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High expectations
UK prunes spending |
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MLA to robber Some people are so upwardly mobile Conventional wisdom is that politics is the last resort of scoundrels. We in India are ever ready to make such conventions stand on their heads. A former DMK MLA has been arrested in Chennai for robbing two local women of cash and gold by posing as an income tax official.
Implications of industrial slowdown
Tale of two images
Punjab's mounting debt burden
Govt should borrow less, tax more
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High expectations
While the Shiromani Akali Dal has formally expelled former Finance Minister Manpreet Singh Badal from the party, Chief Minister Parkash Singh Badal too has moved swiftly and effected a Cabinet reshuffle, ending uncertainty and leaving no room for speculation. Given the raging debate on the precarious financial condition of Punjab, it would not have been in the interest of the government as well as Punjab to keep the Finance Minister’s office vacant for too long. So far the political crisis provoked by the departure of Mr Manpreet Badal has been effectively handled. The real test, however, will be at the time of elections when people will take their call on the functioning of the Akali Dal-BJP government. Veteran leader Sewa Singh Sekhwan has to play a more proactive role now as the Education Minister. Education at the school, college and university levels suffers from lack of resources. The financial crunch is reflected in the pathetic condition and declining popularity of government schools. The waning government support over the years has forced government colleges and universities to cut corners and hike charges, taking higher education beyond the reach of students with modest backgrounds. Mr Sekhwan will have to do something more serious on the education front than playing politics as he has been doing in the recent crisis. Moving from Education to Finance, Dr Upinderjit Kaur has occupied a hot seat. She will be keenly watched for her stand and utterances on the issues of subsidies and state debt. Of course, there will be high expectations from her. She maintains a low profile, takes the politically correct line and is not outspoken or daring like her controversial predecessor. With no known economic agenda of her own, she is expected to follow the populist policies of her party. Now that the state of the economy has evoked wider public interest, the government will have to take hard decisions to arrest the economic slide. Mr Manpreet Singh Badal is expected to keep the issues he has raised at the political centre stage.
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UK prunes spending
THE British Chancellor of the Exchequer (read Finance Minister), George Osborne, has decided to go in for economic surgery to save his country from sliding into instability. This is how one should look at the measures he has announced — to do away with half a million public sector jobs, increase the age of superannuation to 66 years and reduce the expenditure on welfare programmes. He had proposed these steps in June when he presented his first budget after the formation of the Conservative-Liberal Democratic coalition government. Before these budget proposals he had told his ministers in May that they must get ready for a 5 per cent pay cut as part of the new government’s austerity measures to send across the message that the time had come for the Britons to learn to live within their means. There are fears, as pointed out by a few economists, that the recession-hit British economy may experience greater recessionary pressures with growth slowing down considerably. Osborne is, however, not scared. He has made his own calculations keeping in view Britain’s economic health and what other Western developed countries are doing. The UK today has a record budget deficit of 11 per cent of gross domestic product (GDP), highest among the G7 nations. This deficit cannot be brought down to 2 per cent in five years, as planned, unless the economic belt is tightened. The measures to drastically reduce the 156 billion pound deficit may cause a little uneasiness among the public now, but this negative feeling may be replaced by confidence in the government’s economic policies once the results start showing. It is believed that the GDP growth rate for next year can be higher than what has been projected by economists — 1.8 per cent against the current year’s 1.6 per cent. Freezing fresh recruitments against the vacant posts and retaining the employees on the verge of retirement alone will help Britain save a huge amount of money it so badly needs. Retiring the employees who are more productive because of being more experienced is no longer considered a sound economic decision in most developed countries. If Britain succeeds in achieving its objectives through the measures it has announced, it is bound to have a cascading effect elsewhere in Europe and the rest of the world. |
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MLA to robber
Conventional
wisdom is that politics is the last resort of scoundrels. We in India are ever ready to make such conventions stand on their heads. A former DMK MLA has been arrested in Chennai for robbing two local women of cash and gold by posing as an income tax official. He seemed to have lost his old touch. That is the only logical explanation for the fact that he managed to get caught after he “seized” jewellery and cash from the house of an octogenarian retired official of the PWD. His brother who accompanied him in this “tax raid” proved to be a smarter cookie and managed to escape with the bounty. K. Ravisankar himself is a blot on the name of politicians. A politician who gets caught is no politician at all. He was an MLA only from 1996 to 2001. The lack of regular practice during this past decade spent without being given a chance to serve the people perhaps made him rusty and he aroused the suspicion of the old couple and their daughter-in-law who raised the alarm and the passerby and drivers of the nearby autorickshaw stand caught hold of them. The brother made good his escape; Ravishankar could not. What blasphemy on the part of the public! How dare anyone touch a former MLA? The Hon’ble MLA had not exactly been idle all this while. He was also arrested in 2003 on charges of possessing narcotics when the AIADMK was in power. He had escaped from police custody and was presumably studying ever since to plan the perfect robbery. Perhaps he will now take the plea that he was only doing a sting operation to expose the corruption prevalent in the income tax department. If he has the right connections, his plea may also be sympathetically heard. |
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War is nothing but a continuation of politics with the admixture of other means.
