FINANCE MINISTER CHIDAMBARAM PRESENTS A FEEL GOOD BUDGET FOR 2006-07

The General Budget for 2006-07 presented by the by the Finance Minister, Shri P. Chidambaram today in the Parliament was well-received in the Indian press and the business community. It’s a FEEL GOOD and will probably be a DO GOOD budget as well, if the Finance Minister does not ignore issues in public expenditure efficiency, for reasons of political expediency and poor budget management!

The budget includes a number of initiatives that will help spur economic growth and provide justice to the disadvantaged sections of the society. The bulk of the budgetary resources will go for UPA government’s eight flagship programmes – Sarva Siksha Abhiyan, Mid Day Meal Scheme, Rajiv Gandhi Drinking Water Mission, Total Sanitation Campaign, National Rural Health Mission, Integrated Child Development Services, National Rural Employment Guarantee Scheme and Jawaharlal Nehru National Urban Renewal Mission. The total allocation for these programs at Rs.50,015 crores will be 43.2% more (in nominal terms) compared to the last year's allocation of Rs.34,927 crores.

The central government’s total revenue receipts are estimated at Rs.403,465 crores, revenue expenditure at Rs.488,192 crores, and consequent revenue deficit at Rs.84,727 crores (about 2.1% of the GDP). Allowing for the capital expenditure, the fiscal deficit is estimated at Rs.148, 686 crores (3.8% of the GDP). The Finance Minister has tried to keep the fiscal deficit within acceptable limits with the hope that inflation will be contained. Much of the increases in international oil prices are being subsidized by GOI and state governments to contain inflation. In this process, the budgetary funds available for capital investments remain very much constrained. We need to watch how far the domestic and interntional borrowing programs, FDIs and private sector investments help raise the savings/investment rates.

Continuing the emphasis on tax reforms, the Finance Minister has proposed rationalization of some of the indirect taxes while expanding service tax net, given that this sector now contributes about 54 per cent of GDP. As a step in the direction of a progressive convergence of the service tax rate and the CENVAT rate, the Finance Minister has proposed to increase the service tax rate from 10 per cent to 12 per cent. The net impact of this increase is, however, likely to be very small. The Finance Minister has set April 1, 2010 as the date for introducing national level Goods and Service Tax (GST).

As for the direct taxes, the good news is that there will be no change in the rates of personal income tax or corporate income tax, nor any new taxes are being imposed. The Finance Minister has proposed to revise certain tax rates in the quest of equity. And which government can afford to take the political risk of imposing direct taxes on agricultural incomes, even after excluding a substantial threshold to cover subsistence farming as well as risks in farming. Certainly not the UPA government --- the previous BJP-led government could not do this. The Kelkar Committee Report which attempted to deal with this topic remains on shelf, gathering dust.

The Finance Minister’s tax proposals on the direct taxes are estimated to yield about Rs.4,000 crores. On the indirect tax side, the gain is estimated at Rs.2,000 crores. These amounts are negligible relative to total revenues, expenditures and revenue/overall fiscal deficits. It remains to be seen if the rationalization of indirect and direct taxes proposed in the budget will help maintain the growth in revenues that was seen during 2005-06 --- if not, increase in fiscal deficit will be inevitable --- RBI is already on its way to increasing interest rates to contain expected inflation.

The Finance Minister noted that while the world has recognized the potential of India. “It is now for us…..to rediscover the greatness of this country and the potential of its people. The young people of India are building castles, it may appear that those castles are in the air….it is our duty to put the foundations on which the young can build their castles.” So true.

In the same spirit, this blog is concerned with efficiency of public expenditure and overall budget management including delays in or shortfalls in release of funds against budgetary allocations approved by the Parliament; expenditures incurred on activities without approval of the Parliament; use of quasi-budgetary sources of funds to finance government programs; and continuation of inefficient, untargetted, subsidies that not only contribute to distortions in the economy but also perpetuate inequity and doll-out mentality at various levels. Improved budget management is critical to achieve goals intended by the new budget.

Let us address some of these questions as we go along in the context of various programs funded by the budget while recording satifaction that the new budget will help to sustain the overall economic growth rate of about 7% p.a during 2006-07.

