-selecting benefits of the National Rural Employment Guarantee Act programme. This requires an allocation of Rs 1 trillion — three times the NREGA allocation. This would be a fit use for the demonetisation windfall.

Neo-middle class vulnerable to sliding back into poverty

neo

But income support is a short-term mechanism to reduce poverty. The World Bank assesses that the Indian growth strategy, whilst effective in pulling people out of poverty, is less effective in keeping them out of poverty. By 2012 poverty levels were down to 22 per cent, from 45 per cent in 1994. But an astonishingly high 41 per cent in the neo-middle class were vulnerable to sliding back into poverty. Even in the go-go years (2005 to 2012) around seven per cent of the neo-middle class slid back into poverty. Sudden economic stress, like the loss of jobs, can significantly increase this proportion.

Reduce multidimensional poverty through better services 

Vulnerability to sliding back into poverty can be fixed if the poor get steady jobs, which are more likely if they are educated. Shocks to household budgets can be mitigated by access to healthcare. Nutrition can be improved through clean water supply and sanitation. Lower tax on low-income earners reduces the effective cost of labour versus capital, making labour competitive in the formal sector. Public services, which reduce the multidimensional index of poverty, can be ramped up by the private sector, if the government provides viability gap funding.

Junk low economic return schemes & protect the poor from shocks

India can be on track, to meet the interim sustainable development goal of reducing the level of extreme poverty to nine per cent by 2020, if we safeguard growth and cocoon the poor from shocks by providing access to better public services. The finance minister must identify the allocations specifically for the core objectives and discard the chaff generated by the testosterone of high growth.

Adapted from the authors article in Asian Age January 20, 2015 http://www.asianage.com/opinion/columnists/200117/safeguard-poor-bring-india-back-on-track.html

him

Retired Generals win OROP: will the tail of pensions now wag the dog?

It is just as well that Finance Minister Jaitley was away in Turkey rapping with the G20 about “India’s strong fiscal fundamentals”, even as a small part of that fiscal stability was compromised, with nothing much gained, except possibly 20 million votes that the armed forces represent.

Faujis (armed forces) deserve better but not this way

victory

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

The approval of One Rank One Pension is a bad decision. This is not to say that Faujis don’t deserve a better deal. They do – particulars the officers. But succumbing to the OROP demand meant compromising on a sound principle. “Rank”- a level of command responsibility entrusted to a soldier, should only have historical and ceremonial value post-retirement. Associating pay, or even worse pension, with rank is indefensible.

OROP creates perverse incentives

Consider the perverse incentives rank based pay generates. First is the “toe in” incentive to just cross the rank hurdle and be equated thereafter for life. Not very inspiring. Second, rank as a basis for pay, is a huge disincentive for specialists – high quality surgeons, robotics engineers, pilots, staff on nuclear subs, missile technologists, communication specialists. These “geeks” may not have, nor may they want, the “command profile” that comes with a high rank. Civilians call such profiles “desk warriors”- being good at babugiri or administering power.

Two options exist-though both are bad ones- for getting around this conundrum. One-proliferate “Ranks”, as is done in civil service, to create a top heavy architecture but accommodate time scale promotions. Second-compensate specialists by adding on allowances. But this still does not protect their pensions. Therein lies the potential for a second bad decision.

India’s Chief Missile “Geek” and most loved, people’s President of India- late A. P.J Abdul Kalam – a role model for technologists in India’s defence forces. 

Kalam

Army versus  para military forces- chalk and cheese

The third bad decision would be to extend the OROP principle to the Para Military Forces (PMF). Unlike the Armed Forces, senior PMF officers do not suffer the disabilities of their men, who live in much worse conditions than do the jawans of the army. The “in and out” rotation of officers from the Indian Police services and the lack of regimental tradition binding officers to their men are other differences. Most tellingly the “khaki” these forces wear, is stained by the disrepute that the civilian police has brought to that glorious colour.

Happily, the term of the 7th Pay Commission has also been extended up to December 2015 because it has much to mull over in the context of OROP. Here are five suggestions.

Who should pay for OROP?

First, OROP will cost between Rs 10,000 to 20,000 crores annually. This is not a killer. The money can be found over time. Fast forwarding disinvestment, including in the defence departmental undertakings, is an option. But it is a bad principle to sell the “crown jewels” just to service pensions.

The best option is to implement the “there is no free lunch” principle. The Pay Commission should find the money by cutting back on the pay increase it might otherwise have given to faujis. The OROP demand was for inter-generational equity- between those recently retired and the more aged veterans. It is only fair that what fauji pensioners gain should be paid for by faujis in harness today, by foregoing any anticipated increase in pay.

serving fauji

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

On a life cycle basis faujis should have an edge

Second, assess the extent to which OROP corrects the post 1973 skew against the armed forces. Compare the pay and pension earned over an average life cycle of a fauji and a civilian, taking into account the shorter tenures and the fewer promotion opportunities of the former. If the skew persists, rather than an “edge” the armed forces should enjoy, this is the time to correct it.

Pensions and fiscal stability

Third, move explicitly towards fiscal sustainability. Since 2004, the government’s liability on pension stand capped at its “defined contribution” per new civilian employees. But the liability remains open-ended with respect to the armed forces who enjoy an assured level of pension. Is this the “edge” they should continue to enjoy? Fiscal prudence dictates that a “defined contribution” pension, as for civilians, should be the way to go even in the armed forces.

