Something for everyone

A landmark meeting of 33 people is currently under way in New Delhi. This is the meeting of the newly constituted Goods and Services Tax (GST) Council, comprising representatives of the 29 States, two Union territories, and the Finance Minister along with his deputy. The GST Council will lay the foundation for the future of India’s cooperative federalism. Can a nation with an extremely diverse and dissimilar set of States amicably(friendly,सौहार्दपूर्ण) transition to a ‘one nation, one tax’ GST regime is the $250 billion (of indirect taxes) question.

Rainbow nation

The GST Council has a minister representing the median 30-year-old matriculation-educated Tamilian, earning roughly Rs.1.4 lakh per annum. It also has a minister representing the median 19-year-old primary school-educated Bihari earning a mere one-fourth of her fellow Tamilian. The Finance Minister of Maharashtra representing one-seventh of the entire country’s GDP will attempt to strike a fair deal on equal terms with the minister representing Sikkim with less than 1 per cent of Maharashtra’s GDP! Neither the European Union nor the United States nor even China exhibit(show,दिखाना) such stark contrasts in demographics, human development and economic parameters across their large provinces as India. In this context, this transition to a uniform GST regime is both extremely audacious(brave,साहसी) and laudable. Reconciling diverse preferences of all the member States of the GST Council to determine a uniform set of indirect taxes across the nation is a ‘Mangalyaan’ task. But it is possible to accomplish this mission by adhering(follow,अनुकरण) to some basic guiding principles. We present below a five-point thematic framework for the GST Council. But first, it is essential to remove some misplaced notions(belief,मत) around GST.

One, the revenue neutral rate (RNR) is a utopian(imaginary,काल्पनिक) chase. It is best to acknowledge that under a new GST regime, it is impossible to predict how tax collections will be in the short and longer term. It is futile(useless,व्यर्थ) to agonise(pain,व्यथा) exact rate at which there will be no loss of tax revenues for all the States.

Two, fear of loss of revenues to large States due to a lower GST rate is exaggerated(overstated,अतिशयोक्ति). Large States can also benefit from a significantly higher share of service tax revenues to their kitty under the destination-based GST regime.

Three, it is a false notion that high GST rates will not affect the poor since half of the consumption basket is not taxed. This assumption, that the government knows precisely(clearly,स्पस्थ्तया) what the poor and rich consume, is bizarre(weird,अजीब) and outdated. The government decides that regular biscuits is an ‘essential’ good and is not taxed while cream biscuits is a ‘luxury’ good that is taxed at the highest rate. Meat may be a ‘non-essential’ food item for the poorer Bihari but ‘essential’ for a richer Keralite. Given India’s stark economic diversity, there are no uniform standards for the poor across the country.

Five guiding principles

The five guiding principles for a possible consensus(agreement,सहमति) on GST:

One, forget RNR, instead guarantee a minimum for each State: States are bound to be apprehensive about potential revenue losses in this transition to a GST regime. The leaders of these States have budget commitments to keep and elections to fight. Guaranteeing the States a minimum amount of GST revenues will relieve them of the risks of tax buoyancy(boom,उछाल). Every State can be guaranteed a minimum combined GST (Central and State GST) revenues for a period of five years or a State election, whichever is earlier. This minimum revenue formula should include all of the State’s 2015-16 non-petroleum, non-sin goods indirect tax revenues.

Two, keep it small and simple: A simple and low standard GST rate should be set to incentivise tax compliance and boost overall tax collections. In order to minimise overall inflationary impact, the standard GST rate slab should be 15 per cent, equal to the current services tax rate including all cesses. There can then be a slab for low rate, a merit rate and a high de-merit rate. It is then up to the GST council to categorise goods and services into these four slabs.

We acknowledge that a guaranteed revenue stream and a minimum GST rate can be potentially hazardous(dangerous,खतरनाक) to the Centre’s fiscal situation. In the impossible trinity of keeping rates low, reimbursing States and keeping fiscal prudence, it may be worth relaxing fiscal discipline, as an investment into the future of a smooth functioning GST.

Three, no more State-specific tax incentives; increase threshold for exemption: Different States have different thresholds under which businesses are exempt from State taxes. Typically for large States, any business with an annual turnover of less than Rs.10 lakh is exempt. Since a uniform GST will remove the States’ ability to attract new businesses with tax incentives, there is an understandable fear of new job creation in the more developed States. Raising this threshold for GST exemption from the current average of Rs.10 lakh to, say, Rs.40 lakh can incentivise existing small businesses to grow faster, thereby creating new jobs. While outwardly, this may seem unfair to the smaller States, they may actually stand to gain in the longer run as this can attract larger businesses to smaller States where land and labour are ostensibly(seemingly,प्रकट रूप से) cheaper.