Anonymous Comments on Bush Visit: A Brief Response

Readers:

Your attention is invited to the following comment by the Anonymous on the earlier post: Quote: Let us get serious. There is a Railway budget and you have not commented on it. There are all the reports that Planning Commision has prepared - which I presume has the talent to prioritize all development issues. All this buzz about Bush visiting India is of no use. Look at the past history - it did not result in anything meaningful.India has to seize its development by itself.And if this blog is to have impact it should have seriosu commentary - like Paul Krugman / Paul Samuleson or Larry Kudlow on CNBC.Otherwise it is just shooting the breeze. It should be provocative, insightful, unique, analytical and not superficial.What do you think ? Unquote:

I would indeed agree with the tenor of the comments above. However, is not "energy" a critical input that is required to sustain India's economic development -- and therefore the objectives and the outcomes of President Bush's visit to India of relevance to this blog? In the past, on most domestic and international issues, Indian and US wavelengths were not in sync. President Bush's forthcoming visit is the first of its kind that will address an economic issue of great importance to India, in spite of its dominantly political overtones. Afterall, the political economy of a country tends to dominate economic decision-making in any country.

That said, I agree that we should not not lose sight of more urgent economic issues and one such issue is the Railway Budget. Yes, I looked at the Railway Minister, Laloo Prasad's budget speech which very well lays out the financial and performance improvements achieved by the Railways over the past 2-3 years and the system's modernization plans -- including the politically attractive aspect of keeping the passenger fares unchanged and economically important proposal of rationalizing freight structure. I am, however, looking at "efficiency" indicators used by the Railways in presenting this budget. As the Railway Minister has himself put it -- the user of the Railway system should be treated like a "king" -- meaning the quality of service must be improved to the satisfaction of the users. More on this subject soon after we complete the inquiry. However, the readers should feel free to comment on the pros and cons of the Railway budget proposals.

Meanwhile, we will make every effort to improve the quality of the posts we issue on various economic topics. Thanks to the Anonymous for his/her comments.

Who Needs Nuclear Pact More: India or USA?

Perhaps, both -- but more so, India if the country must generate sufficient electric power to sustain its economic growth, continue progress on poverty reduction, and improve quality of life for the millions.

It was indeed creditable for Prime Minister, Mr. Manmohan Singh -- BJP Prime Minister, Mr. Bajpai had started the process earlier -- to secure an exception from President Bush that it should be enough for India to separate its civil nuclear program from military nuclear program and bring only the former under IAEA supervision -- this exception is important especially in the context that India has consistently declined to sign NPT while the US law prohibits sale of nuclear technology to nations that are not part of NPT or have tested a nuclear bomb -- thus India does not qualify to receive US nuclear technology on both these grounds. President Bush says India deserves an exception as it is the largest democracy and can be trusted for good governance!

While some political parties in India are against the proposed pact on the ground that it compromizes the pious principle of "non-alignment", at home, President Bush and his party in Congress would need to make a special effort to push the related legislative process that is so critical to make India eligible to receive US nuclear technology.

While there remains much uncertainty surrounding the proposed pact, there is hope that the India-US nuclear pact will eventually materialize, especially because the prevailing world political situation seems to be in India's favor. Yet, India on its part may have to work hard with President Bush as well as the democratic party caucuses to get this deal through the Congress and the Senate, especially if one takes note of Senator Kerry's diplomatic double talk that he did after his recent visit to Pakistan that immediately followed the one to India.

India on its part has to do a lot of lobbying in Washington. Looks like India's Ambassador, Mr. Ranendra Sen is doing an excellent job in his chacteristic sober style of mobilizing support from both Republican and Democratic parties.

Readers, please do publish your comments on this sensitive issue in this blog.

Who Needs Nuclear Pact More: India or USA?

Perhaps, both -- but more so India if it must generate sufficient electric power to sustain its economic growth, continue progress on poverty reduction, and improve quality of life for millions.

It was indeed creditable for Prime Minister, Mr. Manmohan Singh -- and possibly BJP Prime Minister Mr. Bajpai who started the process -- to secure an exception from the US Government that it should enough for India to separate its civil nuclear program from military nuclear program and bring only the former under IAEA supervision -- especially against the background that India has consistently refused to sign NPT while the US law prohibits sale of nuclear technology to nations that are not part of the NPT or have tested a nuclear bomb.

