Before Finance Minister Pranab Mukherjee presented the Union Budget for 2011-12, many political observers felt that he may just use it as an opportunity to shore up the government’s diminishing equity. Others expected some big-ticket reforms to indicate that the government had recovered from the sting of a series of scams and meant business worthy of the mandate people gave it two years ago.
Belying either expectation, Mukherjee laid out plans to simplify the administrative machinery and improve economic efficiency to prepare for the big ideas that could come later. If everything goes according to plan, a unified goods and services tax for the entire nation and a brand new direct tax code would become a reality; each citizen will have a right to food and perhaps even have health coverage, well in time for the 2014 elections.
The Budget, both by what it announced and what it did not, reiterated a guiding principle that the United Progressive Alliance (UPA) has articulated over the past couple of years — preserving growth momentum is paramount. And it will rely heavily on private investment to pull it off. UPA, by its own admission, had come back to power with the mandate of ‘inclusive growth’. However, each of the three budget speeches in UPA-II list ‘sustaining high growth’ before ‘making development more inclusive’ as priority.
“There has to be growth before there is inclusion. Without growth there cannot be any inclusion,” says one senior official in the Prime Minister’s Office. This budget clearly shows which side of the debate the government has flipped for. It promised to cut spending, even on some of its flagship social welfare plans (such as the rural jobs guarantee scheme) and subsidies, preferring to tighten its finances with a stiffer fiscal deficit target of 4.6 percent (of the GDP) as against a previous target of 4.8 percent for 2011-12.
In Favour Of Growth
The growth versus development debate has been engaging some of the best minds, as India continues to battle growing inequality and persistent poverty despite fast growth.
Worldwide audiences were captivated recently when top economists and thinkers from across the world inconclusively yet hotly debated India’s growth story in an online forum. Economists such as Jagdish Bhagwati and Arvind Panagariya argued for pro-market reforms as they saw growth as an effective and primary tool for alleviating poverty. It also allows governments to have more resources to bring about redistributive justice, they said.
However, others such as Nobel Laureate Amartya Sen believe that excessive focus on growth is inappropriate. While agreeing that growth helps the poor, Sen believes that excessive focus on growth rates alone, especially in comparisons between India and China, is misleading. What really matter are the fruits of growth like improved human development indicators, he felt.
“People (in India) have started taking growth for granted” — This is a standard refrain among India’s policymakers. It is in this context that the Budget for 2011-12, and what it hopes to do in key areas such as agriculture, manufacturing and systemic efficiency, perhaps needs to be interpreted.
The budget lacks short-term measures for tackling food inflation with the government hoping that fresh arrivals of grains and vegetables after a good farming season would by itself take care of that. But it does look at supply side reforms such as a boost to building good storage capacities to tackle price rise in the long term and reduce estimated wastage of 40 percent of India’s fruit and vegetable output.
“After a long time, I have seen a budget which has initiated some very important reforms in agriculture,” says Ramesh Chand of National Council for Agriculture Policy. Chand says the trick lies in pushing those reforms, which, while being crucial, does not necessarily require political consensus. He says the government has recognised the enormity of the constraints on supply and storage and is banking on private investment to remove them.
Farming will also get a boost from direct cash transfer of subsidies that will help improve systemic efficiency and plug leakage. Senior officials say Prime Minister Manmohan Singh had a hand in pushing this reform through.
A PMO official says that it is typical of Singh to let debates and dialogues play out in full before taking a decision.
“We have deliberated for long the modalities of implementing such subsidies. The debate now has to make way for decision,” the finance minister said while announcing the shift to the new subsidy regime. Some other reforms like foreign direct investment in retail remain in cold storage waiting for the right moment as the prime minister does not like to force issues since he believes it could hurt their sustainability.
The same principle is likely to guide other policies too. “He is very interested in liberalising the FDI structure but he is waiting for an opportune time,” says the official. Private, especially foreign, capital remains the cornerstone of the UPA government’s growth strategy.Infrastructure
According to the government’s plan, private investment would surpass its own spending on critical infrastructure like bridges, highways and ports. The Planning Commission estimates that the country needs to double its investment in infrastructure to $1 trillion during the 12th Five Year plan that will begin in 2012.
The government would like to cap its incremental allocation for the sector at around 9 percent per year while letting the private sector maintain a yearly momentum of around 25 percent. Since commercial banks in the country have sectoral caps, their capacity to lend to the sector is limited. An expansion in the corporate bond market is expected to close this funding gap.
The minister has raised limits for foreign institutional investors to invest in corporate bonds issued by companies in the infrastructure sector by $20 billion to $25 billion.
“The biggest requirement of infrastructure companies was to be able to get to sources of funding other than debt from the public sector banks and that concern has been addressed,” says Ankineedu Maganti, managing director of Hyderabad-based infrastructure company Soma Enterprises.
The government has also authorised the National Highways Authority of India, HUDCO and government entities in the ports sector to issue tax-free bonds for Rs. 30,000 crore while the take-out financing scheme introduced by IIFCL last year has been enhanced by Rs. 5,000 crore. Many of these numbers are ambitious.
