Daily News Mail - News of 02/03/2015

Chances of Jammu and Kashmir to get closer : Mufti

• Soon after he took oath as the 12th Chief Minister of Jammu & Kashmir, Peoples Democratic Party leader Mufti Mohammad Sayeed called his party’s alliance with the BJP a historic moment which he wanted to be a turning point. 
• “Kashmir has been a problem in front of every Prime Minister, whether it was Jawaharlal Nehru, Indira Gandhi, Atal Bihari Vajpayee or now Narendra Modi. We want to change history and make this alliance a turning point in history,” he said.
• “It takes 30 minutes to travel [by air] between Jammu and Srinagar, and after the highways are completed, it will take four hours by road,” he said. But the distance between the two regions, he said, is far more than that and he hopes to close this distance with this alliance.
• Mr. Sayeed reiterated his belief that for the State to come closer to the Union of India, the two regions must come closer.
• Mr. Sayeed said India was destined to drive the SAARC region the way Germany did in Europe, and said Pakistan was the only bottleneck in that role.
• He acknowledged that Pakistan and the Kashmiri separatist leadership did not disrupt the atmosphere during the elections in the State leaving it conducive for a high turnout, and said he told Mr. Modi about it as well and urged that there must be a meaningful engagement with them.
• Among the 24 legislators sworn in as Ministers in Jammu and Kashmir on Sunday, 16 will join the Mufti Mohammad Sayeed Cabinet. While 10 of the PDP are in the Cabinet, the BJP has six, including People’s Conference chairman and party ally Sajjad Lone.

Prime Minister Narendra Modi with new J&K Chief MinisterMufti Mohammad Sayeed 

and People’s Conference chief Sajjad Gani Lone

Game changers in the Budget

Paradigm shift

• NITI Aayog has brought paradigm shift by directing the national policymaking body to “adhere to the tenet that while incorporating positive influences from the world, no single model can be transplanted from outside into the Indian scenario. We need to find our own strategy for growth.”

•  Almost a decade back, Finance Ministers and Central Bank Governors of the G20 nations had declared that “there is no uniform development approach that fits all countries” and “each country should choose the development approaches and policies that suit its specific characteristics.” Three years later, the World Bank conceded “we have learned the hard way that there is no one model that fits all.” Yet, for a decade more, India followed the economic model of the West till the NITI Aayog decided to correct the course. The game-changing elements in this Budget are in line with NITI Aayog’s philosophy.

• The first expression of the India-centric approach is the innovative agenda to ‘fund the unfunded’ 58 million micro and small businesses in the non-formal sector. This sector is unique to India. While in other countries the informal sector is largely illegal, in India, it is non-formal because government policies have not reached it. These 58 million non-formal micro businesses generate millions of rural and semi-urban entrepreneurs and provide 128 million jobs. Two-thirds of these units are operated by Scheduled Castes, Scheduled Tribes and Other Backward Classes. Yet, this Kamadhenu of job creation gets only 4% of its credit needs from banks. The sector now borrows at usurious rates of interest of 120% and beyond. While it is denied funds, the formal sector — which garnered some Rs.54 lakh crore since 1991 by way of foreign domestic and domestic capital and loans — has added just a couple of million jobs in two decades. 

• All governments since liberalisation had expected these millions of units to die of euthanasia in market economics. But they have posted the fastest growth among all segments of the Indian economy. But economic policymaking in India continued to ignore them. Mr. Modi is the first political leader to see the potential of this sector to drive up jobs. He also realised that the modern banking system is unsuited to fund this sector. In the last budget, the Modi government had announced a committee to structure a new financial architecture for this sector. The Reserve Bank of India reportedly opposed any new architecture. But this Budget has gone ahead and announced a new financial architecture, the Micro Units Development Refinance Agency (MUDRA), for the non-formal sector with a corpus of Rs.20,000 crore and budgetary support of Rs.3,000 crore for credit guarantee. MUDRA will come into existence by a separate law. This will fund the millions of entrepreneurs by an innovative financial architecture that will integrate the existing private financiers of small businesses as last-mile lenders. It is a completely indigenous, India-centric and innovative solution for the most job-intensive, yet totally credit-starved, segment of an economy unique to India.

