Big Picture, GS-3, Indian Economy, Uncategorized

25 years of Economic Liberalisation: Where are we Heading?

Historical note

It has been 25 years since Dr. Manmohan Singh as the Finance Minister of India presented a historical budget on July 24, 1991 which changed the face of economic India forever.

The economic reforms embarked upon in that budget leading to economic liberalisation, privatisation and globalisation led to far reaching changes. It changed not only the nature of our economy but also the way we lived. It brought in dramatic changes in next 25 years.

  • India’s economy which was ranked 17th in 1991 now ranks 8th in the world.
  • Poverty was 46.1% in 1991 has come down to 21.3% in 2016.
  • Forex which was 9.22 billion dollars in 1991 is now 355.56 billion dollars.
  • STD call rates which were Rs. 22 per minute in 1991 is now Re. 1 per minute.
  • The length of National Highways which was 33700 km is now over 1 lakh km.
  • Number of computers which were just 18,000 in 1991 has now reached to 220 million!
  • Life expectancy has improved from 58.4 years to 67.7 years.
  • The TV sets in the country which was 33.3 million in 1991 is now 168 million.
  • Rural wages which was Rs. 46/day is now Rs. 277/day.

The list goes on of the development that has taken place in last 25 years.

However, there are also very disturbing signs of

  • Jobless growth
  • Increasing gap between rich and poor
  • Malnourishment among children
  • Growth in corruption and crony capitalism

The benefits and the pitfalls of the reforms and liberalisation and our stand today is to be known.

Background

The goals of the liberalisation in 1991 embarked upon were short term as well as long term. The immediate provocation was the critical fiscal situation that India faced in terms of foreign obligations as well as stagnancy in the growth of the economy. To overcome it, certain actions were taken. It also included devaluation of rupee.

A lot of thinking was done by the government to make the organised sector moving. The organised sector, industrial sector, finance sector, trade sector- all of those were experiencing minimal growth rates. This was the background in which the liberalisation process started. It can be clubbed as

  1. Industrial licensing- where most products and lines were de-licenced
  2. Trade liberalisation- a whole lot of items in which the trade was not allowed were removed from the restricted list. Also, to facilitate freer trade, the duties on export as well as on imports were done away with. However, there was no question of India participating in any of FTAs.
  3. Changed attitude towards FDI- it was not a direct impact. It has happened in tranches over 20 years and continues even now.
  4. Financial changes- privatisation of banks

One of the major aims of liberalisation was to create more wealth, create more jobs and shrink poverty and the gap as much as possible.

There was a philosophical change

  • In 1947, the philosophy of all policies was that collective was the key and not individual to blame. So, the states were given a large role and markets were to follow. It continued till 1991.
  • In 1991, a major turnaround happened where the individual is responsible and can be blamed and the collective is not to be. So, individual has to go to market and fulfil the needs by itself, for itself. The market became dominant and the public sector retreated with privatisation in education, health care, employment etc.

Understanding 1991 reforms

The markets are not good masters. It leads to marginalisation of those who are at the margins. Therefore, it happened so that the growth did not pick till first 12 years i.e. till 2002.

  • India had achieved 5.8% growth in 1980s and it remained average from 1991-2002 at 5.3%.
  • It is only from 2003 that India had a 9% growth for four years till the global financial crisis came.
  • The rate of growth dropped but again it picked up in 2010 and then again from 2011 it came down.
  • Now, India is again trying to reach higher growth rates.

Due such dynamic situations, instability has increased, the gap between the rich and the poor has expanded. There are 4th largest number of dollar billionaires in India. This shows the rising inequality.

For example, the minimum wage in 1991 was Rs. 35 which has risen to Rs. 165.

But, on the other hand managerial salaries having cap of 3,12,000 has risen to even 30 crores. Thus, it has risen by almost a 1000 times.

Poverty

In agriculture, the incomes have not risen very much. But in other sectors, there has been a substantial increase in income known. So, gap between agriculture and non-agriculture has increased. Thus, disparities have increased, instability of the economy has increased. So, when it is said that poverty has decreased as a result of new economic policy, the absolute numbers are still on rise. The social consumption necessities are also rising.

