The HINDU Notes – 24th January 2020 - VISION

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Saturday, January 25, 2020

The HINDU Notes – 24th January 2020

πŸ“° India slips two places on Corruption Perceptions Index

Opaque political financing blamed by report

•India’s ranking in the Corruption Perceptions Index (CPI-2019) has slipped from 78 to 80 compared to the previous year, Transparency International said on Thursday, questioning the “unfair and opaque political financing” in the country. Its score of 41 out of 100 remains the same.

•In democracies such as India and Australia, unfair and opaque political financing, undue influence in decision-making and lobbying by powerful corporate interest groups have resulted in stagnation or a decline in the control of corruption.

•The report has revealed that a majority of countries are showing little to no improvement in tackling corruption. “Our analysis also shows corruption is more pervasive in countries where big money can flow freely into electoral campaigns and where governments listen only to the voices of wealthy or well-connected individuals,” Transparency International said. The 2019 CPI draws on 13 surveys and expert assessments to measure public sector corruption in 180 countries and territories, giving each a score from zero (highly corrupt) to 100 (very clean).

•In the Asia Pacific region, the average score is 45, after many consecutive years of an average score of 44, which “illustrates general stagnation” in the region.

•China has improved its position from 87 to 80 with a score of 41 out of 100, a two-point jump.

•“Despite the presence of high performers like New Zealand (87), Singapore (85), Australia (77), Hong Kong (76) and Japan (73), the Asia Pacific region hasn’t witnessed substantial progress in anti-corruption efforts or results. In addition, low performers like Afghanistan (16), North Korea (17) and Cambodia (20) continue to highlight serious challenges in the region,” the report said.

•According to Transparency International, while often seen as an engine of the global economy, in terms of political integrity and governance, the region performs only marginally better than the global average.

πŸ“° Rajasthan govt. to introduce resolution against CAA

It is likely to be tabled and passed in the Assembly on Saturday; Congress issues whip

•Slamming the Centre over the enactment of the Citizenship (Amendment) Act, Rajasthan Deputy Chief Minister Sachin Pilot on Thursday said the State government would introduce a resolution against the implementation of CAA in the Assembly session beginning on Friday. The ruling Congress has issued a whip asking its MLAs to attend the session on the first two days.

•The session will commence with the customary address of Governor Kalraj Mishra. The resolution is likely to be tabled and passed in the House on the second day of the session, which will be extended after a gap for presentation of the State budget next month.

•The Kerala and Punjab Assemblies have passed similar resolutions to build pressure on the Union government over the contentious citizenship law while the ruling Trinamool Congress in West Bengal is planning to introduce a resolution on January 27.

•Mr. Pilot, who is also the Pradesh Congress Committee president, said the State Assembly would request the Union government to reconsider the statute and withdraw it at the earliest. Chief Minister Ashok Gehlot had earlier asserted that the CAA will not be implemented in Rajasthan.

Rahul rally

•The Deputy CM reviewed the preparations for Congress leader Rahul Gandhi’s ‘Yuva Aakrosh Rally’ in Jaipur on January 28 at a meeting held at the PCC headquarters here. He said Mr. Gandhi would raise the “real issues” concerning the people and focus on the fear and unrest among the youths, who were facing unemployment as well as challenges of economic recession.

•“The BJP government at the Centre should listen to the people protesting against the CAA across the country. There is no dialogue with them... They are being attacked and called anti-nationals,” Mr. Pilot said, adding that the peaceful protest was a constitutional right of citizens.

•Mr. Gandhi’s rally, to be held at the iconic Albert Hall where anti-CAA demonstrations are being staged every day, will be attended by Congress workers, youths and students.

•This will be the first in a series of rallies of the Congress leader to be organised in different cities across the country.

πŸ“° India again rejects Trump offer on Kashmir

U.S. President’s comments came after a meeting with Pakistan PM Khan at Davos

•Ruling out any role for a “third party” in the Kashmir issue, India rejected U.S. President Donald Trump’s comments offering to mediate between India and Pakistan.

