Perhaps the most closely watched day in the Parliamentary Calendar is Budget Day. This is not merely because one gets to know the rates of marginal personal income tax, but because the budget is an articulation of the country’s economic and policy vision. The Finance Minister presents his government’s view on key issues affecting the country and the necessary steps taken to counter them. Provision of adequate funds is a necessary condition for alleviating national problems and relentless focus on monitoring efficiency of spends and tracking nature of outcomes is the sufficient condition.

Unfortunately, the Budget nowadays is reduced to a mere accounting exercise – increase allocation to one ministry by 5%, combine three old schemes and rechristen it as a new scheme, take sly potshots at your predecessors’ estimates, use sleight of hand to deliberately obfuscate budgeted estimates versus revised estimates versus actuals, etc.

In my opinion, the government should lay out its 10 big priorities and leave no stone unturned to address them. Lower order issues can be tackled on a business-as-usual basis. For these 10 big issues it should – figure out a funding mechanism first and then expeditiously implement the necessary reforms to make sure amounts are efficaciously spent. An output focused approach (as opposed to an input focused approach) would do us a world of good. Let us take a stab at what these priorities should be:

  • Prudent macro-economic management ushering India to an era of investment led growth at low inflation
  • Increasing India’s agricultural productivity several fold
  • Provision of 24×7 power at all homes, offices and industries
  • Quality public transportation (roads, railways, civil aviation)
  • Availability of affordable housing options
  • Establishing India as the new capital for labor-intensive, cost-competitive manufacturing
  • Education and skill-development for 300 million Indians for the next decade
  • Omnipresence of quality healthcare delivery systems and adequate nutrition for all
  • Modernizing our defense forces and police personnel
  • Capitalizing on India’s potential for becoming a global tourist hotspot

Section I: Prudent macro-economic management ushering India to an era of investment led growth at low inflation

Historically, countries which have succeeded in sustaining rapid growth for decades and induced a step change in standard of living for its citizens, started with massive infrastructure build out. This was seen in the United States post Civil War in the 1870s, then again in the 1930s post Great Depression under President Roosevelt’s New Deal, Japan under Prime Minister Hayato Ikeda in the 1960s and China under Deng Xiaoping’s reign from 1978. Investments kick-start a cycle of growth, enhance aggregate demand, raise incomes and standards of living. Consumption led growth, in contrast, tends to be inflationary and generally can’t be sustained beyond a few years. Consumption led growth is often on account of subsidies and as economists call it – “helicopter drop of money” (e.g., farm loan waivers and NREGA like schemes). Let me emphasize via the graph below:

  • NDA’s [March 99-May 2004] clear focus was on infrastructure build-out and defense upgradation – this initiated growth and was sustained at low inflation levels (see data row below)
  • Contrast this with UPA’s tenure [Post 2004] which has seen indomitable inflation, high subsidy regime and low investment [taking capex and defense spend as a proxy for government investment]. Even budgeted estimates for subsidies don’t seem to hold much weight. For instance, Rs. 43,580 was budgeted for petroleum subsidy for FY13 by Pranab Mukherjee. Mr. Chidambaram silently “revised” it to Rs. 96,880 cr or 2.2x the originally stated amount! As more money is diverted away from much needed capital expenditure into subsidies, growth unsurprisingly comes down to a grinding halt (4.5% of GDP in Q3FY13), as textbook economic theory would predict.

Source: RBI (Table 234: Select Fiscal Indicators of the Central Government), Economic Survey of India 2013

Such pernicious fiscal management in turn has far-reaching ramifications on our deficits, interest rates and currency. The need of the hour therefore is to create an environment for attracting investments via eliminating regulatory uncertainty (e.g., retrospective taxation), ending policy paralysis and granting approvals to much needed projects held up on the whims of certain ministries. The Economic Survey reports an “implementation stalled” status for over 600 projects (valued at $150B) today. We were told that we would have an all-powerful National Investment Board to steam roll through these bottlenecks and immediately give an impetus to investments. What we in turn got was an impotent Cabinet Committee, which has just met twice so far.