A Kerala study shows that

  • Between 1991 and 1999, the bottom decile cost of health increased 750% whereas for top decile it rose only by 250%.
  • Because of the massive environmental pollution that has taken place, there have been massive health issues plus privatisation so health costs have risen.
  • Education costs have risen as far as poor and others are concerned.

If all this is taken into consideration, there is not much clear about how many people have been brought above BPL. Thus, many people argue that poverty has not been much affected, inequality has definitely increased but poverty has declined at same level or not is not very clear.

It is important to recognise that for the first time in the Indian history of poverty, the absolute number of poor from 1973-1993 have declined absolutely.

By the Lakdawala poverty line, there was an absolute decline in poverty line. Though it was only 20 million.

Post 2003-04 when the growth really picked up, there was dramatic decline in the absolute numbers of the poor by the new Tendulkar poverty line of 140 million. Not growing of sufficient jobs is another reason for increase in inequality.

Jobless growth

The jobless growth could have been corrected rapidly if right policies had been adopted.

Even after 25 years of economic reforms, when 50% of the work force is still in agriculture, it is unacceptable.

Reason: never in the history of India, including post economic reforms, has the agriculture sector shown growth higher than 3.2%.

This is half of what East Asian countries achieved on an average.

China’s economic reforms began with agriculture. First decade was dedicated to agricultural reforms. Industrial reforms began only towards the end of 1980s.

India did the opposite and with respect of industry, there was a stratospheric failure which still survives:-

There was an illusion among the policy makers that domestic liberalisation and external opening was going to lead suddenly to industrial growth which it didn’t.

Instead, premature de-industrialisation happened.

Reason: Rapid reduction in tariffs in such industries which had never been exposed to international markets earlier, got wiped out.

East Asia shows the way. The way they moved forward was through an industrial policy focusing on employing workers, labour intensive industries received very significant support. That didn’t happen in India. Thus, jobless growth.

The share of manufacturing in GDP was 15% in 1991 and it is still 15% in 2014.

The share of manufacturing in employment was 11.5% and now it is 12.8%.

Non-agricultural focus

The lives have changed dramatically. Everything we did and now do has changed. India is seen as the fastest developing country in the world. But still, gap between rich and poor continues to grow. This is because the kind of sectors focused on reform period have been more towards non-agriculture.

There has been skewness in rural growth particularly. The middle class growth has been outcome of the reform process. Service sector which grew much faster than others can be one of the reason of growing gap as well as middle class growth. The agriculture is growing less than 2% and industries are also not faring top gear. Thus, service sector made its mark in the post reform era.

However, inspite of increase in gap, there has been overall improvement in the life of each and every person in society.

India’s social status

Considering a broader perspective, globalisation has not affected India alone since 1990s onwards. Globalisation is part of world’s growth process. In growth comparison with other countries, India has performed well.

But, in social sector, India is far behind many emerging economies. India has good framework in MDGs yet it stands below many countries in improving some social indicators.

The reason for rise in inequality is that in 1991 vast majority of the population had low levels of education and health. Unfortunately they were not able to take the advantage of market friendly policy and the growth in jobs that happened. This was the foundational difference between India and other countries

For example, China began its reforms in 1979. Its vast majority of people were literate, had access to good health service, there was equality of land ownership. None of these were in place in India in 1991.

The left out agriculture sector

The liberalisation benefits has not taken place in agriculture sector, labour sector, education, health and other social issues. Privatisation was there but it was not the cure.

The accessibility is the key issue where market can be accessed by only those who can afford it. The above mentioned areas are largely a state responsibility. The state and private sector can handle some of these sectors concurrently, thereby distributing the burden as well as providing basic opportunities for development.

In agriculture, the investment is only 3%. For the 50% of population which in is agriculture, they have only 3% investment and that too is going at the modern sector which is labour displacing. There is mechanisation, farm implements, tractorisation and other things. Hence, agriculture is not generating employment.

The result is that in the unorganised sector of service and industrial sector etc. people are going for employment at very low wages. Yet, they have no protection in employment. Thus, 94% population going in unorganised sector with low skill levels.