•The President’s latest offer was made at a joint press appearance with Pakistan Prime Minister Imran Khan at the World Economic Forum meeting in Davos, Switzerland, on Wednesday, repeating a previous offer made in June 2019.

•“We have seen President Trump’s remarks. Let me once again reiterate that there is no role for any third party in the matter. If at all there are any issues between India and Pakistan to be discussed, it should be done bilaterally,” MEA spokesperson Raveesh Kumar said, adding that “the onus is on Pakistan to create a conducive atmosphere free from terror and violence”.

•The Ministry of External Affairs has not yet confirmed a possible visit by Mr. Trump to India on February 24. However, asked in Davos about the planned visit, reported by The Hindu last week, Mr. Trump did not deny it, only replying that as he had just met Mr. Khan, he would not require to visit Pakistan when he comes to India.

•“What’s going on between Pakistan and India — if we can help, we certainly will be willing to. We have been watching it very closely,” Mr. Trump said.

πŸ“° Budgeting for jobs, skilling and economic revival

The Budget needs to provide direction to India’s tottering economy and a boost to aggregate demand and investment

•The forthcoming Union Budget will determine whether India’s economic engine gets the steam needed for a rebound, or the current economic situation becomes even worse. Not just the future of the economy, the future of the country’s youth depends on the Budget.

•The unemployment rate at 6.1% (Financial Year 2017-2018) is the highest in 45 years. The rate for urban youth in the 15-29 years category is alarmingly high at 22.5%. These figures, however, are just one of the many problems, as pointed out by the Periodic Labour Force Survey. The Labour Force Participation Rate has come down to 46.5% for the ‘15 years and above’ age category. It is down to 37.7% for the urban youth. Even among those employed, a large fraction get low wages and are stuck with ‘employment poverty’.

Structural factors

•The prolonged, and ongoing, slowdown, is the main reason behind the depressing employment scenario, though several structural factors have also contributed to the situation. The GDP growth for the second quarter of Financial Year 2019-2020 is 4.5%, the lowest in the last six years, for which a decline in private consumption and investment are the factors primarily responsible. The aggregate investment stands at less than 30% of the GDP, a rate much lower than the 15-year average of 35%. The capacity utilisation in the private sector is down to 70%-75%.

•While the structural factors need addressing, in the interim, the Budget should also focus on reviving demand to promote growth and employment. Schemes like PM-KISAN and Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) are good instruments to boost rural demand. It is really unfortunate that in the current fiscal year, a significant proportion of the budgetary allocation for PM-KISAN will go unutilised. Farmers and landless labourers spend most of their income. This means that income transfers to such groups will immediately increase demand. Further, rural India consumes a wide range of goods and services; so, if allocation and disbursement is raised significantly, most sectors of the economy will benefit. And, the payoff will be immediate.

•Besides, rural unemployment can be reduced by raising budgetary allocation for irrigation projects and rural infrastructure like roads, cold storage and logistical chains. These facilities, along with a comprehensive crop insurance scheme, can drastically increase agricultural productivity and farmers’ income. Moreover, by integrating farms with mandi s, such investments will reduce wastage of fruits and vegetables, thereby leading to a decrease in the frequency of inflationary shocks and their impact.

Boosting urban employment

•In urban areas, construction and related activities are a source of employment for more than five crore people; across the country, the sector’s employment figures are second only to those of the agriculture sector. These projects, along with infrastructure, support 200-odd sectors, including core sectors like cement and steel.

•However, due to the crisis in the real-estate and infrastructure sectors, construction activities have come to a grinding halt. At present, many real-estate projects are caught up in legal disputes — between home-buyers and developers; between lenders and developers; and between developers and law enforcement agencies like the Enforcement Directorate. The sector has an unsold inventory of homes, worth several lakh crores.