Some bankers doubt whether the financial milestones set by the plan panel can be achieved. “Raising $30 billion equity every year would be tough. In fact, raising more than $15 billion a year would be tough,” Piyush Gupta, chief executive officer of DBS Group Holdings and DBS Bank said at a recent event.For instance, the shipping ministry wants Indian shipbuilders to ramp up their share to about 5 percent of the vessels made globally in the next four years from the present rate of 1.5 percent. As an incentive, the ministry may reintroduce a 30 percent subsidy that the government used to provide between 2002 and 2007. The method, however, will be different this time.
“We are trying to work out a promotional structure which will not be a burden on the exchequer. This can be done by routing back some taxes collected from shipbuilders,” says shipping secretary Mohandas.
An incentive-led policy awaits the whole of manufacturing sector as well because the government wants a sponge that can absorb the large number of low-skilled workers that the country is expected to produce in the next several years. Without this, the country will not be able reap the demographic dividend of its youth bulge.
The draft manufacturing policy circulated among ministries hopes to increase the share of manufacturing in GDP from 16 percent to a fourth by 2020, requiring an annual growth rate of 14 percent.
“The allied advantage with manufacturing growth is that it can absorb the labour out of agriculture,’’ says the official in the PMO. The stress is on how to incentivise sectors such as electronics hardware, shipbuilding and telecom manufacturing where there is enough demand within the country for the industry to prosper.
A senior official from the Department of Industrial Policy and Promotion (DIPP) says that the government is on the verge of accepting the recommendations of a strategy document prepared by the commerce ministry on reducing transaction costs for companies. It will also create a fund dedicated to buying critical technologies in strategic sectors like aerospace, solar energy, capital goods and for high-tech research and development. To boost small and medium enterprises, which constitute about 40 percent of all manufacturing and are a huge source of jobs, the government is expected to implement the pending recommendations of the PM’s Task Force.
The government is also aware that since the year 2000, the Indian industry has increasingly faced a shortage of skilled labour. People like T. Muralidharan of the TMI Group that helps unemployed youth learn job-earning skills believe the government is headed in the right direction.
“The decision to set up the National Skill Development Council (NSDC) in 2009 was a great move after the government realised that this is not the job of regular government departments and requires the active involvement of the private sector,” he says. The NSDC has been given another Rs. 500 crores in this Budget.
However, Muralidharan strongly feels that there are still some loopholes that need to be plugged. For example, instead of providing training reimbursements, the government should further simplify giving educational loans. That way the system cannot be gamed with fake training certificates.The Growth Strategy
Meeting at a conference in New Delhi recently, economists such as Michael Buchanan of Goldman Sachs and Gerard Lyons of Standard Chartered Bank wondered what India’s game plan for long-term growth was. They were as sceptical as many local economists about the fiscal deficit, expenditure, and growth targets. Infographic: Sameer Pawar
Senior government officials say there are broadly five key areas of concern on the near horizon. The first and foremost is the adoption of a new fiscal regime characterised by the DTC and GST at the earliest. The GST, the more contentious of the two, has been held up by BJP- or NDA-ruled states on the grounds that a single rate for all states takes away states’ financial autonomy.
“The central point of GST should be that there is no overlapping of taxes and not the uniformity of rates,” says Raghawji, finance minister of BJP-ruled Madhya Pradesh and a member of the empowered group of state finance ministers on the matter.
However, Left-ruled Kerala’s finance minister, Thomas Isaac, says that the state is very much on board. “We wholeheartedly support GST,” says Isaac. Kerala will gain about Rs. 1,500 crore per year in additional revenue from the shift to GST. Isaac says some states are opposed to it for political reasons.
The Centre believes that states hold the key to the next level of growth. It is hoping to encourage them to create conditions for rapid expansion of industry. It is forcing them to shore up their financial situation by signing fiscal management agreements with them. State-level fiscal responsibility legislations will seek to eliminate revenue deficits and cap fiscal deficit at 3 per cent of state GDP by 2014-15.What Next
The real threat to the government’s game plan for sustained growth, however, is lax implementation, weak governance and political opposition.
The government is hoping that much of it will be addressed by the relatively new system of performance appraisals for bureaucrats, expected to bring about greater transparency and accountability. An incentive scheme for high performers is also on the cards and could be announced as early as April. So far over 60 departments have been brought under the system and more are expected to join. The performance report card will be made public, forcing departments to be accountable.
Many of the measures that are in place now are expected to yield results in the current as well as next year. The idea is that when the government is ready to rollout its next big schemes such as the National Rural Livelihood Mission, the Urban Health Mission and Universal Health Coverage, it will be in a much better position to implement them with efficiency. That would also mean more bang for each precious rupee.
(This story appears in the 25 March, 2011 issue of Forbes India. You can buy our tablet version from Magzter.com. To visit our Archives, click here.)