governance, political economy, institutional development and economic regulation

Posts tagged ‘rural development’

FM walks the budget plank gingerly

happy kisan

The Union Budget 2018-19 appears an honest and judicious construct when first viewed on video. Reading the fine print takes some of the shine off, going by precedent. The biggest relief is that there has been no substantive deviation from the path of fiscal discipline. The fiscal deficit for 2017-18 is pegged at 3.5 percent of GDP. This is 0.30 per cent higher than the budgeted estimate for this year.

But it is well within the 0.50 leeway recommended by the N.K. Singh Committee report on Fiscal Responsibility and Budgetary Management. Disruptions caused by GST still linger. Banks need to be recapitalised to expand new credit and public investment pushed because the private sector is still sitting on its funds. The stage seems set for walking through the door opened by the FRBM committee, in the interest of growth and jobs.

More reassurance comes from the fiscal deficit target for 2018-19 set at 3.3 percent of GDP. This re-establishes the declining trend for fiscal deficit towards the magic number of three per cent of GDP, which has eluded us so far.

Marginalised agriculture gets a break 

On the expenditure side, agriculture and rural development take centrestage. This is welcome against the backdrop of agrarian distress and farmer suicides. Ajay Jakhar of the Bharat Krishak Samaj points out that an Indian farmer commits suicide every 40 minutes. No wonder then that Mr Jaitley outlined, in great detail, many of the specific measures proposed to reverse this trend.

One popular, but possibly ineffective step is an assurance that all the crops notified for the kharif cycle will be covered under the minimum support price (MSP) scheme. This means that if market prices fall below the cost of production plus 50 percent as margin for the farmer, the government will stand committed to make good the difference (as is being done in Madhya Pradesh now) or to physically procure the produce.

Ajay Jakhar

But representatives of farmers’ interests are not satisfied. They want the methodology for setting costs should be spelt out in a participative manner to ensure that a meaningful MSP is assured. The downside of an MSP type of production incentive is that it kills innovation and discourages crop diversification away from those covered under MSP. This way of assuring farmer incomes also privileges the traditional “Green Revolution” areas in the North, which unfortunately are not well endowed with the natural resources — water, for example — to sustain intensive modern farming. On the other hand Eastern India, has all of nature’s bounties, but it is too far away from the national capital-oriented policy making we follow. Consider how different things would have been if Lord Hardinge had not decided in 1911 to shift the capital of the British Raj from Calcutta to Delhi.

Agro-products exports to be liberalised – $100 billion potential

Other big-ticket items in agriculture are a more than doubling of the outlay for agro-processing industries to Rs 14 billion and assurances that the export of agri products would be liberalised to boost their exports threefold to their potential of around $100 billion. Corporate tax on income was also reduced from 30 percent to 25 percent for firms with a turnover upto Rs 2.5 billion (US $35 million) benefiting 99 percent of the registered firms in India.

Bamboo the new “green gold”

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For the Northeast, a Mission for Bamboo – now recognised as a grass and not a tree to facilitate its commercial cultivation – with an outlay of Rs 13 billion. Two new infrastructure funds — one for fisheries and aquaculture and another for animal husbandry — at a total outlay of Rs 100 billion. Crop credit would increase by 10 per cent to Rs 11 trillion in 2018-19 and lessee farmers would be facilitated to access crop credit from banks — something which they cannot do today and have, instead, to rely on rapacious moneylenders.

The budgetary outlay for rural roads, affordable houses, toilets and electricity extension of Rs 2.4 trillion will leverage five time more funds from other sources and generate work for 10 million people, per the Budget documents.

NamoCare is bigger than ObamaCare – health-equity in motion

Big changes were also announced in healthcare. A new flagship scheme will provide in-hospital medical insurance to 100 million poor families with an insurance cover of Rs 5 lakhs. Compare this with the measly cover now available of Rs 30,000 only under the Rashtriya Swastha Bima Yojana. The outlay on health, education and social protection increases by around 13 per cent over the 2017-18 spend to Rs 1.4 trillion. Simultaneously, the three publicly owned general insurance companies – National Insurance Company United India Insurance Company and Oriental Insurance Company are to merged to create a behemoth conservatively valued at Rs 4 trillion and listed on the stock exchange. Listing would enable the government to progressively hive off equity in them to the public and generate the estimated Rs 1 trillion per year premium to fund this mammoth programme, nick-named NamoCare after ObamaCare of the US. The scale of the ambition embedded in the program is breathtaking. A Rs 5 lakh cover is what even the well-off deem sufficient as health insurance. More importantly it signals that for the government the life of the poor is as valuable, as that of a well off person.

