Colombo Telegraph

First Budget Of Modi And Jaitley, 2014 – 15

By S. Sivathasan

S. Sivathasan

It was the best of times for England and the worst of times to France as they appeared in parallel to Charles Dickens. The times are best and worst for the same Modi in Budget 2014–15. Advantageous, since any action after a long spell of paralysis would make a show of movement. But challenges are most exacting as expectations are high, resources least plentiful, prevailing welfarism rife and directional change longing to be introduced.

Direction and New Drive

A budget is often the financial expression of a government’s drive and shift in emphases. The pre-budget increase in train fares and petroleum pricing, noticed the consumer that the leadership of the BJP dares to touch the untouchable. The voter has got an inkling that populism is not a sacred cow and it will be sacrificed for better prospects in the coming years. Finance Minister Arun Jaitley made bold to say that reform decisions will be taken as the exchequer was being burdened mindlessly.

It had fallen to the lot of Hon. Arun Jaitley the Finance Minister to navigate in these trying waters and he did it deftly together with Modi the Prime Minister as able helmsman. Giving motion while providing a ballast of subdued inflation was the first challenge. Imparting direction for the journey with speed in the next eight months was the next. They have done them both with wide acceptance. In presenting the budget, Jaitley was very articulate conveying strong conviction and inspiring confidence. The government’s determination to succeed was the mood.

Total budgeted expenditure is Rs 17.949 trillion equal to $300 billion. Fiscal deficit is pegged at 4.1% of GDP targeting a reduction for the next few fiscals. Pronounced salient commitments are; not to live beyond means, fiscal consolidation and targeting 7- 8% growth in the next 3 – 4 years. Black money is marked for ferreting out and operational efficiency of the budget is to be enhanced. An investor friendly tax regime is being put in place even as FDI will be promoted selectively. The latter is deemed an additionality of resources for domestic manufacture and to boost job creation. All these are outlined with oil price escalation in the backdrop of the Iraq crisis. As engaging is increase in food prices, a perennial spectre.

Abating Food Price Inflation

Even with the best of intentions, a government can have in place the worst of arrangements in the name of food security for her people. This presumably is what has been seen in India in times past. It is unfortunate that it is being continued when people expected unconventional measures to puncture inflation.

The stock of food grains – rice, wheat and maize – maintained by the government is inordinately high and seems an overcautious safeguard. At per capita need of 134 kg per annum, the requirement for a population of 1.236 billion is 165 million tons. An advance estimate of production made in February 2014 is 263 million tons. At a forecast surplus of a near 100 million tons, is the current buffer of 74 million tons at 45% of annual consumption really warranted? Does it not appear an annual over reaction to a haunting ‘Bengal Famine’ of the forties?

What are the grievous implications? The state presents an image as a ‘Hoarder Par Excellence’ not inspiring consumer confidence but striking fears of food grain shortage. Hoard with the government is depletion in the countryside and an imagined scarcity would stalk the land. Taking the cue from such a situation, the trader begins to hoard with the farmer in tow. The vicious cycle spirals prices necessitating consumer subsidies, not to mention state intervention in the distributive system by raiding trader stocks. Releasing redundant stocks is the unconventional solution. When the stockpile is unleashed, there will be a race to sell. The domino effect will be on other food commodities as well. The government’s concerns will veer from chaperoning food prices and shift to managing other areas of inflationary pressure.

Irrigated Agriculture

For India, destined to have 4 times US population, food security is paramount. Agricultural production made to grow by the year and the decade for centuries on end is inescapable. Globally, very great leverage to agricultural production has been through fertilizer use. From 1950 to 2011 consumption had increased 12.5 times. Agriculturists know it well that irrigation is fundamental to wider and enhanced fertilizer use. In the corresponding period as above, irrigated extent more than trebled to 3.25.

The above two factors were supported by improved seed and better agronomic practices. The outcome was world grain production increasing 2.78 times. It needs to be remembered that all this was while world grain land expanded only 0.15 times and acreage per person less than halved worldwide.

Globally 40% of food production comes from 24% of cultivated land that is irrigated. In India, it is estimated that 56% of agricultural output is accounted for by irrigation. The ultimate irrigation potential is placed at 140 million hectares. If this is considered on the high side in the light of future climate change, and brought down to 112 million Ha, what has been realized is 50% and the balance remains to be developed. At the turn of the last century ground water availability was 43%, while the balance was surface water. It is estimated that in Tamil Nadu 49% of water use is well irrigation. Productivity per Ha is 250% more in that. Water storage on ground in tanks and gravity irrigation via canal system is one mode. Water stored underground and brought above through tube wells and open wells by means of pumps is groundwater.

What is India’s food grains extent? 129 million Ha. What is the production forecast for 2014? 263 million tons; ie 2 tons per Ha. Productivity is low, potential is huge and realization lies through irrigation. Dr. Abdul Kalam has argued persuasively for a National Water Grid. Average flow per year in Ganges basin at 525 billion cubic metres, Krishna at 69, Narmada at 45 and Cauvery at 21 give an idea of potential. In dollar terms, incredible billions will be needed. More importantly FDI will be demanded and it is here that attracting FDI needs serious effort.

Linking rivers, creating a grid, harnessing their resources and basing India’s agriculture on them is the key to ridding the country of shortages and to get over the problems of controls, subsidies and anti-hoarding raids.

