Economic Growth: Luck By Chance

As the government prepares to empty its filing cabinets and heads for the hot and dusty plains to solicit votes, it is visibly exuding optimism about the economy. According to its non-elected representatives, all the lead indicators seem to be showing some signs of a revival with the first glimmer of some incipient growth pushing through the enveloping gloom. Steel, cement, auto, fast moving consumer goods (such as soaps and detergents), food items, beverages, volume of goods moved by the railways, have all shown some improvement in January, after having shrunk in the previous two months.

With the government and other political parties having begun their courtship dance with the ballot box, this feat is sure to figure high on the Congress’ list of achievements. The economic slowdown in the past six months has certainly become a sore point with the Congress and threatens to blot its legitimate bragging rights of delivering an average growth rate of 9% year on year over the past four years. This year it may drop to 7%.

But before we start congratulating the government for its excellent economic management, let’s hit the pause button (a la P Chidambaram) for a moment. How much of the Indian economy’s resilience is owed to governmental intervention? Which parts of the successful India story can be credited to government strategy? Or, is there a strategy at all? Let’s find out.

• One of the economy’s mainstays for over a decade has been services. This contributes to over 50% of the country’s GDP and has been providing enormous growth impulse over the past few years. If you were to listen to the government representatives, it would seem as if they had foreseen the coming age of services and had designed this structure. The truth is somewhat different. There are many reasons behind the extraordinary growth of services. One of the reasons is the kind of elaborate rent-seeking structures erected by the government in the manufacturing sector. Any person wanting to set up a manufacturing facility in India still has to fill a large number of outstretched palms, making the operations costly from day one.

• Here’s another unique aspect of the economy for which politicians routinely take credit. One of the saving graces for the Indian economy during this episode of the downturn is the safety net expected to be provided by Indian consumers, even as the international economy winds down and eschews consumption of goods made in India. This has had a deleterious impact on Indian exports, leading many exporters to scale down their operations and restructure their businesses. Fortunately, for the planners and the administrators, the impact of the global slowdown is likely to be cushioned, to a large extent, by the gigantic Indian domestic market, which will continue consuming and providing the growth push to the economy. Again, it’s not as if some wise person in the government woke up one morning and presciently decreed that henceforth the country would focus only on the domestic markets. The government has always felt that exports should be the apposite strategy for economic growth, just like some of the other emerging countries. Guess what? Exporters also have to manufacture and that, as we said earlier, is quite an endurance test in India. Plus, the intricate structure built around promoting exports also worked as a huge deterrent. The government also did not quite see exports as an alternative, viable economic growth model till the Southeast Asian success story burst on to the scene. Hence, till then exports did not quite get the required push. So, no grand design here too.

• Savings, especially by households, is another strong point for the economy. But, there is a difference here. This strong economic foundation has developed for two reasons — partly by government design, and, partly because of deficiencies in services that governments elsewhere in the world provide to their citizens. The government in the 1960s and thereafter made a huge push to develop the banking branch network to funnel savings into the formal system. While that is good, the same savings were then used to finance the government’s various profligate expenses. The government harvested savings not to strengthen the economy but to finance its populist policies. Secondly, savings also grew in the economy because the Indian government has failed to provide any social safety nets for its citizens. Unlike in USA and various other European economies, where the government provides unemployment benefits as part of their social contract, Indians have to fend for themselves. In the current downturn, for example, many Indians – especially in the urban and semi-urban settlements — are wary of spending because of uncertainties surrounding their jobs. This has impacted consumption but, conversely, is bound to improve the savings rate.

The credit, therefore, should go to the Indian citizen who, despite the various hurdles and inconveniences, is using his ingenuity to improve his lot at all times. This collective strength has not been forged by some steely policy push, but has developed by default, almost in line with Charles Darwin’s theory of survival.

(Courtesy: The Economic Times)

Budget: Will It Poll-Vault Or Prop Up The Economy?

What rotten luck! Writing a column for a business newspaper on the morning of major policy announcements is replete with its own peculiar set of hazards. Damned if you write about it, and double-damned if you don’t. Look at the quicksand here. Speculate and you could end up with egg on your face. Ignore it, and readers wonder if you’ve finally tipped over to the other side. The only way one can salvage the situation is by moving beyond the present and the immediate.

Today’s column will try to raise some issues that might help readers determine whether the measures have enough horsepower to drag the economy out of the quagmire. Given that there is a general election coming up, it might also be useful to differentiate between prepoll bluster and genuine economic largesse. It might also help to remember that this is going to be one hell of a tightrope walk for this government — throwing cash at the economy at a time when its finances are deteriorating and the global economic environment is in crisis.

The first, and most obvious, question is: will zapping the economy with large doses of stimuli really help? The only way to find out is if the measures announced in the interim budget by stand-in FM Pranab Mukherjee really induce you to go out and spend some of your savings. Given the uncertainty over retaining jobs in most of the urban centres, consumption spending in the metros is likely to remain tardy for some time to come. The next best bet therefore is the rural areas, where the successful monsoons of the past few years have left many people with some disposable incomes. And, there is no immediate threat of layoffs here. So, how does the budget address this constituency? Another broader question: does the interim budget do anything to boost overall consumption — whether it’s rural or urban — and does it manage to put more money into wallets?