Find the fat in the army

Fourth, previous Pay Commissions, have refrained from suggesting rationalization of personnel- officer to jawan ratios; substitution of mobile strike capacity for “stand and hold” physical presence and clearer separation between the tasks performed by the army and the para military forces. This is where the fat lies to finance OROP. The army, which constitutes more than 80% of the pay and allowances and 90% of the pensions paid in the armed forces, should specifically be in the cross hair.

bungle

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

China has just signaled its transition to a modern superpower by cutting 300,000 redundant, possibly “tail” related jobs, in the People’s Liberation Army, whilst simultaneously sharpening its teeth. India needs to do the same.

Government servants must not feed off the bottom half of India

Lastly, there is little justification for an overall increase in government pay in general. It has been 100% indexed to inflation since 1996. In nominal terms, the per capita net national income increased by 124% over 2006-2015 but the distribution of growth is skewed in favour of the top 50% which includes government servants. The salary including DA, of government servants increased by 113%.

Government servants likely increased their share of the national income, versus the bottom half of India, who do not enjoy automatic inflation hedging. But there has been no appreciable change in the quality of services provided by government to citizens over the last decade. Private employment has been hit by the global economic slowdown, jobs are scarce and inflation a continuing risk.

The bottom line is that the proportion of national income pie available for government salaries must remain capped. The combined share of the public sector (including parastatals) in national employment is barely 5%. Public sector pay must reflect performance and the market test.

Mind the gap please

The demand for government jobs is skewed-very high for unskilled, semiskilled work. But at the other end the Governor of the Reserve Bank bemoans that cutting edge economists are not available for public service. The armed forces face a shortage of officers against sanctioned posts. Doctors, nurses, good teachers, professors, scientists and engineers are similarly scarce. Children of government servants vote with their feet by preferring private sector jobs.

Public sector pay policy must first address demand supply gaps, before fiddling with the pay for positions and cadres where there is excess supply. These latter are usually those, where job entitlements are significant but accountability limited. The tail must not wag the dog.

Adapted from the authors article in Asian Age September 8, 2015: http://archivev.asianage.com/columnists/orop-rough-cut-379

Navigating India’s “perfect storm”

BeltTight

(photo credit:www.webmd.com)

It’s final now. The run of good luck PM Modi enjoyed has tapered off.

The monsoon is likely to be deficient by 12%. This would be the second year in a row. True, agriculture only accounts for around 15% of the economy and didn’t grow much last year either. But when you target 7.8% growth every basis point, added or lost, counts.

Manufacturing and services growth is already slow. Companies are at best cautiously optimistic but the caution makes new investment sticky. The money and jobs spinning realty sector, driven earlier by negative interest rates, is in a slump.

To complete the “perfect storm” scenario there are two important state level elections around the corner-Bihar later this year and UP in 2017. Neither state has BJP governments currently, so doing well in these will inevitably be a metric of how strong the Modi magic remains.

The good news of course is that every threat is also an opportunity. This is PM Modi’s opportunity to show that he is the Lion we think him to be.

Fiscal stability disaster prone

First, more will need to be spent on drought relief; restructuring of bank loans for farmers and income support schemes for farm workers. Delhi, admittedly with a miniscule rural area, has already distributed Rs 50,000 per hectare as relief for the farmers hit by the April 2015 unseasonal rain. FM Jaitley is possibly right that the drought will be localized in North and Central India. But these regions account for around 45% of the farmers. Retaining the targeted revenue deficit at 2.8 % and public investment at 14% of the budget will consequently be tough.

Postponed subsidy reform

Second, it is unlikely that subsidy corrections will now be possible this fiscal. Cheap electricity, water and fertilizer are here to stay with a possible relaxation of the tight minimum support price policy of the last few years.

Higher wage cost

Third, a significant expansion in the wage bill looms. For the armed forces it is the One Rank One Pension promise of the PM.  For the Civil Service the recommendations of the 7th Pay Commission are to kick-in from 2016. Luckily the wage bill is low by international standards- 1.6% of GDP and 14% of the budget. But even small incremental increases, unless accompanied by efficiency enhancing restructuring, are not affordable this year.

This perfect storm of shocks cannot be wished away. Better to deal with it upfront. Here are five suggestions:

Winning the market perception battle

First, don’t be cowed down by stock market fluctuations or seek to pander to them. These are short term adjustments by speculators and not reflective of annual economic prospects. Consequently, rather than play down the “perfect storm” scenario it makes sense for the government to highlight the extreme shocks they are battling with to keep economic growth growing. Even in this David versus Goliath scenario, what is key is to share a plan of action on disaster management; income support; and realigning revenue expenditure to retain the revenue deficit and investment target.

Nothing much was heard about the recommendations of the Bimal Jalan, Expenditure Management Committee (August 2014). But it could provide some useful strategic, short term revenue expenditure rationalization measures.

Cut the Red Tape

Second, stressful times also create an environment conducive for administrative reform. PM Modi’s can quickly lick babudom into shape through positive strokes. He should consider setting up a lean but empowered “Decision Support Team” in his office, manned by ten senior Joint/Additional Secretary level officers selected for their expertise in key sectors; their ability to persuade and their flair for collaborative performance.

They would be mandated to speak for the PMO and be tasked to work with the key ministries and state governments to cut through red tape holding up investment decisions. Working against weekly targets with real time feedback to the PM, the mantra for this team should be “ANA- Achievement Not just Activity”.

