Thursday, 27 March 2014

India's Economic Manifesto - 1

Continuing from the earlier post, we will attempt to understand, and then co create an economic manifesto for India. This is in the context of the upcoming Indian elections, where this blogger believes that

  • Economic upliftment is the most important objective for the nation.
  • Political parties are either completely ignoring, or not doing justice to an economic manifesto 
  • Where they are publishing manifestos, they are mouthing platitudes like we will create X million jobs, we will abolish poverty, etc etc without a word as to "how".

This series of posts cover only the economic tasks before the nation - not social or political or other  issues which are also important. Since this is a business blog, and this blogger believes that economic advancement is the most important priority for the country, we will focus exclusively on economics.

In order to consider what should be the strategy ahead, we should firstly understand where we are. This post explains India's current financial situation. This is grossly simplified, not exactly accurate, with my own classifications , avoids technical jargon, and is not as economists would put it - but this is broadly correct and will enable us laymen to understand the country's position. They represent only the Central government position - not that of the states.

India's central revenues for the year 2013-14  were as follows

 
Revenues           Rs crores
Income Tax            629,871
Customs            175,056
Excise            179,538
Service Tax            164,927
Non Tax Revenues            193,226
Capital Receipts              36,643
Less States' share          (322,880)
Total Revenues   1,056,381



 India's central expenditure in 2013-14 was as follows



Expenditure      Rs crores     Rs crores
Interest        380,066
Defence        203,672
Food Subsidy           92,000
Fertiliser Subsidy           67,971
Petroleum Subsidy           85,480
Rural Devp Subsidies (incl NRGEA)           78,452
Pensions to Govt staff           74,076
North East Subsidies           24,262
Police           43,148
All Others        144,227
Non Productive Expenditure         1,193,354
Education           67,398
Health           30,145
Railways           30,223
Roads           21,399
Agriculture           17,557
Industry           22,393
All Others           88,926
Productive Expenditure            278,041
Grants to States for Plan Expenditure            119,039
Total Expenditure        1,590,434
Note : Classification of "productive" and "non productive" is my own

As a nation, our revenues are Rs 10 lakh crores and our expenditure is Rs 15 lakh crores. So every year we borrow Rs 5 lakh crores to make up the shortfall. The primary reason why there is inflation of 10% + in our country is this.

In understanding this situation, the following explanations may be helpful

  • The interest line in the expenditure is the cumulative effect of all these deficits which have built up over the years and we keep adding to the burden every year. In the short run, we can do nothing about this item
  • The states' share, both in the revenues and in the funding of plan expenditure is constitutionally mandated. This cannot be touched, in terms of percentage.
  • This represents only the Central position. They do not consider state revenues and expenditure . Most states run bigger deficits than the centre and have major subsidies and freebies in their expenditure. There is no ready consolidation of central & state finances - so I am not able to present that position to you.

You can now perhaps understand why this should be the starting point for any manifesto. If a party says they will spend $1 trillion on infrastructure (as the Congress Party said yesterday), you can clearly see that this is bullshit - there is no money. This is also the reason why the BJP plank of replicating the Gujarat model is questionable - how will they create infrastrcuture when the financial position is as bad as it is now - there is no money to spend on infrastructure unless hard decisions are taken on non productive expenditure. No political party is explaining this reality to the voters.

We will begin our own manifesto from here. We will not only present a manifesto, but also how this can politically be sold to the voters - for without that, all this will only be theory.

Readers are  invited to offer their ideas.

14 comments:

Prats said...

You have framed the exact thoughts I have had in mind. There is so much of rhetoric and propaganda noise around elections that hardly anybody is considering the economics.

Ramesh said...

@Prats - Indeed - nobody bothers about plans and concrete policy views. What sort of a democracy is this, when we vote for persons rather than policies.

What's your view ? What do you think can be the action from here ?

Shy said...

Your post clearly demonstrates that a huge chunk of our expenditure is on subsidies and yet 60% or more are below the poverty line!!

This tells me that the money allocated does not reach the intended and lines the pockets of the politicians who pretend to care!!

These are what need to be cut, while we instead of feeding, enable them to feed themselves.

By encouraging manufacturing and other service industries and of course agriculture,we push people to earn their living!!

We bring all the rich agriculturists under the tax bracket coz this tax break really benefits only the rich ones and rarely is the poor man benefited.

I also believe that these are tough things to do, but i do believe that a decisive leader who can show the people a vision can take them along on this hard fiscal journey.

The next 5 years could lay the foundation for a strong India or not.... will depend on the kind of govt we end with - a clear majority to push through reforms or another haggle waggle team that will screw us all further.

Anonymous said...

Looking at the numbers, i feel there is a deficit in revenue area, there are lot of areas government missing its revenue. if we could calculate the amount of tax exemption, tax evasion, revenue loss in auctions we may realize the real economic wealth of our nation. but i know this condition is impractical in India, so let me start alternate thinking. government borrowing strategy shall start from inside the country by forming institutions for development in infrastructure, education, health, agriculture, Industrial setup & railway. there are success stories in public-private partnership, law on this shall be adopted more viable to economic development and security for public. need to thing lot on borrowing inside money.

On fertilizer, we shall invest in R&D rather than spending for fertilizer subsidy. many organic wastes like flowers in temple, vegetables in markets, food wastes can be recycled to organic fertilizer.

we Indians have the attitude to appreciate only foreign products right from fertilizer, electronics, automobiles, technologies etc, resulting us to import lot. we need to create our own products in every segment to world standard. Indians create windows, apple & many software but India don't have mentionable product in soft or hardware. Indian's develop oil&gas in gulf, but we couldn't research for our country. medical is other area, like may. encouragement in R&D is priority for any government and basic duty of every citizen.

