Do a FRBM on subsidies, Mr FM, put a cap on the subsidy bill

http://firstbiz.firstpost.com/budget/budget-2014-mr-jaitley-do-a-yashwant-sinha-on-subsidy-enact-a-law-to-cut-it-progressively-89938.html

President Pranab Mukherjee, once the finance minister, has often been blamed for the mess the economy itself is in. Why, even his successor from his own former party, P. Chidambaram, has often hinted that the economy may have been in better shape if the fiscal easing that Mukherjee had done in the wake of the global meltdown had been reversed a year earlier than it ultimately was.
But one has to give credit to Mukherjee for one initiative in his last budget in March 2012, which has not got the attention it deserved. Dealing with the vexed issue of subsidies, Mukherji had said he would try to restrict the subsidy bill of the Centre to under 2 per cent of GDP in 2012-13 and bring it down to 1.75 per cent of GDP over the next three years.
It is another matter that the subsidy bill in 2012-13 actually shot up to 2.54 per cent of GDP, up from 2.41 per cent in 2011-12. Mukherjee could perhaps disown responsibility, using the excuse that he had moved to Rashtrapati Bhavan within a few months of that landmark statement.
But it is a pity – and a surprise - that Chidambaram did not take this ball and run with it. After all, he had, in his first stint in North Block in the United Front government backed by the communist parties, made bold to commission a discussion paper on government subsidies. He got an update done in 2004 soon after assuming charge during his second shift. In both his stints – and in between – he had constantly stressed the need to trim this bill.
Capping the subsidy bill is a sound idea and one that Arun Jaitley needs to push. It imposes a measure of discipline on the government, saying this is all the cloth you have, now cut it in a manner as to make the most of it. Decide which subsidies are more important, give more to those, less to the others but all within this limit.
Mukherjee took the initial step; Jaitley needs to take the next one and get legislative backing for this, something similar to the Fiscal Responsibility and Budget Management (FRBM) law. Once the cap is set – to be achieved in a phased manner over a period of time like Mukherjee suggested - any move to spend more than the cap will have to be get parliamentary approval. How will this help?
Right now the subsidy burden is a problem of only the government in power. When it attempts any trimming exercise, the rest of the political class comes together to force it to roll back subsidy cuts. Getting legislative backing for a subsidy cap will force Parliament to debate on an appropriate ceiling. Hopefully, it will be one that will not threaten macroeconomic fundamentals. Indeed, the very process of debating the need and level of the cap will reinforce the logic of reining in subsidies, highlight wasteful and unjustified ones, bring out hidden ones, strengthen the case for the necessary ones and focus attention on effective delivery. Importantly, the ownership of that cap will be that of Parliament as a whole.
Since breaching this cap will also require parliamentary approval – an exercise that will involve going through the legislative rigmarole – governments will not be so cavalier in infringing it. This might force more serious efforts at ensuring that only the really deserving get subsidies.
And even if a government does go back to Parliament, once again the entire debating process will again highlight its own inefficiencies and put a black mark on its fiscal performance. So it will try to come back on track soon.
This does sound too easy and good to be true. After all, Parliament did legislate the FRBM Act. And Parliament itself allowed it to be breached. But no party is denying the legitimacy of the milestones set in the FRBM Act and the fact that the UPA government breached it is something that it is constantly pilloried for. The whole process of legislating the FRBM Act – from the time the idea was floated to actual enactment – took a few years and intense debate. Thanks to this, Parliament is serious about it; there is no talk of raising the deficit caps or postponing implementation or even scrapping it.
In taking the initiative to legislate a cap on subsidies, Jaitley can show his party as a fiscally responsible one. It was Yashwant Sinha, during the NDA regime, who initiated the FRBM legislation. It just so happened that the Act got passed toward the end of the government’s tenure and the UPA government notified the rules, allowing it to take credit. But the sheen was taken away from that credit by the fact that first Chidambaram asked for a pause in its implementation (in 2005) and then Mukherjee amended it to relax the deadlines.
Jaitley can now do for subsidies what Sinha did for overall fiscal consolidation.  It will be a feather in the BJP’s cap both economically and politically.