The ACER report shows that in last 10 years children of 8th class can’t read class 3 textbooks or do maths. So these 50% of the children either drop out or don’t know any of the skills will remain poor for next 50 years because they won’t be doing any skilled jobs.

Less structural reforms

India hasn’t really begun with the structural reforms which come largely within the purview of state. The investment pattern, the choice of technology is very important for employment generation. What has happened of late is that public sector is in retreat and the private sector is getting the push. The private sector is more capital intensive than labour intensive as it argues that it has to survive in the globalisation period.

  • Thus, 80% of the investment is going to the organised sector.

The organised private sector employment has increased from 7.5 million to 9.5 million but theworkforce has increased from 250 million to 450 million

So, the balance of the 198 million has to actually go to unorganised sector

Today the manufacturing sector is not expanding because of lack of demand from rural areas. To revive it, there has to be labour reforms, land issues tackling, financial market reforms. However, the labour reforms have to be more labour beneficial.

Conclusion

We are the stage where the time has come to take the full benefits of the reforms. This will be possible when sectors like industries, finances become sustainable and deepen where sectors in which they had not reached also get the benefit of 1991 reforms.

There is a need of dedicated reforms for social sector and the rural sector. The rest of the economy can take care of it.

It is not that all states are performing poorly in the post liberalisation period. Some states have lagged behind in becoming a part of reform process and some states like Gujarat, TN, Kerala, AP, have already adopted the best practices. In MP, for past 5 years, the agriculture sector is growing at double digits. Thus, the lack of political will at state levels to some extent is also responsible for slow reform.

India has good policies. The need is that state and districts implement it well so that the outcomes are visible, qualitatively and quantitatively.

The 1991 reforms focused too much on market and hence balance needs to be restored by the state intervention. There has to be a holistic change. Individual and unconnected changes in agriculture or business will not help as the resources are limited. And hence, the resources have to be allocated in such a way that all the sectors have something to gain. More emphasis on agriculture and employment generation through investment pattern and choice of technology pattern changes.  Thus, the future course of action should be focused on greater concern for agriculture and an Industrial policy.

Connecting the dots:

  1. Evaluate the impact of 1991 reforms in 25 years.
  2. The 1991 reforms were market oriented. Critically analyse the need of reforms in social and agricultural sector
Editorials, GS-3, Indian Economy, Uncategorized

The ease of living in India: 25th Anniversary of 1991 Reform

The Hindu

25th anniversary of the 1991 reforms approaches, it would be legitimate to take stock of what has been achieved.

The crisis of 1991

  • In 1991, the focus of the reforms had been on trade, exchange rate and industrial policies.
  • This had everything to do with the immediacy of the balance-of-payments crisis the economy then faced.
  • When the Rao government took charge, it was estimated that foreign exchange reserves would cover up to two weeks’ imports. A rule of thumb is that a country should aim at a cover of about six months.
  • To contain the external deficit, Finance Minister Manmohan Singh had devalued the rupee and reined in public expenditure.
  • He then went to the International Monetary Fund for balance-of-payments support.
  • This would have required courage. Retrenchment, belt-tightening, and devaluation were unpopular across the political spectrum, even within the Congress party — though on the question of how the foreign exchange needed to finance international payments was to be acquired, the critics of the strategy had little credible to offer.
  • Within three years the crisis was surmounted and the programme with the IMF ended.

Forex today:

  • There can be no doubt that the reforms have eased India’s balance-of-payments constraint.
  • India’s reserves today exceed $350 billion, compared to less than $6 billion in March 1991.
  • Moreover, the period since is the longest recorded when the country has gone without a foreign exchange shortage.
  • Earlier one had arisen in every decade, starting with the 1950s.
  • It is also significant that this new-found resilience has been achieved while the economy has got increasingly integrated with the rest of the world.
  • This outcome has gone against the pessimistic prognosis of the time that eliminating controls would suck in imports and jeopardise the balance of payments.
  • This did not happen as exports also rose, though mainly in a sector unimagined in 1991, that is, software services.
  • Of course, the rupee has depreciated very substantially after it was floated.