•Even worse, multiple authorities — the Real Estate Regulatory Authority (RERA); the National Company Law Tribunal (NCLT); and the many consumer courts — have jurisdiction over disputes. Consequently, restructuring and liquidation of bad projects is very difficult, and in turn, is a main source of the problem of Non-Performing Assets faced by the Non-Banking Financial Companies.

•To revive demand for housing, the Budget can raise the limit for availing tax exemption on home loans. The Rs. 25,000-crore fund set up by the centre to bailout 1,600 housing projects should be put to use immediately. The funds should be used to salvage all projects that are 80% complete and not under liquidation process under the NCLT. Several additional measures can also help. For example, there should be a single adjudication authority.

•The multiplier effects of spending on infrastructure and housing in terms of higher growth and employment are large and extensive. Therefore, the Rs. 102-lakh-crore National Infrastructure Pipeline (NIP) programme is a welcome step. If implemented successfully, it will boost the infrastructure investment over the next five years by 2%-2.5% of the GDP annually.

Private sector’s risk appetite

•Here, the problem is that more than 60% of the planned investment is expected from the private sector and the States. The government does not seem to realise that for private investment, regulatory certainty is as important as the cost of capital. Many infrastructure projects are languishing due to regulatory hurdles and contractual disputes between construction companies and government departments. As a result, infrastructure investment has come to be perceived as very risky. This is the major reason behind non-availability of private capital for infrastructure.

•In this scenario, where the private sector has very little appetite for risky investments and State finances are shaky due to low GST collection, the onus is on the Centre to ensure that the programme does not come a cropper. The budgetary support to infrastructure will have to be much more than the NIP projection at 1.11% of the GDP.

•Bidding and contracting for new roads, highways, railway tracks and urban development projects is a lengthy process. This is also the reason why several infrastructure-linked Ministries like those for civil aviation and roads have not been able to spend money allocated to them in the current fiscal year. Therefore, rather than earmarking budgetary support for new projects, the focus should be on projects that are currently under implementation so as to complete them as soon as possible. That is, funding should be front-loaded. In addition to creating employment, a timely completion of infrastructure projects will help increase competitiveness of the economy.

•The distress among Small and Medium Enterprises (SMEs) is another area of concern. For many products produced by these enterprises, the GST rates are higher for inputs than the final goods. Due to this anomaly, around Rs. 20,000 crore gets stuck with the government annually in the form of input tax credits. This has increased cost of doing business for SMEs, which employ over 11 crore people.

•Next, according to some estimates, there are more than 22 lakh vacancies in various government departments. Such dereliction is baffling when the unemployment among youth is very high.

•Job openings that arise in the private sector put a premium on practical skills and work experience. Here, popular perception is that a good job requires a college or university degree. This misperception is the result of failure of the governments to provide affordable and good quality vocational training programmes.

•To stop the demographic dividend from becoming a national burden, there is a need to invest heavily in skilling of the youth. Besides, the Budget should give tax incentives to companies and industrial units to encourage them to provide internships and on-site vocational training opportunities. This work experience can be supplemented with teaching of relevant theories. at educational centres set up at district levels. Distance education mode can also used for the purpose.

πŸ“° Will the Budget suspend the FRBM’s fiscal deficit goals?

Any fiscal review needs to ideally redirect spending priorities to capital from consumption

•With revenue receipts lagging behind budget estimates and economic growth slowing sharply, there is a real risk of the Centre missing its fiscal deficit target this year. In a discussion moderated by Suresh Seshadri, N.R. Bhanumurthy and Ajit Ranade look at how the Union Budget may approach the fiscal balancing act in the face of a need for a stimulus and the government’s stated commitment to adhere to the Fiscal Responsibility and Budget Management Act (FRBM). Edited excerpts:

How realistic does the FRBM’s goal of reducing the fiscal deficit to 3% of GDP by March 2021 appear now?

