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Admin 2020-02-03

03 Feb 2020: The Hindu Editorial Analysis

1) On 15th Finance Commission’s interim report: Cognisant of constraints


  • The interim report of the 15th Finance Commission, tabled in Parliament on Saturday, has largely preserved the devolution mathematics of its predecessor, belying concerns of a sizeable cut in States’ share. 
  • The commission has recommended a one percentage point reduction in the vertical split of the divisible pool of tax revenues accruing to States to 41%. This follows the reorganisation of the erstwhile State of Jammu and Kashmir into the Union Territories of Jammu and Kashmir and Ladakh. 
  • While the former State’s notional share based on the parameters for horizontal devolution would have been about 0.85%, the commission has cited the security and other special needs of the two territories to enhance their aggregate share to 1%, which would be met by the Centre. 
  • As part of an effort to balance the principles of fiscal needs, equity and performance as well as the need to ensure stability and predictability in transfers, the criteria for the horizontal sharing of taxes among States have been rejigged. 
  • A crucial new parameter, demographic performance, has been added to the mix. Having been mandated to adopt the population data from the 2011 Census, the commission has incorporated the additional criterion to ensure that States that have done well on demographic management are not unfairly disadvantaged. 
  • And since the norm also indirectly evaluates performance on the human capital outcomes of education and health, it has been assigned a weight of 12.5%. This should address the concerns voiced by several States over the switch to the 2011 Census from the 1971 data.

  • Among the States, with the exception of Tamil Nadu, all the other four southern States see a reduction in the recommended share of taxes for the year 2020-21. Notably, the suggested devolution to Odisha and Uttar Pradesh have also shrunk in percentage terms. 
  • Crucially, the commission has flagged the issues dogging the GST, especially as indirect taxes constitute almost half the total tax revenues of the Union. From the sizeable shortfalls and volatility in collections, to serious cases of fraud, the new tax has yet to stabilise leaving a majority of the States dependent on compensation from the Centre. 
  • The commission’s effort to improve the granularity in devolution to local bodies has generated some interesting results. Urban local bodies, especially municipalities in cities with populations of more than one million, are set to get a larger share of the pie. 
  • However, the increase in the percentage of outcome-tied funds to 50%, from 10%, could prove vexing to the last mile providers of basic services in India’s federal and highly fragmented structure of governance. 
  • The commission has also been justifiably critical of the Union and State governments’ tendency to finance spending through off-budget borrowings and via parastatals. It has done well to ask that such extra-budgetary liabilities be clearly earmarked and eliminated in a time-bound manner.

 

2) On novel coronavirus: No room for panic


  • The Emergency Committee convened by the World Health Organisation (WHO) on January 30 has declared the novel coronavirus outbreak in China as a ‘public health emergency of international concern’, a development that comes after its meeting for the second time in just a week. 
  • The virus, that has been infecting hundreds and killing several each day in China, is now being reported in at least 23 other countries - nearly 14,380 cases as on Sunday - since the committee last met on January 22-23. 
  • There has also been the first confirmed fatality outside China, with a death in the Philippines. As on Sunday, Chinese authorities said 45 more deaths had been recorded in Hubei province by the end of Saturday, bringing the death toll in the country to 304. 
  • All of China’s provinces and territories have now reported cases. But the critical factor that prompted WHO’s emergency declaration is the virus’s human-to-human spread in other countries. 
  • In fact, WHO’s committee reconvened to assess the situation mainly because of local transmission in other countries - a scenario for further global spread. China is also having to deal with another disease outbreak - a “highly pathogenic” strain of bird flu, or H5N1.