Those taking up such high tension assignments should expect to be on the fast track to become Secretaries to the GOI.  The PM is known to be cagey about trusting officers beyond a tiny circle familiar to him. This is not surprising given that he has never worked closely with the babudom in Delhi. But he should experiment by subjecting a larger group to the “agnipariksha” of performance. He will not be disappointed with the results.

Forget the optics of who gets the credit

Third, the knotty problem, particularly in Bihar and Uttar Pradesh, is how to be proactive in the face of state governments, which have the incentive to rebuff such support as being politically motivated.

The farmer does not distinguish between the state and the Union government (Lokniti Survey 2013) – 58% held both the state and the Union government responsible for the sorry plight of agriculture. If farmers fall through the gaps of political finger pointing, they will punish both the BJP and the SP-in Uttar Pradesh and the JD (U)-in Bihar. The beneficiaries of apathy will be Bhenji (Mayawati- the BSP supremo) in UP and Lalu Yadav in Bihar. Doing little is not an option for the Union government despite some of the shine rubbing off on the SP and the JD (U).

Don’t rattle the private sector

Fourth, it would be a big mistake to take too seriously the campaign to paint the BJP as a consort of the corporate sector. When stern action is warranted, it must be taken transparently and without rancor or bluster. But a “Preet Bharara type” of regulatory action is not what we need. Jobs are what the average citizen wants, which only the private sector can generate them.

Strong arm regulatory actions against foreign investors are bad optics- both for investment and for citizen sentiment. If our regulatory agencies are seen to be handmaidens of the government, they lose credibility. But the government also loses by devaluing an efficient instrument for regulating the private sector in a hands-off, technical manner.

Sticky revenues

Fifth, boost revenue. The tax receipt scenario is grim. First, projections for the year were over optimistic at Rs 14.5 lakh crores (US$ 230 billion) around 16% higher than the previous year. Tax receipts are bound to slide with slow external and domestic demand and lower corporate profits, despite the 15% increase in the rate of service tax. A tax receipt equal to last year’s estimate of Rs 13.7 lakh crores (US$217 billion) or 9% more than the actuals of last year is the best we can hope for- 5% points due to inflation and 4% points due to growth of the taxable base.

Getting more tax payers into the net is a worthwhile but effort intensive option with limited upsides. In 2013-14 there were 47 million direct tax assesses. New assesses have varied between 1 to 3 million per year since 2011. Even doubling the number of new assesses helps only marginally in additional revenue.

Transferring the crown jewels to citizens

There is more upside in fast tracking disinvestment. Listed Public Sector Undertakings (PSU) account for 13% of the valuation of the Bombay Stock Exchange or around Rs 13.6 lakh crores (US$ 215 billion). Of this, some equity is already held privately by minority investors. But an additional 10% can be sold without diluting government’s majority control. The problem is that, in the past, Institutional Investors have been the primary takers for such shares. Retail investor appetite has been largely absent from the tumultuous stock market for some years now and market momentum has been primarily provided by Foreign Institutional Investors.

Selling PSU shares in large volumes, without transferring majority control to the private sector, dampens the market price. Even the private IPO market is slow. Government is wary of inviting the charge of crony capitalism by selling shares to large institutional investors at cheap rates.

On the other hand, selling directly to retail investors is more defensible even if the price is low. After all the “Crown Jewels” really belong to citizens. Dispersing the ownership of PSUs widely also meets multiple objectives. Why not borrow a leaf from Dhirubhai Ambani’s 1982 market making strategy and incentivize the retail investor back into the market?

Link disinvestment, as a sweetener, to the issue of government debt for retail investors only – special convertible bonds – with a fixed return for three years at the prevailing Government Bond rate. 50% of the face value could be optionally convertible on termination in 2018-19, into a balanced bouquet of public sector equity at a 15% discount to the then prevailing market price.

A sequenced, mega issue of Rs 1 lakh crores (US$ 16 billion) of an asset backed government security can reduce the short term risk profile of PSU equity investments and pull in finance from an alternative source.

Government must come out with an evidenced strategy to deal with the “perfect storm” India faces. Of course, the PM is a “lucky General”. The drought may not materialize; the world economy may sort itself out and the opposition in Bihar and UP may self-destruct. But waiting for this to happen may be pushing the Gods too far.

Well run, PM Modi

modi run

(photo credit: http://www.iosipa.com)

Reposted from the Asian Age May 25. 2015 < http://www.asianage.com/columnists/well-run-modi-690>

Should it worry us that Modi sarkar resembles the Ethiopian Haile Gebrselassie, the greatest long-distance runner ever and not Usain Bolt, the 100-metre thunderbolt from Jamaica?

Not really. The 100-metre dash, whilst spectacular and crowd pulling, is a good tactic for disaster mitigation but disastrous for managing a huge, diversified economy. The marathon analogy suits India better. It is a test of endurance, grit and determination. Outcomes are only visible towards the end of the 42 km race. Those in the lead for the first eight km rarely end up winning.

Other than physical fitness the marathon runner needs a disciplined mind, which restrains the urge to sprint till the last mile whilst maintaining a planned and steady pace all through. Also important is the ability to transcend the near continuous pain and stress, and remain focused on the goal.

Modi sarkar has expectedly followed the epic Bollywood masala — a marathon interspersed with sprints. Citizens have been kept entertained by a blitzkrieg of short-term Bolt spirits to simulate inclusive ascent on a rising elevator of well being, whilst working steadily behind the scenes towards medium-term goals.