Four, minimal categories of exemption: Petroleum and petro products along with sin goods such as alcohol and tobacco are already exempt from the current GST law, allowing States to levy appropriate taxes on these goods. With a guaranteed minimum GST revenue for each State for a certain period and an overall low GST rate, it is in both the interest of the States and the Centre to then not allow for any more goods or services to be exempt from GST.

Five, incentivise States for GST collection: The key to a successful GST regime is increased tax revenues to States failing which it is bound to get fractious(uncontrolled,बेलगाम) in the years to come. Since GST is a destination tax concept, it is best to give each State the greater responsibility to collect both Central and State GST taxes within its State. The more the States collect, the more they get back.

It took three years post-Independence for the Constituent Assembly to draft the Constitution of India that has remained the edifice on which the Republic of India still stands firm. The GST Council has a similar weight of responsibility in cementing the economic unity of India on a seemingly shaky pluralistic foundation. It is an onerous(heavy,भारी) task that deserves debate, discussion and consensus.

Praveen Chakravarty is Senior Fellow in Political Economy, IDFC Institute. Ajit Ranade is Chief Economist, Aditya Birla Group.

courtesy:the hindu

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know your english

What is the meaning of ‘moxie’? (K Rajesh, Delhi)

First, let us deal with the pronunciation of this word. The first syllable rhymes with ‘box’, ‘fox’ and ‘pox’, and the ‘ie’ in the second sounds like the ‘i’ in ‘bit’, ‘sit’ and ‘hit’. It is pronounced ‘MOK-si’ with the stress on the first syllable. The word is mostly used in informal contexts to mean determined. A person with moxie is a fighter; he does not give up easily - no matter how often he is knocked down, he gets up. He is courageous in adversity.

Suraj showed a lot of moxie when he questioned some of the CEO’s decisions.

The girl has a lot of moxie in her. There’s no way she’s going to give up now.

The word comes from the name of a soft drink that was quite popular in the States in the early twentieth century. The advertisements claimed that the drink would ‘build up your nerve’. It is possible to buy a can of Moxie even today.

What is the difference between ‘terrified’ and ‘petrified’? (V Radhika, Madurai)

Both words suggest that you are extremely scared or frightened of something or someone; you are in a state of panic. When you are ‘terrified of’ something, you may choose to run or you may stand still because you are too scared to move. When you are petrified, you become paralysed; you stand there like a stone. You are too scared to move. The word ‘petrified’ comes from the Latin ‘petra’ meaning ‘stone’.

When they saw the tiger, the terrified villagers ran into their houses.

When the villager saw the tiger, he was petrified.

What is the meaning of ‘in the groove’? (Ajit Kumar, Vizag)

The ‘oove’ in ‘groove’ rhymes with the ‘ove’ in ‘prove’ and ‘move’. A ‘groove’ is a long, thin cut on a hard surface. For example, sliding doors and windows have grooves cut into them. They make it possible for a person to slide the door/window easily. When you say that you are ‘in the groove’, what you are suggesting is that you are doing something quite easily, without any real effort.

When Federer returns in 2017, it’ll probably take him time to get in the groove.

Anand didn’t like being a Manager at first; but now, he’s getting in the groove.

When you are bored of doing something over and over again, you say you are ‘stuck in a groove’. You have been doing the same thing for a long time and have become very set in your ways.

Anita’s job no longer excites her. She’s stuck in a groove.

Is it okay to say, ‘It’s high time you clean the motorcycle’? (M Priya, Chennai)

No, it is not. It should be ‘cleaned’ and not ‘clean’. The expression ‘high time’ is mostly used in informal contexts to mean that it is time to do something that should have been done a long time ago. In other words, you have unnecessarily delayed doing something. It’s high time Laxman bought a new car.

It’s high time that the children went to bed.

courtesy:the hindu

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Lend aggressively but responsibly

Developing countries today target high growth through investments in infrastructure, modernization and expansion of manufacturing and service facilities, and in agriculture and allied areas. At the same time, they seek to enable disadvantaged sections to upgrade their standard of living. In this, the developing countries expect financial institutions to act aggressively as well as responsibly.

The global financial structure, as it is evolving, is a technological marvel. Assets originating at the base are securitized, packaged in different forms for sale to investors all across the globe. These assets, if infected with a high probability of default, will always carry the germs of a systemic crisis. The lending agencies therefore have an enormous(large,विशाल) responsibility; while a high-growth economy offers opportunities for profits, lenders need to be (despite insistent pressures from powerful borrowers and politicians) extremely cautious and desist from taking on high-risk assets.

