How I see this Budget (Part1)

It has been said that there aren't big bang reforms in this budget. The point here is, we are living in a democracy and in a democracy government's future (parliamentary and assembly elections) is dependent upon majority. In India, this majority is formed by middle and lower class people. And they must be taken into account while formulating budget. Subsidies can't be wiped out in one go without building institutions to streamline distribution of subsidies. And institution building takes time. JAM (Jan Dhan, Aadhar and Mobile)  as coined in Economic survey as best tool for limiting the leakage in subsidy will take time to be resilient and successful.

Tax benefits can't be provided leniently without compromising with government revenue (many expecting tax limit to increase to 3 lacs). At the same time, government needs more fund to invest in infrastructure and minimize deficit. But still, government has given hint of following direction of fiscal expansion by reducing fiscal deficit to 3% by next three years instead to 2 years.

Now looking at the measures announced:

1. Ease of doing business

• Bankruptcy laws help resolving insolvency (one measure of easing of doing business)
• Other measuring units are getting electricity, registering property, getting credit, enforcing contracts, paying taxes, protection of minority shareholders, dealing with construction permits. Improvement in these require more of governance reforms rather than budgetary reforms
• Few of the governance measures announced includes encouraging compliance and dispute resolution, simplifying tax procedure and implementing recommendations of TARC (Tax Administrative Reforms Commission)

2. Agriculture

• In urgent need of public investment towards capital building like irrigation, there is also growing demand of making a national market for agriculture products. Both these need has been addressed in this budget
• 25000 crore fund to Rural Infrastructure Development Bank, 5300 crore to Micro Irrigation Programme, watershed development and PMKSY (Pradhan Mantri Krishi Sichai Yojana)
• Farmer's credit to the tune of 8.5lakh crore

3. Infrastructure

• Infrastructure bottleneck is due to lack of funds, non viability and litigants in PPP projects, delay in land acquisition
• Funds problem has been tried to solve through 70,000 crore additional fund to Infrastructure from Union government, tax free bonds, and revitalizing the PPP projects with government bearing maximum risk
• To improve the functioning of public sector ports; they will be encouraged to come under Companies Act.
• Emphasized Research through Atal Innovation Mission with 150 crore to foster culture of innovation in development of infrastructure.

4. Financial Sector

• Indian financial sector that enable the companies and developmental organizations to raise funds for investment and infrastructure building and opportunity for investors has many shortcomings (insider trading,
• Forward Market Commission (which looks after commodity trading) is proposed to be merged with SEBI (can be said to be moving towards one uniform regulator)
• For a very long time now, economists have been arguing in favour of an independent debt management office, which in the Indian discourse is called " National treasury management agency" or debt management agency, so that RBI can be relieved of the burden of being the Centre's investment banker. And Public debt management agency being formed is one of the recommendation of IFC (given by  Financial Sector Legislative Reform Commission)
• PJ Nayak Committee has recommended Banks Board Bureau for appointment of chairman to PSU banks to ease them off government controls. This has been approved of in new budget
• Gold imports has been a major concern since last two to three years for India; to case off gold monetization has been attempted through Sovereign Gold Bond (equal to holding gold) and Indigenous gold coin with Ashok Chakra

5. Industries

• At present, India has seen a surge in entrepreneurial activity across the sectors. These activities bring innovation in industry and need to be promoted. Indian democracy can be best justified if it enable its weakest individual (financially)to dream of becoming a millionaire by just business. And establishment of Mudra bank with initial capitalization of 20,000 crore to finance micro-finance firms  who lend to small units.
• Regarding the high class educated entrepreneurs willing to start in technology related business, SETU incubation programme  has been launched with funds coming through NITI.
• Regarding the big corporate houses, corporate tax will be reduced to 25% over four years (nothing in this year) with end to all the exemptions phase wise (exemptions are responsible for reducing effective tax). It is believed that this will boost investment; but when already companies are sitting on pile of cash worth 8-9 lacs crore and not investing, this justification seems questionable. 