Section II: Increasing India’s agricultural productivity several fold

The farm sector barely finds a mention in our budget discussions on TV and columns in newsprint, despite 62% of Indians directly earning their livelihoods from agriculture & allied livelihood. The sector is in dire straits, let me explain:

  • Net sown area has stayed flat since 1970 (140 million hectares in 1970 => 141 million hectares in 2012)
  • 62% of Indians engaged in agriculture contribute mere14% to the GDP
  • For like-to-like crops, our yields are a fraction of what top producers are able to sustain. For example: Rice – 2130 kg/hectare in India vs 13,500 kg/hectare in China i.e. 6.3x!
  • In allied activities including animal husbandry, yields of desi bovines for instance are <1000 kg per year vs 7,000-10,000 kg per year in case of foreign breeds. Yields and incomes can be dramatically increased if cross-breeding is done at a larger scale.
  • There was a decline in food production this year (see chart below), factor in wastage/spoilage due to FCI’s woeful warehousing infrastructure and poor rural roads, effective available food grain is significantly lower

Source: Economic Survey 2013

Interestingly, some analysts suggest that disproportionate increases in MSP mitigate any need for farmers to focus on improving productivity and yields. Short term enhancements in MSP is of course easier for the government to implement than encouraging long-term productivity enhancement practices via better soil health management, increasing mechanization, better water utilization and removing skewed subsidies that encourage urea usage.

This myopic vision of the government invariably hurts the small subsistence farmer the most, since his income depends directly on the volume cultivated and because he has no other sources of income in contrast to large farmers.

Section III: Provision of 24×7 power at all homes, offices and industries

Barring a few states (e.g., Gujarat) and hotspots (e.g. Delhi, South Bombay), very few states provide its citizenry and industry access to reliable 24×7 power. The situation is particularly grim in states where Chief Ministerial aspirants have won elections by announcing deleterious “free power” schemes. In certain states, the status is so deplorable that industries are asked to take “power holidays” for 3 days a week i.e. 12-15 days a month! Imagine the impact on production, revenues and profits! Not surprisingly, wherever possible, industries are moving out of such states. As a wise soul once said – “A free power state invariably turns to a power free state”.

Let’s look at a few numbers:

  • 9MFY13 number reveals less than 55% achievement rate vs target. Let’s bear in mind that our governments are not known to set ambitious targets.

  • Page 235 of the Economic Survey 2013 says – “11th Five Year Plan initially envisaged a capacity addition of 78,000 MW, the target was revised to 62,374 MW and a capacity addition of 54,964 MW has been achieved”. This sly downward revision of targets to show a higher “achievement” figure is a trick mastered by the Govt.
  • Many obstructionist NGOs who claim to fight for environmental rights but actually fight against development regularly hold up projects by needling ruffians, riling up locals and filing petitions in courts over petty matters. That approval for land acquisition, right of way, environmental clearances etc get stuck in ministerial and bureaucratic red-tapism and turf-wars even without overt or covert involvement of obstructionist NGOs is also undeniable. This graph lays out the story rather well – over 600 projects are now stalled amounting to over Rs. 7500 billion (~$150Billion); The secular decline in new project announcements is worth paying attention to, as well:

  • On the broader point of energy security, we have to think strategically as a country – exploration activities for petroleum and natural gas should be enhanced immediately. India is said to have reserves of shale gas as well, which might be worth expeditiously exploring. Production and refinement capacity should be beefed up to the optimum levels to minimize oil imports. After the necessary processes, gas can be supplied via pipes to homes instead of the inefficient mode of LPG cylinders. Quality public transport systems can significantly reduce demand for fuel for automobiles as well.
  • Srivatsa Krishna, in his article in Times of India lays perspicaciously analyzes all the issues plaguing our power sector (I’m highlighting just three):
    • Significant fuel supply risk where Coal India is unable to meet the demand and yet holds power producers in a happy Stockholm Syndrome
    • Setting up a power plant involves 12 statutory and four non-statutory clearances, which takes about 5-7 years to complete. The uncertainty around it tosses every economic logic and calculation of any sane investor out of the window
    • Just five states— J&K, Haryana, UP, MP and Tamil Nadu — account for 80% of the cash losses of the utilities and for aggregate technical and commercial losses anywhere between 35% to a whopping 70%
  • The solutions aren’t far-fetched:
    • Immediate steps to be taken to quell transmission & distribution losses (euphemism for power theft). Gujarat Government has taken pioneering steps and filed 100,000+ FIRs against power thieves, as Srivatsa notes.
    • T&D equipment including transformers, cables etc should be modernized to minimize losses. Privatization of distribution pan India should greatly help in this endeavor. Sick PSU run DisComs can’t be expected to invest when they have to borrow to meet their working capital needs.
    • Gujarat has also segregated feeders and is a guiding light for shift to an open access regime eventually.
    • Power tariffs haven’t been raised in many states for political considerations and state SEBs continue to bleed. Tariffs could be gradually increased with a path to profitability for these SEBs without necessitating a taxpayer funded bailout.
    • Pooling could be done for coal-imports from Indonesia and other places
    • Fires at Jharia and other mines should be addressed immediately to prevent an ecological and human tragedy.
  • If there’s one sector in India that’s likely to hit the subprime zone, it is the power sector. Yet, the FM’s speech on 28th merely had four lines for sector.