A good example in this regard is the subprime crisis in the US during the decade just gone by. The lending ambience was congenial(favourable,अनुकूल) : a continually rising property market, a flood of liquidity fed by an upsurge in global savings and an accommodating credit policy. The lenders had two options: low profit, low risk from sound but relatively few mortgage assets, and high profit, high risk from high risk but abundant(excessive,अत्यधिक) mortgage assets.

Lending agencies chose the second option—a choice dictated by the inexorable(harsh,कठोर) logic of a profit-driven market economy. They lured(entice,लुभाना) subprime borrowers with a slew of “innovations” to create assets at any cost: progressively relaxing margin money, dispensing with the requirement of income investigation and dismissing borrower concerns about unexpected shortfalls in their disposable incomes. All this they did, not out of any philanthropic(generous,परोपकारी) zeal but out of the urge(force,मजबूर) (given the opportunity) to make quick profits. The major premise underlying their behaviour was that if the property market collapsed, leading to a systemic crisis, the state could not but step in, as it had indeed done several times in the past.

State intervention in a crisis is a must, but the challenge before any polity is to intervene before the crisis erupts and to do so in a manner that helps the lending agencies generate a sustainable level of good assets. Such intervention must be planned and designed such that a balance is struck between the aspiration of marginal borrowers (to create and own assets) and the continued viability of lending agencies—critical for the efficiency and stability of any financial system. If we are to grapple(fight,लड़ना) with the recurring problem of non-performing assets and continue uninterruptedly with pushing social sector lending and infrastructure development, the polity has to act innovatively: There has to be a partnership, so to speak, between the state and the financial system.

But what kind of a partnership? Two points need to be made here. The plea for state participation is not to seek a return to the “loan mela” days of political patronage, to open the purse strings for subsidies, to interfere with the credit decisions of lending agencies, or to justify the oft-talked about practice of lending at political behest. This is a plea for selective public investment aimed at enhancing(increase,बढ़ाना) the viability of private sector projects and the income and employment potentials for the disadvantaged sectors.

Take housing, for instance. Our desire to have a pool of affordable houses has hardly made any headway, primarily because of the prohibitive cost of land. The state has to do some out-of-the-box thinking to clear the hurdles(problem,बाधा) in the availability of land at a reasonable price. The flow of funds from the state and the lending agencies, made available in tandem(one behind other,एक के बाद एक) and planned and targeted at select locations, should be the basis for this partnership.

A second point. Admittedly, we have to push private sector investments into different types of infrastructure projects, industry and agriculture for sustaining growth and generating employment. In this regard, a good many projects are clearly viable and remain good candidates for institutional funding, even as several others continue to inhabit the penumbra zone. Given the technological complexities and demand in today’s dynamic global economy, and with the kind of in-house skills currently available, the projects of the latter variety do not lend themselves to easy appraisal. It is also next to impossible for individual lending agencies to cost-effectively build in-house skills for the accurate evaluation of these projects. If investments in all key sectors are to be pushed aggressively, we must have special institutions with the mandate to assess these projects and to provide such critical financial assistance as can induce the lending institutions to lend appropriately to them.

We had set up development finance institutions in the early stages of our industrialization in the 1950s and early 1960s; nearly 75% of the cumulate private investment was canalized through these. However, we committed the grievous(serious,गंभीर) mistake of scrapping these institutions in the 1990s. On the other hand, China, years after it had switched over to a market economy, set up its National Development Bank in 1995; the institution is estimated to have financed over 60% of the total private investment in that country since then. Brazil is another illustrious example in this regard, while even Germany and Japan are continuing with these types of development banks.

Back home, in India, we must recognize that, without the critical support, financial and otherwise, that such national-level development finance institutions can provide, our objective of creating a sustainable level of good assets and maintaining a steady rate of growth is bound to remain hamstrung.

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One-dollar labs for the ‘citizen scientist’

Frugality(economical,कमखर्ची), crafting inexpensive knock-offs and making do with little may be the ethos(character,प्रकृति) of India’s pharmaceutical industry, its manufacturing sector and the spirit with which our scientists conduct their research but an Indian-origin bio-engineer at Stanford University has just won one of America’s grandest prizes — the MacArthur ‘Genius’ grant — worth Rs.4 crore for designing a $1 microscope.

Towards do-it-yourself science

Manu Prakash from Rampur, Uttar Pradesh and an engineer from the Indian Institute of Technology, Kanpur, has made a name for fashioning ingenious(simple,सरल) devices that make the essence of science — observation and experiments — accessible to those who can’t afford expensive instruments.

His best-known is the ‘Foldscope’, a microscope that can be fashioned out of paper that comes pre-fixed like in a jigsaw puzzle set. Most of these kits have been distributed free so far and the aim is to have it cost less than a dollar. The kits come with a glass slide that can be slipped into the do-it-yourself microscope and can be used to check for microbes in a soil or water sample, closely observe the anatomy of a water lily or the striations of an earthworm.