Inflation needs a political solution

http://www.firstpost.com/economy/politicians-hold-the-key-to-taming-inflation-dragon-1298845.html

So, India’s central banker Raghuram Rajan did not hike rates on 18 December, even though both wholesale and retail inflation persisted at elevated levels. The man who was expected to act like a hawk, is being panned for behaving like a dove, taking a benign attitude to inflation.
Rajan made it clear that he is not comfortable with such labels and that, far from being soft on inflation, he was keeping a close eye on it. If inflation did not ease, he said, he would act appropriately. Maybe he had a problem with the choice of birds, and would have preferred to be compared to the wise owl instead.
Will inflation – particularly food inflation – ease over the next month? Given that general elections are due in a few months, the government and the Congress Party will certainly hope that it will. The results of the recent assembly elections made it very clear that the public will be unforgiving about rising prices. However, opposition parties would do well not to gloat about the government’s plight. What India is seeing today is not a cyclical or seasonal high inflation that will correct itself. High inflation, especially food inflation, has got entrenched and is not likely to go away soon. It is certainly going to pose a huge challenge to whichever government comes to power in May 2014. And there is no quick solution for it.
The persistent high inflation that we are seeing now is an economic problem created by politics. The solution, too, is rooted in politics. The UPA cannot escape the blame for the current high inflation. The unchecked populism during its ten years is mainly to blame. Finance minister P. Chidambaram admits that higher farm gate prices and higher rural wages (thanks to the NREGA effect) had played a role in rising inflation. But he justified both decisions as being right. “The argument that inflation must be contained by suppressing farm gate prices or rural wages is a specious argument that ignores the needs of the poor and deserves to be rejected,” he said at the Delhi Economics Conclave in mid-December.
It is by now well established that the rising food inflation is the result of increasing demand, thanks to growing prosperity, far outstripping supply. This statement, however, needs to taken with a bit of caution. While expenditure on fruits and vegetables (which has seen the highest levels of inflation) grew by 42 percent between 2004-05 and 2011-12, data from the National Horticulture Board shows that production increased 53 percent. Dr Ramesh Chand, director of the National Centre for Agriculture Economics and Policy Research (NCAP), explains this discrepancy, pointing out that given the huge increase in demand even a marginal fall in production in some months has a huge multiplier effect on prices. This becomes more marked in vegetables that lend themselves to hoarding – potatoes, onions and tomatoes, which have almost become necessities now. So clearly, there is a supply bottleneck issue that needs to be addressed. For this, traders and the entrenched cartels in farm goods are to blame.
How is this to be tackled? The solution is an economic one – liberalising and bringing in more competition into agricultural trade. But politics is not letting it happen.
The issue of monopolies and cartels in agricultural trade has to do with the state-level Agricultural Produce Marketing Committee (APMC) Act which set up regulated zonal wholesale markets to which farmers in a particular area are bound to sell their produce. This not only encourages monopolies, but also stands in the way of the integration of farm production with the national market. According to an ICRIER report on the non-alcoholic beverage sector, even in cases where food processing firms buy produce directly from the farmers, they have to pay the APMC cess.
There is near-unanimity that the APMCs need to go or at least be modified to allow more competition and that a barrier-free national market is the best way to tackle food inflation. Unfortunately, this is something that is solely in the realm of state governments. A model APMC Act, which allowed for more competition, was drawn up by the Centre during the National Democratic Alliance (NDA) government. During the NDA and the UPA reign, there have been attempts to prod states to adopt this model legislation. A committee of state ministers in charge of agricultural marketing has unanimously endorsed the need to adopt the model Act. And yet, only 17 states have done so. So strong is the political hold of the vested interests that control these markets.
When food inflation started heading northward in 2002-03, the NDA government cooled prices by releasing part of food grains stocks through the public distribution system and selling grains at cheaper rates to millers. The government is sitting on huge food grain stocks, but it is wary of offloading this because of the requirements of the Food Security Act. Can the damage be contained? There is a provision in the legislation to move to a system of cash transfers, which will obviate the necessity of huge public stockholdings. This is again a political call that either the present or future governments will have to take. Do parties have the gall to take this route? Remember that this unwise piece of legislation was green-lighted by all parties.
Former finance minister Yashwant Sinha recently recalled an anecdote from his tenure about the finance minister of a northern state losing his temper when the Union finance secretary suggested that states abolish a tax on trade in food grains in order to keep food prices down. For the minister, filling up his state’s coffers were more important than the larger macro-economic implications of rising food prices.
When politicians across the country and across parties refuse to see economic logic, can there be an easy solution to the inflation problem? There is no point drawing comfort from the fact that high inflation is being driven by food prices and that core inflation is largely at acceptable levels. As C. Rangarajan, chairman of the Prime Minister’s Economic Advisory Council, has warned, sustained food inflation gets generalised and spreads to other sectors. Given the current levels of distortions in the marketing of food grains, cereals and fruits and vegetables, high food inflation is unlikely to be a temporary phenomenon. Rajan, at his press conference on Wednesday, clearly said that the RBI could not indefinitely wait for the supply side to catch up with demand pressures on the food front and that if necessary, he would take steps to bring demand closer to supply. That is obviously the only solution that will be left.
But just because inflation targeting is one of RBI’s mandates, is it justified to put on it the entire onus of solving a problem that is not of its creation in the first place? In doing that, isn’t the political class that is responsible for the situation being let off the hook? Won’t the use of monetary policy to address a supply-side problem lead to other problems? These are questions all political parties need to mull over. It is time inflation is seen as a political problem requiring political solutions. The structural problems cannot be addressed overnight. The benefits also will take time to materialise. If any new government does not take action early enough, five years down the line (or even earlier during elections to state assemblies) it will find itself in the same situation as the UPA.
In October 2012, when Rajan’s predecessor D. Subbarao hiked rates to tackle inflation amid fears that it would hurt growth, a miffed Chidambaram had said he would walk alone if necessary to face the challenge of growth. Chidambaram or whoever the finance minister will have to walk alone to address the challenge of inflation. At any rate, they can’t expect the RBI governor to walk alone on this issue. They – and the entire political class – will have to support him.

