Cloud seeding

The benefit of the thrust on the agri and infrastructure sectors will be apparent in the run-up to the 2019 general election

Rather than spend on installing new fittings, freeing a choked pipeline sometimes can produce better results at a far lower price. When Finance Minister Manmohan Singh introduced sweeping reforms in 1991, the structure had become rusty and was on the verge of collapse. The current situation is grave but not critical.The channels of delivery are up but not running satisfactorily. The need was for a plumber to spot the problem and carry out the repairs rather than an engineer to undertake extensive restructuring. The Union Budget for 2016-17, in a sense, is an effort to make the existing system work rather than undertake a renovation. There were four reasons to exercise caution. First, the turmoil in the global economy, with a wide swathe of markets facing slowdown or recession. So pump-priming of the economy might have produced results in the short term but turned out to be counterproductive in the long run. Second, India had faced two consecutive deficit monsoons, affecting consumption and triggering food inflation. Third, banks, the primary conduit to infuse liquidity to oil the wheels of the economy, are far from healthy, creating a credit crunch. Fourth, lack of investment from the private sector, saddled with excess capacity and slump in demand. Against this backdrop, Finance Minister Arun Jaitley had three challenges: control inflation, kick-start investment and address the rural distress. A mediocre book-keeper might have tried to tackle each problem separately. The solution was as much political as it was interlinked. Reviving the rural economy without straining the balance sheet was the prescription to restart the stalled growth.

Never has a budget focused so relentlessly on the agri,social and infrastructure sectors. Hopefully, the highest-ever outlay for the national rural employment guarantee scheme is correctly targeted to create tangible assets. Agriculture and rural allocation has been doubled. Ports and roads are the thrust areas. A regulator will scrutinize disputes in public-private projects. The target to electrify the entire country has been brought forward by a year to May 2018. Providers and users of affordable housing have been showered with duty concessions and deductions. Start-ups, small enterprises and self-employed, too, have been given tax breaks.Taken together, these provisions will boost consumption and generate employment. The amnesty scheme will avoid prolonged litigation and bring black money into the mainstream. 100% FDI in distribution of India-made food will avoid wastage and inefficiencies and keep prices down. The infrastructure and clean climate cess on passenger cars is a better option than dotting the highways with toll nakas. The insufficient recapitalization earmarked for public sector banks is the clearest indicator of the the government’s intention to dilute its stake when the market begins to give a second look at these institutions after a clean-up of their books. Gas pricing will be based on import parity with other fuels, encouraging exploration and production. An insolvency and bankruptcy board will decide the fate of sick companies within 180 days. Deepening of the bond market by allowing private placement, introducing an electronic trading platform and permitting foreign funds into unlisted debt securities and those issued by special purpose vehicles will diminish the need for capital-intensive projects to dilute equity.

The low price of oil has helped the government to stick to the fiscal deficit target this year. Spectrum and coal auctions and PSU divestment proceeds, too, have contributed. On the other side, increase in indirect tax collection due to enhanced service tax of 14% also has played a major role. Service tax is slated to go up another 0.5% due to the imposition of Krishi Kalyan Cess from 1 June 2016. Rationalization of fertilizer subsidy and reduction in fuel subsidy are expected to curtail expenditure next fiscal. The 10% tax on individual dividend income in excess of Rs 10 lakh a year will create a level playing field for the minority and majority shareholders. Promoters benefited hugely from the tax-free dividends. Imposition of need-based cess is a better idea than diverting tax revenues to populist schemes, widening the fiscal deficit , borrowing from the market and, thereby. putting pressure on interest rates. The controversy over taxing 60% of the EPF corpus that is not invested in annuity products henceforth is as bogus as the net-neutrality wailing. EPF is essentially a post retirement safety net offered to private sector employees deprived of life-long pension. It is not an SIP of a mutual fund that accrues capital gains. In short, the increase in rural, social and infra outlay along with fiscal discipline are basically ingredients for cloud seeding to build up a perfect storm in the stock market and sow the seeds for the NDA government’s comeback in 2019.

Market intervention

The campaign for the state to step in to erase inequality can end up disturbing the demand-supply equilibrium

By Mohan Sule

Three recent controversies capture the essence of the tussle between state intervention and market forces. They raise important issues about the extent of freedom various stakeholders should enjoy. Take the 10th anniversary of the launch of the rural employment guarantee scheme. It provided an opportunity to revisit the need for the flagship project of the UPA government Soon after propelling to power, Prime Minister Narendra Modi credited the existence of the scheme to the failure of the socialistic policies of the Congress government. The NDA government pared allocation in the first year but increased it subsequently. Two years of successive deficient southwest monsoon perhaps contributed to the reckoning of its importance. Congress saw in the step-back a vindication of its pro-rural policies.The real reason perhaps is slightly different. The wages boosted the purchasing power of the agri-related population, leading to increased consumption of consumer durables and non-durables. In turn, the shareholders of these companies got enriched, bolstering economic growth.With the spigot turned off, this important constituency has shown withdrawal symptoms, affecting the top line and bottom line of a host of industries. The inescapable conclusion is that the money doled out was in effect a fiscal stimulus as no productive assets were being created. The Modi government is trying to correct the anomaly. What remains unsaid is that the GDP growth since the implementation of the scheme is a suspect. The cash infusion under the guise of the social welfare scheme might have contributed in a major fashion to the resultant food inflation that has left the central bank frustrated.

Even as introspection of the so-called success of the rural social program was under way, the cyber space was exploding with another battle. At stake was the ability to roam the Internet without barriers. Leading the attack were welloff net users, deploring attempts by services providers to offer free access to selective data. The tie-ups were viewed as a win-win deal by the ISPs and the content providers. Due to the policy shift against the backdrop of giveaways to cronies by the previous regime, all spectrum is now auctioned. The run-up in cost to bag circles was sought to be blunted by attracting more subscribers from the hinterland with the offer of free visits to certain sites. The developers, in turn, were aggressively promoting the scheme to get more eyeballs and, thereby, revenues. E-commerce sites are able to offer deep discounts due to supply agreements with manufacturers. What is perfectly okay for one set of players was criticized as an attack on restriction-free surfing of the net. At the forefront of the campaign were promoters of startups who had benefited from network connectivity to showcase their talent. They now feared established players’ edge in seeking collaboration with ISPs. The Telecom Regulatory Authority of India was swayed. What was the byproduct of market forces was nipped in the bud.The losers: the financially weak telecom users who would have graduated to using smartphones and been the potential customers of innovative ventures.

How good intentions get circumvented was amplified by the recent ruckus over mounting bad debts of PSU banks. Pre-1969, there were no government-owned banks. Banking functions were dictated by market forces. To bring into the mainstream the marginalized section, most of the private banks were nationalized. Norms of priority sector lending were introduced despite non-existent returns. Loan melas and loan waivers became the pre-election flavor. Licensing raj ensured that favored capitalists got access to cheap funds. Top appointments were made not based on capability but willingness to bend. The Reserve Bank of India recently directed banks to undertake controlled fusion of the rotten assets. The explosion brought down equities. If liquidity infusion is considered essential to create demand for goods and services and regulatory oversight necessary to create a level-playing field for net users, there should not be any scope to question the government’s use of the public sector to channelize funds to starved sections and create life-long employment. Regulators all over the world step in to prevent deals that would create monopolies or pricing inequality.Losers are the shareholders of enterprises that would have thrived only if they were left alone. Investors’ naively believe listing improves efficiency and prompts profit maximization policies. They have to keep in mind that the risk of distortion of the market might be outside the control of companies.