•N.R. Bhanumurthy:First of all, I would like to say that the FRBM amendments that were part of the Finance Bill 2018 are very different from the original FRBM Act of 2003. The original FRBM Act had said that you have to bring down the fiscal deficit to 3% and the revenue deficit to 0%. The 2018 Finance Bill actually did away with the revenue deficit target. So, there is no revenue deficit target any more. Rather, we have the target of bringing down the fiscal deficit to 3% and at the same time, we expect that that will bring down the public debt to 40% at the Central level.

•In my view this is a very flawed kind of FRBM roadmap that the Central government has adopted. To that extent I am not really concerned about bringing down the fiscal deficit to 3% because if you look at the last two years, the fiscal deficit has been brought down to 3.3% and the revenue deficit is actually increasing; that itself violates the original FRBM Act.

•In principle, the FRBM is basically an expenditure switching mechanism, where you try to switch the expenditure from consumption to capital. That would lead to higher GDP growth and then lead to reduction in the public debt-to-GDP ratio. What we are seeing is not expenditure switching from consumption to capital, but we are actually seeing a switch from capital to consumption. And that would be growth retarding, in my view.

What is likely to be the impact from a markets, ratings and investment perspective if the Budget does end up signalling at least a temporary suspension of the fiscal deficit goals?

•Ajit Ranade:Since the last quarter of calendar 2018 and the subsequent three quarters, we have seen declining GDP growth to the extent that nominal GDP growth [estimated at 7.5% for the full fiscal year] will be the lowest in the last 42 years. This is an alarming number. Even real GDP growth is very low, below 5%. So, clearly this is evidence of lack of demand — whether it is for consumption, investment or exports — and it requires a growth impetus. In the short run, the biggest impetus comes from fiscal stimulus. Now the thing about the fiscal responsibility act, the fiscal discipline Act, is that it tends to be what is called ‘pro-cyclical’. If you are going to focus on just a number, discrete 3% of GDP, so when the GDP itself is small now, the growth is slower, the 3% is going to be more. And when the GDP is rising fast the 3% is not so bad. You want a higher deficit spending to boost growth if you believe that the government spending is going to help. So, for fiscal policy to be effective, it has to be counter-cyclical. But the way the fiscal responsibility act has been framed, if you are only focussing on a number from year to year, it ends up being pro-cyclical. So, actually the spirit of the fiscal responsibility act should have been over a business cycle. So over a multi-year horizon it should be declining. That is the sign of fiscal discipline. But there should be room for governments to spend extra when needed. That is an important point to note. Also, there is nothing in theory which says 3% is ideal and 2.8% is not and 3.5% is not ideal, there is no basis for saying it.

•I believe that in the Indian context, because of our young demography, our dependency ratio is low. This means there are more taxpayers than retired people. And this is going to remain like this for the next couple of decades, which means that if we have higher deficit spending today to induce growth — what Professor Bhanumurthy said about capital spending — tomorrow’s generation will have to pay it back in the form of taxes. But per capita tax burden on future generations is going to be relatively low or modest because we have the young demography advantage. So I think the bottom line is that there is an expectation that the Budget will do something about providing a fiscal stimulus but there will also be a challenge of remaining within the legislative remit. Also, the legislation itself gives the government some leeway of overshooting by 0.5% in times of rapid fall in GDP growth rate, which is what we are seeing.

Is there a downside to all this?

•AR:The downside is that first of all we need to worry about sustainability... when you go into deficit spending, whether the debt that you take on additionally is sustainable. The young demography and medium-term growth prospects make it reasonably sustainable. And you also need to worry about whether international ratings agencies would react negatively to an extraordinary fiscal stimulus. That’s the balancing you would need to do. On that count I believe India’s ratings have improved, at least the outlook, and I don’t think it’s going to become negative simply because of a higher fiscal deficit this year. In any case you know the world today is awash with so much funds and negative interest rates in most of the developed world, so I don’t think the adverse impact of a rating action, which I think is very unlikely, and higher interest rates for India, including corporates, is a big risk.