Incentives for generating employment rather than buying machines

The government proposes to extend the existing scheme under which it meets the cost of a contribution of 12 percent per year towards the Employees’ Provident Fund contribution in the medium, small and micro enterprises to all the manufacturing sectors. The idea is to increase the attractiveness of employing young job seekers by reducing their cost to the employer for three years, by which time it is expected the skills they acquire will make their value addition viable on its own.

Infrastructure development – falling short

The highlights for new projects in infrastructure are that 99 smart cities have been selected with an outlay of Rs 2.4 trillion,  against which projects worth around 10 per cent of the outlay are ongoing and projects worth one per cent of the outlay have been completed. The government expects to complete 9,000 km of highways in this year. Bharat Net, the fiber connectivity programme, is also proceeding apace. The Railways will spend Rs 1.48 trillion on capital investments, mostly in new works in 2018-19. Six hundred railway stations are to be upgraded.

The nominal GDP in 2018-19 is estimated to be 11.5 per cent  higher than in the current year. The total expenditure next year is around 10 per cent higher than the estimate for 2017-18 of Rs 22.2 trillion. On the revenue side, the big increase is an estimated increase of 53 per cent (after accounting for the fact that GST was collected only for 11 months in 2017-18) in GST revenues next year by around Rs 2.6 trillion to a level of Rs 7.4 trillion, and a conservatively assessed Rs 20,000 crores from the new capital gains tax of 10 per cent on equity sold after holding it for one year. The huge increase assumed in GST and the undefined budgetary support for “NamoCare” make sticking to the 3.3 fiscal deficit target a bit dodgy in 2018-19.

FM keeps his gun-powder dry and in-reserve

Jaitley budget 2018

But who knows, maybe the finance minister has some artillery hidden up his sleeve.. Disinvestment has been assessed conservatively in 2018-19 at Rs 80,000 crores, against the achievement this year of Rs 1 trillion. The bank recapitalisation support of Rs 80,000 crores is expected to leverage new lending capacity of Rs 5 trillion. One cannot but  feel that some of the expenditure estimates are a bit conservative relative to the ambition embedded in the programmes.

The good news is ending 2018-19 with a higher fiscal deficit but equal to this year’s at 3.5 per cent is no big deal from the view point of fiscal stability, if all of it is pumped into infrastructure and other investments. But for the Narendra Modi government, which takes targets seriously, it would be an unhappy ending.

The blog and the article mistakenly mention the estimated value of a merged insurance behemoth as Rs 400 trillion. The error has now been corrected in the text. I am deeply embarrassed by this snafu. A more reasonable number is Rs 4 trillion. Regrets.

Adapted from the authors article in The Asian Age February 1, 2018 http://www.asianage.com/opinion/oped/020218/fm-walks-the-talk-honestly-and-judiciously-but-very-diffidently.html

Plough deep for reform results

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Deep ploughing is necessary for reform results. Photo credit: hardrainproject.com

The government is stacking up its “reform credentials”. The long elusive Goods and Services Tax is now part of the constitutional scheme for taxes. This has been followed up with a double-punch by putting to rest the colonial tradition of a separate railway budget.

Bye bye separate rail budget

Rail budget reform was well received by the opposition, including the Congress and the Biju Janata Dal. In contrast Mr. Nitesh Kumar’s criticism that this will make the railways less autonomous appears to be reflexive dissent with an eye to the potential media coverage. Didi’s Trinamool Congress was similarly truculent. But Mr. Dinesh Trivedi, a previous minister of railways from the TMC, dulled the edge of the attack by not opposing the move.

The net budget support for the railways is just Rs 5,000 crore or one quarter of one percent of the annual budget. But having to get its budget passed, independently by parliament – a colonial tradition when the railways were a major public asset – exposes the railway minister to the inevitable “populist” demands to steer the budget through. This additional burden will now be borne by the finance minister – the redoubtable Mr. Arun Jaitley – whose reform credentials are growing by the day.

There is some concern that the granular information in the railways budget may no longer be available. But the concern is misplaced. The railways are reportedly implementing commercial accounting standards. Mr. Suresh Prabhu – the energetic minister for railways – could consider tabling an advance supplement based on the results for the first three quarters of the fiscal year- April to December, with the Budget documents for next fiscal followed up by yearly outcomes in the annual report tabled in parliament.

