Economic Survey 2014-15 Part 3

9)An increase in public investment would not crowd out private investments in India under the present circumstances.Public investment should be targeted to the sector where it can generate the maximum spillovers-which could well be the Indian railways.

10)The IMF in the World Economic Outlook has noted that increase in public infra investment,if efficiently implemented, affects the economy in two ways. In the short run,it boosts aggregate demand and crowds in private investment due to the complementary nature of infra services. In the long run, a supply side effect also kicks in, as the infra built feeds into the productive capacity of the economy.The two biggest challenges facing increased public investment in India are financial resources and implementation capacity. As regards the later, the trick is to find sectors with maximum positive spillovers-rural roads and railways.This impetus has the potential to crowd in greater private investments and do so without jeopardizing India’s public debt dynamics.

11)Problems in Indian railways: Safety, modernization, cross-subsidisation and consequently high freight charges, along with inefficiency, stressed capacity and weak financial health.

12)Tradability: Rapid growth has seldom been based on the domestic market.Part of the reason for this might be that trade serves as a mechanism for technology transfer and learning, which may have spillovers on related industries. Perhaps a more important part is that trade and exports in particular provide a source of unconstrained demand for the expanding sector.Construction sector, does not require high education levels  and has grown significantly in its resource use over the last three decades. However, the sector is not tradeable and in any case is low productivity, so that moving labour resources to the sector does not considerably improve overall welfare.

13)Manufacturing has not been a positive factor for India.This is due to four broad categories: distortion in labour markets, distortion in capital markets, distortion in land markets and inappropriate specialization away from India’s natural comparative advantage(low-skilled labour) and toward skill-intensive activities.

14)Most service subsectors have a limited capacity to make use of India’s most abundant resource, unskilled labor.This may explain why the share of employment from services has risen so modestly, even while the share of output from services has grown so spectacularly.

15)It is registered manufacturing,not manufacturing in general,which has the potential for structural transformation. In a low-skilled labor abundant country like India, a sector must make use of this dominant resource in  order to offer the greatest possibilities for expansion and structural transformation. Indeed, the experience of East Asia shows that it is possible for countries to start by specializing in low-skill but dynamic activities and subsequently move to more skill intensive production once the growth process has picked up steam.

Economic Survey 2014-15 Part 2

5)The government’s stalled projects are predominantly in infrastructure.Unfavourable market conditions(and not regulatory clearances) are stalling a large number of projects in private sector, and in contrast, regulatory reasons explain bulk of stalling in the public sector.Stalling of projects is severely affecting the balance sheets of corporate sector and PSBs,completing a vicious circle,characterized by an investment slowdown.The biggest lesson from stalled projects situation is that perhaps morethan a run-up problem(over exuberant and misdirected private investment), we face a clean-up problem(bankruptcy laws, asset restructuring etc).

6)An important policy lesson:India needs to tread the path of investment-driven growth(from consumption driven strategy). But highly leveraged corporate balance sheets and a banking system under severe stress suggest that this will prove challenging. Against this backdrop, public investment may need to be augmented to recreate an environment to crowd-in private sector investment.

7)The challenges in banking system fall into two categories: policy and structure.The policy challenge relates to financial repression. Financial repression on the asset side of balance sheet is created by SLR requirement  that forces banks to hold government securities, and Priority Sector Lending that forces resource deployment in less than fully efficient ways. Financial repression on liability side has arisen from high inflation, leading to negative real interest rates and a sharp reduction in households’ financial savings.The structural problems relate to competition and ownership i.e. lack of competition, reflected in private sector banks’ inability to increase their presence.The four key policy recommendations are is in the form of four D’s:deregulate ( in relation to financial repression),differentiate(within the PSBs), diversify(within and outside banking) and disinter( to create more efficient exit)

8) Household savings continue to be the largest contributor to gross capital formation. Household savings have two components:financial and physical, where the later does not lend itself easily to financial intermediation in the economy. The contribution of physical assets to household savings has stood stubbornly above 60 percent all through the last decade.

Economic Survey 2014-15 Part-1

1)Benefits of cash transfer: Faster delivery of service and reduced leakage and therefore fiscal savings.Example:In Andhra Pradesh, MNREGA and social security payments made through AAdhar-lined ban accounts.Households received payments on average 10 days faster and leakage reduced by 10.8 percentage points.

2)Eliminating or phasing down subsidies in neither desirable nor feasible unless accompanied by other forms of support to cushion the poor and vulnerable and enable them to achieve their economic aspirations.The JAM Number trinity-Jan Dhan Yojana, Aadhar and Mobile numbers-allows the state to offer this support to poor households in a targeted and less distorted way.

3)Harmful effects of subsidies:i) Price subsidies are often regressive i.e. a rich household benefits more from the subsidy than a poor household.ii)Price subsidies can distort markets in ways that ultimately hurt the poor-subsidies can distort the incentives of consumers and producers and result in misallocation of resources.eg:high MSPs,freight tarrifs iii)leakage seriously undermine the effectiveness of product subsidies-leakages not only have the direct costs of wastage,but also the opportunity cost of how the government could otherwise have deployed those fiscal resources.

4)Strategies for fiscal framework: The medium term fiscal strategy should be based on two pillars.First, the fiscal deficit should be reduced over the medium term to the established target of 3 percent of GDP.Second, efforts to achieve this objective should be based on firm control over expenditures, most notably by eliminating leakages in subsidies and social expenditures.Further, switching from public consumption to public investment will mitigate long-term inflationary pressures because the later will add to capacity and boost the aggregate supply potential of the economy. India should move towards the golden rule of eliminating revenue deficits and ensuring that, over the cycle, borrowing is only for capital formation.