The opening of 80 million small bank accounts; the launch of three social protection (pension and insurance) schemes; the attractively packaged, near weekly engagements with foreign governments on their soil and ours; pushing through the border realignment with Bangladesh; the quietening down of tension with China in Arunachal Pradesh; the relatively incident-free border with Pakistan; the warming relationship with Sri Lanka; the race to make India “cough-free” by substituting clean renewables with dirty fossil fuels; the quick response to natural disaster in Nepal and Bihar; the disciplining of the bureaucracy and the Bharatiya Janata Party’s political cadres; effective management of the sensitive relationship between the BJP and its regressive cultural font — the Rashtriya Swayamsevak Sangh; the visible dominance of the Prime Minister’s Office, which had wilted under the previous government; the productive alignments with Didi’s (Mamata Banerjee) government in West Bengal; Mufti Muhammad Sayeed’s People’s Democratic Party in Kashmir; the Telugu Desam Party in Andhra Pradesh; Amma (J. Jayalalithaa) in Tamil Nadu, are all signals of aggressive political outreach.

But behind the scenes, several half-marathons have also been initiated — the blistering pace of tendering and award of infrastructure projects with results expected over the next three years; the quick decisions on defence procurements; the swift auction of coal mines to resolve the fuel supply bottlenecks; the opening up of the defence sector to private investment and management; relaxation of foreign direct investment constraints in insurance — both major sources of good jobs and the quiet continuation of the previous government’s Aadhaar electronic platform as a primary mechanism for verifying identity so necessary for subsidy reform via direct cash transfers.

Prime Minister Narendra Modi has run the first leg of the marathon with exceptional skill. But this was the easy part. The next 16 km till 2017 is what will make or break his chances for re-election in 2019. Five key measures stand out.

First, with two big state-level elections coming up, the BJP will need to marry the compulsion for populism with fiscal rectitude, which has been the leitmotif of the first year of Arun Jaitley as the finance minister of India. Reigning in inflation is a continuous struggle in such circumstances. It is fitting that the Reserve Bank of India continues to focus on managing money supply and interest rates. The ministry of finance will have its hands full substituting for the erstwhile Planning Commission in allocation of funds and enhancing real-time, expenditure management systems and metrics to ensure “value for money” spent. Key indicators to watch will be achievement of the targeted reductions in revenue, current account and fiscal deficits.

Second, introduce a poverty and private jobs creation filter. Share the assessments publicly via a “dashboard” of proposed allocations to make the allocation process more transparent and participative. Direct democracy is of Mr Modi’s signature tune. This is also a great way of self-restraining crony capitalism and populism.

Third, cut loose the railways and the public sector companies and banks from the crippling constraints of ministerial intervention. Corporatise all production and service delivery entities as a first step to reform, followed by administrative autonomy and selective listing of stock. The creeping tendency, reminiscent of the “Indira Gandhi ‘commanding heights’ syndrome”, of falling back on the public sector for getting quick results is unfortunate. The international experience shows that poor investments are the outcome if public funds are plentiful. India cannot afford “bridges to nowhere”, even if they create jobs in the short term. This implies fixing the “broken” public-private partnership (PPP) model, not effectively junking it altogether with the government assuming all the risk, as is being considered currently.

Fourth, trim the flabby Union government. The UK model of agencification and administrative reform, tight budget constraints, monetisation of assets and the levy of user charges, fits the Indian context best. Look for “asymmetric reform”, rather than whole-of-government approaches. The Aadhaar unique ID experiment is a useful example of the benefits of strategic, but narrow reform. The “Namami Gange” Clean Ganga Mission is another example. If “cooperative federalism” is to be more than just an attractive slogan the Union government must be the pied-piper, which the state governments follow.

Fifth, fix the big institutional constraints to rapid development. The last thing we need is a clash of titans — Rajya Sabha versus the government — a replay of the dysfunctionality of the American political architecture; judiciary versus the executive. Are we really keen to tread the Pakistan route? Avoid proxy veto by the Union governors over elected state governments — a throwback to the ugly days of the Emergency in the 1970s. Implement the 74th Amendment (1992), which mandates decentralisation but remains ignored two decades later.

The final 16-km dash in 2018 and 2019 will be easy if the half marathons already initiated are run well, over the next two years. The trick is not to sacrifice public interest in an all-out attempt to win state elections in Bihar and Uttar Pradesh. The question remains: will the BJP’s marathon mind rule or its sprinter’s muscles dominate?

Selling spectrum: Telecom’s Kohinoor (Reposted by the author from http://swarajyamag.com/)

spectrum

(Photo credit: http://www.intelligent-eneregy.com)

Now that the Spectrum Big Bazaar auctions are over, it’s time to sift through the smoke and dust of the financial battle and figure out who lost and who won. But before the juicy part, here are the bare facts for those who don’t spend their lives following spectrum auctions.

Limited spectrum on offer

First, the bulk of the spectrum sold in the 800, 900 and 1800 MHz frequency bands relates to licenses issued in 1995 and 1996 which are now expiring after 20 years. Very little new spectrum has been added by either the government releasing spectrum, currently reserved for the army (TRAI opines at least three times more than required) or from the cache given free to BSNL and MTNL, two government-owned telecom companies which grossly underuse their spectrum allocations because they just can’t compete with private service providers despite the public gift of free spectrum. So much for the “public Kohinoors” the government loves to hoard in public interest.