Monetisation of gold

• The second potential game changer is the beginning of the process of monetisation of gold — creating and circulating money based on gold. Modern economists would dismiss gold as a wasteful item; as a “relic of barbarism.” This might be the case in the U.S., which successfully proscribed private gold in the 1930s, made possession of gold an offence and turned it into a government asset. But Indians celebrate gold and the Indian government, unable to do what the U.S. did, has always been bewildered about how to handle this asset. The Budget policy to monetise the domestic gold stock is an Indian solution to a unique Indian economic phenomenon. Obviously, no Western idea can handle it. If, through the sovereign gold bonds proposed in the Budget, the government can generate a substantial gold stock as buffer stock, India can aggregate its demand for gold and use that power in the international market. If it builds a decent buffer stock, it can play the global gold market which, barring China perhaps, no other country can, because only in India private gold consumption is as high as a fourth of the world’s. Despite that, India has no gold refining and standardisation infrastructure. This new policy will help build this. The only concern is that unless full tax immunity is granted to gold to be lodged in bonds, the entire stock of black gold may not enter monetisation.

• The next big idea is accident insurance for Rs.2 lakh at Rs.12 per annum; for life insurance at a premium of Rs.330 per annum and lifelong pension on an annual premium of up to Rs.1,000, each to be contributed by the beneficiary and the government equally. This ambitious plan aims to reach crores of poor Indians.

Scaling up execution

• Each one of them is a potential game changer. But their success requires scaling up of execution. The MUDRA idea requires millions of private financial intermediaries, who are currently providing finance to non-formal businesses, to be registered and integrated into the new architecture as the last mile delivery instrumentalities. The insurance and pension idea also needs mobilisation of crores of beneficiaries into the network. The idea of gold monetisation also calls for a massive campaign to convince the millions of Indians possessing gold to look at gold bonds as equal to gold itself. These are great ideas but their success will need scaling up of the kind which Mr. Modi demonstrated when he got over 12.5 crore Indians hooked to the banking system through the Jan Dhan Yojana [JDY]. The RBI was reportedly not very enthusiastic, if not optimistic, about such extensive banking extension. But Mr. Modi reportedly insisted on 7.5 crore bank accounts and in less than six months. He could scale up the very execution mechanism of PSU banks, written off by elite Indians as inefficient, to achieve not just 7.5 crore accounts but 5 crore more.
• Reaching and financially formalising crores of people was thought of as impossible till Mr. Modi could insist on and drive the JDY to a huge success. His high scale of success lends credibility to the massive reaches of human numbers proposed in the MUDRA, Pension and Sovereign Gold Bond schemes. With Aadhar cards and JDY accounts, the huge scale of operation assumed in the game-changing ideas in the budget do not seem over optimistic. If Mr. Modi succeeds in delivering credit through the MUDRA model to millions of non-formal units, he would do in India what Deng Xiaoping did to China through the 28 million Town and Village Enterprises. If Mr. Modi gets several crores of Indians hooked to the insurance and pension schemes, he could improve their life beyond recognition. If he brings hidden gold into national coffers through the sovereign gold bond scheme, he could transform gold from being a liability of India to its global asset.

Mr. Modi’s proven capacity to scale up the government to his level of ambition makes the game changing ideas in the Budget possible.

A framework for recovery and growth

This is a very good article highlighting on recovery and growth of the Indian economy by Subramanian Swamy (former Union Minister of Commerce and Professor of Economics).

• Budget-making today is a tough call for a Finance Minister trying to reverse the past decline caused by the UPA’s policies. The Indian economy, for example, decelerated from an 8.4% growth rate in GDP in 2003-04 to 4.8% in 2013-14. The UPA’s decade of economic decline has been wrongly attributed to the global economic meltdown especially during the last six years of the decade.