Is it time to trigger the FRBM’s ‘escape clause’? And if so, what is the roadmap when the escape clause gets triggered?

•NRB:I think in terms of the escape clause, my guess is that we are actually ‘escaping’ every year. The way we are amending the FRBM Act regularly shows that we seem to have the escape clause within the mandate. The initial FRBM said you need to achieve 3% by 2018; now we are in 2020. That itself shows that the Act has some kind of flexibility. Now we don’t know what the 15th Finance Commission is going to recommend; they’re also supposed to come out with their own FRBM roadmap. I think when the Action Taken Report is placed in Parliament, we will know what the 15th Finance Commission is recommending. But in terms of this analytical issue, the 3% fiscal deficit target, what we are looking at is a general government fiscal deficit of 5.6-6% and that actually came from some of the studies done by Dr. Rangarajan as part of the 12th Finance Commission. And later for the 13th and 14th Finance Commission, we have done some work, where it is clearly evident that if you can bring down the revenue deficit to zero, that means if you are not borrowing for consumption purposes, that itself will bring down the general fiscal deficit to close to 6%. That is how this whole 3 plus 3 has been worked out.

Would a targeted TARP-like programme, which tries to give fiscal support to just the financial services sector, because it is such a key sector in terms of its multiplier impact, work?

•AR:I absolutely feel that is so. It is true in general that capital spending is seen as more productive and better quality spending than consumer spending. But this year is so unusual that we also need to give a consumption stimulus, including in the form of PM-Kisan, enhanced spending for the MGNREGA, and so on. Growth today is constrained due to a collapse in credit. Bank credit growth has fallen steeply and ironically there is so much excess liquidity... in fact, on a daily basis the Reserve Bank of India finds that there is more than 3 lakh crore of excess liquidity. The reasons for the credit collapse is because of the NPA [non-performing assets] situation. NPAs are actually incrementally rising. Plus the lingering effects of the NBFC [Non-Banking Financial Company] crisis and the still relatively high real interest rates. So, I believe it is going to help if some kind of a credit enhancer, or anything that can release the credit flow which is required for growth, is done. There is some discussion about gathering all the NPAs... the toxic ones and into a bad bank. I am not sure a bad bank is appropriate but something like that needs to be done.

•We need to give high priority for recapitalisation wherever necessary, identifying or isolating bad assets and let credit grow. For GDP to grow at 7-8%, we need credit to grow at 15-20% and that includes bank credit, NBFCs, ECBs [external commercial borrowings], everything.

Where would you suggest the whole thrust of the Budget’s emphasis on the FRBM and the fiscal deficit should be?

•NRB:Revisit the FRBM Act, revert to the original FRBM, try to focus more on the revenue deficit and at the same time try to increase capital expenditure. That alone will bring you more growth and fiscal discipline. I’ve been arguing that when you’re going to revise the FRBM Act, please come out with some kind of range target. Not just point targets of 3% you know you’re going to violate.

•AR:I agree with Professor Bhanumurthy that we should not ignore the quality of spending and cost savings or cost efficiency wherever possible before we embark on fiscal stimulus in terms of increased spending. Secondly, remember fiscal deficit is equal to expenditure minus revenue. It’s got two aspects: expenditure and revenue. So let’s not forget the revenue sources for spending as well. For example, I would not let go of the capital gains tax. And the fact that the stock markets are at an all-time high I think negates the argument that LTCG [long-term capital gains] would be detrimental to the stock market. So, don’t let go of revenue sources you have.

•The government has to acknowledge that this is a year when aggregate demand has really fallen and while we wait for consumption, investment spending from the private sector to come up, to revive, it falls on the government to stimulate. And I would say not just capital spending but you might have to look at providing a consumption stimulus especially to the lower incomes. Also, look at avenues to revive financial savings. This is a year where they have very little choice but to provide fiscal impetus and that means we will have to exceed the target and perhaps take refuge in some of the escape clauses. And also wait for the growth revival next year.

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