Fiscal success

Second, the government secured firm bids worth Rs 110,000 crore (US$ 17.8 billion) as revenue from auction—25 or 33% paid upfront and the rest to be paid in 10 annual instalments after a moratorium of three years.

Spectrum in the 900 band garnered an incredible 120% more than the reserved price. TRAI had predicted and service providers moan, that they have paid through their nose just to hang onto spectrum they had till now.

The 1800 band secured an auction value only 14% above the reserved price. TRAI had predicted that the small amount and non-contiguous spectrum on offer would negatively impact valuation despite the 1800 band being a fallback option for supporting service in the preferred and scarce 900 band. The 800 band secured a respectable 64% above the reserve price value.

The big fight for 900 band spectrum

Third, the 900 band was the star of the auction. Despite comprising only 46% of the spectrum auctioned, it secured the lion’s share of revenue—71% of the total auction value. The 1800 band, comprising 27% of the spectrum auctioned, did the worst with a revenue share of only 9% of the auction value. The 800 band, used mainly for data transfer, balanced its share in spectrum auctioned of 27% with a share of 21% of revenue in auction value.

The institutional short circuit

Fourth, let’s look at the institutional arrangements within which the auctions happened. Telecom Regulatory Authority of India (TRAI) has an overwhelmingly “advisory” role. The real decision making power on spectrum pricing; quantum of spectrum to be sold and the constraints to be imposed on the buyers of spectrum—right to swap, share or leverage spectrum financially, all vest with the Minister in the Department of Telecommunications (DOT).

In this sense, TRAI is very similar to the low profile Central Electricity Authority which is an adjunct of the Ministry of Power and advises it on techno-economic matters. Note that the similarity extends even to the nature of the entity. Both are “authorities” not “commissions” like latter-day utility regulators, including the electricity regulators, are titled.

This institutional arrangement has advantages. It reduces the risk for TRAI in offering innovative advice. After all, should the CAG or the CBI come calling with their inevitable investigations, usually once the government has changed, TRAI can turn around and coolly assert they decided nothing, being mere advisors to DOT. Also, this arrangement liberates TRAI from considerations of political economy- all of which weigh-in for government.

The arrangement also encourages TRAI to be transparent and participatory in its functioning which is a boon for ”Telecom watchers” who are not industry “insiders”.

TRAI’s consultation papers are drafted painstakingly. They provide a wealth of information and outline options for decision making. Most importantly, TRAI encourages open participation. None of this happens in the DOT.

Once an issue reaches the “in box” in DOT, the iron curtain crashes down; information put out is terse; formatted to confuse the “outsider” and as minimalist as Swedish furniture. The cumbersome “Right To Information” route becomes the only way to get access. But even then, the rationale for the many commercial decisions the DOT takes, is never disclosed. TRAI itself has, courageously, voiced its frustration on this “zipped lips” policy of DOT.

Undeniably, DOT could be much more.

transparent and “un-babu like”. Equally, TRAI has to learn to play ball. Adopting a strictly “technically correct” approach is not what an “advisor” is paid to do. In fact, by “islanding” itself, TRAI has cut its significant technical expertise off, from the deliberations in government around the “second best” option, which is the kernel of public decision making.  The correspondence between TRAI and the DOT around its recommendations for the 2015-16 spectrum auctions bears out this institutional short circuit.

The bottom line is that, whilst the existing institutional arrangement could work better, what exists is far better than deciding everything in the cozy confines of the DOT. TRAI Chairs and its members have been outstandingly progressive in safeguarding public interest.

Fiscal success but a tunnel vision?

Fifth, is the question how successful has this particular auction been? Undeniably, from the purely fiscal point of view, no one—hopefully, least of all the CAG—can quibble. But the issues TRAI raised, and which remain unanswered, are pertinent.

Should “public silver” be sold only for short-term gains or should there be a wider strategic objective? Telecom adds 3% to the GDP, so a 30% growth in telecom adds a significant 1% point to national growth and could meet one-eighth of the target of 8% increase in GDP. The bulk of the incremental, “good-jobs” are in the information technology space and depend on robust growth. Identifying needs and monitoring the delivery of social services are strongly dependent on a pan-India telecom network being available. Consider also that in a vast, poor country like India, where 25% of the citizens are domestic migrants who remain culturally, strongly linked to their home village or town and it becomes easy to view telecom access as a necessity for improving the quality of life.

Clearly, no one wants a situation where funds from spectrum sale in the hands of the government, come at a huge cost hurting the growth of private telecom services or adversely affecting their affordability.

The problem is that both government and TRAI are prone to fall back on the “cost-of-service”—heavy handed model of regulation, which entails examining the pockets of the private service providers, either to ferret out if they are making too much profit (DOT) or too little profit (TRAI) and somehow adjust the profit by either squeezing service providers (DOT) or conversely compensating (TRAI) through spectrum pricing.

Undealt with legacy issues compromise the future

The Spectrum Usage Charge (SUC) is one such additional levy, over and above the spectrum cost. It is levied as a proportion of the Adjusted Gross Revenue of a service provider. Actually, there should be no usage charge at all, since spectrum is now auctioned and bidders reflect a part of their expected surplus in the bid. The user charge is a revenue generating instrument, left over from the days when spectrum was “allocated” administratively. TRAI has repeatedly suggested that it be brought down transparently from 5% to 3% before an auction, to induce bidders to reflect the reduced cost into a higher bid. But DOT has resisted this move without ascribing a reason for its obduracy.