Another of his inventions, according to a press statement from the MacArthur Foundation, is a sticker-like microfluid chip that can be used to collect thousands of nanolitre-sized droplets of saliva from mosquito bites in order to test for pathogens. Dr. Prakash also recently demonstrated a novel diagnostic tool, a “water computer”, which involves building a computer out of tiny(small,छोटा) air bubbles travelling in a microfluidic channel.

India has been an early adopter of his devices. The Department of Biotechnology (DBT) has signed a Rs.1.5-crore agreement with the Prakash Lab at Stanford University to procure 10,000 Foldscopes that could then be given to schools, colleges, forest field officers and help encourage an interest in field observation and research. Already workshops with schools, students and colleges in Delhi, Guwahati and Kaziranga (Assam) have enthused students and teachers, says Shailja Gupta, a DBT official who coordinates the Foldscope programme. “I’ve used it, my daughter likes it. The charm of the device is that anyone can use it to see their surroundings differently… the microbes on your food for instance,” she says.

Earlier this year, Dr. Prakash’s lab came up with a new device that modifies a child’s toy, whirligig, into a device called a ‘paperfuge’ that — he and his colleagues claimed in a June research paper — could be used to “isolate malaria parasites in 15 minutes from whole human blood”. The device can be used to separate pure plasma in less than 90 seconds.

Just what India needs

Expanding the materials used could mean new kinds of devices that don’t need electricity to develop point-of-care diagnostics, especially in resource-poor settings, the paper added. India accounts for over 17 per cent of the world’s population while spending less than 1 per cent of the world’s total health expenditure.

The healthcare expenditure stands at 4.1 per cent of its GDP, which is among the lowest in the world, and dealing with challenges like these requires affordable interventions, something that both public and private healthcare experts have repeatedly emphasised through the years. “If there were more devices like Prakash’s, there’d be uses for them that we can’t yet envisage(imagine,विचारना),” says Ms. Gupta, adding, “We are exploring options like a manufacturing facility to scale up these devices.”

Dr. Prakash’s approach to engineering allows a wider range of professionals to become so-called ‘citizen scientists’ and bring new facts about nature and solutions to technical problems to the fore. The Foldscope allows images of samples to be relayed via an app to a central site that stores information, about an intriguing(fascinating,लुभावना) microbe or a new earthworm or the beginnings of a new plant infection from a place that may be otherwise inaccessible to scientists.

“It certainly isn’t a replacement for the lab microscope,” says Vibha Narang, coordinator of the Botany Department, Atma Ram Sanatan Dharma College, Delhi, “but we saw a lot of fervor(enthusiasm,उत्साह) among school students.”

Her college was part of a workshop organised by the DBT and Dr. Prakash to explain the Foldscope. “But for collecting samples during a field trip or a quick survey, I think this is a very handy device,” she adds.

courtesy:the hindu

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Railway Budget, a vanishing trick

So finally, the almost century-old practice of presenting a separate Railway Budget ahead of the General Budget is to be dispensed with from the next financial year (2017-18), and the Railway Budget “merged” with the General Budget. The Union Cabinet has just cleared the proposal.

What are the reported reasons for this merger? According to earlier media reports, a separate Railway Budget is being dispensed with so that the Indian Railways need not pay the annual dividend to the Government of India on the budgetary support given each year, saving the financially stressed Railways about Rs.10,000 crore annually; over the years, the Budget has been misused by politicians as a populist platform to enhance(increase,बढ़ाना) their own image; no other Ministry has a separate budget and the practice exists in no other country today; the Bibek Debroy Committee has recommended discontinuance of a separate Rail Budget and it is part of the Prime Minister’s reform programme. Besides, it is a colonial legacy.

A point particularly stressed by the Finance Minister in the press conference announcing the Cabinet decision was that the Railways’ share in the General Budget has progressively reduced over the years, making a separate budget an anachronism.

Each of these “reasons” does not present the true or complete picture. It is necessary to separate fact from fiction.

It is a review

There have been sporadic(periodic,छिटपुट) calls in the past for doing away with a separate Railway Budget for various reasons, but the matter was never pursued seriously. One of the more publicised reasons is that it will free the Railways of the obligation of paying the annual dividend, as mentioned earlier. This is only partly true. The dividend is paid not only on the budgetary support extended during a year but also on the total “capital at charge” which includes the gross budgetary support (GBS) of previous years. By this merger, a “loan-in-perpetuity” is converted to a grant. Shorn of officialese, it is a loan waiver; and loan waivers are granted to individuals or institutions in extreme financial distress — something not to go to town about.

