When will the political class realise that govt freebies offer no lasting solution?

In its new agri-policy, which would be released shortly, the Uttarakhand government is planning to give interest-free loans for setting up self-employment agriculture industry (SAI) units under the sp

'Brand Gujarat' is on the roll and the state government is aiming to reach out globally this time.

The jute industry has urged the ministry of textiles (MoT) to impose a ban on the imports of A.Twill and B.Twill jute bags from Bangladesh as part of its qualitative restriction. It has also requested the ministry for quantitative restrictions, whereby imports from Bangladesh will be limited giving a breather to the domestic jute industry. The country imported around 55,000 tonnes of jute products from Bangladesh, Nepal, China and Pakistan during 2006-07 jute season. The government recently made jute and jute goods imports duty free. According to the industry, qualitative and quantitative restrictions are required to be maintained as rules on these line have already been laid down in the Jute Mandatory Packaging Act (JPMA). In a letter to A K Singh, secretary, MoT, the jute industry has pointed out the events leading to the adverse effect faced by it because of the withdrawal of import duty on the crop and items. Indian Jute Mills Association ( IJMA) chairman, Sanjay Kajaria said, quantitative and qualitative restrictions need to be imposed to plug loopholes on imported jute bags by certain vested interested persons. Moreover, the restrictions would also ensure the stoppage of import of cheap and non-standard quality of jute bags which are not in conformity with Indian and international standards. The industry feels, unrestricted import of the raw crop and jute goods would be disastrous and therefore should be stopped immediately.

Prime Minister Manmohan Singh today claimed the political credit for making a speech that not only led to a Bharatiya Janata Party (BJP) walkout from the Lok Sabha but earned him applause from the Left parties. Days after the government declared it hadn't given up on the Indo-US civil nuclear agreement despite the Left's staunch opposition to it, and Congress President Sonia Gandhi announcing at a party rally in Tripura that the government was not in power because of any favours shown by the Left, the political message of the PM's speech today was: opposition to the BJP was not the Left parties' prerogative. In his speech in reply to the President's address to the joint sitting of Parliament, Singh charged the Opposition with ruining the lives of farmers and giving in to terrorist pressures when it was in power until 2004. Rejecting Opposition charge that the farm loan waiver was announced with an eye on elections, Singh said it was a historic initiative to meet the "unpaid distress bill' left behind by the erstwhile NDA government. "Doubts have been raised about the resources required for this write-off,' he said, referring to questions raised by Leader of Opposition L K Advani and other members asking the government how it could provide the whopping Rs 60,000 crore towards waiver of bank loans to small and marginal farmers. "Let me remind the Leader of the Opposition that what we have done is nothing more than picking up the unpaid distress bill which the NDA government left behind,' Singh said. If bankruptcy is permissible form of business outcome in industry, what is irrational about this waiver, he asked. "It will allow a fresh flow of institutional credit to farmers. It will clean up banks' balance sheets. It will stimulate economic activity in rural areas,' he said. Singh assured the House that the debt relief will be a simple exercise which will be completed by June-end. "It will not be a long drawn affair,' he said. Singh named Opposition leader L K Advani in his speech, leading to a walkout by the Bharatiya Janata Party (BJP) and its allies.

Prior to announcing the Rs 60,000-crore farm loan waiver package, the finance ministry had toyed with the idea of setting up an Agriculture Credit Guarantee Corporation with a corpus of around Rs 5,000 crore to deal with bad loans. The entity would have insured lenders against borrower defaults with banks making less provisioning for such loans and continuing to offer farm loans. However, the plan was dropped after the amount of the waiver and relief package rose to a massive Rs 60,000 crore. "We then thought of giving direct subsidies to farmers as there will be no leakage in this scheme and the benefits will go directly to farmers,' said a government official. Cooperative banks account for Rs 37,000 crore or about 61 per cent of the Rs 60,000-crore package announced in the Budget. Regional rural banks and scheduled commercial banks account for Rs 12,000 crore and Rs 11,000 crore, respectively. The details of the farm package are likely to be finalised by March 25. As the government will implement this package over a period of three financial years, it may make a provision of up to Rs 25,000 crore in 2008-09. Part of the financial assistance due for restructuring of cooperatives according to the recommendations of the Vaidyanathan Committee is also likely to be part of the package, officials say. Cooperatives and banks may also have to share a little burden in case of default loan accounts, which have been written off for prudential accounting norms.