Save the country, Dr Singh

http://www.firstpost.com/economy/stand-up-dr-singh-you-have-only-your-doormat-reputation-to-lose-1279879.html

It is indeed interesting that in all the reactions—solicited and unsolicited—that have come after the drubbing that the Congress party has just got in the assembly elections, one voice has not been heard at all—that of Prime Minister Manmohan Singh. That, clearly, is a measure of the man's irrelevance. But what he does in the next few months will become increasingly relevant, by virtue of the office he occupies.
Local factors and the disarray in the Congress party no doubt added damaging volume to the anti-Congress wave, but what led to that wave in the first place? Was it not a complete popular disenchantment with the functioning of the United Progressive Alliance government headed by Singh, whose policies have fuelled inflation, messed up the economy and fostered widespread corruption?
Singh is as responsible as the Gandhis for electoral debacle. Had he refused to be a mere figurehead, quietly rubber-stamping the Sonianomics brand of populism and turning a blind eye to corruption, the country would not have been in the mess it is in and the public would not have been so angry as it is today. As prime minister he could have put his foot down on several issues. He did not.
So what do the next few months hold for the country? Any Congress strategy for 2014 cannot revolve around revamping the party machinery alone. Since the Congress is the main party in the UPA coalition, the Central government’s actions or non-actions will also be part of this. The Congress could play it two ways. It could, for one, decide to get the UPA to do a course correction so as to recover some of the lost ground. What can a lame duck government do will remain a question, but the prime minister’s former press advisor Sanjaya Baru has argued in this piece that quite a bit is possible. 