FFC and Cooperative Federalism

FFC stands for Fourteenth Finance Commission. Finance Commission is a constitutional body  constituted under Article 280 with the main task of division of resources among centre and state government through tax devolution and grants in aid. Besides this, it also give recommendations to problems as requested/directed by the government of India.

FFC was constituted under the leadership of Y V Reddy (erstwhile RBI governor, IAS officer renowned for sailing India out of BoP crisis and appreciated by Nobel Laureate Stiglitz for his work as RBI governor during global financial crisis) . FFC was further given the task of:

1. Effect of GST on finances of state and Union governments
2. Amendments to FRBM Act
3. Pricing of Natural resources
4. Subsidies level for inclusive growth

The recommendations of FFC is aiming towards achieving cooperative federalism (equal say to states and centre on developmental activities). Also, this is in line with recent trend of growing decentralization in decision making which was started with 73rd and 74th amendment in early 1990s.

Funds and Grants in Aid

FFC major recommendation is regarding fund given to states through tax devolution to 42% from current 32% ( recommended by 13th FC) and change in weightage of factors like per capita income distance, forest cover, population, demography and area. To be precise, tax devolution will now on the basis of distance from highest per capita income district (50%), Population (1971 census, 17.5%), demography (2011 census, 10%), area (15%) and forest cover (7.5%). This changed formula has given more funds to special category states (states like Arunachal Pradesh, HP, Mizoram, Nagaland, Sikkim with difficult terrain and near border and strategically located). It will also benefit states with high forest cover like Jharkhand, MP and Chhattisgarh, but definitely a loss to UP and Bihar with population as low weightage.

Regarding the grants in aid which are more discretionary in nature; FFC  recommended a specific institutional arrangement be introduced for this purpose. And Inter State Council has been suggested to expand its role into this area. If implemented with true intention, this can be a milestone in achieving fiscal federalism among states and union.

Local Bodies

Local bodies often complain of less fund available, to take care of amenities. FFC has gone further towards decentralization in this with more fund to local bodies to tune of 2.8 lacs crore over five year period. And recommended states to pass advertisement tax to local bodies. FFC has kept check on working of local bodies by incorporating performance grant to funds being granted.

FRBM

As usual, FC commented on reducing fiscal deficit of centre to 35 ceiling level by 2016-17 and zero revenue deficit by 2019-20. And reduce the debt of centre to  36.3% by 2020 (from 45%). All these measures are suggested to be part of amendment to FRBM act. Or alternative to that, FRBM should rather be replaced Debt ceiling and fiscal responsibility legislation (as per Article 293). 

GST

Even FFC unable to estimate the loss of revenues to states amidst absence of clarity and design of GST. However, it recommended the same system as was used in VAT compensation (for three years, 100%, 75% and 50% respectively) but for five years (first three years as 100% then 75 and 50%). Also, Y V Reddy has given the suggestion of autonomous independent GST compensation fund to decrease the discretionary power of centre in such issues (seems his experience at RBI with centre government interference implicitly)

Pricing of Public Utilities

The only major recommendation is regarding the amendment to Railways Act through Railway Tariff Authority as statutory body rather than advisory body. This will rationalize the tariff in India. Currently, India has lowest passenger tariff and there is cross subsidization through freight revenues. But at same time, needs of poor need to be taken in account through use of technology in subsidizing rail travel.

In nutshell it can be said that FFC has given ample room to states to act on its own and share a higher fiscal responsibility for implementing the various central schemes. This will take care of diversity and inequality among states. GST matter is still left uncleared with lack of clarity and may take more time to come into existence. And as usual being a democratic nation, every recommendation's success depends upon the political will power of the party in the government. Although, this government has shown the right mood by accepting greater funds devolution to states.  