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Implications of industrial slowdown
Recently, there was much hype about Washington-based International Monetary Fund’ s forecast of 9.5 per cent growth rate for India next year. But the news of an unusually low industrial growth rate in August 2010 has dampened the spirits of the market and the government. The BSE Sensex, after reaching 20,000, quickly shed 225 points after the report of industrial slowdown surfaced in the market. Industrial output in August grew at the slowest pace in 15 months at 5.6 per cent, casting doubt on the IMF forecast that was based on India’ s high manufacturing growth. In India’s Industrial Production Index (IPI), the manufacturing sector, which accounts for 80 per cent of the factory output and is the key indicator of the consumer demand, grew only at 5.9 per cent in August as compared to 10.6 per cent a year ago and 16.7 per cent in July. The problem with slow manufacturing growth indicates that there has been an impact of the government’ s tight monetary policy that has manifested itself in the Reserve Bank of India raising interest rates five times in the last one year. Due to the high interest rates, factories have been reluctant to increase capacity or undertake new projects. A slowdown in manufacturing growth also indicates that the demand for manufactures is not rising rapidly. The growth in the demand for non-consumer durables or fast moving consumer goods (FMCG) has declined from 1.4 per cent in July to minus 1.2 per cent in August even though the demand for automobiles and consumer durables has been rising rapidly. The 8.5 per cent general inflation and over 16 per cent food inflation are obviously causing people to spend less on some types of manufactured goods. Actually, low manufacturing and capital goods growth can keep industrial growth low for quite sometime, and if the latter is low, GDP growth will also be lower than the government forecast of 9 per cent. Manufacturing growth, however, can pick up if export growth is high in the future. Around 72.3 per cent manufactured goods are exported. Export growth was quite high at 22.5 per cent in August and total exports amounted to $16.2 billion. For export growth to remain high, there would have to be some way of preventing the rise of the rupee against the dollar. The rupee has risen because of a heavy inflow of FII (foreign institutional investment) dollars that caused it to appreciate by 6.2 per cent against the dollar since September 1, 2010. The high rupee is bound to have an adverse effect on exports because exporters have to quote their prices in dollars and euros, and a high rupee means higher international prices. They would have to compete with the exporters from other countries which are manipulating their currencies in order to remain competitive. The high rupee will further increase imports into the country that will offer tough and often unfair competition to Indian products, denting the demand. In August, imports grew faster than exports at 32.2 per cent, amounting to $29.7 billion. The trade deficit ballooned to $13 billion and in a few months could reach $135 billion for the entire fiscal year. The current account deficit could be 4 per cent of the GDP, which may prove to be unsustainable. The other important component of IPI is the capital goods industries’ growth which indicates the scale and level of investments taking place in the economy. Capital goods aid manufacturing processes to gain efficiency that reduces costs. As compared to the growth of capital goods industries in July 2010, its growth in August 2010 has been very disappointing. There was a negative 2.6 per cent growth in August as compared to 9.2 per cent rise in the sector’ s output in 2009 in the same period and a rise of 72 per cent in July. Some doubts have already been cast on the July figures by various economists and they have questioned the surprise growth of insulated cables and its disproportionate contribution to capital goods industries’ growth. Some other indicators are also portraying a gloomy picture about the robustness of industrial growth underlying the July figures. The indicators such as cargo traffic at ports, railway freight traffic and non-food credit offtake and the HSBC’s PMI (Market Purchasing Managers’ Index) show that investment cycles have not picked up and there has only been an increase in investment in infrastructure. There has been a slowing down of order book expansion in some construction companies and a slowdown in the cargo handled in ports and in railway freight traffic which grew