A few years ago, while delivering the Palkhivala Memorial Lecture in Mumbai on the then Finance Minister Jaswant Singh's Budget, P Chidambaram made the perceptive comment that it was the most unfunded budget in the country's history. There was no provision in the Annual Financial Statement on many new items of expenditure. Now, ironically, it is the turn of Yashwant Sinha to point out how Chidambaram's budget is silent on expenditure on such proposals as debt waiver! Any issue of bonds to banks by way of compensation for debt waiver and relief, especially when staggered over three years, will put them in the same predicament as the oil marketing companies burdened with similar IOUs. The bonds are not likely to qualify for investments to meet the Statutory Liquidity Ratio. In case of depreciation in their values, the banks will face the same problems they experienced a few years ago in adhering to prudential norms. The difficulties are cropping up at a time when the system is in transition to Basel-II norms. There is an ominous suggestion in some official quarters that banks that have already made provisions for the overdues of farm loans may not be given the compensation. It will be unfair to them. The overdue loans will still remain part of the gross non-performing assets of the institutions, reflecting on their soundness. The loan waiver does not solve the problem of farmer distress. The inequity in the definition of marginal or small farmers based only on cultivated holding is obvious. According to the budget document, a marginal farmer is one with a holding up to one hectare and a small farmer is one with holdings between one and two hectares. A farmer with, say, five hectares of rain-fed land in Pali Marwar in Rajasthan is economically in no better condition than one with two hectares with assured irrigation families in Ludhiana in the Punjab. But the former will not be eligible for the waiver. The need for adopting an income criterion for defining the size of farms was discussed in detail in the Reserve Bank of India's Report on the Seventh Follow-Up Rural Credit Survey entitled "The Small Farmers

While we all get ready for elections, fiscal rectitude will be a priority for the next government. The curtains have finally come down. The Budget has provided a clear indication of things to come. In a year when 11 states will go for elections and the sword of Damocles for the general elections hanging, a populist fiscal stance is only to be expected. Unfortunately, a populist Budget never fully appeases anyone. Those who get the sops want more and those who do not get them get more upset. This Budget attempts to target the benefits to sections of farmers and urban middle class and when the Pay Commission report is submitted, to the government employees. It is yet to be seen whether the largesse will translate into votes, but surely, these measures will impact for several more years. The Economic Survey was candid about the need for austerity in the prevailing environment, but the Budget does not seem to care. The Budget for 2008-09 has been formulated in the background of moderating growth, a difficult international environment, unimpressive agricultural performance, rising world oil prices, surging capital flows and continued infrastructure bottlenecks. Austere fiscal policy was required not only to provide a counter-cyclical stance but also to keep interest rates low and manage capital inflows better. Acceleration in growth required significant augmenting infrastructure investment. Rationalising subsidies and increase in investment were necessary to accelerate the agricultural growth rate to 4 per cent. It was also hoped that the finance minister would initiate reforms in the excise tax regime to move towards a goods and services tax (GST). To be fair, higher allocations have been made in the Budget for some of the infrastructure sectors though capital expenditure as a ratio of GDP shows a decline. The energy sector's allocation is 30 per cent higher, the roads and transport sector's 22 per cent higher, and communication sector's 32 per cent higher. There are substantially higher allocations to the six components of the Bharat Nirman Programme, which are in the nature of improving connectivity and rural infrastructure. The total plan expenditure in the Union Budget shows an increase of 17.3 per cent over the revised estimate for 2007-08, though this is just about one-half of the level in 2004-05. However, plan capital expenditure shows an increase of just 5.3 per cent, and at 0.6 per cent of GDP this is worrisome. Thus, there has been a significant increase in plan expenditure, but not for creating infrastructure but for various schemes, most of which are in the states' domain. The funds for these programmes are transferred directly to the third level of government or other implementing agencies because the central government wants to claim ownership and clearly, in many places accountability and delivery systems have yet to be put in place. Economists judge the Budget on the basis of its likely macroeconomic impact and policy signals it gives. In the context of surge in capital flows, it was necessary to keep the interest rates low and allow the RBI to undertake market stabilisation to ensure relatively stable exchange rates at least in the short term. That called for containing the fiscal deficit at even lower than the target set under the FRBM Act. For 2007-08, thanks to the buoyant revenues from direct taxes, it was possible to overreach the target, though some expenditure liabilities, particularly on subsidies, have not been fully taken account of. The revenue deficit for 2008-09 relative to GDP is estimated at 1 per cent and the fiscal deficit at 2.5 per cent. Indeed, although phasing out the revenue deficit is mandated in the FRBM Act, it was unrealistic to expect reduction in the deficit by 1.5 percentage points in one year. Budgets are like fashion girls on the ramp; what they hide raises more curiosity than what they reveal. However, most observers have been quick to point out that the fiscal deficit is clearly an underestimate for it does not take account of some important liabilities. First, the Budget estimates do not include the impact of implementing the Sixth Pay Commission. It may be recalled that it was the pay revision in 1997-98 that led to an era of high fiscal imbalances and this alone could add to the fiscal deficit by about half a percentage point of GDP. The second important omission is provision for loan waiver. This is estimated to cost Rs 60,000 crore and or a little over 1 per cent of GDP. That is not all. Despite claims to transparency, the subsidy numbers clearly look under-budgeted. In the case of fertilisers, for example, the Budget estimate for 2008-09 at Rs 30,986 crore is close to the revised estimate for 2007-08 (Rs 30,501 crore). Of course, this does not take account of the Rs 7,500 crore bonds given to fertiliser companies. That is not all. The subsidy accruing to fertiliser companies based on the estimated sale of fertiliser would not be less than Rs 60,000 crore in 2007-08 and to that extent the deficit numbers for 2007-08 are suspect. This is the problem with a Budget prepared on the basis of cash and not accrual accounting. Finally, it is not clear how the finance minister will find an additional Rs 10,000 crore for Gross Budgetary Support for the plan when revenues are estimated to grow at 17.5 per cent and direct taxes at close to 20 per cent even after taking into account the increase in the exemption limit in personal income tax and reduction in excise duties. By this reckoning, the fiscal deficit and off budget liabilities should at least be higher by another 2 per cent of GDP. On changes in tax policy, reduction in the CENVAT rate to 14 per cent, increase in the threshold for service tax and reduction in the Central Sales Tax would help in eventually introducing GST. But the measures stop there. This was the opportunity to extend the base of service tax to all services and universalise input tax credit to convert the CENVAT into a manufacturing stage GST. The tinkering in excise rates has continued and this does not make sense. The policy makers are still to understand that crowding the tax policy with too many objectives only adds to administrative complexity and creates pressure groups. On the whole, difficult days are ahead and while we all get ready for elections, fiscal rectitude will be a priority for the next government, whoever comes to power!