  • All about the Coronavirus: In Kerala, after a student who had travelled from Wuhan city, the epicentre of the current outbreak, was found to be infected, State health authorities, on Sunday, reported a second case being detected. This patient too had a history of travel from China. 
  • Besides isolating those who exhibit overt symptoms and conducting contact tracing, there is an urgent need to raise public awareness. This is essential so that they report to a hospital when symptoms show up later or in case of contact with a person who has travelled to China recently. 
  • There is evidence that those who appear to be healthy despite being infected can spread it even during the incubation period. Also, cases have been reported wherein people have not exhibited symptoms in spite of being infected. 
  • In both instances, thermal screening at airports, which is largely helpful, would fail to detect infected people - as in the case of the Kerala patients. Hence, time-tested measures which include handwashing and hand hygiene, wearing protective gear while attending to sick people and covering one’s mouth and nose properly when coughing or sneezing will drastically reduce the infection risk. 
  • There is no clinical evidence whatsoever that any specific drug, either modern or of the traditional system of medicine, can prevent infection or treat infected people. And it is the novel virus transmitted through physical contact or droplets that causes the infection, and not any food items as social media claims.


3) The Budget’s blurred social sector vision


  • CONTEXT: Finance Minister began her speech by saying that the Union Budget was “woven around three prominent themes” - aspirational India,  economic development for all and building a caring society. 
  • Achieving any of these would require extraordinary efforts on the social sector front starting with allocating additional resources for health, education, nutrition, employment guarantee, and social security schemes.
  • GLOOMY ECONOMY: Given the current state of the economy, with decelerating growth, a slump in rural demand and stagnant real wages in rural areas, an expansionary budget with a focus on the social sector would have also made economic sense. 
  • It would have meant more money flowing into the rural areas, creating jobs as well as purchasing power, while at the same time making a dent on the poor outcomes in health, nutrition and education that continue to haunt India.
  • Unfortunately, the allocations for the social sector this year once again fail to deliver for the country’s poor and marginalised. And this is the situation across the board.
  • NREGA: The Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) and the Public Distribution System (PDS) are two important lifelines for the rural poor: 
  • providing employment and 
  • food during times when the market fails them. 
  • The allocation in this Budget for MGNREGA is ₹61,500 crore which is ₹10,000 crore less than the revised estimate (RE) for the current year (₹71,000 crore for 2019-20) and, in real terms, even less than what was allocated last year (₹60,000 crore). 
  • It is obvious that in current times when the levels of unemployment are at their peak, the demand for employment will only increase. But MGNREGA is failing to fully play the role of filling the gap because of poor implementation and inadequate funds. 
  • There is also a need to revise the MGNREGA wages to bring them on a par with minimum wages. All of this would require much higher allocations for the scheme, which are entirely justified as the MGNREGA expenditure is also known to have high multiplier effects through boosting consumption demand in rural areas.
  • INADEQUATE SUPPORT TO THE PDS: On the food front, excess food stocks to the tune of almost 60 million tonnes, high food inflation in recent months and reports of hunger from across the country warranted some announcement expanding the PDS. 
  • This could have been done by universalising ration entitlements in the poorest districts, increasing quantity given per individual, including pulses. 
  • However, what is seen in the Budget is an allocation which is not even enough to support the existing PDS under the National Food Security Act (NFSA). 
  • The food subsidy allocated for 2020-21 is only ₹1.11 lakh crore, which, once again, is slightly higher than the previous year’s RE of ₹1.08 lakh crore. 
  • This is much less than the budget estimate (BE) of last year, of ₹1.8 lakh crore, which is closer to the actual subsidy required for meeting the costs of the grain distributed through the PDS and other welfare schemes.
  • UNWARRANTED DEMAND TO DIMANTLE FCI AND PDS: Over the last few years, the government has been funding the Food Corporation of India (FCI) for this gap in funding through loans from the National Small Savings Fund (NSSF). 
  • As seen in the latest Economic Survey, in FY 2018-19, the total food subsidy released was ₹1.7 lakh crore which included an NSSF loan of ₹70,000 crore to FCI — it does not get reflected in the Budget documents. 
  • Once again, this is not prudent economics, as it only increases the interest burden in the long run; what it does in the short term is that it makes it possible to artificially show a lower expenditure, and hence smaller fiscal deficit. 
  • On the other hand, such mismanagement is then made an excuse to call for the dismantling of the PDS and FCI, which is entirely unwarranted.