Remember, there is a hidden layer just below the level of economic stimulus, and it is called elections. It might be interesting therefore to see how they camouflage some of the political handouts as a part of the stimulus package. Here’s a pointer: with crude oil prices now crashing below $40 per barrel, the government might have slightly greater leeway in their spending plans over the next 15 months. Lower oil prices have direct and indirect effects. It not only reduces India’s import bill immediately, but will also reduce the subsidy bill that the government incurs for compensating oil companies (which had to sell petroleum products to the pubic at a price below their raw material cost). Ditto for fertilisers. So, despite the larger-than-estimated total subsidy bill by the end of the year — primarily because of the high food subsidy bill and the huge oil and fertiliser subsidies incurred in the first six months — the government will have acquired some headroom on the fertiliser and oil subsidy bills now. The question to ask is: are funds being spent on growth-inducing areas, or are they being diverted towards expenditure under the spurious head of “social sector expenditure,” that does nothing to the economy but pays enormous political dividends?

Which brings us to the next question: will this budget create some long-term fiscal burdens? You bet! Government finances are already creaking under the strain of so many stimulus packages and give-aways. Tax collections have already slowed down. The government has already revised its tax collection estimates downwards once. Given the continuing slowdown, experts are wondering whether the government will need to recalibrate its tax revenue estimates further downwards. Whatever might be the analysis, one thing is sure — the government’s tax collections will not only miss this year’s target, but will most certainly further dip in the next financial year. At the same time, with so much money being spent on prodding the economy, the government will have to keep borrowing to finance its ballooning expenses.

The trick might therefore lie in additional revenueraising strategies. One, there is a sure source of revenues in the scheduled auctions for 3G spectrum. The second is, of course selling some of the family property — it is high time the government resumed its divestment programme. The pause button was pressed on this revenue source soon after the UPA government got the Left Front on board. As a result, it missed out on the bull run and an excellent opportunity to bolster revenues. It may not be too late even now. In fact, the government’s selective divestments also could, theoretically, even give the stalled stock markets some sort of a push. Did you spot any additional revenue-raising items?

Finally, it might be a fun idea to try and use the interim budget document to figure out if this government is confident of returning to power. Who knows what clues might be available here. Have fun.

(Courtesy: The Economic Times)

Altering Tax Rates To Prop Up Economy

Tough times call for tough measures. One of the greatest advantages of being in a soup is that the means of getting out of it are never questioned. So, too, with the economy. Bushwhacked by an economic ice age that has frozen all economic activity, governments across the world are now adopting methods that were held in great disdain till the other day to thaw the chill. That also gives the government of the day in India some elbow room to try out stuff that they otherwise would have balked at even touching with a barge pole.

Former finance minister P Chidambaram let the cat out of the bag a couple of days ago, when he said that constitutionally there is no bar on the government altering tax rates to stimulate a decelerating economy. The same day in another location, the minister of state for industry Ashwini Kumar told reporters that the government was indeed drawing up a sector-specific stimulus package that would be presented during the “interim” Budget on February 6.

Hence, it does seem that the government might arm itself with some extraordinary economic tools to stir a recalcitrant economy into some sort of movement. Whether these will take the form of tax breaks or not is still too early to say. But, one thing is for sure — these exceptional circumstances warrant exceptional actions. And, the Opposition might be willing to relax its traditional, and probably perennial, hypercritical role in the run-up to the elections. In all the demands made for tax breaks made by industry, including the one submitted by the textiles and the gems and jewellery, there are some other tax issues that might have got obscured in the avalanche of sector-specific demands. There might be some stimulus potential in them, too. Here they are:

• The former finance minister introduced a tax called “fringe benefit tax”, which sought to tax companies offering their employees fringe benefits, or perquisites, in addition to the monetary wages and salaries. In short, “fringe benefit” as defined by the Finance Bill, means any privilege, service, facility or amenity directly or indirectly provided by an employer to his employees (including former employees) by virtue of them being employed. The benefits also include reimbursements, made by the employer, either directly or indirectly to the employees for any purpose, contributions by the employer to an approved superannuation fund as well as any free or concessional tickets provided by the employer for private journeys undertaken by the employees or their family members.

There were many arguments made in favour of the new imposition, especially since it was also in currency in the US, Australia (on which the Indian structure is modelled), the UK, Canada, Japan and some other countries. There were also some arguments made both in favour and against the new levy, citing the constitution as the reference point. However, even if we are to ignore all these arguments for the moment — since they have all been made by learned people — there is only one teeny-weeny case that can be made in favour of scrapping or lowering FBT. And that is this: the tax is actually levied on expenditure at a time when the government is struggling to induce people to spend. Therefore, there seem to be adequate reasons — especially of the “exigent” variety — that warrant a rationalisation, or even a drastic reduction in FBT.