This is just a random thought came in mind. will participate after reading more details if work permits me.

The Million Miler said...

No matter what you do, there is one ingredient that is vital to national revival - Ethics and Morals.The business suits, safari suits, Gandhi topi and Khaki uniform along with the screaming/teeming newswallas form a vicious alliance and have hijacked any form of rectitude.And all our schemes remain on paper as pipe dreams. People often mock my decision to live in a remote part of the world near nothing but the Antarctic wastes, but look at the statistics - with the Scandinavians, Kiwis pretty much are in the top 5 ranks on things that matter- Absence of corruption, human rights, gender equality, saftety and personal security, enrolement in schools and so on. Which other country would have had the PM in the court hearing on a speeding ticket? (or for that matter which other country has had a PM who finishes parliament at 5pm, rolls up his umbrella, walks to Wellington station, jump into a suburban train to go home)
We had a tryst with destiny at the dead of the night. And our polity continues to thieve operating in the middle of the night. Bring conscription to instill a spirit of National Identity- that is my two cents on the economic manifesto

Sriram Khé said...

Hey, that is a pretty easily understandable summary of income and expenditure.

1. Interest plus Defense = almost a third of the expenses. Here in the US, the two amount to about 22 percent.
Easily understandable given that the Indian government has been running a wider percentage deficit compared to here. As long as the deficit is huge, the interest will keep sucking money away from productive investments. Which means then ... leads to the following ...

2. Food subsidies rarely ever reach those really in need. Even assuming they do, it is bizarre that the food subsidies only slightly exceed the pensions to gov. staff. That alone is a clear indicator that the pensions are way out of whack and are clearly unaffordable in a country with tremendous needs. (Greece is the word!)

3. I understand from your footnote that productive and unproductive are your own definitions. But, given that you have put things up for debates in order to develop a manifesto, I would seriously urge a rethinking. Food subsidies and rural development subsidies are not by themselves unproductive--it is the sheer corruption that renders them so. There is a wonderful example I use in a couple of classes--providing free bicycles in Bihar to girls in the school-going ages. This might under your rural development subsidy, for instance. But, that free bikes have done wonders (data analyzed by economists in univs here in the US) to boost attendance and graduation rates. And female education goes an incredibly long way towards economic performance and towards the "non-economic" factors that the New Zealander brings up. (BTW, yes, I agree with him, again!)

A good start, dude!

BTW, the source of the data? Might help those who decide to take up your challenge to develop a manifesto.

Ramesh said...

@Shy - Agree with all your prescriptions and we'll develop them in subsequent posts.

@Anon - You are right in that we can do a lot more on the revenue side. Not by borrowing, but by enhancing tax revenues. And the route to do that is through growth. Subject of next post.

@Kiwi - Oh yes, Morals and Values are a key determinant of the success of any society. But even without movement on that front, we can do a lot on the economic side.

CONSCRIPTION ??? Oh no :)

@Sriram - Source of the data is government's own website - they do a great job of publishing lots of details about the economy. Here is the budget link - http://indiabudget.nic.in/

Yes, there are some which I have classified as Non Productive , which are actually productive. But the the Rural develop subsidy is mainly NRGEA which is Rs 33000 crores out of the Rs 750000. Its a straight dole. Nothing productive about that and one of the worst moves by the previous government.

Expenses like the bike example you give (or the mid day meal scheme which has been the most effective of measures for promoting education), come under the Education line of the expenditure.

Of course, I would never argue that all subsidies should be abolished . We'll develop that theme when we discuss strategies for curtailing expenditure.

Thanks for participating in the debate. Although you are not a citizen, its nice of you to devote energy and thought into this.

Gaurav Jain said...

That was really eye opening. I am a CA and even I never understood our country's finance report this well, mainly because its very tedious and cumbersome. But when you put it in such a simplified manner, it becomes mighty clear that it makes no economic sense. The sources of income fall vastly short of the proposed expenditure. PERIOD. That's the bottom line.
Will definitely look forward to more on this.

The Million Miler said...

Conscription does not necessarily mean carrying a rifle and killing a mythical enemy across the border! You can still conscript young people to work on infrastructure development!

Ramesh said...

@Gaurav - Yes, indeed that is the bottom line. Share your views on what we can do as well; there is no right answer and every Indian must develop his or her own considered view of what should be the future.

@Kiwi - Oh that way - OK, here I come :)

Pranav said...

In classic b-school style, I am trying to play with the numbers and see what I can do but the way I see it, we're gonna have to continue borrowing for a bit, and maybe reallocating funds from a few expenditure buckets to others - at least in the short term. I'd love to see a post that talks about the implications of shifting funds out of one bucket to another. I think you mentioned that you are going to devote a post to strategies around curtailing expenditure. I feel like I cannot contribute anything meaningful until I read that post.

Ramesh said...

@Pranav - Oh yes you can. Give it a try and state your case.

In your own country replace subsidies with Medicare and Social Security, bump up defence expenditure and the situation is not dissimilar.

Anonymous said...

Let me correct my word borrowing to utilizing inside money by forming new institutions with private participation which will enhace the development and reduce goverment finance burden.

Ramesh said...

@Anon - Yes understand your view and I agree.

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