Inflation—the one issue on which people unforgiving—will obviously top the list. The Congress is now claiming a conspiracy is behind the onion price hike. Perhaps, but let’s not forget that food inflation has remained at elevated levels for over a year. The reasons for these are structural and as Finance Minister P Chidambaram himself admitted recently, there is no easy or quick solution to the problem. "I am afraid it will take some time to contain this inflation. We are paying a political price for that and I acknowledge that, but those are the facts," he said on 15 November.
When the country’s finance minister is throwing in the towel, there is no scope at all for taming the inflation dragon within the next five months.
Reviving an ailing economy should be another priority. Here, too, the scope of easy and early successes is doubtful. There are several reform-oriented legislations that need to be passed but that seems unlikely, with an aggressive opposition and uncooperative allies.
Baru has suggested that the government can address issues like uncertainty over tax policy which could alleviate concerns of investors. While that could help the stock markets, quell the fears of foreign investors and arrest a possible flight of capital, it is hardly likely to bring in electoral gains.
The government could shake off the policy paralysis it is caught in and get into action mode, clearing pending projects, ironing out policy glitches and the like. Plan expenditure is only 43 percent of what is budgeted for the year (of which capital expenditure is only 40 percent of what is scheduled) and it could decide to step this up. All this will revive sentiment and businesses may perhaps not put off their investment plans till after the elections. But it takes several months for investment plans to make their effect felt on the economy. So the benefits are not going to come within five months.
Realising that these steps may not reap the expected gains and that it will face certain defeat in May, the Congress could opt for another strategy – to lay booby-traps for the next government. It will then get a stick to constantly beat that government with. Fortunately, the government won’t be able to push bad legislation like the proposed National Right to Homestead Bill through Parliament (though some good legislation will get hit as well) but that will not stop it from taking decisions that are clearly populist and which will leave an enormous fiscal burden for the next government. Some of that has already started. The June decision on pricing of natural gas (read Firstpost editor-in-chief R Jagannathan's criticism of this) and the early announcement of the Seventh Pay Commission are cases in point.
Using the fact that the fiscal deficit is already at 85 percent of the full year’s target, the government could put a lid on spending on the grounds of wanting to stick to the target of 4.8 percent of GDP. That will leave a lot of the spending for the next government. Already, tax refunds are being delayed and oil companies are not being reimbursed for subsidies in time.
The government could also go on a populist announcements spree. Already, news reports say, Chidambaram is under fire for hard decisions and there is a call for rolling back fuel subsidy cuts. Rural Development Minister Jairam Ramesh, for example, wants to hike old age pensions paid under social welfare schemes, when there is evidence that much of this is not reaching the intended beneficiaries.
The assembly elections did not give a clear picture on how voters respond to welfare schemes. Welfarism didn't appear to work in Rajasthan and Delhi but seemed to work in Madhya Pradesh and Chhattisgarh. So, what is there to stop the Congress from announcing schemes? If it brings in the votes, that’s great (and the fiscal bridge will be crossed when it comes); if it doesn't, well, the next government will have to deal with the economic consequences. The only thing that might stop the UPA from doing this will be the fact that many welfare schemes are implemented by the state governments and non-Congress governments may just walk off with the credit.
The first path will put the economy back on the rails, but the gains for the Congress will be uncertain. The second could swing things in favour of the Congress, but will spell ruin for India. It is now up to Singh to choose between the two. As prime minister, he can still has veto power (though some of his ministers may slip things through). 

Dear Manmohan Singh, for the sake of the country, please opt for the former. You have nothing to lose but your reputation as a doormat.

Shutting doors on FTAs is a bad idea, push through reforms instead

http://www.firstpost.com/economy/shutting-doors-on-ftas-is-a-bad-idea-push-through-reforms-instead-1217035.html

News of finance minister P Chidambaram and chairman of the National Manufacturing Competitiveness Council, V Krishnamurthy, speaking out against India’s growing penchant for free-trade agreements (FTAs) invited a quick clarification from the commerce ministry.
Yesterday, The Times of India reported that Chidambaram and Krishnamurthy differed with Planning Commission Deputy Chairman Montek Singh Ahluwalia on the benefits of FTAs. According to the report, both Chidambaram and Krishnamurthy said FTAs had not been advantageous for India.
By evening the commerce ministry put out a press release pointing out that the effects of FTAs had not been as detrimental as they have often been made out to be and that there is an in-built mechanism of review in all agreements.
The last paragraph of the press release was a gentle rebuke – “. . . Indian exports to different regions are crucially dependent on competitiveness which is guided by other factors such as ushering in the second generation reforms on taxation, rolling out of GST, reform in labour laws, upgradation of infrastructure relating to power, ports and roads.”
Indeed, the lament over FTAs is really a lament over the complete lack of competitiveness of Indian industry and hence of its exports. That is why import of goods at zero or low duties under FTAs are possible and hurt domestic manufacturers (though the consumer benefits) even as Indian goods are not able to make significant inroads into markets that are now open to them.
Interestingly, Indian companies are using the FTA route innovatively, setting up manufacturing bases in countries with which India has signed these agreements and then importing the finished goods under the low duty regime. They do this for two reasons. One, the raw materials are available in those countries and importing them are costly. Two, it is easier to do business in those countries.
It is not as if Chidambaram and Krishnamurthy are not aware of this fundamental problem. Way back in 2006, The National Strategy for Manufacturing document put out by NMCC noted that “in order to attain competitive edge in manufacturing the constraints being faced by the sector have to be mitigated.” It then listed some ‘generic issues’ – lack of proper infrastructure, higher transaction costs, higher interest rates, inadequate power and other disabilities and regulatory issues, among others – that it would take up.
The report also notes that India suffers on competitiveness due to various factors such as higher import duties, including inverted duty structure; higher incidence of indirect taxes; sub-optimal levels of operations; lower operational efficiencies; higher transaction costs; lower labour productivity; higher cost of capital; and inadequate infrastructure. Taken together all of these are estimated to push up the cost of Indian manufacturing by between 15 percent and 30 percent.
Needless to say, keeping the cost of manufacturing low is the first step to being competitive. Chidambaram can address some of these issues – those relating to taxation and cost of capital - as they fall within the purview of the finance ministry. What is preventing him from doing so?
The solutions to the other problems are also well known and have been repeated any number of times for more than a decade now by economists, chambers of commerce, global consultancy firms and, yes, even by NMCC.
It is a telling comment on economic policy making in India that there has been no progress on these, with successive governments putting them on the backburner. By lowering import duties, without addressing these issues, FTAs can hurt domestic industry really badly. But using the poor competitiveness of Indian industry – because of bad policies – to stall FTAs is not the right remedy, since the country will lose out on the benefits they bring. And even if we take that approach, there is always multilateral trade liberalisation through the World Trade Organisation (WTO) to deal with.
Another WTO ministerial is scheduled for December in Bali and it is not clear which way it will go. If the Doha Round gets revived, then countries will have to prepare themselves for greater trade openness. If the deadlock continues, the popularity of FTAs (which became the preferred route to trade liberalisation because of the WTO logjam) will increase. Either way, it is clear that we are getting into a scenario of greater integration with the world economy. It has its advantages and disadvantages. It is necessary to maximise the first and minimise the other.
For India, both require a very strong dose of internal economic reforms. There is simply no getting away from this – for either this government or any government that comes to power after the next general elections.