Great power ambitions

  • However, the reforms were not envisaged as merely staving off a balance-of-payments crisis. In Dr. Singh’s words, spoken in Parliament, they were meant to be the harbinger of “the emergence of India as a major economic power in the world”.
  • This is a worthy aspiration and the crude nationalism at times on display today should not discourage us from nursing it.
  • The question is whether we are on the right path to the goal.
  • If per capita income is taken as the measure then we are still some distance away from ‘great power’ status.
  • The most recent World Bank data show that over 2011-15 GDP per capita — measured in PPP dollars — was 5,700 in India, 11,108 in Albania, 13,206 in China and, yes, 25,638 in Malaysia.
  • Though India’s economy may not at present compare well with that of other countries, it could yet be that its rate of growth has increased after the reforms.
  • While the rate of growth of the economy accelerated after 1991, it had done so twice earlier, first in the 1950s and then in the late 1970s.
  • So the reforms have only maintained an existing history with respect to economic growth.

What of poverty?

  • Here the record is the same as that of economic growth. Absolute poverty has declined since 1991, but this has been the trend since the early 1970s.
  • Essentially, the decline in poverty has kept pace with growth.
  • Thus, mirroring growth of the economy, while the rate of decline in poverty accelerated since 2004, it had already accelerated on the cusp of the 1970s and the 1980s.
  • However, even after a quarter century of economic reforms, approximately a quarter of the country remains poor according to a poverty line that is low by international standards.

It is important to note that poverty measures are dependent upon the definition of poverty.

  • The official index in India, on which the above cited trends are based, measures access to food a little more accurately than it does access to other conditions of life which are at least as vital.
  • Even beyond health and education, the conditions of life are affected by physical infrastructure, which determines livelihood chances and well-being.
  • Major components of this infrastructure would include transportation, water supply and sanitation.
  • It is not as if successive governments have not recognised their significance, but they fail to convince that “more reforms” — incidentally called for by both the Finance Minister and the Governor of the Reserve Bank — will be able to provide them.
  • Structural reforms as liberalisation aim to provide access to and raise the profitability of the private sector. This may be essential at times, but there is a wide swathe of an economy where the market fails to deliver.
  • This it does in the presence of what are referred to as externalities and public goods.
  • Public goods are important as they mitigate the impact of income poverty and inequality.
  • We can think of health, education, public infrastructure and recreational facilities as constituting the space in which we actually lead our lives.
  • A significant transformation of it in India would require both a strengthening of the public finances and a generation of political will.

Natural capital

  • Then there is natural capital.
  • In many spheres of the economy controls had proliferated over the decades to the detriment of both growth and welfare, and their dismantling has resulted in an increase in both.
  • But markets are not always the best way to deal with nature.
  • Deep and smart regulation is necessary if we are to deal with depleting natural capital, of which this is only one instance.

Conclusion:

  • Widespread liberalisation of the economic policy regime was long overdue in 1991, and has played a positive role since, but its impact has run its course and the policy has recognisable limits.
  • Liberalisation cannot address all aspects of the man-made environment and now climate change threatens to change everything forever.
  • We do not have another quarter century to deal with these imperatives.
  • Government must be prevailed upon to match their concern for the ease of doing business with a commitment to the ease of living in India.
  • The official poverty index in India measures access to food a little more accurately than it does access to other conditions of life which are just as vital
  • A quarter century of economic reform has transformed the economy. But governments have been less mindful of addressing social and natural capital.
Editorials, GS-3, Indian Economy, Uncategorized

The risks of creating giant banks

Summary:

The government has decided to push for the creation of a new banking giant by merging the State Bank of India with its associate banks. The quest to create an Indian bank that will be in the league of global giants is an old one. It has been talked about since the 1991 economic reforms. However, not many are happy with this move. Large banks have lost their charm in recent years, especially since the global financial crisis.

  • The merger move comes at a time when the most important issue facing Indian banks—and the Indian economy—is the growing pile of bad loans with the baking system.
  • If the merger of the five associate banks with the SBI goes through, the latter’s assets will jump from about 21.50 lakh crore to 28.25 lakh crore. The number of branches will increase from 16,500 to over 21,500.