In popular imagination, the Railway Budget was seen as a grand spectacle, with the Railway Minister using it as a platform for populism and political grandstanding. What is not appreciated is that the Budget is not merely a statement of allotment of funds to various projects and programmes, unlike other ministries, but comprises a fairly detailed performance review, physical and financial, of the previous year and prospects for the current (Budget) year. Perhaps nowhere in the world is a political functionary called upon to present a financial report card of the country’s largest public undertaking in the full glare of publicity. A separate post-Budget discussion in Parliament on the Railways, as indicated by the Finance Minister, is no substitute, as the focus most likely will be on allotments to various projects, not on financial performance.

Talking of populism, the recent announcement by the Finance Minister of the proposal to set up a new Railway zone to placate(calm,तसल्ली) a State government as part of a “special package” is proof that it is possible to be “populist” outside a separate budget.

Why should there be a separate budget for the Railways? The fact is that the Railways is indeed unlike any other Central ministry in size and scope: It is an operational ministry; it earns as well as spends, unlike other ministries that only spend. Its gross earnings (Rs.1.68 lakh crore in 2015-16) are among the highest for any Indian organisation, public or private; it has a staff strength (13.2 lakh) that exceeds that of the Indian Army; it fully meets the pension liabilities of its retired employees (13.8 lakh) out of its own earnings unlike other ministries; it follows an accounting practice, though not up to the standards of a purely commercial establishment, that has a number of features of a commercially-run organisation. So, if the Railways is to be treated like other ministries, will the government also fund its pension liabilities which are estimated to be about Rs.45,500 crore in 2016-17? That should be some “savings” indeed!

Part of a package

Perhaps the most misquoted reason given for the merger is that the Bibek Debroy Committee has recommended it. That is being economical with the facts. The committee has recommended it not as a stand-alone step, but as part of a slew of measures such as: complete overhaul of the project financing architecture of the Railways involving ruthless weeding out of unviable/long-pending projects; comprehensive accounting reforms; separation of infrastructure and operations; and setting up of a rail regulatory authority. Pending these steps, each of which is a major project in itself (some politically sensitive), the move to give a hasty send-off to the Railway Budget is perplexing(baffling,हैरान करने वाला).

The Railway Budget is indeed a colonial legacy; but so are English, the Railways, Rashtrapati Bhavan and the sedition law. Enough said. All this is not to say that the Railway Budget is a holy cow that cannot be touched. Far from it. The question is not “why”, but “why such a hurry to bury it”?

The answer, in one word: Obfuscation(anxiety,घबराहट). By all accounts, the Railways’ financial position is precarious(uncertain,अनिश्चित) due to the triple whammy of a fall in revenues, a sudden spike in expenditure due to implementation recommendations of the Seventh Pay Commission, and an increasingly unsustainable interest burden on market borrowings. A separate Budget would have meant having to openly declare an operating ratio in excess of 1.0 (in layman’s language, that means one is living beyond one’s means): not a very good advertisement for a system that aspires to have high-speed tilting Talgo trains shortly and Bullet trains in the not-too-distant future. So why not banish and “vanish” the Railway Budget into anonymity as one of the myriad(infinite,असंख्य) annexures in the General Budget and earn a fat “bonus” of about Rs.10,000 crore in the bargain? A smart move indeed! It seems now the Budget is more valuable dead than alive. However, what should be a matter of serious concern to the aam aadmi is that the Railways’ finances are sought to be shored up, not by improving efficiency, increasing revenues and cutting costs, but through a dexterous(skillful,कुशल) bureaucratic sleight of hand, taking cover behind the smokescreen of “reforms”.

Finally, a suggestion to the government: Do not throw the baby out with the bathwater; table an annual “Indian Railways Report” in Parliament on the lines of the Economic Survey prepared by the Chief Economic Advisor under the Ministry of Finance. That will signal reforms with transparency.

courtesy:the hindu

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know your english

“Tell me, how is the word m..e..t..e pronounced?”

“It’s pronounced like the word ‘meet’. Nowadays, this rather formal word is mostly used in the expression ‘mete out’. It means to punish someone. You...”

“So, are you the one ordering or giving the harsh punishment? Are you...”

“It could be anyone. It could be you or someone else. For example, the students were highly critical of the treatment meted out to the workers.”

“How about this example? Judges are reluctant(unwilling,अनिच्छुक) to mete out harsh sentences against crooked politicians. I think they should.”

“Sounds good. Even today, there are many teachers in our country who believe it’s okay to mete out punishment to little children.”

“I certainly don’t! In fact, I feel that we should .......”

“Please, you need to lighten up. You have a tendency to.....”

“Lighten up? Are you telling me that I have put on weight and that I need to....”

“No, I don’t want you to go on a diet. When you tell someone that he should lighten up, what you’re suggesting is that the individual should learn to relax.”

“You want him to stop taking everything that is being said very seriously.”

“That’s right. The new teacher is very serious in class. She needs to lighten up.”