  • INADEQUATE FUNDS FOR HEALTH AND EDUCATION: Health and education also did not see any significant increases in allocations this year. The BE for the much publicised Ayushman Bharat Yojana/Pradhan Mantri Jan Arogya Yojana stays at ₹6,400 crore, the same as last year (RE was 50% lower at ₹3,200 crore). 
  • The budget for the Prime Minister’s Overarching Scheme for Holistic Nutrition, or POSHAN Abhiyaan, another flagship scheme of this government, sees a meagre increase of ₹300 crore (from ₹3,400 crore to ₹3,700 crore).
  • The funds allocated for the maternity entitlement scheme, Pradhan Mantri Matru Vandana Yojana remains the same as last year — ₹2,500 crore. There is an overall increase of ₹5,000 crore-₹6000 crore each in the overall education and health budgets which are hardly sufficient to cover for inflation.
  • As we look at the various schemes, including social security pensions, Anganwadi services, mid-day meals and those mentioned above, the same pattern emerges — first, we see a much reduced RE for 2019-20 compared to the BE of 2019-20, indicating underspending in the current year. 
  • This means people are being left out, coverage is low and benefits are irregular; field reports suggest all of this to be true.
  • FOCUS ON PRIVATIZATION: Second, there are some increases as seen in the BE for 2020-21 which barely bring the allocations to the same level as the previous year’s Budget estimates in real terms. 
  • Considering that all these sectors are grossly underfunded in the first place, there is not much hope of seeing anything different in terms of what ultimately reaches people.
  • It is clear that the agenda of the present government for the social sector is for greater privatisation and withdrawal of the state. 
  • This is reflected not just in the low allocations but also policy pronouncements such as introducing the public-private partnership model for medical colleges and district hospitals or the push, in the Economic Survey, for narrowing the coverage under the PDS. This would be a worrying direction in the current context.

 

