The recent NSSO survey results of the PDS and other sources of household consumption, done in with over a lakh households in 7428 villages and 5263 blocks across the country shows an increased dependence of households on the PDS. Some of the salient points in the survey are
a) Rice purchase under PDS had increased to 23.5% in rural areas ( compared to 13% in 2004-05) and to 18% in urban areas (compared to 11% in 2004-05)
b) Wheat / Aatta purchase had increased to 14.6% in rural areas ( compared to 7.3% in 2004-05) and to 9% in urban areas (compared to 3.8% in 2004-05)
c) Sugar purchase had increased to 14.7 % and 10.3% in rural and urban areas ( compared to 10.3% and 6.6% respectively in 2004-05)
And 39% of rural households and 20.5% of urban households depend on the PDS. While some of us would possibly become happy and think that the figures show an increase in the efficiency of the PDS, the results are disturbing considering that , this dependance is because,
a) Survey results show a reduction in levels of employment. The labour force fell from 496.4 M in 2005 to 487.6 M in 2011. Of the employable population, 9.8 % is unemployed, clearly indicating that growth is not leading to increased employment.
b) Food prices have grown manifold in the last few years. Rice price had increased from about 12,890 per MT in 04-05 to 32,320 per MT now ( reaching a peak of about 42,500 per MT in 2008), for a 10 year period the increase is around 222 %. Sugar prices have gone up by around 177%.
These can then only mean that they are signs of growing distress at the lower strata of the population. Possible reasons why we have not seen any major upheaval till now could be the combination of the MNREGS and the PD System. But these cannot be long term solutions. A major rethink on the structure of the economic growth model is needed, with a clear focus on making it truly inclusive - and unless that is firmly in place, any move to cut down subsidies would result in major social upheavals. The doubt is whether, given their firm western schooling, people at the helm have the willingness and capability to come out with economic models for growth that suits this country and its citizens who have become more dependent on subsidies for survival.
Showing posts with label economic policy. Show all posts
Showing posts with label economic policy. Show all posts
Saturday, February 9, 2013
Monday, January 14, 2013
Bending back to please - Deferring the GAAR
As expected, the Government has deferred implementing the General Anti Avoidance Rules by two years - in a bid to 'allay fears of foreign investors and boost sagging FDI inflows'. The Deputy Chairman of the Planning Commission says that this 'will boost the investment climate'
The implication is that FDI inflows have been / are structured to avoid tax payments. It also implies that tax avoidance - the Mauritius route etc is viewed in a benign fashion , while the honest tax payer is penalized. This kind of economic policy making hurts.
Justice J S Verma's observation on the SC judgement in the Vodafone case clearly stresses this point . He says "The effect of benefiting a corporate is to cast a higher tax burden on the common man and when you uphold an illegal tax avoidance, then you cast a higher tax burden on the honest tax payer". True.
While the markets gave a thumbs up with the Sensex gaining 240 points, what is still not clear is how postponement of GAAR will boost sagging FDI inflows. It is not that there is a long queue of investors dying to invest in India and wanting only this change to be done. And notwithstanding what the western schooled economists say, it is plain common sense that FDI is no panacea for economic evils in this country and so, the question is whether the Government needs to bend back to please.
The implication is that FDI inflows have been / are structured to avoid tax payments. It also implies that tax avoidance - the Mauritius route etc is viewed in a benign fashion , while the honest tax payer is penalized. This kind of economic policy making hurts.
Justice J S Verma's observation on the SC judgement in the Vodafone case clearly stresses this point . He says "The effect of benefiting a corporate is to cast a higher tax burden on the common man and when you uphold an illegal tax avoidance, then you cast a higher tax burden on the honest tax payer". True.
While the markets gave a thumbs up with the Sensex gaining 240 points, what is still not clear is how postponement of GAAR will boost sagging FDI inflows. It is not that there is a long queue of investors dying to invest in India and wanting only this change to be done. And notwithstanding what the western schooled economists say, it is plain common sense that FDI is no panacea for economic evils in this country and so, the question is whether the Government needs to bend back to please.
Tuesday, January 8, 2013
Forcing policy changes by threat
Fitch Ratings , the international rating agency has reiterated its negative outlook for India and has warned of a downgrade. The agency complains that structural reform process is sluggish. This is the era of policy making by threat. The agency is concerned over
a)India's economic and fiscal outlook
b)Sharp slowdown in growth
c)persistent inflationary pressures
d)weaker public finances.