More importantly, now that the auction is over, reducing the user charge retrospectively is not an option. Any reduction in license cost will now go directly into the pockets of the service providers. Worse, those bidders who may have “inside” knowledge of a probable post-auction reduction, would have been enabled to bid lower on the basis of this “privileged information”. A classic case attracting the allegation of potential “crony capitalism”.

The current Minister of Telecom is too savvy a person to fall into this trap. But political office is transient with too little institutional memory. In comparison, service providers bid their time better than a leopard and the institutional memory of an elephant. It is an unequal match which can only go against the public interest.

Why go to Nagpur via Kanpur?

But even on the issue of technical efficiency to achieve a narrow fiscal objective, TRAI had raised “red flags” which merit more serious consideration. TRAI had warned of a price war if additional spectrum was not made available for new comers in 900 or 1800 bands. If newcomers have to fight it out with incumbents, clearly, bidders will scrape their revenue models to the bone. This is what has happened.

In the 900 MHz band, the bids are more than 2.2 times the reserve price. Was there really that much undiscovered fat in the revenue models of the service providers? Clearly, if there were such huge margins then the auction has achieved what markets are supposed to do– cut the producer surplus to optimum levels and pass the benefits to customers.

But there could also be a fine print to this bidding madness. DOT has still to take decisions on the property rights of the new spectrum owners. We know that they can share spectrum in the same band (900 and 1800 MHz being considered as one band) with other service providers, but on what terms? When and how will they be able to trade it with spectrum in other bands within and outside their License Areas? When does government intend to implement it’s “in-principle approval” to create a post-auction market for spectrum trading? If not, why not?
All these are “untapped value pools” for enhancing producer surplus post the auctions. Are we sure that this discretion will be used well?

More importantly, recent history in natural resource management in India shows that the use of administrative discretion immediately raises “red flags” and can invite an adverse comment from the CAG or CBI investigations on the charge of “crony capitalism”.

The spectrum auction is for 20 long years. Does this mean that if the Minister or his officers err on the side of complete probity and safety, it effectively seals our economic future at a sub-optimal equilibrium level till the next auction two decades hence? And only because they failed to take these crucial decisions upfront prior to the February auction?

Of course, the Indian bureaucracy has a delightful habit of springing welcome surprises. It is entirely likely that they will find a way out of this conundrum. But TRAI’s observation remains relevant—why go to Nagpur via Kanpur?

Who won and who lost

And finally the juicy part—who won? The Finance Minister won big time. He got around Rs 9,000 crore in FY 2015 to plug part of our fiscal deficit, courtesy the generosity of the winning bidders, who paid up part of the upfront payment before time to meet the March 31st  fiscal deadline.

The DOT lost the opportunity to burnish their image and came out instead looking like bumbling, inefficient, indecisive babus.

TRAI covered itself in short-term glory by being outspoken—almost pugilistic and technically sound.

The handful of six private service providers, being canny business people, frankly don’t care how the government wants to play the game, so long as they win out in the end—which some of them are likely to.

Customers are on a roll with the fizz of tailored talk and data plans and an ascending escalator of bundled services to care too much one way or the other.

And the nation—well, any outcome which helps reach the tight fiscal deficit target helps India get good risk ratings; cheaper credit and most importantly international recognition that PM Modi means business. All’s well that ends well.

FM Jaitley’s conundrum: Fat wallet but empty pockets

Jaitley fat wallet

(photo credit: http://www.firstpost.com)

Imagine if FM Jaitley had admitted in his budget speech of February 28 that of the Rs 17.77 lakh crores (US$ 287 billion) of expenditure he was tabling in Parliament, less than one third was really available for innovating on the past trends and the bulk of the funds relate to liabilities already contracted before the year begins.

Given the lack of fiscal space for new commitments one would think then that the budget would be transparently split between contractual liabilities of past decisions, which are “sunk cost”- loosely defined and new budget allocations to make instant and easy sense to citizens. After all it is the “new” allocations that everyone looks forwards to, assuming that they could perturb the status quo and kick start growth.

But you will not find the budget classified thus, even though the eleven budget documents, excluding the Finance Bill, runs into 949 pages! Instead it is split between Plan and Non Plan expenses – a practice that should thankfully end now with the demise of the Planning Commission– or Revenue and Capital, another archaic distinction, which was traditionally used to track investment expenditure due to the traditional direct linkage between investment and growth. But increasingly, the right kind of revenue expenditure is also critical. Funded by the “revenue black box” are catalysts for efficiency and innovation led growth- skilled employees; functioning institutions and well maintained public assets.

The cost of feeding the public beast

How much needs to be spent just to keep government systems alive even if they do nothing of value for citizens? This is a close proxy for “current liabilities”.

First, civilian employee pay and allowances account for around 8% of total expenditure, not high at all by international standards where high, double digit proportions are the norm.

Second,  expenditure on pension of government employees accounts for 5% of total expenditure but growing rapidly as ex-babu couples age and live longer.

Third, the administrative cost (providing workplaces, consumables and equipment) of managing 3.6 million civilian government employees has to be paid for. Assuming administrative cost to be one third of pay and allowances it amounts to around 3% (0.33 of 8%) of total expenditure.

Fourth, annual interest on government debt accounts for 26% of total expenditure.

Fifth, is expense on maintaining physical assets- the Achilles heel of the government. Chronic under provisioning results in axle-breaking pot holes; overflowing public toilets; broken x-ray machines and no doors or windows in classrooms. Two decades ago the PPP model for providing public services seemed like the way to go but those hopes faded.