Why merger is good?

  • The merger benefits include getting economies of scale and reduction in the cost of doing business.
  • Technical inefficiency is one of the main factors responsible for banking crisis. The scale of inefficiency is more in case of small banks. Hence, merger would be good.
  • Mergers help small banks to gear up to international standards with innovative products and services with the accepted level of efficiency.
  • Mergers help many PSBs, which are geographically concentrated, to expand their coverage beyond their outreach.
  • A better and optimum size of the organization would help PSBs offer more and more products and services and help in integrated growth of the sector.
  • Consolidation also helps in improving the professional standards.
  • The size of each business entity after merger is expected to add strength to the Indian Banking System in general and Public Sector Banks in particular.
  • After merger, Indian Banks can manage their liquidity – short term as well as long term – position comfortably. Thus, they will not be compelled to resort to overnight borrowings in call money market and from RBI under Liquidity Adjustment Facility (LAF) and Marginal Standing Facility (MSF).
  • This will also end the unhealthy and intense competition going on even among public sector banks as of now. In the global market, the Indian banks will gain greater recognition and higher rating.
  • The volume of inter-bank transactions will come down, resulting in saving of considerable time in clearing and reconciliation of accounts.
  • The burden on the central government to recapitalize the public sector banks again and again will come down substantially.
  • This will also help in meeting more stringent norms under BASEL III, especially capital adequacy ratio.
  • Synergy of operations and scale of economy in the new entity will result in savings and higher profits.
  • A great number of posts of CMD, ED, GM and Zonal Managers will be abolished, resulting in savings of crores of Rupee.
  • This will also reduce unnecessary interference by board members in day to day affairs of the banks.
  • After mergers, bargaining strength of bank staff will become more and visible. Bank staff may look forward to better wages and service conditions in future. The wide disparities between the staff of various banks in their service conditions and monetary benefits will narrow down.
  • Customers will have access to fewer banks offering them wider range of products at a lower cost.
  • From regulatory perspective, monitoring and control of less number of banks will be easier after mergers. This is at the macro level.
  • Mergers can diversify risk management.

Why merger is not so good?

  • Merger will affect regional flavour and end regional focus.
  • The argument that size is going to determine the future of the bank in a globalised scenario is facile. Remember the fate of large global banks, which collapsed during the global financial crisis? On the contrary, small banks have survived the crisis due to their nimbleness and the niche areas they operate in.
  • Immediate negative impact would be from pension liability provisions (due to different employee benefit structures) and harmonisation of accounting policies for bad loans recognition.
  • There are many problems to adjust top leadership in institutions and the unions.
  • Mergers will result in shifting/closure of many ATMs, Branches and controlling offices, as it is not prudent and economical to keep so many banks concentrated in several pockets, notably in urban and metropolitan centres.
  • Mergers will result in immediate job losses on account of large number of people taking VRS on one side and slow down or stoppage of further recruitment on the other. This will worsen the unemployment situation further and may create law and order problems and social disturbances.
  • The weaknesses of the small banks may get transferred to the bigger bank also.
  • New power centres will emerge in the changed environment. Mergers will result in clash of different organizational cultures. Conflicts will arise in the area of systems and processes too.
  • When a big bank books huge loss or crumbles, there will be a big jolt in the entire banking industry. Its repercussions will be felt everywhere.
  • Also, India right now needs more banking competition rather than more banking consolidation. In other words, it needs more banks rather than fewer banks. This does not mean that there should be a fetish about small-scale lending operations, but to know that large banks are not necessarily better banks.

What should be ensured by the government?