“Shreya had been tense all morning. But once she heard she’d got the promotion, she lightened up.”

“Revathi lightened up during our trip to Hyderabad. I’ve never...”

“Oh yes, you went to Hyderabad, didn’t you? How was the seminar?”

“It was okay. Nobody had anything new to say. But I did manage to see quite a few places in Hyderabad.”

“Did you go to the Salar Jung Museum? They say it’s great.”

“It is, actually. I wanted to spend at least half a day there. But unfortunately, my boss’ brother-in-law had tagged along with us and he...”

“Tagged along? Does it mean he went along with you?”

“You could say that. When someone tags along with you, he accompanies you even though you haven’t asked him to.”

“In other words, he’s like an uninvited guest. He forces himself on you.”

“Exactly! Whenever Raman took Laxmi to a movie, her brother tagged along with them.”

“That couldn’t have been fun. When I went out with my friends, I made it very clear http://editorialwithvocab.blogspot.in/2016/09/download-monthly-pdf-of-august.htmlto my parents that I didn’t want my younger brother tagging along with us.”

“The puppy tagged along wherever we went. Despite being...”

“Tell me, is there a difference between ‘despite’ and ‘in spite’? I mean is....”

“In terms of meaning, there is not much of a difference. You can use the two words interchangeably in most contexts. Just remember that ‘in spite’ is always followed by ‘of’ and ‘despite’ is not. The children continued to play in spite of/despite the rain.”

“In spite of/Despite his brilliant performance in the league matches, Rahul wasn’t selected for the State team.”

“That’s politics for you. I’ve got to go to the supermarket. I need...”

“Mind if I tag along?”

courtesy:the hindu

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The economy on autopilot

As the Narendra Modi government inches towards its halfway mark, its economic philosophy stands revealed. This appears to consist of aiming at some ideal institutional architecture while leaving economic forces to play out on their own. The criterion of macroeconomic stability, defined mainly by inflation kept within a range, completes the picture. Underpinning such an approach is the premise that the potential of the economy, reflecting the chosen acts of private agents, not only cannot be improved upon by the government but its realisation could actually be stymied by intervention. This is a well-known position in the canon of Anglo-American economics tending towards the view that market outcomes are the best. The maxim ‘minimum government is maximum governance’ could legitimately claim to be its progeny.

Life in the slow lane

How, it may be asked, has this philosophy served the economy? We could start with growth. Since May 2014, growth has accelerated but at a much slower rate than that it already had commenced(start,शुरुवात) upon in 2013-14. India today is the world’s fastest growing economy but this we owe to the fact that China has slowed more than India has. India has not exactly surged to number one position. But more importantly, the government has not so far been able to achieve the substantial quickening of the economy that Mr. Modi had promised at election time. The government has on occasion extolled(praise,गुणगान) its record in maintaining macroeconomic stability. This is indeed correct. Inflation has declined but this only reflects a downward trend that had started in 2013-14. The government would also no doubt like to take credit for sticking to the pre-announced fiscal consolidation(integration,सुद्रढ़) path. The fiscal deficit has steadily declined since May 2014. The Finance Minister’s public statements suggest that he treats this as a significant achievement of his government. Actually, it typifies the search for the ideal architecture without sufficient concern for outcomes. The truth is that this government had inherited an economy with quite rapidly accelerating growth and steadily declining inflation. It has barely managed to maintain this scenario. The promised resurgence has not materialised.

It is with respect to investment that the government’s record is uninspiring. Far from having been able to instil confidence among private investors, the government has been unable to stem a decline in capital formation — as a share of output — in progress for at least half a decade. On its part the government takes recourse to the figures on foreign direct investment (FDI) to signal the effectiveness of its policies. Data from the Department of Industrial Policy and Promotion show that in the year just passed, the economy attracted increased FDI up to 29 per cent in dollar terms. While this is impressive, and to be welcomed, it is important to have a sense of what it amounts to. In the year 2014-15, FDI amounted to a mere 4 per cent of total capital formation in India. So, while FDI is to be encouraged, its ability to make a significant contribution to growth is limited. On the other hand, over 75 per cent of capital formation is undertaken by the domestic private sector. Any significant change in the investment scenario would depend upon the actions of this segment.

Sticking to fiscal consolidation

Right now private investment is very likely being restrained by the weak balance sheet of firms. The flip side of this is the high level of non-performing assets (NPAs) of the public commercial banks. Forcing these banks to lend would be poor policy. But it is not clear whether everything that can be done to lower the lending rate is being done. After all, consumer price index (CPI) inflation, the Reserve Bank of India’s (RBI) preferred inflation index, is trending downward and there is a case for lowering lending rates. But the RBI has now been put into the straitjacket of inflation targeting and can no longer respond to considerations of output. This leaves fiscal policy as the only instrument with the government.