• Therefore, recovery and growth need a different policy today, and require choosing a new framework of objectives, priorities, strategy and resource mobilisation measures in constituting a budget.

• The Budget for 2015-16 presented on 28 February to Parliament by Union Finance Minister Arun Jaitley is a serious attempt to usher(show or guide (someone) somewhere) in such a new framework. An analysis of how far he has succeeded and what more remains to be done for a successful turnaround is the concern here in this article.

Participatory Notes

• The Indian economy has declined because of the peculiar Indian “invention” of that perfidious(untrustworthy) financial derivative called Participatory Notes or PNs, otherwise known as the crony(a close friend or companion)/crooked(bent or twisted out of shape or out of place; dishonest or illegal) facilitator for black money-based portfolio investment. No other country would think of such a derivative.

• The Budget does not treat PNs as a time bomb and to seek to abolish this derivative, as the Tarapore Committee had wanted. Actually, PNs have been even more legitimised by enhancing their status to that of FDI inflow.

• The Finance Minister ought to have abolished PNs in this Budget to stabilise the economy. I do not know if Mr. Jaitley was even shown this legitimisation of PNs which is in the fine print of the Budget documents.

• He has introduced many new measures, such as a vastly increased agricultural credit facility, the new MUDRA Bank to fund the underfunded, especially Scheduled Caste/Tribe entrepreneurs, tax-free bonds for infrastructure development, ultra-large power plants of 4,000 MW, monetisation of hoarded gold by paying interest on gold deposit accounts in banks and ease of doing business in India by a digitisation of procedures. But this is not enough to kick-start the economy since Mr. Jaitley has not embedded such piecemeal (characterized by unsystematic partial measures taken over a period of time; a little at a time) measures in the larger picture of economic reform and budgetary restructure.

The question arises here that why the participatory notes is dangerous?

Participatory Notes (PN) — a general name used for the investment by Foreign Institutional Investors (FIIs) through Offshore Derivative Instruments (ODIs) such as Participatory Notes, Equity-Linked Notes, Capped Return Notes and Participating Return Notes — have created a storm in the stock market, with SEBI coming out with a draft for discussion to regulate them, the RBI suggesting that they be phased out, and the Finance Minister assuring that the Government is not going to phase them out.

First things first. Let us clearly understand the fundamental issues. The PNs are a slap on the face of every citizen who is an investor. For a person to invest even in one share, several KYC (know your customer) forms have to be filled up, and PAN numbers and proof of address, etc., provided. For the PN investor the system is totally silent on even elementary information. The FIIs issue PNs to funds/companies whose identity is not known to the Indian authorities.

Looming crisis

• Today, for example, there is a budgetary crisis looming on the horizon because the allocations for major heads of expenditure — government employees’ salaries, pensions, police, defence, subsidies, interests to be paid for past loans taken by the government, etc., and which now cover 98% of the current and capital account revenues accruing to government — cannot be reduced without creating a political crisis.

• These allocations are revenue expenditures, and hence not asset-building or investments for development projects.

• Moreover, in the past, in the revenue budget, these expenditures far exceed the revenue. Thus, the revenue budget has been in huge deficit, and which is covered by taking more loans from public sector banks and creating a surplus in the capital account by trimming investment allocation.

• In the Budget, we find this is continued because Non-Plan Expenditure has risen 11% while Plan Expenditure has been stagnant. In a financially healthy economy, it should be the other way around — surplus on the revenue account, i.e., revenue exceeding expenditure, and a deficit in the capital account, i.e., investment exceeding amortisation. 

• This situation however cannot continue for long because loans from public sector banks to the government to pay for the overall deficit in the Budget have to be paid back. It will require a major recapitalisation of banks to meet the Basel III norms or else the public sector banks may go bankrupt by 2017. A time bomb is ticking here.

Being futuristic

• The big picture we have to usher in is an Indian economy growing annually at 10 to 12% by inducing the current household saving rate of 29% of income to rise again to the rate of 36%.

