8/22/2015

DistinguishedLecturesDetails

Home DistinguishedLectures DistinguishedLecturesDetails

India'sUnionBudgetincludingMEA'sBudgetResourcesand
ImplicationsforDomesticEconomicGrowthandDevelopment
PartnershipAdministration
By:Amb(Retd)JaminiBhagwati
Venue:PondicherryUniversity
Date:April02,2015

SpeakingNotes
SlidesonMacroeconomicOverviewandBudget201516
Asamplingofinternationalanddomesticfactorswhichimpactouroverallobjectiveofhighergrowthcoupledwithlower
inflationwhichobviouslyneedtobeprecededbyfiscalconsolidationandotherstepsoutlinedbrieflybelowasalso
managementofattendantrisksandconstraintsFACTORSINFAVOUR
1. EXTERNAL: Lower International Commodity prices including for oil and gas. Has reduced the trade in goods
imbalanceandthecentralgovernmentssubsidyburdenonthisaccount.Promotesconditionsforlowerinflationand
hasreducedthecurrentaccountdeficit.2
2. INTERNAL: Fourteenth Finance Commissions recommendations which were accepted provides a larger share of
taxestobespentasperstategovernmentdecisions.Overallvolumesoftransferswouldnotincreasebutthisispositive
intermsofdecentraliseddecisionmaking.
VULNERABILITIESANDCONSTRAINTS
1. OvervaluedRupee.
2. Littlefiscalroomforthecentralgovernmenttoinvestininfrastructureorothercapitalintensivelonggestationprojects.
Further,littlecapacitytoprovideequitycapitaltoPSUbanks.5
3. The PublicPrivatePartnership model for building infrastructure is fundamentally flawed and hence broken. The
specificationsonriskreturnsharingwerejustplainwrong.Theprivatesectorcannottakethelongtermriskswhichare
inevitableinlargeinvestment,longtermprojects.PSUbankswith10%ormoreofstressedassetsontheirbalance
sheetsnotinapositiontoincreaselending.5
4. Staff cost at about 60% of revenue budget for Railways is way too high. Passenger fares have to be increased.
Investmentsinrailtracksetc.bothforsafetyandincreaseinlengthhavetobeincreased,particularlyintheNorthEast.
5
http://www.mea.gov.in/distinguishedlecturesdetail.htm?265