While some Indian parties are still against the proposed India-US Nuclear Pact, at home, President Bush would need to make special efforts to push through the legislative process to qualify India to receive US nuclear technology for civil purposes. Thus, uncertainties abound. India on its part may have to work with President Bush to get this deal through the Congress and the Senate as India cannot be sure about a democratic President to be of help on this issue if the statements made by Senator Kerry after his recent visit to Pakistan that immediately followed the one to India are any guide -- that was kind of a diplomatic double talk?

Readers, please do publish your comments on this sensitive issue in this blog.

From India, President Bush Goes to Pakistan: His Key Themes for Pakistan!

President Bush in his speech to Asia Society on February 22 referred in the post below noted that Pakistan is a key ally in the war on terror, referring to the country’s contribution to end Taliban regime in Afghanistan; stopping al Qaeda operatives at its border; and sharing intelligence on terrorist activities and movements with USA and its allies.

President Bush believes that Pakistan now has an opportunity to write a new chapter in its history as the United States wants to build a broad and lasting strategic partnership with the people of Pakistan. In his meeting with President Musharraf, Mr. Bush will be discussing areas that are critical to the American-Pakistan relationship—especially in terms of continued cooperation in confronting and defeating terrorists and making progress on the road to democracy by strengthening local institutions that will help guarantee civil liberties and lay foundations for a democratic future for Pakistani people.

The United States wants help in promoting Pakistan's economic reform and growth including opening up of markets and expanding trade. The two countries are currently engaged in improving educational opportunities for the people of Pakistani. "Young men in Pakistan need a real education that provides skills required in the 21st-century workplace. Pakistan needs to improve literacy for its women and help more Pakistani girls have the opportunity to go to school". By helping Pakistan increase the educational opportunities for its people, the United States hopes to help its people raise their standard of living, and marginalize terrorists and extremists.

President Bush believes that good relations with America can help both India and Pakistan in their quest for peace. “Not long ago, there was so much distrust between India and Pakistan that when America had good relations with one, it made the other one nervous". Changing that perception has been one of Bush administration's top priorities. “Pakistan now understands that it benefits when America has good relations with India. India understands that it benefits when America has good relations with Pakistan". And President Bush is pleased that India and Pakistan are beginning to work together to resolve their differences directly.

President Bush observed that “ India and Pakistan are now engaged in dialogue about the difficult question of Kashmir. For too long, Kashmir has been a source of violence and distrust between these two countries”. President Bush believes that India and Pakistan now have an historic opportunity to work toward lasting peace. During his forthcoming visit, Mr. Bush hopes to encourage both Prime Minister Singh and President Musharraf to address this important issue. “America supports a resolution in Kashmir that is acceptable to both sides”!

The World will be keenly watching the impacts and outcomes of Presidents Bush's visit to India and Pakistan within the two countries and vis-a-vis the Unisted States and the rest of the world. Indeed, very interesting and challening times ahead.

President Bush Sets Out Key Themes for his forthcoming Visit to India!

In his eloquent speech today to Asia Society in Washington, President Bush said USA’s relationships with India and Pakistan were important for USA’s economic security and national security. He hoped to discuss with Prime Minister Singh in India and President Musharraf in Pakistan, the ways that the three nations must work together to make the world safer and more prosperous by fighting terrorism, advancing democracy, expanding free and fair trade, and meeting our common energy needs in a responsible way.

President Bush’s first stop will be in India. According to President Bush, “India is the world's largest democracy. It is home to more than a billion people -- that's more than three times the population of the United States. Like our own country, India has many different ethnic groups and religious traditions. India has a Hindu majority, and about 150 million Muslims in that country. That's more than in any other country except Indonesia and Pakistan. India's government reflects its diversity. India has a Muslim president and a Sikh prime minister. I look forward to meeting with both of them. India is a good example of how freedom can help different people live together in peace. And this commitment to secular government and religious pluralism makes India a natural partner for the United States".