• To become a developed country in the foreseeable future, India’s GDP will have to grow at 10 to 12% per year for at least a decade. A 12% GDP growth rate per year will mean a doubling of GDP every six years, and that of per capita income, doubling every seven years.

• This level of the growth rate can take us to the league of the top three nations of the world, of the United States, China and India by 2020, and then aim to overtake China in the next decade thereafter. That should be a stated goal of every budget and not just a “balancing the books” exercise.

• Technically, this is within India’s reach, since it would require the rate of investment to rise while productivity growth will have to ensure that the incremental output-capital ratio** declines from the present 4.0 to 3.0. Productivity increases can be achieved by cutting transaction cost in the ease to do business and by motivating labour with incentives to work harder.

• Further, if we reduce transaction cost by eliminating corruption, then the current incremental capital-output ratio will easily fall from 4.0 to 3.0.

Enthusing the middle class

• This can also be sustained by directly, and not indirectly, enthusing the middle class — which today can be achieved only by abolishing personal income tax.

• In this Budget, the middle class has little to cheer about. The morning-after announcement of petrol and diesel price hikes even while internationally, crude oil price continues to be in decline, has only further discouraged the middle class. India’s middle class urgently needs some good news.

• India has many advantages to achieve a booming economy such as a demographic dividend, agriculture that has internationally the lowest yield in land and livestock-based products, and also, by WTO reckoning, the lowest cost of production, 12 months a year of farm-friendly weather, a highly competitive, skilled and semi-skilled labour force and low wage rates at the national level, the advantages of which have already been proved to the world by the outsourcing phenomenon. We have a young population — the average is 28 years when compared to the U.S.’s 38 years, and Japan’s 49 years — that is the base for it to usher(show or guide (someone) somewhere) in innovation in our production process.

• Since the worldview of economic development has now completely changed, economic development is no more thought of as being capital-driven, but knowledge-driven. For application of knowledge, we need innovations, which means more original research, and more fresh, young minds out of the cream of youth to be inculcated with learning and to be at the frontier of research.

• The unintended consequences of past policies should not make us squander this “natural resource” of youth we have acquired. Today, using proper policy application for the young, we must realise and harvest this demographic potential.

• Thus, these goals have to be at the core of the economic agenda underlying the making of the Budgets. But for all that to happen, more vigorous, market-centric, economic reforms are necessary and need to be at the centre stage of the nation’s attention in a Budget and not be overwhelmed by what corporate-driven, media hype expects of a budget.

• Looking ahead positively, the nation still has four more annual Budgets to see, and which will hopefully set the stage for India’s economic renaissance in the next decade.

**Incremental output capital ratio - The Incremental Capital-Output Ratio (ICOR), is the ratio of investment to growth which is equal to 1 divided by the marginal product of capital. The higher the ICOR, the lower the productivity of capital. The ICOR can be thought of as a measure of the inefficiency with which capital is used.

Medha Patkar joins campaign against neutrino project

• Social activist Medha Patkar on 1 March, 2015 said the campaign against proposed neutrino observatory project in Tamil Nadu will be taken up as a “national battle”, because some foreign companies were attempting to destroy the Western Ghats in India.

• Environment impact assessment was not done properly while choosing Pottipuram in Theni district, she alleged, adding that the India-based Neutrino Observatory (INO) project was proposed at a cost of Rs.1,500 crore.

• Extending her support to MDMK general secretary Vaiko, who has been opposing the underground observatory, Ms. Patkar said that it was the responsibility of Centre and scientists to answer the questions raised with regard to safety of people’s lives and the biodiversity of the Western Ghats

• Addressing a joint press conference along with Mr.Vaiko, she said digging of a huge tunnel would negatively impact the Western Ghats.

• “The Kasturirangan report pointed out the fragility of the Western Ghats. If the scientists are sure that the safety is intact, are they ready for a public debate,” she asked.

• She also asked the Centre to clarify whether the INO site will be used for storing nuclear waste coming from the Kudankulam Nuclear Power Plant.