But let’s not kid ourselves. Well begun is only half done. Process reform, like the new rail budget mechanism, whilst necessary, is low hanging fruit. To show results process reform has to induce management and operational changes. In the age of “Big Data” access is not the constraint. It is using data to change behavior that matters.

1991 reforms had a narrow, central government focus

Some change in track is also necessary. Since 1991, the economic reforms have primarily focused on the sunrise sectors –  industry, commerce and finance. Tech grew under the governments radar because it remains export oriented. Inevitably urban boats have risen significantly. Two third of jobs are generated in cities, which explains the continuing in-migration from rural areas.

But connectivity and business as key drivers of growth blur the urban rural divide. Business is more concerned about seamless supply chain networks as the critical cartographic feature, not administrative borders. Similarly, markets do not end at the city limits, particularly if mass e-tailing is to grow.

SMART cities and dumb villages; broken supply chains.

We cannot hope that cities will be the sole engine of growth. There were nearly 19,000 villages, with a population of more than 5000 persons each and nearly 4000 villages, each with more than 10,000 persons, in 2001. Merely reclassifying these villages as urban spaces could increase the statistical level of urbanization from 31 to 50 percent of the total population. Estimates of the share of urban population in 2030 would then increase to 70 percent. But even the remaining 30% would constitute 450 million people left behind in villages. A significant market and a sizable vote bank.

The government has been diligent in rolling out new schemes to pull rural dwellers out of poverty. Financial inclusion via the Jan Dhan Yojna; economic and social security via subsidized insurance policies and the focus on public health and publicly financed housing are all positive moves. But most of these initiatives are still at the process reform stage. Tangible results – more disposable money in the hands of the poor – is still some time off. It is unclear, for example how many of the 200 million bank accounts opened under JAM are operational on a substantive manner. Enlarging the direct benefits transfer will make financial inclusion real. But last mile implementation is a slow process.

Unleash a reforms Tsunami to lift “rural boats” as well

rural-boat

Rural India : Seemingly placid but very uncertain.

Glimmers of hope persist. The Arvind Subramanian Report on price support for Pulses is a signal that government is shifting attention from urban centric reform areas, where progress is ongoing, to the neglected but high potential value addition sectors – agriculture, rural development and water. Agriculture needs to be brought out of the shadows where it has been consigned since the Green Revolution in the 1970s.

Visibility in rural and local governance is the first step

people-baiga

Baiga women at a meeting – listening passively to top down wisdom.

If the government is to lead, it first has to increase its presence in rural areas by decentralizing personnel, functions and finance to the sub-district level. Currently, on average, only one third of state government jobs are in local governments. The majority are centralized in the state capital and its deconcentrated offices, like the District Offices of various departments. This inter-se allocation of personnel needs to be reversed and officers reallocated closer to the people. This implies starting a conversation with state governments.

Mr. Piyush Goyal, the effervescent minister for power, coal and renewable energy recently successfully concluded just such a conversation around restructuring DISCOM debt. This model of cooperative federalism can be replicated for personnel reallocation – targeted central funds for measurable actions.

A second conversation also needs to be started for levying Income Tax on agriculture. The tortuous but eventually successful negotiations around GST provide the replicable model for this thorny issue. States may be happy to let the central government impose the tax and share the proceeds- for them a windfall gain with no political downside..

rural-rich

End untargeted agriculture subsidies or tax agricultural income.

Use NITI Aayog strategically

As in everything else, leadership counts. The Prime Minister should consider shifting the attention of his “A” policy team – NITI Ayog – to agriculture, irrigation, rural development and social protection. Currently it seems flooded with all manner of residual work. It could usefully focus on delivering tangible, measurable outcomes from its two key task forces on agriculture and poverty alleviation set up way back in March 2015.

Recommending which PSUs to sell; planning new tourist islands and ensuring 50 gold medals in the next Olympics, can be done elsewhere just as well. Surely creating jobs in rural areas and putting more income in the hands of the poor rank higher in the priority list. There is not enough bandwidth to run all races simultaneously.

team-india

Adapted from the authors article in Asian Age, September 28, 2016 http://www.asianage.com/columnists/rural-jobs-growth-key-lasting-reforms-308

Myopic Urbanization

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Divisive economics is worse than divisive politics. Proponents of Urbanization are the loudest proponents of economic divisiveness. The vision they subscribe to is of shinning cities connected by corridors of gold, glittering like diamonds in a waste land of the rest of Bharat. Their justification is that the rest of the World has adopted this approach. But India constitutes 17% of the World’s population and around 33% of the World’s poor people. It is for us to define “good practice” in development, not to blindly follow international examples, which do not relate to the context of India.