Section IV: Quality public transportation (roads, railways, civil aviation)

China, in the last five years alone, has built 609,000km of new roads, 19,700km of new rail lines (of which 8,951 km were high-speed rail), 31 new airports and 602 shipping berths for 10,000-ton ships. For us, investing in quality public transportation is a no-brainer and will see no opposition from any quarter. Despite being so blindingly obvious, over the last 9 years, we haven’t seen any significant movement or focused attention in this direction at a pan-India level. As mentioned in the earlier section, quality public transportation systems can significantly help reduce our demand for fuels for running our cars, as more people switch to public transport. Better highways would help deliver better fuel efficiency for trucks as well as well as minimize wastage of food products (e.g., fruits) due to frequent jerks between the farm and the suburban warehouse. These interventions in turn will solve our supply-side inflation woes to a substantial degree.

IV. A. Roads:

  • As per Bhagwati & Panagariya, “Despite the excellent beginning of the National Highway Development Programme (NHDP) under the NDA, the highway construction programme languished under the UPA“. There has been a drop off a cliff to 4.7km per day on average ever since (12,000 km between 2005-06 and 2011-12 in 2555 days i.e. 4.7km/day) in part due lack of ownership driven by frequent reshuffling of the portfolio and in part driven by disagreements between Ministry and Planning Commission. Kamal Nath, ex Road Minister was quoted in the Economic Times saying – “When I joined this ministry, everyone told me that the Panning Commission will not let you do it”. He went onto describe the Planning Commission as “a bunch of armchair advisers who have lost contact with ground realities”.
  • Issues relating to land acquisition, right of way, environmental clearances and spiraling input costs aren’t unique to India. What is necessary is due process and sanctity of contracts.
  • While arguably state and urban roads fall under the state governments, it wouldn’t be a stretch to say we still have a long way to go. What is worrying is, we don’t even see master-plans for easing traffic woes in many cities (e.g., road-over-road, express links to airports etc). The few projects such as the Bandra-Worli Sea Link (later rechristened as Rajiv Gandhi Sea Link) that eventually see the light of the day are marred in controversy over cost over runs (4x initial estimate), significant lags behind project schedules (5 years), debt traps and repeated allegations of nepotism and corruption.

IV. B. Railways:

For longer distances, railways are perhaps the most efficacious mode of transportation for goods and passengers. While we inherited a decent railway network from the British, our systematic neglect has ensured that railways are the last resort for travelers. People nowadays have to think a number of times before taking the railways. Unfortunately, those who can’t pay for airfare or have to go to places without air connectivity have no alternative but to use the railways. It is imperative that we don’t let railways go the Air India route.