In his meetings with Prime Minister Singh, President Bush proposes to discuss ways to advance the strategic partnership that the two announced last July. Through this partnership, the United States and India are cooperating in five broad areas: (a) defeat the threat of terrorism; (b) support democracy around the world; (c) promote global prosperity through free and fair trade; (d) improve human health and the environment; and (e) help India meet its energy needs in a practical and responsible way - addressing three key issues: oil, electricity, and the need to bring India's nuclear power program under international norms and safeguards.

President Bush today talked about the most contentious issue that “India must first bring its civilian energy programs under the same international safeguards that govern nuclear power programs" which also involves "separation of civilian and military nuclear programs”. President Bush says “ I'll continue to encourage India to produce a credible, transparent, and defensible plan to separate its civilian and military nuclear programs".

President Bush recognized that while India and US have an ambitious agenda to work on, " it builds on a relationship that has never been better. India is a global leader, as well as a good friend, and I look forward to working with Prime Minister Singh to address other difficult problems such as HIV/AIDS, pandemic flu, and the challenge posed by Iran's nuclear ambitions". President Bush hopes that " his trip trip will remind everybody about the strengthening of a important strategic partnership -- to work together in practical ways to promote a hopeful future for citizens in both our nations".

This blog will closely follow on this historic visit of President Bush' to India and its outcomes -- and will cover in later posts the key themes that he will be pursuing during his visit to Pakistan that follows. President Bush believes that "good relations with America can help both nations in their quest for peace. Not long ago, there was so much distrust between India and Pakistan that when America had good relations with one, it made the other one nervous. Changing that perception has been one of our administration's top priorities, and we're making good progress. Pakistan now understands that it benefits when America has good relations with India. India understands that it benefits when America has good relations with Pakistan. And we're pleased that India and Pakistan are beginning to work together to resolve their differences directly."

Farmer Suicides Again in the News

Mrs. Sonia Gandhi Gandhi, Congress President, while in Ahmednagar on February 22, expressed concern over rising incidents of farmer suicides in Maharashtra! She wanted such cases to be thoroughly investigated. She wondered why farmer suicides should be growing when government has taken so many steps to safeguard farmer rights -- she was probably referring to National Rural Employment Guarantee Scheme that was recently launched by her jointly with Prime Minister, Mr. Manmohan Singh. Maharashtra’s Chief Minister Vilasrao Deshmukh added that from next kharif season, the state was going to "declare" loans at six per cent interest that should benefit farmers. Mrs. Gandhi probably knows by now that government schemes do not necessarily reach farmers who need them most and Mr. Deshmukh also knows that his government has no money to disburse credit cheap or provide interest subsidies and the cooperative credit system that his government administers is already in doldrums. Rural India needs a community-owned and-administered "social safety net" to save lives of desparate farmers --- NREG scheme is a partial answer if it is administered well and reaches the rural population soon!

Mr. Peter Milford's Comments on the Post below

Readers should please take note of Mr. Peter Milford's comments on the post below, which tell us a lot. Experience of Russia, China and other communist countries has abundantly shown that "forced equality" perpetuates poverty and deprivation by killing entrepreneurship and incentives in the society and in turn economic growth. I had a chance of looking at Chinese and Russian economies in the early stages of their respective economic reform and talk to several Chinese and Russian households. What I saw and heard was that in the so-called equal and egalitarian societies there were some people, especially those who happened to be coveted members of the communist party, were "more" equal than others -- how about that?

India's Leftist Parties Letting Out Anger

India's leftist parties are upset over India’s vote at the IAEA in favor of the referral of Iran nuclear issue to U.N. Security Council, embarrassed by the fact that their mentors, China and Russia, also voted in favor. Are India’s leftist parties feeling isolated? Looks like the leftist parties must revisit their respective ideologies and programs, rooted as these must be in Indian soil.

There are other issues over which India's leftist parties have yet to come to grips including privatization, public-private partnerships, and the role of FDI in the country's economic development. During 1970s, China’s Communist Party Chairman, Late Mr. Deng Xioping, told his people, guys, GET RICH FIRST and then we will see how we distribute our wealth? He opened the country’s borders, especially coastal regions -- special economic zones -- to foreign capital and technology.