• As part of the two stimulus packages announced a few weeks ago, the government sharply cut excise duty to spur consumption in the economy. This was widely expected and had been demanded by both experts as well as industry lobbies. The impact of these cuts might take some time to play through the various layers of the economy (especially since some of the companies might still be holding old inventory, either in the form of finished goods or raw materials), though the industry analysts seem to think that the auto industry might have benefited from it already. But, there was unanimity that the excise rate cuts were indeed the right thing to do, since the levy is a pass-through and, eventually, it is a tax on consumption.

But, just like excise duty is a tax paid on manufacturing, which finally is borne by the consumer, the government also introduced a tax on services soon after it became well established that services were contributing to almost 50% of the country’s GDP. But, while the government has been reducing excise duties to spur consumption of products, no thought has been given to its equivalent in services. There is a possibility that some cuts in service tax might also help bring about a spurt in consumption.

(Courtesy: The Economic Times)

Omission, Commission & All That Election Jazz

Strange are the ways of events which unravel with close proximity to each other, as if part of a greater design that is unfurled slow-mo, screen-by-screen, denying us an opportunity to determine whether a bigger picture exists behind the sequencing of the frames or actions. Just when the public has started feeling nauseatingly overfed on stories of Ramalinga Raju’s fraudulent practices, and was eagerly looking forward to some sort of retribution, comes an unguided missile from the Election Commission of India.

Or is it a guided one, of the political-heatseeking variety? That will be tantalisingly revealed as the slides change on the projection screen, but it is definitely a peculiar coincidence that around the same time that the Satyam incidence has turbo-charged all corporate governance discussions, questions are also being raised about “governance” at a more general level, in one of the unimpeachable institutions of the country. The Chief Election Commissioner, a constitutional authority, has written to the President suggesting that one of his Election Commissioners should be retired before the next general elections to be held in April. The grounds: the CEC suspects the man to be close to the ruling party and is, therefore, concerned about the Election Commission’s ability to discharge its duties without prejudice or bias during the coming elections.

This column will — rather sanctimoniously, one must add — refrain from taking any sides in this debate or sitting on judgement on any of the parties concerned. But, it will certainly point out to some existing facts — which seem like a strange quirk of fate (or, call it an odd twist to events) — and let readers reach their own conclusions. Case in point is a document that was prepared by the commission in 2004, which outlines all kinds of electoral reforms required in the country. In one part of the report, there is a section titled “Composition of Election Commission and Constitutional Protection of All Members of The Commission and Independent Secretariat for the Commission.” Rather mouthful, what?

But it contains one precious gem. This section outlines how the CEC can be removed only on certain grounds and only through a certain process, as laid down under clause (5) of Article 324 of the Constitution. It is similar to the grounds and processes applicable to judges of the Supreme Court.

Here’s the clincher: the Election Commission had suggested in 2004 that the two Election Commissioners too be granted the same immunity available to the CEC. The report on electoral reforms reads: “However, that Clause (5) of Article 324 does not provide similar protection to the Election Commissioners and it merely says that they cannot be removed from office except on the recommendation of the Chief Election Commissioner. The provision, in the opinion of the Election Commission, is inadequate and requires an amendment to provide the very same protection and safeguard in the matter of removability of Election Commissioners from office as is available to the Chief Election Commissioner.”

The President, in 2003, fixed the number of election commissioners, under the CEC, at two — one of whom is under the spotlights now. Under the existing rules, they cannot be removed unless suggested by the CEC in writing. Had the proposed changes been carried out by the current parliament, the process for expelling the two election commissioners would have become long-drawn and cumbersome. In which case, then the current CEC might not have been able to write such a letter and trigger off such a public outcry on both sides of the aisle. The important issue is what happens after the CEC writes the letter: does it become binding on the president or the government?

The other important point is: who won? Nobody’s sure, because the election commissioner in question does not seem to be anywhere near the exit points. Even the CEC, who retires before the next round of elections commence, might not have hoped for much through his letter. But, he surely has stirred up a hornet’s nest and ensured that his letter—and the paper on proposed electoral reforms—gets some more attention.

So, let’s turn our attention to some other important recommendations, which too have rather far-reaching implications. There is one which forms the cornerstone of all electoral reforms, and should be the starting point for all reforms process. The section is titled “Compulsory Maintenance of Accounts by Political Parties and Audit Thereof by Agencies Specified by the Election Commission.” This is something that has been considered to be the root cause of all corruption in the country and changes have been demanded time and again by all members of civil society. The suggestion is simple. It demands that all political parties, first, keep proper accounts of monies received and spent and get them audited, and second, make them available to the public. These accounts could be audited by any agency approved by the Comptroller and Auditor General.

Unfortunately, not only have the political parties stubbornly refused to implement this significant piece of reforms, they have also been reluctant to engage in an open debate about it.

(Courtesy: The Economic Times)