1/4

8/22/2015

DistinguishedLecturesDetails

5. Uncertaintyininterpretationsoftaxlawsandapplication.Thisisasystemicissuemuchbeyondandmorecorrosive
thanthehighprofiletaxdisputeswithforeignmajortelecom,oilandothercompanies.5
6. SUBSIDIES:Fertilisers,Foodgrains(FCI),Freeorsubsidisedpowerforfarmers(morestategovernments),Notaxon
agriculturalincome.PassengerfaresRailways.AirIndia.BettertargetingthroughJanDhanYojanaandAadharis
welcomeparticularlyforrice,fertilisers,railways(passengerfares),waterandsugarindescendingorderofmagnitude
offiscalexpenditure.Inevitablyitisthepaceofimplementationwhichwouldbecrucial.5
7. IndiahastoalsowatchoutforriseinUSinterestratesandlaterunwindingofQuantitativeEasingintheUS.Thismay
pricksomeassetbubblesparticularlyinstocksandrealestate.
IMPLEMENTATIONISKEYTimeFrameforimplementationofBUDGETPRIORITIES
Shortterm(uptooneyear),Mediumterm(upto3years),Longterm(5yearsormore)
SHORTCOMINGSINESTIMATES&SHORTFALLS
ILLUSTRATIVE:Totalreceipts,includingborrowingsandotherliabilities,for201415at16.81lakhcroresarenow6.3%
lowerthanbudgetestimatesfor201415.Primafaciethetotalreceiptsnumberinthebudgetestimatesfor201516appears
toberelativelyconservativesincethisis1%belowthesamenumberfor201415
GovernmentdoesnotadequatelydiscussPrimaryDeficiti.e.RevenueDeficitminusInterestPayments(thisdoesnot
accountforbunchingofprincipalrepaymentssinceourBudgetstatementsarecashflowbasedandnotaccrualbased).This
numberwillbeabout1lakhcroresfor201516.
Itisobviouslynotobligatoryfortheuniongovernmenttomakepolicyannouncementsbeyonditsannualaccountsand
projectionsforrevenuesandexpenditures.Reformsandfollowupstepstobetakenevenwithinthenext12monthsneed
notbecoveredinthefinanceministersbudgetspeech.However,expectationsareinevitablyhighbecauseofpastpractice.
1. Monetary:Reporateneedstocomedown.UsefulthattheBudgetannouncedthedecisiontosetupaMonetary
PolicyCommitteewithinflationtargetsandattendanttransparency.
2. OvervaluedRupee:RupeeExchangerateneedstodepreciatenominallyandgraduallyagainsttheUS$by68
RupeesmaybearoundRupees70toadollarbytheendofcalendar2015.Rupeeisovervaluedbyatleast10%.
NoenoughinthepublicdomainabouthowtheRupeesmanagedfloatisactuallyMANAGED.
3. EnablinglegalenvironmentforINFRASTRUCTUREdevelopment:Shorttermobjectiveneedstoincludegetting
thelegislationonlandacquisitionthrough.
4. WhytreatRailwaysseparatelyfromothermodesoftransport:Roads,ShippingPortsandAirports?Theseareall
part of the overall Infrastructure sector. Why have a separate Railway budget? Different rules of the game for
railwaysbecauseitisthelargestemployer?BudgetaryallocationofRupees40,000crorestoRailways.Since
this number is large makes sense to review combined outlays across the transportation sector to look for
synergies.
5. Government intends to corporatize ports not quite clear what is the road map and time frame? Why not
corporatize select railway stations, busstops and so on? Is there any overall framework for the infrastructure
sectorsupportingthismove?
6. Powersectorweneedmoredetailonwhatgovernmentintendstodoi.e.morethancoalauctionse.g.hydro
electricity,prospectingforoil&gas(gaspricing),nuclearpower(nuclearliabilitylawneedstobeamendedasit
alsoinhibitsparticipationofdomesticsupplierse.g.L&T.
http://www.mea.gov.in/distinguishedlecturesdetail.htm?265

2/4

8/22/2015

DistinguishedLecturesDetails

7. Funding for Infrastructure Not clear where the additional resources are coming from for Railways. Escrowing
futurerailrevenuestoservicelongtermrailwaybondstobepurchasedbyLICdoesnotaddtosourcesoffunds.
Railways and for that matter the armed forces own large tracts of prime urban land used principally for
independenthousesformiddlelevelexecutives/officersupwards.Someofthislandcouldbeleased(notsold)for
commercialpurposestoraisefunds.
8. New Infrastructure Fund. In what way will it be different from India Infrastructure Finance Company Limited
(IIFCL)?
9. Publicinvestmenthastoberaisedaswewaitforprivateinvestmenttogrow.Inthiscontext,wehavetoraise
tax/GDPratioreviewandraiseexciserates.Indiahasarelativelylowtax/GDPratiocomparedtodeveloped
anddevelopingcountries.
10. IfDTCistobeabandoned,thisdoesnotaugurwell.Corporatetaxtobeloweredover4yearsto25%isastepin
therightdirection.However,hastobecloselytiedtoeliminationofexemptions.
11. ProjectedintroductionofGoodsandServicesTax(GST)byApril2016,whichwouldhelppromoteonemarketin
thecountry,appearstobeunrealisticgiventhat2/3majorityisneededinbothHousesofParliamentandhalfthe
statelegislatures.
12. Anothershorttomediumtermobjective:FOREXreservesneedtobehigher.Betterwaytojudgeadequacyisby
focussingontheFXreservestoshorttermdebtratioandfactoringintradecredituptooneyear.
13. Medium term objective to fund a larger judiciary at all levels in a phased manner. Too many pending cases
includinginvolvingtaxandinfrastructureprojectspendingincourts.
14. FINANCIAL SECTOR Bankruptcy Code: Very important in terms of ease of doing business and also e.g. to
promotesecondarymarketliquidityincorporatedebtmarkets
15. Privatesavingshavetoflowmoreintolongertermfinancialinstruments.Thatis,furtherdevelopmentoffinancial
sector investment alternatives. Capital markets relatively well developed. Pension, Insurance and Banking
marketsinthatorderneedtogrowfaster.
16. PSUbanksneedtobeoverhauled,mergedasnecessaryandincentivized.
17. CompositecapsforFPIsandFDIwelcomewaslongoverdue.Foreignequityinvestmentsnowtoberegulatedby
centralgovernmentratherthanRBIunderFEMA.Willimproveregulatoryclarity.
18. Internal debt management to be entrusted to an independent body was first included in former FM Yaswant
SinhasBudgetof2000i.e.15yearsago.RBIobjectedongroundsthatfiscalconsolidationwasaprerequisite.
ThisisaparochialturfissueforRBIandastatutorilyindependentDebtManagementAgencyi.e.independentof
notjustRBIbutalsoGovernmentisoverdue.
19. InclusionofNBFCswithcapitalbaseofRupees500croresintheambitofSecuritizationandReconstructionof
FinancialAssetsandEnforcementofSecurityInterestAct,2002(SARFAESIAct)ispositivesinceitshouldhelpin
NPArecoverycases.
20. SpecificissueswhichareofconcerntoFPIs(Foreignportfolioinvestors)andotherforeigninvestors:
Proposed changes in MAT Minimum Alternate Tax benefits for FPIs. Not clear whether this is excessively
generoustoFPIs.Weneedawhitepaperfromgovernmentonthisissue.
MAT is also an issue for SEZs high time the country became one large SEZ rather than setting up of
enclaveswhichareinsomecasesthinlydisguisedplaysonrealestate.
GeneralAntiAvoidanceRules(GAAR).ExtremelypositivethatthishasbeendeferredtoApril2017.Weneed
toresolvethisissuewithinthenextoneyear.
http://www.mea.gov.in/distinguishedlecturesdetail.htm?265