Throwing away the garb of extreme socialism, in early 1990s, Russia's former President Yeltsin embraced capitalism and went on with mass privatization of many of the state-owned enterprises and state farms. He too encouraged the flow of foreign capital and technology to begin the process of economic renewal from what was then a big junk-yard.

Of course, Indian form of communism or socialism, – which was never close to what China and Russia preached and practiced over decades -- has a limited focus on protecting interests of working class and peasantry-- and not on nationalizing private property. Even the leftist parties do not expect Indian farmers to give up an inch of their land in favor of state ownership.

It is clear that time has come for India's leftist parties to chart out their own medium to long-term paths with clarity and conviction for the country's economic development, that they want to purse to further reduce poverty and deprivation and ensure social safety nets to millions of people. They need to go to the people at large with their own well thought out agenda rather than blaming coalition partners for not doiong what they would want to achieve under their own platforms. The leftist parties need to face the winds of change that are blowing all over the world including through the lengths and breadths of their mentors, Russia and China, and explore what they must need to do in India including changing their own orientation in some ways!

WHAT DO YOU THINK? Please comment

Should India Expect Early General Elections?

India’s leftist parties have made it known that they are opposed to privatization. Yet they seem to concede to privatization on a case-by-case basis, as they did recently for the proposed modernization of Mumbai and Delhi airports with private sector participation.

Clearly, the main political concern behind the leftist parties' approach is to keep UPA government remain in power as long as feasible and prevent rightist parties' (likely or unlikely?) chance of coming back in power – or at minimum, they want to discourage (Sonia) Congress going on its own in national elections without alliance with leftist parties, until the current five-year term ends!

The politics of India's leftist parties with regard to the country's agenda economic reform is indeed complex and confusing to many, especially when you see that China and Russia to which they look for intellectual guidance or framework are going aggressively for market-based economic development --- knowing well where they want private sector to have a free hand and where the government would continue to play a role on social grounds.

In China, for example, provincial and local governments have set up numerous independent economic entities outside the government administration, which function just as any private sector entity would do -- although notionally, public ownership of asset remains. Russian privatization is much deeper than that -- it is real in most cases but not so real in some cases. Do we see any attempt on the part of India’s leftist parties to clarify their positions in a transparent manner on the privatization question and outline what they see as right and as wrong?

India's leftist parties include the Communist Party of India (Marxist), the Communist Party of India (CPI), the Revolutionary Socialist Party and the Forward Bloc? All these parties publicly supported the recent airport workers’ strike. The strike was withdrawn only after the government assured the leftist parties and airport workers that the latter’s jobs would be protected even under the new arrangment. One wonders how the country would fully realize the potential benefits of privatization if private sector entities bringing in capital and management skills and taking the underlying financial risks are constrained by restrictive labor policies?

For CPI, the struggle on the privatization issue does not seem be yet over -- it has announced that if the UPA government uses now-agreed private sector participation in modernization of Mumbai and Delhi airports as a precursor for further privatization initiatives, it will fight against these at all levels.

What do you think will be the likely political outcome of all this? Should India expect early General Elections? May be not, but at the cost of slowing down mobilization of domestic resources and FDI and, in turn, the country's economic progress which is critical to reduce the poverty at large?

India Launches A Revolutionary National Rural Employment Guarantee Scheme

The Parliament has recently passed NREGS bill that will directly or indirectly benefit some 80 per cent of India’s 260 million poor who live in rural areas. NREGS is indeed revolutionary as it provides for the first time in India, a right to employment to the rural poor, backed by the national government's commitment .

NREGS aims to guarantee a minimum of 100 days' work per year to all (adult) men and women seeking work in rural areas and if the scheme cannot provide work for any of the guaranteed 100 days, it is expected to pay equivalent amount of wages for the work foregone as "unemployment allowance".

NREGS will be implemented in 80,000 villages in 200 districts and will initially cost about Rs. 28,000 crores but eventually the annual outlay could go up to Rs. 100,000 crores. The state governments are expected to contribute about 10% of the total outlay in their respective states, while the balance amount will be provided by the central government. Some state governments have already expressed difficulty in raising the required funds.

Massive cash transfers under NREGS are expected to reduce rural poverty, malnutrition, disease and indebtedness, and improve availability and productivity of assets through critical infrastructure development, which may also help reduce rural to urban migration to an extent.