Guess what? Maintenance expense is not transparently available as a separate line item in the budget documents. This is not surprising since the government has, inexplicably, not adopted a more complete economic classification of budget items, endorsed by the IMF and followed internationally.

Today we will have to make do with assumptions- albeit conservative ones. A God send is that ever since the promulgation of the FRBM Act the government is obliged to share an asset register of civilian assets (which excludes cabinet secretariat-a code word for India’s spooks; defence; police; atomic energy and space which together account for approximately 46% of the annual CAPEX).

The register of physical assets (excluding land) for 2013-14 values civilian assets at a measly Rs 1.87 lakh crores (US$ 30 billion) for a Rs 141.09 lakh crore (US$ 2 Trillion) economy. It seems designed, like the asset declarations of politicians, to hide more than it reveals.

Assuming a thumb rule asset value 20 times the annual capital expenditure yields a “notional” but more realistic value for government assets (other than land) of Rs 48.76 lakh crores (US$ 786 billion). Annual maintenance at 2% of “notional” asset value requires an additional 5% of total expenditure.

Just these five “tied” revenue expenses, all of which account for 47% of the total expenditure, reduce the “free play” money with the FM to 53% of total expenditure.

The drag of politics

But it doesn’t end here. Central assistance for states is what gives leverage to the PM to negotiate with state governments. In the new “cooperative federalism” framework envisaged by the PM, after the niceties are done, bargaining power will depend on the fiscal muscle the union government can flex in inter-state negotiations. How else could the PM, for example, influence the governments of Haryana and Delhi or the governments of Tamil Nadu and Karnataka to share water with the minimum of bloodletting as the searing heat of May pushes up water consumption? The 2015-16 allocation accounts for just 1% but is highly politically sensitive to change.

Subsidies on items like food, fertilizer and petroleum and interest subsidy account for 14% of the total expenditure and also fall in this category. “We need to cut subsidy leakages not subsidies themselves” is what FM Jaitley remarked in his FY 16 Budget Speech on February 28, 2015.

The “Statement of Fiscal Responsibility” tabled under the requirements of the “Fiscal Responsibility and Budget Management  (FRBM) Act, 2003” unveils the FM’s hope that subsidies shall decline from 2% of GDP in 2014-15 to 1.6% of GDP in 2017-18. This could happen if annual GDP growth accelerates to the targeted 7.5% whilst the nominal amount of subsidy grows slower. But it sounds like an over optimistic assessment.

True, subsidies can be better targeted to eliminate waste and corruption. But there are also millions who are eligible for subsidy, but remain unable to access it today, because of complex administrative arrangements and poor documentation.  If the JAM (Jan Dhan, Aadhar, Mobiles) inclusion initiative succeeds it will likely swell the numbers accessing subsidy. Consequently, the jury is out on the net savings that better administration of subsidy can achieve.

Accounting for the amounts committed to assistance for states and subsidies, the “play” money available to the FM reduces from 53% to 38% of total expenditure.

Funding White Elephants

The remaining 38% or Rs 7.18 lakh crores (US$ 116 billion) sounds like a lot of money. But we still have not accounted for the FMs compulsion to fund the variable costs of programs managed by the mind boggling 72 (seventy two) departments of the union government-each a fiefdom in itself.

Not accounted either are allocations for ongoing projects which are unproductive “sunk cost” unless completed and operationalized. Budget 2015-16 proposes parceling out Rs 1.11 lakh crore (US$ 18 billion) of CAPEX  as grants to as many as 375 projects.

Oddly, the budget documents make no distinction between CAPEX allocations to ongoing projects and the CAPEX for new projects. Could this be because making such information public may reveal the absence of fiscal space for new projects or force government to abandon undeserving old projects?

Inefficient governments under-allocate to old projects thereby making space for announcing new ones. This makes sense politically, if sharing “pork” is the mantra of survival. But it happens at the expense of previous investment lying unutilized, worsening thereby the Incremental Capital Output Ratio- jargon for how much bang each buck buys and increases the interest burden every year as borrowed funds lie unproductively in incomplete projects.

To be sure none of this mess is of FM Jaitley’s making. But it is fair to expect him to clean it up since PM Modi’s is a government which works.

There are four initiatives the FM must launch to achieve this worthy objective.

First, he must walk the budget speech to aggressively resuscitate the PPP model and not solely because it pulls private capital into public projects. Partnering with the private sector forces the government to be efficient, effective and results oriented. Entering into explicit contracts with the private sector also makes information public, which can then be used to hold government accountable.

Second, the economic rationale behind civilian investment decisions must be made public. How are potential investments ranked? Hopefully, making the investment and economic analysis public knowledge can reduce the political noise and avoid wasteful decisions. We cannot just leave it to path breaking individual ministers like Suresh Prabhu to be punctiliously technocratic, as he was in the Railways Budget 2015-16. The weight of public opinion, via direct participation, must be institutionalized to assist the government in avoiding “bridges to nowhere”.

Third, at least ruling party MPs must commit time and effort to disseminate the logic of the budget to their constituents. It is for this purpose that Parliament takes a month’s recess during the Budget session- this year from March 24 to April 20. Have, at least, the BJP MPs fanned out to their constituencies to interact with citizens? Doing so would force MPs to understand the provisions better; come across as being well informed and initiate a more substantive dialogue at the local level. Delhi is a fish bowl in which MPs operate. Happenings here do not resonate with the rest of India automatically.