Railway Budget: This time its different

When I think of Indian railway, the picture that comes to mind is overcrowded stations, late running trains, tracks full of filth at stations and long lines for enquiry and ticketing. It may be because I was limited to north and East India, most populous region. But, when 65% of an organization's customer are not satisfied with the facilities, it must need to be restructured.

The status of Indian railway can be judged from the facts that only 200 km/year has been added since independence to Indian Railway infrastructure. Also, new trains were announced every other year to woo the voters of whichever states undergoing assembly elections; and they had to run on same limited track length. In last 30 years, only 317 projects out of 676 sanctioned projects have been completed. All this shows the poor decision making and operational efficiency of Indian railway.

This railway budget 2015-16 represented by Suresh Prabhu is bit different as there isn't any announcement of newer trains and jinx regarding focusing on transparency and accountability has been broken. The railway budget rather can be viewed from different angles like

Transparency and Accountability

In order to take care of projects running and prevent time delay, a new delivery mechanism and monitoring system (to prepare deadlines and make sure deliveries sticking to deadlines ) has been proposed. Further management inside railways has been said to be revamped to the need of time and increase the operating efficiency of railways. Training to front line  employees has been proposed to enhance accountability.

Services

Various measures are taken from installing CCTV cameras in Women compartment to declaring 182 as the helpline number . Although, it's efficiency depends on time that whether someone would be there to pick that phone or repair the faulty cameras or not. A separate department is going to be established for cleanliness which will ensure training of employees, coordinate with RDSO regarding vacuum toilets or with NIFT regarding linen that is in use inside bogies.

Technology

This year special emphasis has been given on use of technology by railways to efficiently serve customers. Use of Ipads by TTE, bar code on parcel handling, unreserved tickets available on smartphones are few such measures. But, how railway is going to implement such measures is yet to be seen because it's the same country where there is more than 95% enrollment to schools one side and 8th standard student unable to divide on another side. (truly, we are in a diverse nation). Also, there is emphasis on applied and fundamental research with new centre proposed to be established in four universities.

Infrastructure

The much needed boost to infrastructure has been given in this budget with eyeing finance from international development banks and pension funds, joint ventures for developmental projects with revamped PPP model (specially the contractual clause part), stress on satellite railway terminal to ease off overcrowding at metros and junctions. Also, to increase the freight handling capacity of railway that make it earn 67% of its revenue, private participation has been encouraged through freight terminal scheme.

This railway budget seems realistic with emphasizing completion of already undertaken projects, call for participation of NGO and MPs (through MPLADS), revamping the services being provided by railways and not on populist measures like bullet train. Rather, it led stress on research and use of technology in existing infrastructure. And as said in hard core economics, "All can't be satisfied with sops but can with hope" and this hope seems achievable. 

Fiscal prudence versus Fiscal deficit

In a country like India with mixed economy, government plays a major role in economy from investment to making availability of social goods and from running social benefit programmes to supporting the less developed market of certain goods. The recent debate on fiscal discipline versus fiscal expenditure is important because of this role of government in economy and state of Indian economy over last four years.

The first question that comes to mind is what is fiscal discipline. Fiscal discipline is phenomenon where government try to limit its expenditure to the extent it earns from tax, disinvestment and others. Or if there is excess expenditure, it must be controllable (regarding payment of interest) and justifiable (stimulus during recession or capital building).

 In absence of fiscal discipline, government used to have less room for spending during crisis situation. Also, it would be difficult for government to borrow from international markets (because of poor rating which depend upon fiscal numbers), huge interest to be paid to borrowers and adverse impact on exchange rate  causing low export numbers.  The high exchange rate is a result of high interest rate which would be a result of crowding out phenomenon by government borrowing. Amidst this, fiscal discipline is important and necessary.

But, at the same time fiscal deficit is also important. For a developing country like India, the resources available to the government are often not enough to spend on capital building as well as running social benefit programmes. Under such situation, it is advisable to borrow from market (both national and international) to spend on productive work.