at 1.3 per cent in July as compared to an average growth of 4.8 per cent from June 2008 to June 2009. Non-food credit offtake has also not picked up. There has been a moderate growth of 3.7 per cent in the core sector (crude oil, petroleum refining products, coal, electricity, cement and finished steel) in August which contributes 26.7 per cent to the Industrial Production Index. It was also responsible in pulling down industrial growth. All these underscore the problems underlying industrial production, especially when slower export growth in the future due to the hardening of the rupee looms large in the horizon. India may have to apply capital controls in the future like Brazil has done to regulate the inflow of FIIs, and there could be more effective intervention in the currency market by the RBI to stabilise the rupee to promote export growth. FII inflows have amounted to $20.34 billion this year. Any reversal could have an adverse effect on the market. In today’ s world of currency wars, India cannot be a passive watcher. It would definitely help the exporters if the rupee is not so high. The surge in the FII inflows will continue as long as the US has a low interest rate regime to stimulate its economy, hit by the financial crisis that began in 2008. India was insulated considerably from the crisis because of its own huge domestic market, but clearly the demand is falling with rising interest rates and inflation. The most important item in the agenda for remedying the situation seems to be inflation control by non-monetary means like having a better distribution of essential commodities and stepping up agricultural growth. Even though agricultural growth is going to be higher than that of last year because of a good monsoon, there are doubts about the self-sufficiency in pulses and oilseeds. Industrial growth also depends on the demand coming from agriculture. Next in importance would be to control the unabated FII inflows. Otherwise we would have high inflation and low industrial growth. We ought to aim at high industrial growth fuelled by higher export growth to achieve what the IMF has
predicted.
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Tale of two images
Two images confronted me constantly in the Himachal hinterland. I found them without prejudice, on walls, on T-shirts, on caps, on badges even. One: bespectacled, benign, smiling and avuncular. The other: bearded, intense, glowering and mesmeric. One: the spiritual spearhead of a people in exile; the other: variously a heroic fighter or murderous totalitarian. The former, His Holiness the Dalai Lama, unmistakable in the maroon and ochre of a Buddhist monk; the latter, a certain Che Guevara, in an altogether singular sartorial choice: fatigues. The former, a reverential figure in the region, explains itself; it was the latter I mulled over. Argentinean by birth, Cuban by invite and immortalised by death, Ernesto Guevara was the original poster boy. His romantic illusions about peasants participating in guerrilla warfare, in answer to the economic ambitions of the US in the Third World, found him in the august company of Fidel Castro. The rest, as they say, is history. Che Guevara may well have faded into oblivion were it not for his chronological positioning — the sixties. It was the decade that witnessed the emergence of a counter-culture – hippies, alternate music forms, Woodstock, the Beatles, sexual freedom, drugs. It was in those socially tumultuous times that Che Guevara, for some, a rebel willing to sacrifice everything in pursuit of his ideals, met his inglorious death. Soon after, his iconic status would find a logo. Alberto Korda’s candid shot of him, looking “sad and angry” has outlasted every representation of Che’s persona; underscoring the “Guerrillero Heroico” as the world’s most famous photo. It is this image that I saw plastered along the erstwhile hippy trail. Possibly, an import by them as they arrived in droves to discover themselves, emulating those other, more famous Indomaniacs, The Beatles. Eventually the sixties gave way to the seventies. The Beatles fell out with their guru. The hippies left. Come eighties and nineties, drugs control got tighter and overland backpackers were a thing of the past. At the turn of the century, Che, once upon a time the epitome of change, too, lay forgotten. And today, author Michael Casey’s “quintessential post-modern icon signifying anything to anyone and everything to everyone” signifies nothing to anybody. While his much replicated image, a dubious legacy, has become merely another way to decorate a patchy
wall.