The One Rank One Pension(OROP) controversy

The retired armed personnels are relentlessly demanding their due right of the One Right One Pension as promised by the ruling government in its election manifesto. They have resorted to measures such as sit-ins and hunger strikes and demanded the urgent resolution of the technical difficulties plaguing its implementation.

The objective of the One Rank One Pension scheme is to provide equal pension to the armed forces having the same rank and length of service irrespective of the date of retirement. In 1973, the government reduced the pension of the jawans of the armed forces from 70 percent to 37 percent . Similarly the officers’ pension was reduced to 50 percent. However, the government assured that the step would not reduce the pension amount since the OROP scheme would be implemented. Till 2015, the assurance was not met with much to the dismay of the armed forces.

The OROP needs to be implemented due to two primary reasons. First, the jawans of the armed forces retire at a relatively early age in mid 30s. This is the period when the family obligations are at a maximum. Moreover, they are unable to join any alternative employment since they cross the age of eligibility. Second, with rising prices, the cost of living has increased dramatically. Therefore, they need economic benefits to maintain a decent living standard.

The government has stated that certain arithmetic issued have delayed its immediate implementation. However, the government would do well to make such data public in the interests of the nation. This would promote healthy debate among the citizens and policy makers as necessary details would be put in the public domain. The government also needs to provide alternative employment to the retired personnels by initiating new policies in conjunction with the private sector . The retired soldiers are relatively young and possess human capital to be absorbed in entrepreneurial ventures.

The fiftieth anniversary of the 1965 Indo-Pak war

The year 2015 mars a special event. It is the fiftieth anniversary of the military battle of the Indo-Pak war that took place in the year 1965. While India celebrates this event as a mark of victory against its rival Pakistan, the opponent too commemorates this day as Pakistan’s defence day. This is due to the fact that India failed to unilaterally win the war against its rival. Therefore, India should introspect rather than celebrate the event while saluting the sacrifices made by our defence forces, as suggested by an eminent foreign relations expert.

One of the major failures in the 1965 war was in the area of intelligence. That said, close on the heels of 1962 Indo-China war, the 1965 war too witnessed a surprise attack by Pakistan. New Delhi was taken by surprise when it learnt that Pakistan had launched an offensive against India along the Rann of Kachchh in its western frontier. Although India launched a spectacular counter-offensive strategy, the inability to deal with strategic intelligence in the first place was a notable failure of its intelligence network.

Second,India lacked strategic planning for the war. It was along the International Boundary(IB) line in Punjab that India captured some areas of the Lahore district in Pakistan.Similarly, India forces captured the Hajipir pass along the ceasefire line in Jammu and Kashmir. Later,in the Tashkent agreement that materialized on the insistence of UN, USA and USSR, India had to forego all its claims and possessions. It is natural for India to follow the policy of ‘non-aggression’ and thus give up the occupied territories during war. However, India failed to pursue the case with strategic view-point and deal with Pakistan firmly in the Taskent meeting in 1966, that was mediated by a third party.

It is notable that India managed to outsmart Pakistan while the Kashmir issue came up at the UNSC meeting in 1965. According to a prominent diplomat who was posted at a member of India’s permanent mission at the UN, India staged a walkout protesting against the speech delivered by the then Prime Minister of Pakistan at the UNSC meeting. This led to the members of the UNSC refraining from discussing the ‘Kashmir issue’ for decades after the war. It is evident from the fact that between 1948 and 1965, UNSC passed 23 resolutions on Kashmir issue. On the contrary, UNSC passed only one resolution after 1965 when it called for respecting the ceasefire line after the Bangladesh war in 1971

Is organic farming the way out?

Organic farming is the model of farming that uses organic resources thus making it an eco-friendly practice. That said, organic farming does not use chemical pesticides and chemical fertilisers. With the growing awareness of the harmful effects of pesticides in the form of high morbidity and life-style diseases, there is a growing clamour for organic farming. Moreover, the need to conserve soil from the impact of chemical pesticides and the consequent run-off resulting in eutrophication and water pollution has given precedence to the adoption of organic farming.  Several states like Sikkim and Kerela have adopted organic farming on a wide scale.

However, it is a proven fact that the productivity of organic farming is much lower and that more organic resources would be required to ensure that there is no substantial decrease in productivity. This may lead to disproportional increase In prices of organic commodities thus making it unaffordable for the common man. Moreover, in the context of India, availability of land is a critical factor. India’s arable land is 2.4 percent of the total arable land in the world. With such scarce resources, India has to feed 1.25 billion of people which comprises 15 to 16 percent of world’s population.

Thus, what is required is a balanced approach that makes a judicious use of organic methods and science and technology.

Smart cities

Smart cities are those cities that strive to promote citizens’ engagement through information and communication technology(ICT) and a well-to-do urban service delivery system. The central government has proposed an outlay of 48000 crore over a period of five years to develop 98 smart cities across the nation. The remaining 48000 crores would be mobilized by the states as well as the private sector.

The reasons for developing smart cities are primarily two-fold. First, it would shift the already existing employment burden in agricultural sector towards non-agricultural sector. The agricultural sector is reeling under disguised unemployment. So, the construction sector in smart city plan would readily absorb the labour force thus providing employment to the needy sections of the society.

Second, the creation of employment opportunities would boost internal demand in the economy resulting in the sectoral growth of the manufacturing sector. It would ultimately help us to realize the ‘Make in India’ concept  that the nation aims to achieve. The smart cities would also indirectly attract foreign investments like FDI in the economy.

However, promoting urban governance holds the key for the success of ‘smart city’ initiative. That said, the central, state and the local government must work in tandem to implement the urban-centric programs. The urban bodies ought to be well-equipped and adequately staffed so as to implement the programs in an efficient and time-bound manner.