NREGS was formally launched the other day jointly by India’s Prime Minister, Mr. Manmohan Singh, and Congress President (UPA Chairperson), Mrs. Sonia Gandhi in a village in Andhra Pradesh. Singh and Gandhi believe that benefits of the scheme would reach the targeted poor (living below the income level of about $2 per day equivalent) and that there would be no room for corruption.

The people are urged to make use of the Right to Information Act to ensure NERGS' proper implementation with required transparency. It is hoped that corruption will come down if there is a fear that truth will become public. The scheme provides for a mechanism to help people with grievances to secure justice.

While NREGS is designed to provide national coverage to rural employment and poverty issues for the first time, it is not entirely new in concept. A first such initiative was started in Maharasthra as back as in early 1970s, with a focus on undertaking construction or maintenance of rural infrastructure, especially rural roads, percolation tanks, and other smaller infrastructure, with payment of wages generally linked to food for work program.

The Maharastra EGS had mixed results though fraught as it was with many implementation problems including the lack of adequate annual budgetary allocations, diversion of allocated budgets to other (not necessarily priority) activities, inefficient project designs which meant lack of sustainable outcomes, and above all corruption that could not be easily detected and checked. Hopefully, NREGS will not suffer from these problems.

While one should not sound negative at the very start of NREGS, which undoubtedly is a well-intentioned and well-targeted program, what seems to be problematic is the NREGS implementation might involve a plethora of government officials at various levels, especially in Zilla Parishads, including a Program Officer at Village Panchayat level and a Program Coordinator at Block level to "assist" Gram Panchayats (village level local governments). The communities of rural poor may not necessarily be in the driver's seat?

This blog believes that unless this nation-wide scheme is implemented as a community-driven program in which resources are directed to range of small-scale investments, identified by poor communities to improve their own livelihoods, it will be doomed to fail. Active community participation in planning, decision-making and use of development funds is fundamental for the success of the scheme.

The Indian Press has come down heavily on some aspects of NREGS which says: Imagine the scope for corruption where village level Program Officers and block level Program Coordinators are expected to prepare muster rolls for use by Pachayats? Hopefully, these muster rolls will be verified in community meetings? Why not use local NGOs, acceptable to communities, to assist them exercise oversight over the implementation of the NREGS and the preparation of muster rolls and payment of wages?

Under NREGS, the rural poor are expected to get information about the works to be taken up under the scheme through local newspapers. How many such people read local newspapers on a regular basis, if at all? For this reason, the rural poor need to get information from the communities themselves who should be in charge of the preparation of work lists, hiring their own experts -- governmental and non-governmental. Government budgetary procedures need to be changed and/or adapted to suit the community driven development approach!

While Gram Panchayats and their Chairpersons' political commitment may help to drive the program, this could lead to biases against those who do not belong to the political party in power – this problem cannot be addressed unless communities are in charge of NRGS funds and drive the work programs outside the political allignments.

When communities are in charge on a non-political basis, one can expect that the NREGS financed accretion to rural assets to become demand-driven (rather than supply-led) and the choice of investments determined by the communities themselves, going beyond construction and maintenance of rural roads and drinking water facilities to include construction of primary healthcare centers, schools and the like that are required to improve their quality of life and welfare.

One provision of the scheme that is particularly difficult to implement is the payment of unemployment allowance to those rural adults who do not get work under the scheme. Will rural communities be able to ensure that this process remains transparent and objective and does not benefit the politically powerful? And why not ask people who do not get work at their home locations to move to another location where there is work -- instead of receiving cash for no work? Will the unemployment allowance approach for the rural sector, though justified on socio-economic grounds, be constitutionally equitable and valid, if not made available to urban unemployed/underemployed poor? Also, imagine the administrative work and litigation that will be plague the scheme unless local arbitration is used to resolve the problems? And who will finally pay for NREGS? Is the UPA government and participating states ready to raise taxes – reduce subsidies on grain, fertilizers, oil, power that go to non-poor to raise resources for NREGS?

This blog wishes all success to the NREGS and hopes to monitor its implementation and outcomes on a regular basis. Dear readers, your active participation in this effort is keenly solicited.