If not, it would take a long time for the nation to come out of poverty, unemployment and malnutrition (prevalent problem of developing economy). Also, going by Keynesian thought fiscal deficit is justifiable if used to augment business activities either during depression or through infrastructure building.

Indian economy which has seen 8-9% growth rate in pre 2008 has declined to below 5% growth rate in 2012-14 (excluding the change in base year, recently done). Amidst this low growth, there was the change of government at the centre in mid 2014. At the time, government was reeling under high deficit of 4.9% of GDP in 2012-13 and 4.5% in 2013-14. This was definitely far beyond comfort level of 3% as specified in FRBM Act . Rather, the main problem is regarding the use of this deficit causing money which was spent heavily on subsidies and less on capital building. And subsidies in India has been very poorly targeted with leaking organizations like TPDS, MSP, Fertilizer subsidy ill targeted.

As a result of high deficit, there was less capital available to private sector leading to slowdown in business activities. Further, government itself has not been spending on capital expenditure, causing infrastructure bottlenecks. And worst of all, more money is available to the people without increase in business activities and production causing inflation.

But in the recent past, fiscal status has been improved with prudential expenditure and reduced international oil price. Now the conflicting point is that to go either for fiscal consolidation through reduced expenditure or go for fiscal expansion with stress on building infrastructure to support production. The resulting fiscal expansion if used judiciously will be cyclical in nature and not structural, but it purely depends upon the intention of the ruling party. Or else, go for fiscal consolidation but  then infrastructural bottlenecks need to be overcome through private players (which in present situation, not capable enough).

Disaster of Kedarnath

Kedarnath has been one among the most religious and pilgrimage place for Hindus in India. Kedarnath temple is famous for its historical importance, association with Lord Shiva and connection with some great personalities of the past like Shankaracharya and Raja Bhoja. These personalities were believed to be behind the construction of this temple in 10th -11th century. But, in the present it has been infamous for the natural disaster of 2013 in form of cloud burst resulting to massive flood.

Kedarnath temple is made up of schist stone found locally in middle Himalayas. The temple was built over a single rock as its platform and it's a totally dry construction. Dry construction is the kind of ancient construction with absence of any binding material like mortar or cementitious material. Dry construction gains its strength through gravity in vertical direction and interlocking of building blocks in horizontal direction. The building blocks are huge Schist boulders locally available in the region and cut into specific shape and size. This prevents the vertical and horizontal movement of the building blocks. And in fact, this aspect of Kedarnath temple prevented it from flash flood carrying millions of gallons of water. At the same time, all the modern construction in the vicinity of temple was washed out. 

 

The intensity of the damage can be guessed from the above image. There was massive landslides and undercutting; infact, the Mandakini river has changed its course during and after the calamity. But Kedarnath temple survived the force of nature by luck and by use of engineering. The flood brought with itself huge volumes of water and massive boulders (some of even size of 10m x 2m x 3m). These boulders were the reason behind the annihilation of Rambara town falling into the course of river. But for the temple, one among such boulder was the savior.

First, small boulders came from top along with water, which got settled in the rear side of temple. Then, a huge boulder of size 10x2.5x3 (m3) came and bifurcated the flow of water along the sides of the temple. Also, since the temple is of dry construction with use of interlocking among building blocks at same level; the damage was minimized. 

Damage was there mainly into projections spreading out from main structure like few columns of the Mandapa (middle portion of temple). Few of the building blocks were broken or missing from the corner of the temple, which can be repaired with locally available stones stitched to remaining one. 

Above figure demonstrates the damaged column of the temple, which for temporarily supported with stone bricks available locally. The only concern regarding the temple is its foundation where water gets deposited after the flood. The exact location of water has to be found in order to pump out; but the concerned technology is not available in India. And the only solution of digging is not there in the list because of sanctity of the area as fixed the so called religious guards. And it's very difficult to make them understand the engineering. The existence and durability of this great Kedarnath temple structure depends on this, which will be decided by time only.