4) Falling short of aspirations


  • CONTEXT: There were many expectations from the Union Budget 2020: 
  • that it would reverse the falling growth rate, reduce unemployment and rekindle the animal spirits needed to revive private investment. 
  • Does the Budget really hold out the promise on these counts? 
  • To answer the question, the Budget can be judged in terms of its effect on rural demand, investment and private sentiments - all critical elements for recovery. While the Budget offers hope on the last count, it leaves much to be desired on several other parameters.
  • SKILL DEVELOPMENT ALLOCATION: There is a huge, unmet demand for teachers, paramedical staff and caregivers, and skilled workers. 
  • Well-paying jobs are created in the organised services and industry but require candidates with quality education and skills. 
  • Both elude India’s youth due to the poor quality of education and lack of opportunities to acquire practical skills. 
  • Still, the Finance Ministry has allocated a paltry ₹3,000 crore for skill development. Skilling will require massive investment and concerted efforts. 
  • The Budget could have given tax incentives to companies to provide internships and on-site vocational training to unemployed youth. The country cannot afford to let the world’s largest workforce waste this way.
  • FISCAL IMPRUDENCE: The government remains very determined to present itself as being fiscally prudent. Total expenditure is slated to go up marginally to 13.5% GDP from 13.2% of GDP for the current fiscal (revised estimates). The fiscal deficit is pegged at 3.5% of GDP. 
  • Going by the experience with the current fiscal, the deficit level is not paramount concern for the market. 
  • Due to the ‘slippage in tax collections this fiscal year combined with stepped up government expenditure, market borrowings by the government have gone up as much as 15%’. 
  • Still, yields on government securities have not gone up significantly. Neither inflation nor the current account deficit have set alarm bells ringing, as feared by the government.
  • ON FLAGSHIP WELFARE SCHEMES: Indeed, there are plenty of private savings that the government can tap to boost growth and raising public investment. 
  • However, the Finance Minister has opted for a longer route. The Budget falls well short of expectations when it comes to boosting demand. 
  • Budgetary allocations for the Pradhan Mantri KIsan SAmman Nidhi (PM-KISAN) and the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) are disappointing. 
  • The MGNREGA is allocated ₹61,500 crore, which is less than ₹71,000 crore for the current fiscal year. Going by the last year, disbursement under the PM-KISAN will also be less than budgeted, unless the beneficiary base is expanded. 
  • This is unfortunate. These two schemes are good instruments for income transfers to small and marginal farmers, landless labour who spend most of their income and generate demand for a wide range of goods and services. 
  • Higher disbursement under these schemes would have benefited most sectors of the economy. Budgetary allocations for health and education are also well below what is needed.
  • Focus of schemes such as micro irrigation schemes for 100 water-stressed districts is welcome and so is a modest increase in allocations for agriculture and rural development schemes.
  • Rural roads, cold storage, and logistical chains are crucial for the growth of income and employment in rural India, as the multiplier effects of rural infrastructure investment on growth and employment are large and extensive.
  • The allocation of ₹1.7 lakh crore for transportation infrastructure is also a welcome step. But a lot will depend on whether the money actually gets invested or remains unspent as it has happened in the current fiscal year. 
  • HOPE FOR THE INVESTMENT TO MATERIALISE: If the public investment infrastructure actually materialises, it will lend credence to the government’s stated commitment to revive the investment cycle - to spur job-creating growth. 
  • To pull in private investment, the public funding should be front-loaded in under-implementation projects. 
  • Small irrigation and rural road projects are also relatively easy to complete and deliver immense benefits to several sectors.
  • GETTING PRIVATE INVESTMENT: The Budget’s main growth plank is the hope for a deluge of private infrastructure investment through public-private partnership (PPP) and external sovereign wealth funds that have been given 100% tax exceptions in the Budget. 
  • But private investment depends on the cost of capital along with the certainty of returns.
  • Many projects have been mired in contractual disputes with government departments and various regulatory hurdles. All these factors make infrastructure investment unnecessarily risky and render these projects unattractive for investors.
  • BONDS AND STARTUPS: The fundamental problem of infrastructure finance is the asset-liability mismatch which can be addressed only by developing a vibrant ‘corporate bond market. 
  • However, the focus of the Budget is the multiple schemes for government bonds mainly through additional room for foreign portfolio investors and exchange traded funds in government bonds. 
  • These are welcome moves but are not enough’. A well-developed bond market should draw upon domestic insurance funds, pension funds and mutual funds which are capable of investing in corporate bonds across different schemes.
  • The other leg of the “aspirational” Budget is the startups. Some relief on the tax they have to pay and on taxation of the Employee Stock Option Plans is welcome but the reluctance to abolish the angel tax that results in harassment of start-ups and their investors is unfathomable. 
  • Another welcome feature is the scheme to allow the non-banking financial companies into the Trade Receivables Discounting System (TReDS) - an ecosystem that aims to facilitate the financing and settling of trade-related transactions of small entities with corporate and other buyers, including government departments and public sector undertakings.
  • (SMES) SECTOR: To reduce the compliance burden on small retailers, traders and shopkeepers who comprise the Small and Medium-sized Enterprises (SMEs) sector, the threshold for audit of the accounts has been increased from ₹1 crore to ₹5 crore for those entities that carry out less than 5% of their business transactions in cash. 
  • It is also good that the Finance Minister has extended the window for restructuring of loans for micro, small and medium-sized enterprises till March 31, 2021.
  • However, for many products produced by these enterprises, the tax rates are higher for inputs than the final goods. In addition, many SMEs suffer from high taxes on imports of raw material and exports of intermediary services by them.
  • RECOGNITION TO REVIVE THE ECONOMY: It is good that the Finance Minister has recognised the need to revive the dying spirit of the private sector. 
  • Accordingly, she has assured decriminalisation of several civil offences by firms under the Companies Act. 
  • The abolition of dividend distribution tax, and the assurance that tax-related disputes will be considered with compassion might deliver the expected results provided these promises are fulfilled in letter and spirit. 
  • The same logic applies to ‘the scheme to reimburse to exporters assorted duties, such as excise duty on transport fuels and electricity’.
  • CONCLUSION: Everything considered, the future of the economy will turn on whether the government walks the talk in terms of public investment and the promises made to different sections of society including the taxpayer and companies. 
  • When it comes to reviving private sentiments, actions will speak much louder than the budgetary promises.