BUDGET 2008-09 IMPACT The Rs 60,000 crore loan waiver for farmers announced in this year's Budget is being projected as a major achievement of Agriculture Minister Sharad Pawar in his stronghold and sugar cane country western Maharashtra. The minister has unleashed a blitzkrieg of advertisements of his Nationalist Congress Party, addressing sugar cane farmers there. On the other hand, Congress leaders in the party stronghold of Vidarbha are on the defensive, even as farmer groups are openly saying that Pawar engineered the package to weaken the Congress in Vidarbha. The political sub-plot to the waiver has once again added to the agony of the dryland farmers who were earlier denied a waiver when the prime minister announced a relief package. The waiver benefits sugar cane and horticulture crops vastly, while the benefits for cotton farmers and those doing unirrigated farming are minimal. For, while loan available for dryland farming is Rs 4,000 an acre, it is Rs 50,000 for irrigated farming, which sugar cane farmers do. Hence the waiver will be a lottery for farmers in western Maharashtra and in Pawar's constituency of Baramati. The advertisements seek to drive the point home. The full page advertisements appearing in Marathi newspapers on March 1, with several pictures of Pawar, trumpet home the fact that the waiver is meant to benefit the sugar cane and horticulture farmers of western Maharashtra rather than the cotton farmers of Vidarbha. Pawar's advertisements in newspaper Sakal's Nagpur edition, for instance, talk about how loans for tractors will be waived. The advertisements in Lokmat and Tarun Bharat, which appeared on March 1, also splashed Pawar's picture and highlighted the waiver saying that loans for pipes, wells, tractors and buying of cattle would be waived. The Sakal advertisement, which says

East-West pipeline is the longest in India. The pipeline to evacuate gas from Reliance Industries (RIL) block in the Krishna-Godavari (KG) basin

Pages