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Punjab's mounting debt burden Subsidies to the small and marginal farmers, disadvantaged and poor families and individuals can be fully justified. Yet subsidies like free water and electricity supply and even subsidised fertilizers, pesticides, diesel etc to the rich farmers who grow hundreds of acres of potatoes, vegetables, wheat, rice, sugarcane etc. cannot be justified in any manner. Similarly, cash handouts at the so-called sangat darshans are illogical. It is here the proposal or conditions to reduce the farm and other subsidies in order to avail of the partial debt waiver by the central government would apply. Also in the case of farm subsidies on inputs like water, electricity, fertilizers and diesel, to the extent these are used for commodities that are procured at the minimum support prices, in the ultimate analysis the benefits do not flow to the producers because the Commission for Agricultural Costs and Prices considers the actual cost incurred by farmers on these inputs. As a result, to the extent the cost of production of the crop enters into the consideration for arriving at the MSP, the prices remain low. In turn, the issue price remains low. Thus, the benefit of these subsidies, to a large extent, flows to consumers in the deficit states. In a sense, through this process, Punjab subsidises the consumers of the deficit states, not its own farmers. The right approach should be to charge the right price of these inputs from farmers and get them the corresponding higher prices for their produce. There is, therefore, a considerable scope to reduce the subsidies and a need to focus these subsidies so that the benefits flow to the intended and deserving sections of society However, it is not only the subsidies that are responsible for such a huge debt burden on the state. Partially, it is the wasteful and extravagant expenditure by the government, which is responsible for the pitiable financial condition. Nurturing the status symbols by hordes of so-called VIPs, self-serving increases in the salaries and perks of MLAs and even an out-of-proportion increase in the salaries and pensions of the government and semi-government functionaries from back dates, generating arrear liabilities, are also responsible for the financial mess. Besides, the government's reluctance to plug huge tax evasions, in which even the persons in power are involved and lack of political will to mobilise additional resources through progressive taxation are also responsible for the build-up of the tax burden. As a consequence of the conjoint effect of these laxities and a myopic vision of our political class on these aspects, the debt burden of the state has risen fast, especially during the current regime of the Akali-BJP government. From a level of Rs 48,344 crore debt in 2006-07, the amount has escalated to Rs 71,086 crore (BE). Maybe by the time this government demits office, the debt burden is estimated to be around Rs 81,000 crore. The previous government had taken some steps to reduce the debt burden during its last two years of governance. It was believed that this trend would continue, but this government has reversed the gear and the debt burden during the regime has increased at a rate of Rs 6,700 crore a year. A major reason for this escalation is the continuous increase in the revenue deficit, which increased from Rs 1,241 crore in 2005-06 to Rs 4,152 crore in 2009-10. The interest liability on the money borrowed to the tune of more than Rs 8,000 crore is an untenable liability. All these committed liabilities do not leave any money from capital borrowings to be used for development work. Social sector investments have suffered considerably. Whatever additional funds got allocated to these sectors went into meeting the salary liability and service to people suffered a serious setback. Therefore, if this trend is not reversed, the economic state of Punjab, which already is in a debt trap, will deteriorate. The committed expenditure on the salaries, pensions, interest etc is being met through additional borrowings as the escalating revenue deficit does not leave any funds from revenue incomes for development. Therefore, the state must seek avenues of a debt waiver by agreeing to the reasonable conditions of reducing and rationalising the subsidies, mobilisation of additional resources through checking tax evasion and bold decisions on levying additional progressive taxes. It is unfortunate that instead of listening to the sane voice of the sacked Finance Minister, Mr Manpreet Singh Badal, his party opted for clipping his wings. There is hardly any politician in the state who considers the interests of the state above his own. This mindset has harmed the state on its core strength and our leadership is not ready to change this mindset and appear to be incapable of thinking of out-of-box solutions. All said and done, the Central Government is also responsible for the financial mess in which almost all states are struggling for survival. The debt burden of the states is almost proportional to their size and population density. Thus, Punjab is not the only state in this mess. This is the reason the Central Government is considering a debt waiver for states. In the first stance, if half of the debt liabilities of the states are waived, their interest burden would decease to affordable limits and some level of prudence on spending and additional resource mobilization of resources will take the states out of the financial mess. Such a waiver is not any favour to the states. The Central Government is amply responsible for this situation because the devolvement of funds to the states out the Central tax revenue has been kept low for decades together. As a result, the states could not meet their financial obligations from their own resources and consequently the states kept sinking deeper and deeper into the debt trap. This allowed the Centre to waste funds with a free hand and throw morsels at the states of their choice. The recapitalisation of public sector loss-making banks, repeated debt waivers, setting up non-consequential commissions and committees, liberal foreign junkets and fiscal imprudence are just a few examples. Now there is no alternative to providing substantial debt waivers to the states. The former Finance Minister was explaining all these aspects in his own language and style. The political game play apart, the question in the mind of the people is: Did he deserve this treatment at the hands of his political party in which he was born and brought up?