  • The government shall not have any hidden political agenda, in bank mergers.
  • All stakeholders are taken into confidence, before the merger exercise is started.
  • After mergers, shares of public sector banks shall not be sold to foreign banks, foreign institutions and Indian corporate entities, beyond certain limit.
  • Whenever further divestment (dilution of government holdings) takes place, the government share holdings shall not fall below 51% under any circumstances. This will ensure that the ownership and control of public sector banks remain with the government.
  • The central government shall not rush through the process of bank mergers.
  • The decision with regard to selection of smaller/weaker banks for merger with larger/stronger banks is to be taken carefully and grouping of various banks for this purpose is the key issue involved. The government shall not yield to pressure from any political or social groups.
  • The acquiring bank shall not attempt to dominate or subsume the acquired bank. Good aspects of both the banks before merger shall be combined, in order to instil confidence in all stakeholders and to produce better results.
  • Personnel absorbed from the smaller bank shall undergo brief, intermittent training programs to get acquainted with the philosophies, processes and technology in the new environment. The management must be ready with a good roadmap for this and allot considerable budgetary resources for this purpose.
  • There shall be conscious and organized efforts to synthesize the differing organizational cultures, for the mergers to yield the desired results.

Various committees in this regard:

Various committees appointed by the government and RBI have studied in detail the aspects of consolidation through the process of mergers.

  • Narasimham committee (1991 and 1998) suggested merger of strong banks both in public sector and even with the developmental financial institutions and NBFCs.
  • Even the Khan committee in 1997 stressed the need for harmonization of roles of commercial banks and the financial institutions.
  • Verma committee pointed out that consolidation will lead to pooling of strengths and lead to overall reduction in cost of operations.

Conclusion:

Merger is a good idea. However, this should be carried out with right banks for the right reasons. Underperforming shall not be the only reason for merger. Now that the move has been initiated, the bigger challenge is consolidation in the rest of the banking system. This is tricky given the huge challenges banks face, including the bad loan problem that has plunged many public sector banks in an unprecedented crisis. Also, since mergers are also about people, a huge amount of planning would be required to make the consolidation process smoother. Piecemeal consolidation will not provide a lasting solution and what is required is an integrated approach from all stakeholders including the government.

GS-3, Indian Economy, Uncategorized

N.K. Singh to head panel to review FRBM Act

The Hindu

What happened?

  • The government has announced the constitution of a panel under Former Revenue Secretary and Rajya Sabha MP N.K. Singh to review the Fiscal Responsibility and Budget Management (FRBM) Act of 2003.

Considerations before the Panel

  • It will  consider the possibility of replacing absolute fiscal deficit targets with a target range that may be adjusted in line with the overall credit trends in the economy.
  • The Committee is also tasked with examining the need and feasibility of aligning the fiscal expansion or contraction with credit contraction or expansion respectively in the economy.

What is a counter-cyclical policy?

  • Procyclical and countercyclical are terms used to describe how an economic quantity is related to economic fluctuations.
  • The terms are often used loosely to describe a government’s approach to spending and taxation. A ‘procyclical fiscal policy’ can be summarised simply as governments choosing to increase public spending and reduce taxes during an economic boom, but reduce spending and increase taxes during a recession.
  • A ‘countercyclical’ fiscal policy refers to the opposite approach: reducing spending and raising taxes during a boom period, and increasing spending/cutting taxes during a recession.

Challenges before the economy

  • The challenge for the committee would be not just to define a counter-cyclical policy but also to build it into law considering that few countries have such provisions in their fiscal legislation.
  • The other potential danger lies in providing a wide range that could provide leeway to governments closer to re-election to abandon prudent fiscal practices.
  • But the true test of compliance with a legislation like the FRBM is when the economy is gripped by a slowdown, and governments are tempted to spend to sustain jobs and growth.

Conclusion

  • Considering some of the hard won gains over the last few years and India’s record on fiscal prudence, hopefully, the N.K. Singh Committee would work on a set of recommendations that would lead to a conducive fiscal environment, which would help foster growth.
GS-3, Indian Economy, Uncategorized

Two committees to ensure consistency in tax policies

The Union Government has constituted two new committees:

  1. Tax Policy Research Unit (TPRU)
  2. Tax Policy Council (TPC)
  • Aim: To streamline the taxation policy and administration
  • These committees have been constituted based on the recommendation of the Tax Administration Reform Commission (TARC)

Tax Policy Research Unit

  • The TPRU will be headed by Revenue Secretary
  • It will carry out studies on various topics of fiscal and tax policies
  • It will assist the TPC in taking appropriate policy decisions and shall prepare tax proposal and analysis of legislative intent
  • It will also take decisions on expected increase or decrease in tax collection and economic impact
  • It will comprise of officers from CBEC, CBDT as well as economists, researchers, statisticians and legal experts