3/4

8/22/2015

DistinguishedLecturesDetails

ECONOMICDIPLOMACY
SlidesonMEAsBudgetandDPABudget

WhatdoesEconomicDiplomacymean?
Incurrenttimescan/shoulddiplomaticworkbesegregatedfromeconomicandstrategicobjectives?
Some countries have set up joint or wellcoordinated administrative structures to follow through on economic
diplomacyobjectives
Should the Ministry of External Affairs, Ministry for Overseas Indian Affairs (MOIA) and Ministry of Commerce be
mergedwithoneCabinetMinisterandtwoMinistersofState?
ForinstanceBrazilandAustraliahaveoneMinistryforforeignaffairsandforeigntradeinvestment
FDIandForeignPortfolioInvestments.Stableversuslessstableflows
RegionalFTAsandregionalsecurity
Is India extracting the commensurate economicdiplomatic benefits it could from its larger defence purchases?
Finalityofdecisionmakingatpurchasestageandpredictabilityasanenduser

SPECIALIZATION&PERIODICTRAINING
Initialandregulartrainingofofficersaspertheirindicatedpreferencefor:(a)economic(b)political(c)security&
strategic(d)information&culturalwork

DEVELOPMENTPARTNERSHIPADMINISTRATION
Theextentofgoodwillfromprovidinggrants,loansortechnicalassistanceandtrainingiserodedif"projectsarenot
implementedinatimelymanner
DecisiononprojectsneedtobetakeninconsultationwithorinitiatedbytheterritorialdivisionsinMEA.However,
implementationofcivilandrelatedprojectsshouldbedonebyanindependentagencywhichismadeaccountable
fordelays,ifany

INTERACTIONWITHMULTILATERALDEVELOPMENTBANKSANDAGENCIES
MoFisthenodalMinistryforMDBs.However,greatercoordinationisneededonthepoliticalaspectsofborrowing
andinteractionwithMDBs.Forinstance,IBRDstoppedlendingtoIndia,exceptforhumanitariangrounds,forany
newprojectspostPokhranIIinMay1998
TheExecutiveDirectorstotheWorldBankandIMFshouldbeservingofficersandreporttotheIndianAmbassador
inWashingtonDC
BRICSNewDevelopmentBank,ContingencyReserveArrangementandAsianInfrastructureInvestmentBank

ContentOwnedbyMinistryofExternalAffairs,GovernmentofIndia.

http://www.mea.gov.in/distinguishedlecturesdetail.htm?265

4/4