A second “best” defense of “urbanization wallahs” is that it is “inevitable” so best to plan for it. The “inevitability” is related, yet again, to the manner in which growth has happened in the past and not to the specific prospects for India in the future. The fact that even by 2039 only 50% of the population is expected to be in “urban areas” is glossed over, whilst making the inevitability argument. In any case we must not succumb, further than we already have, to the “everything is written” syndrome. It is for Indians to write their own destiny.

Here are three reasons why a divisive focus on urbanization is retrogressive.

First, people tend to fall into the category the State creates for them. Caste, gender, religion are traditional fault lines created by “Authority” such as it was defined since ancient times. None of these provide any progressive social value today. The modern World identity of Urban versus Rural is as corrosive.

The needs of a shopkeeper in a village or a city are much the same; a serviceable road linked to the habitations of their bulk suppliers and customers; electricity for extended business hours, storage of perishable goods and medicines; security of life and property; a collection service to collect the trash generated by customers and sanitation facilities; customers with money in their pockets and a bank in which to safely put her money and access credit; telecommunication links to remain in contact with current events and clean water. Why would we want to discriminate in the standards of supply of these public goods between urban and rural areas? By creating “urban” and “rural” labels we are perversely creating a modern fault lines around which antagonistic interest groups start to coalesce. Please stop this. We have enough fault lines as it is. It doesn’t help when power elites benefit from the touting of urbanization.

Second, sustainable development is indivisible. You cannot steal from the future to make the present pleasant. You cannot fatten the urbanite at the expense of the rural poor. In our democratic society, you cannot cordon-off urban development from rural prosperity as China can and does. Urban centric development is self-corroding due to unlimited in-migration from rural areas in much the same way as international immigrants storm the national borders of developed countries, spawning land and migration mafias and vote banks. Cities and rural areas are organically linked as a sugar factory is linked to the cane fields; a steel factory to the iron ore mines and an electric power generating station to the coal mines, the water or solar, wind or marine energy harvesting area.

 Area based “indivisible” development optimizing on the comparative advantage of each development area has been a standard development tool. Why have we abandoned it? Let us instead abandon the decrepit slogans of the past and opt for integrated development which maximizes value generation using resources which are available locally whilst benefiting from India’s vast, common, domestic market and the liberalization of international trade. Innovation in India need not be limited to cities it has to be a fundamental credo of growth.

Third, the literature tells us cities benefit from the economics of agglomeration. That is why incomes are higher in cities and businesses happy to locate there. Population density is higher so it is cheaper to provide public services. Product markets are larger so scale economies kick in for suppliers and effective competition can pass on the benefits to consumers. Finally, the human element; traditional identities (religion, caste and gender) are replaced by modern identities in the anonymity of cities; professional human networks leverage human capacity and aspirations change. In a recent survey, two thirds of Lady Shri Ram College alumni (admittedly an elite Delhi college for women pulling in the best) viewed their professional identity as the primary one, even over gender.

All these are indeed the virtues of cities, but should they also not make the cities self-financed? Do they justify the subsidies provided by the State to keep cities alive and humming at quality-of-life standards far above rural areas? Collection of user charges even in metros is rarely more than 40% of the cost of providing services. Revenue collected by cities from their own sources (by taxing residents and from their real estate and other assets) only meets slightly more than 50% of their expenditure. The rest is grants from the Government of the related State or the Government of India. Development schemes which are off-budget for Cities but are directly funded by the Central Government, like the Jawaharlal Nehru Urban Renewal Mission further add to their kitty of goodies. A full accounting of the actual distribution of the government’s resources between urban and rural areas, including expenditure on education, health, science and technology, industry would further skew the allocation in favour of cities, where the elite reside. This resource allocation bias for cities is indefensible.

Relying on urbanization for economic growth is an end-of-the-pipe option, like a housewife resorting to RO filtration to drink clean water as against the State cleaning the rivers and other ground water sources. It is expensive and exclusionary.

Ignoring the human cost of migration from the villages to cities, in search for work, including the life cycle social costs of predominantly male migration, in large numbers, is scary.

Lastly, in the context of the recent democratic trend of targeted social disruption as an instrument of political power, cities are powder kegs waiting to be blown up. A “soft” State, like India, cannot cope with the unleashing of such violent and disruptive, social pressures.   

 

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