Tax Policy Council

  • The TPC will help the government in identifying key policy decisions for taxation
  • It shall aim to have a consistent and coherent approach to the issue of tax policy
  • It will look at all the research findings coming from TPRU and suggest broad policy measures for taxation
  • The council will be headed by Union Finance Minister
  • It shall have 9 members – Minister of State for Finance, Commerce Minister, NITI Aayog Vice-Chairman, Chief Economic Advisor and Finance Secretary
  • It would also have secretaries from the department of Revenue, DEA, DIPP and Ministry of Commerce

Background:

  • Presently, taxation policy and administration is handled in the CBDT and the CBEC
  • But there are also two independent boards Tax Research Unit (TRU) and Tax Policy and Legislation (TPL) wings which are also sending proposals to the Union Finance Minister
  • TARC in its First Report had identified handling of tax policy and related legislation as one of the areas in need of structural modifications
  • In order to bring consistency, multidisciplinary inputs and coherence in taxation policy making, it had recommended establishment of Tax Council supported by a common Tax Policy and Analysis (TPA) unit to cater to needs of both direct and indirect taxes
GS-3, Indian Economy, Uncategorized

Arvind Subramanian Panel on GST Tax Rates

  • The Chief Economic Advisor Arvind Subramanian led panel submitted its report on Possible Tax rates under Goods and Services Tax (GST) to Finance Minister Arun Jaitley
  • Union government had set up the committee under chairmanship of CEA Dr. Subramanian in June 2015 to arrive at GST rates by factoring in the economic growth rate,  taxpayer base and tax compliance levels

Recommendations:

  • Standard GST rate of 17-18%- It is the rate at which most products would likely be taxed
  • Not to specify GST rate in Constitutional Amendment Bill
  • Revenue-neutral rate of 15-15.5%- It is a single rate at which there will be no revenue loss to the centre and states in the GST regime
  • Eliminate all taxes on inter-state trade including one per cent inter-state tax on transfer of goods
  • Two options for states: Single rate of 1% or a range of 17-18%
  • Allocation to states will depend on revenues raised by Centre and states
  • Three-tier GST rate structure:
  1. Essential goods will be taxed at a lower rate of 12%
  2. Demerit goods such as luxury cars, aerated beverages, pan masala and tobacco products will be taxed at 40%
  3. Remaining all goods will be taxed at a standard rate of 17-18%
  • Excluded real estate, electricity and alcohol and petroleum products while calculating tax rates but suggests bringing them under the ambit of GST soon
Editorials, GS-3, Indian Economy, Uncategorized

How reforms killed Indian manufacturing

Article Link

Manmohan Singh, the then minister of finance, ended his budget speech of 1991–1992 with a quote from French novelist Victor Hugo: “No power on earth can stop an idea whose time has come.” He then went on to conclude with the declaration: “Let the whole world hear it loud and clear. India is now wide awake. We shall prevail. We shall overcome.”

  • This speech set the stage for the cleanest declared break from the past that India has seen on the economic front.
  • 2016 marks 25 years since the so-called “economic reforms” were launched in India in July 1991.
  • By now, intentions behind policies and practices that characterized such reforms are well known, viz. radical deregulation, marketization and privatization of the industrial, technological and financial sectors, and an across-the-board induction of foreign direct investment and foreign institutional investment, and so on.

What necessitated such transformation?

Licence raj had the unintended consequence of giving birth to a vast and unending bureaucracy, significant public expenditure and the development of a few large corporations that would dominate the private sector. Besides, exports were encouraged while at the same time imports were discouraged.

What changes were introduced?

The external shock of 1991 set the stage for a fundamental mindset shift. The government no longer selectively removed restrictions and rules, though they were only selectively applied. The government also did away with licence raj, ended many public monopolies, and opened several sectors to automatic approval of foreign direct investment. It was an undeniable paradigm shift, and one that changed India dramatically.