  • Our railways network (measured in route kilometers) has seen an abysmal 20% in the last 60 years (that’s 0.3% per year: 53.6K KM in 1951 to 64.6K KM in 2012). It looks like we are rather satisfied with what we inherited from the British. China in contrast has added almost twice (19,700km) in the last 5 years than we did in the last 65 (11,000 km)!
  • Freight accounts for ~70% of revenues, yet the lamentable infrastructure forces them to traverse at a peak speed of under 50kmph vs peak speeds of 300kmph in China and 320kmph in Western Europe. China has laid out 9000 km of high-speed network in the last five years alone vs zero for India. Yes, zero. Zilch. Cipher. While the usual defense is “Democratic discount”, I doubt if the discount is 100%. After all, there’s only so much ideology in arguing for or against a high speed rail network.
  • The 12th Plan target for overall infrastructure investments is $1Trillion (~Rs. 55 lakh crores) of which over ~Rs. 5 lakh crores (at today’s prices) is to go to railways. Planning Commission Deputy Chairman Dr. Ahluwalia though, rather candidly said – “I don’t regard the $1 Trillion figure as some kind of figure written in stone“. Mind you, he said this within a few months of releasing the 12th FYP document. Why announce something and then trivialize it a few months later? I can understand if political compulsions force certain MPs to behave in this manner. But the Deputy Chairman of Planning Commission?
  • While demands for high speed trains and track networks might arguably be good to have, what is absolutely non-negotiable is the necessity to urgently improve safety systems. An astonishing 15,000-20,000 people die in rail accidents every. Hamirpur MP, Anurag Thakur in his response to Rail Budget in Lok Sabha, made some startling revelations:
    • Deaths on unmanned level crossing: 14,611(2011-12), 15,934 (in 6 months in 2012-13), think about that – more deaths in half the time! Of which, unmanned rail accidents in Mumbai’s suburban railway line alone accounts for ~6,000 deaths!
    • Around 1000 people die from injuries while in the train (hanging out, sitting on top, falling off, collisions etc)
    • There are 36,000+ bridges built pre-independence, several of which are in critical condition. For instance, the 330m Bhairavgarh Bridge in Ratlam, over which fifty trains ply in a day had been declared “distressed” in 2003-04 itself. Trains reportedly have to slow down to less than 20kmph to ensure that the bridge doesn’t keel over! Yet after seven years, no action has been taken. This is gross criminal negligence! Are we waiting for a human tragedy?
  • Operating ratios continue to decline thanks to gross inefficiency thanks to bloated workforce thanks to unionization thanks to monopolization & public sector backing. The Railway Minister was asked how operating ratios of Indian Railways compare to those in other countries. Pat came the reply – “Information on operating ratios of railways in other countries is neither compiled nor maintained in the ministry“. I leave you to pause on that statement for a minute.
  • That railway need immediate attention is undisputed. Lack of resources is the most common bogey (pun unintended) cited. Here are a few ways to increase profits (by increasing revenues & cutting costs), to invest in safety, speed and hygiene:
    • Auction thousands of acres of surplus railway lands & buildings in a transparent process, after taking stock
    • Heavily rationalize the swollen bureaucracy (consolidate shared services, relentlessly measure performance and initiate action). Fix the skewed staffing model in operation currently – 1.5 lakh vacant posts in safety division alone in the railways yet significant percentage of the remaining ~13 lakh are involved in several low-value add high-overlap jobs
    • Stop paying out dividends to the Central Government pool for five years
    • Actively avail PPP opportunities in infrastructure build out and modernization
    • Reduce turnaround times for trains and update time-tables (current time tables continue to reflect pre-independence thermal power engine slots. Extra time was budgeted for loading & unloading coal into engines, which is no longer necessary today)
  • Railways need a visionary minister to dramatically transform the sector. It is not an unrealistic demand. Instead what one sees are a few token new train announcements, rehearsal of names of projects launched in previous years with minor or no changes and nonsensical sher-shayaari in Parliament, after every tragic fact is announced.

Section IV. C: Civil aviation

Dr. Atanu Dey, among the foremost thinkers and a leading development economist, often says “Government has no business of being in business”. This is perhaps no where as appropriate, as it is, in the case of civil aviation.

As is well known, Air India and Indian Airlines went through an ill-advised, bitter and value-destructive merger a few years ago. Since post-merger management isn’t really an area of prowess for PSUs, innumerable issues cropped up about equal pay, benefits etc and employees went on repeated strikes. Moreover, in the guise of modernization, a new fleet was ordered and the entity now had to deal with a mountain of debt. Unsurprisingly, grave allegations of nepotism surfaced but were hurriedly buried. Several profitable routes were silently given away to private airline companies, whose promoters were good buddies with the then Minister. Now you had a case of a PSU with a belligerent workforce, which was compelled to ply in Tier-2 routes, was heaped with debt, was coerced to serve ministers and their whims and was on a vicious downward spiral. Invariably, a tax payer bailout was necessitated ($10B in FY11 alone as per Arvind Panagariya and Jagdish Bhagwati’s India’s Tryst with Destiny).

While there are no easy answers to wriggle out of a precarious scenario, the following options could be considered to mobilize resources:

  • Land holdings can be monetized after a systematic audit and a transparent auction
  • While distress sale isn’t optimal, but a path to eventual disinvestment should be laid out and unprofitable services should be immediately outsourced/privatized (e.g., ground handling, catering etc)
  • Allow foreign airlines to participate in the Indian market and to invest in the sector in India. I don’t see any downside to 100% equity even, especially since most Indian players have bled in the past owing to government controls and internal mismanagement (barring one honorable exception)
  • PPP model has indeed has delivered world-class airports – Delhi and Hyderabad for instance. It is time to extend this to the top 15 airports in the country and allow 100% private ownership in 50 new airports in cities with population above 1 million.

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