The government, however, is reluctant(unwilling,अनिच्छुक) to use it to increase aggregate demand for fear of deviating from its fiscal consolidation path. It is of course possible to step up public investment by trimming subsidies. Here the National Democratic Alliance government’s approach is cravenly(cowardly,कायराना) political, and no different from that of its predecessor, the United Progressive Alliance. It is reluctant to be seen as cutting subsidies even when it is clear that a rupee-for-rupee swap in certain subsidies for public capital formation is likely to be beneficial for both growth and welfare. The fertilizer subsidy presents the most obvious instance. It has done little to stem the rise in food prices while continuing to take up precious fiscal space. There is a strong case for reviewing its continuation, at least in the present form. Well-designed empirical(practical,अनुभवजन्य) research alone can settle the matter of its desirability, and one hopes the government will provide this in time for its third annual Budget.

Looking for inspiration

An object of this government’s admiration has been revealed to us in the choice of speaker for the firstNITI Aayog Lecture on Transforming India. It chose Tharman Shanmugaratnam, the Deputy Prime Minister of Singapore who was earlier its Finance Minister for close to a decade. A trained economist with considerable international exposure, Mr. Shanmugaratnam typifies the Singapore model, which recognises the value of high human capital in its leadership, something that India has not seen since the time of Jawaharlal Nehru. Prime Minister Modi is right to have invited this global leader to participate in a brainstorming on how to transform India, thus drawing much-needed attention to the achievements of Singapore. Though its cultural policies may not be to everyone’s taste, the economic transformation that this tiny state has so quickly wrought is most impressive indeed. There is an astounding(surprising,चौकाने) presence there of public capital in the form of infrastructure, the most egregious(powerful,प्रबल) of which is public housing which hosts over 80 per cent of the population. Along with its approach to political freedoms, Singapore’s record is closer to that of socialist planning rather than free-market capitalism. Its government has not hesitated to intervene in the economy but its interventions have been made with a finesse that has yielded(give,देना) substantial returns. It is ironic that a government that had so ceremoniously replaced the Planning Commission must simultaneously seek clues from the history of a country transformed by economic planning.

There is one specific area in which our own government may learn from the Singapore experience. The government there had instituted a provident fund to which all workers and employees have had to contribute. These contributions ensured a rise in the saving rate which in turn was a source of funding for public investment. In the muddled discourse on fiscal policy in India today, the reigning argument appears to be that a fixed private saving rate sets the limit for the attainable fiscal deficit. This overlooks the possibility of raising the private saving rate, which is precisely(clearly,स्पस्थ्तया) what the Singapore government had done early in its history, enabling it to achieve a scale of public capital formation that truly distinguishes it from India. All indications are that the present government of India is striving to replicate Singapore’s institutional architecture, as in laws governing business, rather than the transformative role of public investment that turned a fishing village into a global destination for FDI. What other conclusion can be drawn from the fact that in the Budget for 2016-17 the increase in the allocation for capital expenditure amounted to a mere 2.3 per cent, with inflation running at around 4 per cent per annum?

Bleak agricultural landscape

A sector that is unlikely to be well served by the philosophy than an economy left to its own devices will achieve its potential is agriculture. Three of the past five years in India have been years of poor agricultural performance, reflected in persistent(continuous,लगातार) food price inflation. We are very likely witnessing creeping climate change with direct consequences(result,परिणाम) for production. The advisory from most funds in the financial sector is that the economic outlook this year will depend upon the monsoon. It is surprising that the imperative(mandatory,अनिवार्य) of drought-proofing an increasingly vulnerable(weak,कमज़ोर) Indian agriculture hardly figures in the public discourse on the economy when it is of no less importance than rolling out the Goods and Services Tax. Nothing short of a transformation akin(similar,के समान) to the Green Revolution can achieve this, and the States would have to be on board. The present government has had little to say on the matter so far. By disbanding the Planning Commission, the Centre has lost a long-standing conduit to the States whose planning boards did have at least a titular connection to the former.

courtesy:the hindu 

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No proof required: Blind men in search of inflation

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.For the last few years, the Technical Advisory Committee (TAC) has provided advice to the RBI on the setting of policy (repo) rates. Very soon, perhaps as soon as the October 4 meeting of the RBI, the Monetary Policy Committee (MPC) will be formed, and rather than an advisory role, it will make policy. In other words, rather than the governor taking in inputs from the TAC, and others, he will now be part of a six-member committee that takes decisions on policy rates.

Three of the six members of the MPC are to be chosen from outside the RBI. By definition, the five external members of the TAC are strong contenders for the three available slots in the MPC. But does the record of the TAC suggest that they are fit to take on MPC membership? Possibly not. (An important caveat(warning,चेतावनी): This is a summary conclusion. It might well be the case that some members of the TAC were not as thoughtless as the majority, the minutes of the TAC do not mention names.)