The writer, a former Vice-Chancellor of Punjabi University,
Patiala, is a well-known economist
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Govt should
borrow less, tax more None of the budgets presented so far by the present Akali Dal-BJP coalition government has levied any new tax. Instead, the government has taken heavy loans to run its affairs Taxes, the ruling parties seem to believe, annoy voters, while few other than academics grasp the debt implications. None of the budgets presented by the sacked Finance Minister Manpreet Singh Badal reflect his present concerns on the state’s financial decline. He compromised on all budgets, which carry the unmistakable stamp of populist politics pursued by Chief Minister Parkash Singh Badal. The budget for 2008-09 earmarked no money for compensating the Punjab State Electricity Board for providing free power to farmers. The government adjusted its financial commitment against its outstanding loan to the board. For that year the state added Rs 4,433 crore to the debt, which swelled to Rs 57,369 crore by the end of the financial year. The next budget (2009-10) again carried no new taxes though the employees’ pay hike put on the exchequer an additional burden of Rs 3,000 crore due to the increased salaries and Rs 4,800 crore on account of the payment of arrears from January 1, 2006. The wage hike along with the usual extravagant ways of the ruling politicians pushed the debt to Rs 64,924 crore. The budget for the current fiscal again failed to raise resources.. While the electricity duty was raised to fetch Rs 270 crore, the entertainment duty was cut from 125 per cent to 25 per cent, defying all logic. In a well-meaning gesture, the stamp duty on the transfer of property to women was reduced. The revenue mobilisation committee comprising Deputy Chief Minister Sukhbir Singh Badal and Industry Minister Manoranjan Kalia raised the VAT and introduced water charges but all that yielded only Rs 1,100 crore. The VAT and stamp duty collections have gone up but the revenue-expenditure gap remains glaring. Still the state debt will climb to Rs 71,000 crore by this fiscal end. The BJP opposes taxes on urban voters and the Akali Dal on villagers. That is why the Centre’s conditions tied to the Rs 35,000 crore waiver did no find any takers in either party. The tax evasion in Punjab has been phenomenal, especially whenever the BJP is in power along with the Akali Dal. As Finance Minister Manpreet Badal had observed that one multinational food joint pays more taxes to the government than the entire industry of Ludhiana. The Punjab financial crisis had deepened to scary levels during the previous Akali Dal-BJP government (1996-2001). It abolished the enforcement wing of the Taxation Deaprtment on the pretext of ending harassment of the business community. The government stripped the SDMs of the power to detain illegally plying vehicles. Between 1995-96 and 1997-98 the sales tax collection fell from Rs 903.26 crore to Rs 891.06 crore due to tax evasion. The entry tax imposed to discourage cheap imports from other states protects local manufacturers but hurts consumers. “Given the class-alliance populism of the SAD-BJP ruling combine in the state, there is inadequate trade-profit taxation in Punjab”, says noted economist Nirmal S. Azad. During the tenure of the Congress government led by Capt Amarinder Singh (2001-06) a white paper on the state finances was brought out. At a discussion on the white paper a top functionary of the previous Badal government estimated Punjab’s annual loss on account of tax evasion at Rs 2,000 crore. However, a functionary of the then Congress government corrected him saying that the right figure was Rs 4,000 crore. Had the Akali and Congress governments merely stopped tax evasion with a firm hand, the state would have come out of the fiscal crisis.
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IF Punjab’s fiscal health has to be restored, the government must give up its populist approach of resorting to borrowings instead of raising resources through fresh taxes.