Finally, there is the appeal to save trees by reformatting the budget documents and making them shorter in length (500 pages for starters?) but more transparent in quality and to share both, the genuine constraints and the FM’s innovations to punch above his fiscal weight.

If only Suresh Prabhu was CEO of Indian Rail!

train-crowd (1)

(photo credit: Indianexpress.com)

As expected Suresh Prabhu, the likable, very professional and intensely committed Railway Minister presented a Rail Budget yesterday, which is not only fiscally responsible; internally consistent; aligned with the medium terms needs of the economy but which also pushes all the right buttons.

For the middle class the buttons pushed are availability of disposable linen in trains, on payment, for the squeamish- a first; entertainment on board to while away boredom; Wi-Fi at stations; a choice of meals; an assured maximum waiting time of five minutes whilst purchasing a ticket – again a first. Most important is there is no increase in the price of “upper class” tickets, which no one was expected, given the gaping hole in the financials of passenger traffic.

For the environmentally conscious citizen, Minister Prabhu flags that investing in rail reduces transport of goods and people by road, thereby saving up to 90% of energy and 85% of the carbon emissions as compared to road transport. A clear plus for the security of energy imports dependent India and a plus for the global climate.

Second, dual fuel engines are planned which will run on diesel plus the significantly less polluting Compressed Natural Gas, which compulsorily fuels all commercial road traffic in Delhi thanks to a Supreme Court order a decade ago and is why Delhi citizens are not choking to death in stand-still traffic.

Third, select railway stations will switch to green solar power, generated on site, using the ample land available with government.

For the poor, he has held the lower class ticket fares constant despite a net loss on passenger traffic of Rs 26000 crores ($ 4.2 billion). He adds that he is likely to be helped somewhat by weak oil prices which may reduce the loss by 20%.

Revenues from passenger traffic contribute only around 33% of total revenues but passenger trains get priority in congested routes. Of the passenger revenue the “lower class” subsidized fare contributes only around 70% even though around 85% of passenger miles are in this class. These rates are crying for upward revision.

Sadly, he has hiked the rates for goods transport by around 10%, in line with the long term trend, in which freight of goods and upper class passenger fares are taxed to cross subsidise passenger fares for the poor.

But there is hope. Unlike all his august predecessors he has resisted the temptation of announcing new trains and thus frittering away the meagre public funds (Rs 40,000 crores – $ 6.6 billion) that Indian Rail (IR) gets from the budget.

Sensibly, he intends to invest in around 50% of pre-identified segments of the congested routes to remove blockages,  which slow down premier passenger trains- technically capable of running at 130 km per hour to a mere 70 and freight trains- which can run at 75 km per hour to a mere 25 km per hour.

Decongesting such sections will increase the speed of transport, improve turnaround time of rolling stock and reduce the delivery time at destination of both goods and passengers. Once realized, this by itself will result in financial rewards for IR from improved efficiency. Sadly these intended benefits are either not assessed or not shared with the public.

But it is sad that India still wastes both executive effort and scarce parliamentary time on issues which are squarely within the corporate ambit. There is really no reason why IR should not be a government corporate just like Oil and Natural Gas Corporation (ONGC) the oil behemoth or the National Thermal Power Corporation (NTPC), India flagship power Generation Company.

India’s stock market is booming and capital values are several times the book value of “capital employed” in the these corporations based on future expectations of their profits.

Meanwhile IR, a monopoly in the rail transport segment, with annual revenues of Rs 183, 828 crores ($ 30 billion) struggles to charge cost reflective rates; needs to mind its Ps and Qs because its budget is debated in Parliament, where the 790 honourable members can each be a stumbling block to reform and rationalization and is strapped for capital to invest.

If Indian Railways were a government corporation with a Suresh Prabhu clone as its CEO, it would be the second largest Indian company by assets size, after State bank of India (SBI); the fifth largest Indian company by profits after ONGC, the Mukesh Ambani led Reliance Industries (RIL), SBI and TATA motors and the seventh largest by revenues after Indian Oil Corporation, RIL, Bharat Petroleum, Hindustan Petroleum, SBI and TATA motors.

Ofcourse if it had been a government corporation it would not have had to suffer the political interference which has crippled it since the last “business like” minister it had in the late Madhavrao Scindia of the Congress more than  two decades ago. It is time all the Scindia descendants alligned with the right side of reform again.

The best part of Suresh Prabhu’s Rail budget is that it is “timid” in its ambition. It does not promise the moon and instead bats for “incremental improvements” which aligns well with the glacial pace of reform in India. It is realistic in its assessment of political economy compulsions and yet firm on not “giving in” to the long prevalent culture of “pork” in railway budget allocations.

Small is still beautiful and the Rail budget does well to recognize it. It is the small changes which have a big bang for the buck. Problem solving and unplugging bottled up efficiency essentially involves looking for cost effective solutions. The railway budget assiduously finds them all. The only exception is the commitment to green solar energy which, despite the hype, remains a hugely expensive option for grid connected electricity generation in a poor country like India.

If PM Modi’s “invisible hand” was behind the Rail Budget, we hope to see more of the same, strengthening FM Jaitley’s resolve on February 28, whilst presenting the nation’s Budget for FY 2016, to be efficient without being excessive; effective without being cruel and carefully allocating public funds where the maximum private sector jobs can be created; the poor most benefited and the common tax-payers wallet swelled.

The Rail Budget was a good beginning. Lets hope for a  happy ending tomorrow to the budget mania.

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