Monetary policy, with or without the MPC, is meant to be forward-looking and anticipatory. Unfortunately, the record of the TAC, as gleaned from their latest — and last — August 9 recommendation, is anything but forward-looking. What has also been noteworthy about the TAC is that it most likely echoed what it thought were the “wishes” of the RBI. To be sure, individual members may have differed from the majority, but the majority has been nothing but “His Masters Voice” (youngsters, look up what HMV was).

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A perusal(study,अध्ययन) of the TAC “recommendations” emphasises the fact that it has been broadly clueless about the determinants of inflation in India, and therefore, not well informed about the determinants of policy rates. Their summary statement for the August 9 policy meeting is informative (TAC Report on the RBI website, August 30, para 3, page 1). For example, the TAC concluded that:

“The monsoon has also been normal so far, although the targeted pulses production — pulses being a major driver of food inflation — will also likely be driven by higher minimum support prices in this sector.” (emphasis added).

The TAC contention(dispute,विवाद) that minimum support prices (MSP) for pulses will influence higher production is somewhat ill-informed. The MSP for pulses has been set approximately eight per cent higher for the 2016-17 agricultural season than the previous year — at a level of around Rs 55 per kg. The prevailing(popular,प्रचलित) retail market price for pulses, so far in 2016, has averaged almost four times this level (at Rs. 200/kg).

However, a good monsoon this year is likely to send the retail price tumbling to close this huge “hoarders” gap between the farm-gate and retail price. What should be of concern to the TAC is retail (CPI) inflation for pulses — and this is likely to be significantly lower than last year, that is, pulse prices will help reduce inflation in 2016, contrary to the belief of TAC that MSPs for pulses will be inflationary. In other words, the TAC is looking at the “wrong” side of the elephant.

TAC again: “Members felt that increased upside risks to the five per cent CPI inflation target in Q4 of 2016-17 remain, specifically, from rising consumption demand — both private (because of a consumption-led recovery) and public (one rank one pension, seventh CPC (Central Pay Commission ) — and cost-push shocks in the form of a steady rise in crude prices.”

This quote provides us with some clue to the thinking in the TAC. Worldwide, disinflation is the new phenomenon, and has been so for at least the last decade. Many economists and policymakers have realised that output gaps no longer explain inflation. If they did, then why did India have double digit inflation from 2008 to 2013 with ever slowing demand? So “rising consumption demand” will not be an important factor in future (or current) inflation. Just look at the lowest two years — there was accelerating GDP growth and declining inflation rates.

What about the contention of the TAC that the pay commission will lead to higher inflation? In the last decade we had the pay commission, and observed high inflation; in the previous decade, we had the pay commission and obtained low inflation. So? It would have been more honest if the TAC had said that we don’t know much about the determinants of inflation, and are too lazy to find out, rather than arrive at wrong conclusions from models that do not make sense now (if they ever did).

Undeterred, the TAC moves from one wrong conclusion to another. “Cost push shocks in the form of steady rise in crude prices”. One had hoped for a little bit of humility here — whoever the TAC might be, they are not oil price experts. On August 8, 2016, the oil price was around $44. A month later, it is exactly the same. More importantly, what evidence is there that a rise in crude prices leads to cost push inflation?

Perhaps the memory of TAC experts goes back to October 1973, when a quadrupling of oil prices ushered in worldwide inflation. But their memory stops at 1980. In the 1990s, the average price of crude was $20/barrel. In 1998, the average price was a low $14.4. Since then, oil prices went up ten-fold, reaching a peak level of $ 140 barrel in June 2008.

What happened to world inflation post-1998? It continuously fell. The new near 40-year-old reality of crude oil and world inflation is that there is virtually no relationship between the two. So can the TAC oil experts stop looking for one?

The TAC noise continues. Sample this — four of the five TAC members were of the view that “CPI and CPI-food inflation have seen a recent uptick and certain other price indicators continue to be sticky; elevated food inflation has second round effects on headline inflation if it is persistently(continuously,लगातार)  above double digits”.
When was food inflation last above double digits — how many months ago? In the last two years, the highest food inflation level was eight per cent (July 2016); the average (sustained) food price level has been nearly half the double-digit level (5.5 per cent). So can the TAC not confuse itself with second round effects if it can’t even observe the bare facts pertaining to the first round?

We all make mistakes, but so many mistakes in one TAC report is noteworthy and perturbing(worrisome,चिंताजनक). It is to be hoped that when the MPC is constituted, and meets, the new members are unlikely to lazily assess and forecast inflation as the TAC seems to have done.

courtesy:indian express
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