FDI Inflow to India

Globally FDI has become the engine of growth principally in the major economies. UNCTAD forecasts a cumulative total of $24 trillion by end 2014 and $ 40 trillion by end 2020. The top 2 economies, US and China are also the top 2 recipients of FDI. India now among the largest is not anywhere around. When the new government is clearing the decks, the stage is being set for several areas to attract FDI. India’s need of FDI is Himalayan, yet the current stock is miniscule and hardly anything worthy of mention either in agriculture or irrigation.

For a major food grain producer – among world’s larger ones – limping from year to year cannot be the ideal for centuries on end. For a quantum leap in the delivery of a water grid by linking 20 river systems, at least a 20 year flow of FDI in gigantic proportions would be required. A sustained surplus in agricultural production will eliminate state intervention in pricing and subsidies. This is the answer to food price inflation once the market displaces the state.

On the eve of independence, food grain production was 45 million tons as stated in the 1947 – 48 budget speech. It was 2/3 rd of need for that time. The estimate for 2014 is 263 million tons. Is it impressive as 66 years of growth and when buffer is discounted?

Defence Production

In defence purchases, India is the largest buyer in the world. The first ever policy on India’s defence production approved in 2010, laid emphasis on building a robust industrial base. It encompassed indigenous design, development and manufacture. Defence procurement through import was $15 billion amounting to 70% of total purchase. Out of the remaining balance, procurement from the private sector was a meagre 9%. FDI in defence production had a cap at 26%. The new budget lifts the cap to 49%. This is a major step in greater self-reliance in production with multiple economic benefits, technology transfer and a new generation of employees in the private sector.

India’s defence expenditure for 2014/15 is $ 38 billion while China’s is about 4 times more. In this background BJP stated in its Manifesto that it would encourage private sector participation and investment including FDI in selected defence industries. Technology transfer was envisaged in defence production and domestic industry is to have a greater share in design and manufacture. The budget now spelt out is faithful to the manifesto.

Subsidies

A byword for subsidy is profligacy. A misnomer for the latter is welfare. When a government finds itself unequal to the hard task of delivery and of good governance, its easy recourse is purchase of acceptance through subsidies. When its hold yet slips, the final resort is freebies. A confident government pares them off. As of June, India was saddled with a subsidy burden in excess of Rs 2 Trillion:  Food Subsidy Rs 750 billion, Fertilizer 610 billion, Petroleum 436 billion, Rail travel 260 billion, Cooking Gas and many more. If so much is for present ease what goes into future wellbeing and happiness?

To assure the people of a life of purpose Modi and Arun Jaitly have put their finger into the ill-gotten till of subsidy. In this effort BJP and NDA are together with them. They are engaged in the necessary though unpleasant task of dismantling the subsidy regime. A beginning however is not made even in the current budget. Stronger than the grip of narcotics is subsidy.

Land Acquisition Policy Change

In no country and at no time can development be undertaken without land acquisition. Generous compensation is absolutely justifiable, but a state’s right to acquire is non-negotiable as in Singapore. It is unchallengeable as well. India had an archaic Land Acquisition Law of 1894, under which the government dithered because it was stymied by negative forces. The UPA government enacted a new law in 2013 adding a few more tangles, notably an ornate Social Impact Assessment, more inhibiting than facilitating. Many state governments have criticized it.

The government is now on the threshold of launching India into the developed world. For everything developmental and pointedly for smart cities and infrastructure, acquisition and very swift at that is crucial. Either the new government cuts through or India’s development gets mired even more.

Smart Cities

As a product of development and also as a condition of further modernization, Smart Cities have received critical focus. This area of activity is basic to satisfying the aspirations of an emergent class that is growing and migrating to urban centres. The vision of developing 100 Smart Cities as satellite towns of large cities and modernizing mid-sized cities is getting translated to reality. A sum of Rs70 billion has been provided for this purpose.

As importantly, the smart cities will be linked to transport connectivity. This is considered the cornerstone of the strategy to drive India’s growth in manufacturing and urbanization. Industrial Corridors in select locations along major national highways, HSR routes and freight corridors are marked for implementation. For a composite approach on the above, “The government is committed to reviving the SEZs and to make them effective instruments of economic growth, export promotion and employment generation”. A National Industrial Corridor Authority with HQs in Pune is being set up to coordinate this development with an initial provision of Rs 1 billion. The Master planning of Amritsar – Kolkata for establishing smart cities in 7 states and for master planning of 3 new smart cities in 3 states in the South will be completed early.

Budget Then (1948 – 49) and Now (2014 – 15)

As a matter of academic interest the 1st budget of independent India and the 1st budget of the new government are compared to highlight the contrasts.

The first 12 month Budget was for fiscal 1948 – 49. It was presented in February by Hon. Shanmukham Chetty the first Finance Minister of independent India. In the previous year the budget was for only 7-1/2 months and covered some activities of Pakistan as well. In 1948-49, total budgeted expenditure was Rs 2.573 billion equal to $780 million ($=Rs3.3).

For 2014 – 15, total budgeted expenditure is Rs 17.949 trillion equal to $300 billion. It is an increase 385 times higher denoting the government’s massive engagement in defence, civil administration, welfare and development. External debt then was Rs 360 million or $ 109 million. Now it is $412 billion.

Defence then consumed 44.7% at Rs 1.210 billion. Civil expenditure had the balance 55.3% at Rs 1.362 billion. Changes in and around India, in the world and in sophistication of armaments have now secured Rs 2.290 trillion. After partition and with reconstitution, the army had a strength of 260,000. The Armed Forces with reserves are now 10 times more in personnel and Defence expenditure is 90 times more.

As is seen and known, the landscape of India physical, economic and social has changed considerably. The present budget sets the stage for the next quantum leap.

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