Ambani is more deserving of VIP security than others

My initial reaction to the news that Mukesh Ambani would get Z-plus category security was one of absolute outrage.  For the usual reasons – why should a few Indians move around in armoured cocoons while the rest of us live in absolute insecurity; why should the taxpayer bankroll the security of a man who, as a friend pointed out on Facebook, lives in the world’s costliest home; this will start a trend of other businessmen seeking the same level of security.
Just 20 minutes earlier, my heart had been gladdened by a report in the Newsline section of the Indian Express (devoted to city news). That said the Delhi government had filed an affidavit in the Supreme Court saying that visiting VIPs from other states could bring their own security only if they were staying in the Capital for less than 72 hours and, in any case, they could not use sirens and flashers nor could the armed personnel accompanying them brandish their guns at or intimidate the public to clear traffic on the roads. That is a common sight on Delhi roads, where Black Cat commandos bully others driving on roads to give way to VIP cavalcades. (Read this report here.) 

When I read the report about Ambani’s security in the main paper after this, I was angry once again.
My mind went back some years ago, when P Chidambaram had just been shifted to the home ministry after 26/11. I was stuck in a traffic jam and suddenly noticed that the car next to me had a red beacon on top. Other cars were honking and trying to manoeuvre in whatever little space they got (as only people stuck in Delhi traffic can do) but this car remained where it was (I don’t recall if the beacon was flashing) and didn’t use the siren (as Delhi VIPs are wont to do to get ahead in traffic or to jump traffic lights). Then I found that the person who was sitting in the back seat, rubbing his eyes tiredly, was none other than Home Minister Chidambaram, entitled to Z plus security. There were no escort vehicles surrounding his car.
I asked a friend to tweet about this contrast – between Ambani and Chidambaram. The latter had refused to take any security though his predecessor, Shivraj Patil, continued with his full complement even after demitting office. Chidambaram had also initiated a review of VIP security and struck 130 people off the list, generating a lot of heartburn.
By late afternoon came reports that Ambani would pay the government for the cost of his security, but that didn’t mollify me. Trained people would still be diverted for his use and even if he pays, replacing them won’t be easy.
But by evening my opinion had changed. By then I had read about how Chidambaram’s successor, Sushil Kumar Shinde, had reversed his approach and been pretty generous about granting security cover to a host of politicians as well as a petrol pump owner in Rae Bareli, Sonia Gandhi’s constituency. Read about that in this report.
That’s when it struck me. What is the contribution of these worthies to the country? In what way are they enriching our lives? At least Ambani is contributing to the GDP, generating wealth and employment. Even his obscenely humungous Antilla would have had tremendous trickle down on other industries – cement, steel, construction, to name just three. Whatever else you may call him, you can’t call him a parasite.

He, perhaps, is more deserving of security than they are. Yet they will demand it as an entitlement. While he is paying for it.