Probably these are concerns, but should the government choose to cut back spending to ensure that the fiscal deficit is contained, it will impact the already fragile recovery , and should the central bank increase rates to cut out inflation, it will affect growth. Less taxes may help growth, but will increase the deficit. Cut rates to spur growth and you have the threat of inflation picking up again. Look anywhich way, the Goverment cannot really do much. And this is after the spate of 'actions' taken by the Government.The fact is that we will need to live with this situation till global growth rates pick up. What the agencies would desire is a cut in subsidies (which is only huge in absolute amounts - in relative terms it is not really as big a problem as it is potrayed to be), lowering of taxes and a cut in rates. They forget that this country has a population of 1.2 billion and all that we have been taking in terms of growth has not been very inclusive. NSSO data clearly shows that the growth has not resulted in increased employment - it is a jobless growth.These policy prescriptions by Fitch or S&P will only aggrevate the problem. Running a country is not like running a company. And that is where the problem is.
Ratings are statements of opinions and the track record of thees agencies in rating corporate bonds is decent. What is questionable is their ability to rate other issues (their track record in rating mortgage backed securities is disastrous) and sovereigns. Sovereign debt rating is almost entirely unsolicited and the ratings and policy prescriptions of the three big agencies Fitch Ratings, S&P and Moodys has played a major role in accentuating the EU crisis, forcing governments to consider placing curbs on the timings of release of such un-solicited ratings and curbing ownerships. There is nothing to prove that these agencies have been successful in predicting crises.
What happens is that rating changes affects the ownership pattern of sovereign bonds - as most institutions. Because most institutions have allocations for bond holdings based on the ratings of the bonds, when a downgrade happens, it results in a huge sell off.... well that is what is supposed to happen in theory. But when US had its AAA ratings stripped, its bonds rallied ! Bloomberg reports that 'Predicting the consequences of a rating change by S&P or Moody’s may be little better than flipping a coin, with yields moving in the opposite direction than suggested 47 percent of the time, according to data compiled by Bloomberg in June on 314 upgrades, downgrades and outlook changes going back to 1974'....
So should the Government worry ? Reforms are required. But we should make haste slowly. Policy should not be made under threat.
a)India's economic and fiscal outlook
b)Sharp slowdown in growth
c)persistent inflationary pressures
d)weaker public finances.
Probably these are concerns, but should the government choose to cut back spending to ensure that the fiscal deficit is contained, it will impact the already fragile recovery , and should the central bank increase rates to cut out inflation, it will affect growth. Less taxes may help growth, but will increase the deficit. Cut rates to spur growth and you have the threat of inflation picking up again. Look anywhich way, the Goverment cannot really do much. And this is after the spate of 'actions' taken by the Government.The fact is that we will need to live with this situation till global growth rates pick up. What the agencies would desire is a cut in subsidies (which is only huge in absolute amounts - in relative terms it is not really as big a problem as it is potrayed to be), lowering of taxes and a cut in rates. They forget that this country has a population of 1.2 billion and all that we have been taking in terms of growth has not been very inclusive. NSSO data clearly shows that the growth has not resulted in increased employment - it is a jobless growth.These policy prescriptions by Fitch or S&P will only aggrevate the problem. Running a country is not like running a company. And that is where the problem is.
Ratings are statements of opinions and the track record of thees agencies in rating corporate bonds is decent. What is questionable is their ability to rate other issues (their track record in rating mortgage backed securities is disastrous) and sovereigns. Sovereign debt rating is almost entirely unsolicited and the ratings and policy prescriptions of the three big agencies Fitch Ratings, S&P and Moodys has played a major role in accentuating the EU crisis, forcing governments to consider placing curbs on the timings of release of such un-solicited ratings and curbing ownerships. There is nothing to prove that these agencies have been successful in predicting crises.
What happens is that rating changes affects the ownership pattern of sovereign bonds - as most institutions. Because most institutions have allocations for bond holdings based on the ratings of the bonds, when a downgrade happens, it results in a huge sell off.... well that is what is supposed to happen in theory. But when US had its AAA ratings stripped, its bonds rallied ! Bloomberg reports that 'Predicting the consequences of a rating change by S&P or Moody’s may be little better than flipping a coin, with yields moving in the opposite direction than suggested 47 percent of the time, according to data compiled by Bloomberg in June on 314 upgrades, downgrades and outlook changes going back to 1974'....
So should the Government worry ? Reforms are required. But we should make haste slowly. Policy should not be made under threat.
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