The broad goals of this transformation were:

  1. To increase the productivity of investment of Indian industries.
  2. To improve the performance of the public sector in order to gain a competitive edge in a fast changing global economy.
  3. To achieve greater social equity.

Analysis:

Twenty-five years hence, it is evident that the economic growth rates are transformed; not only was India’s growth in this quarter-century substantially higher than in the past, it was also less volatile than in the high-growth period of the 1980s, when it was hovering at an average of around 6%.

  • As a result, India has taken its place on the global economic stage—both as a key market for most multinational corporations and as a global provider of services.
  • The reforms spurred a new age of entrepreneurship, making India the fourth largest country and one of the fastest growing computer and digital start-up hubs in the world.

However, not all goals have been met:

  • Income inequality has grown, and the ratio between the top and the bottom wage-earners has doubled in 20 years.
  • Conglomerates created during the license raj still dominate many sectors.
  • India is No. 130 in the global Ease of Doing Business rankings.
  • Also, industrial India is plagued by a lack of skilled, educated workers.
  • Additionally, some sectors—such as broadcasting, telecom, retail, and information technology—have leapfrogged in their development cycle, while others such as agriculture, roadways, manufacturing and electricity have yet to change much.
  • Structurally too, despite consensus at the central level—which has transcended governments led by different parties and coalitions—reforms have been deployed in fits and starts and not as a continuous process.
  • The reform mindset has taken hold in states to different degrees, as evidenced by variable progress on state-level fiscal and social indicators (education and health).

Negative effects of these reforms:

On IT:

As part of 1991 economic reforms, the government reduced import duties on all IT hardware purportedly to facilitate software promotion and growth on a globally competitive basis using imported hardware.

  • However, by 1994 our fledgling civilian IT hardware industry folded up. During those days, IT hardware far more technologically sophisticated than the commercial hardware being imported by our software companies was being manufactured by Indian defence, atomic energy and space agencies and even exported to other developing countries such as Brazil, Malaysia, and Indonesia. But, the government failed to take note of this.

On fibre telecommunication systems:

The reforms also dealt a body blow to the indigenous optic fibre telecommunication systems industry, a project begun by the Department of Electronics (DoE) in 1986 with the setting up of the public sector utility, Optel. This was mainly because of the reduction in import duty on fibre from 40% to 10%. With this, large quantities of optic fibre began to be imported. This move affected the domestic industries very badly.

On electronic corporations:

In 1990-91, there were at least a dozen electronics corporations producing a range of high-tech radio communication equipment, industrial electronics and control and instrumentation equipment worth annually around Rs.6,000 crore.

  • However, the reduction in customs duties from 60% to 30% overall, which led to a glut of imports, forced many of these corporations to halt production and become import agents, a phenomenon repeated in the key solar photovoltaic industry.
  • Reforms also led to large-scale import of cell-phone handsets that could have been easily produced here had a policy of phased manufacture been adopted. As a result, the entire market for such handsets was met by unnecessary imports from Day One in 2005-06. In 2013-14 cell-phone imports totalled Rs.35,000 crore.
  • Also, by 2000, foreign brands grabbed 80% of the television sets market, from a situation where 10 local companies catered almost fully to the demand. Six of the 10 indigenous television makers have folded up, with a ripple effect on the electronic components sector.

On heavy electrical equipment industry:

This industry was led by Bharat Heavy Electricals Limited (BHEL). Up until 1998-1999 this industry was doing very well. However from the next year onwards, four Chinese power plant equipment manufacturers began to seriously erode BHEL’s market.

  • This erosion was despite the quality and technical reliability of the Chinese equipment being considerably inferior to BHEL’s products.
  • Besides, the United States, home to General Electric and Westinghouse, had already imposed penal anti-dumping duties on Chinese power plant equipment. Yet, the Indian government merely watched as BHEL lost 30 per cent market share by 2014.

Conclusion:

The above analysis indicates that, despite few positive gains, the reforms have largely led to deindustrialisation. Products that we were manufacturing in the 1990s are being imported now. The negative impact this deindustrialisation has had on employment and on our economy is gigantic. Therefore, the government must now act immediately to halt the destruction of domestic industry on such a massive scale.