As the first budget of the new government, the market is looking for the government to set the agenda for the next few years. High fiscal deficit will restrict maneuverability with regard to tax reduction. The popular mandate, as interpreted by the ruling party, is one of continuity of fiscal policy with a bend to offering direct assistance to farmers and the fiscally weak. This limits the ability to reduce expenditure.
The agenda therefore has to focus on improvement in efficiency of expenditure and better tax collection. Besides, steps are needed to reduce of size of government, and bureaucracy to speed growth. Some steps I would look for are:
1. Financial Reporting – remove the obfuscation. The Fiscal Responsibility and Budget Management (FRBM) Act was expected to form the blue print for India to the path of fiscal prudence. Instead, it has led to the government resorting to a policy of smoke and mirrors to hide its inability to manage the budget. Obvious ones include the non-inclusion of fuel subsidy in the budget deficit. The more pernicious ones are reduction of state transfers – with states being asked to approach the market. While this reduces the apparent expenditure of the Central government, it does not actually reflect better fiscal management. What is needed is to:
a) Move to a system of accrual accounting instead of cash accounting. This will help focus policy debate on not only the immediate term issues, but the longer term ones of ballooning pension liabilities, and debt servicing.
b) Reflect all governmental revenues and liabilities through the budget – all non-budgetary items to be avoided – to prepare a true and fair picture of the state of government finances
c) Prepare accounts that are consolidated – which represent the accounts of the state governments as well as the centre
d) A key area of reform has to be to measure all salaries paid by the government and its agencies and by public sector companies on a cost-to-company basis. This will likely throw up interesting information especially when measured against productive output!
2. Establishment of efficiency parameters – for the most part, the budgetary focus is on revenue and expenditure and not on measuring the efficiency of use of the money spent. Most government departments do have review mechanisms. However, these are not transparent – a case in point is the inability of the Ministry of Human Resources to explain where the money collected (as a cess) for secondary education actually goes. Besides, rarely is the measurement of delivery of efficient service a goal. As part of smaller government, the government needs to move out of providing services itself and instead set up monitoring agencies that set out goals and monitor results while using private enterprise to deliver.
3. Privatization – not disinvestment – This debate seems to have been set-back by the present government. While it continues to desire selling off bits of public owned companies, the approach is essentially episodic in nature. Efficiency of operations can only increase if there is a change of ownership that leads to a change of management style. Arguing that 51% stake would allow better performance is not demonstrable. On the contrary, the use of oil marketing company balance sheets to offer fuel subsidy, that of banks to write off loans and the “donation” by Gujarat state owned companies (where the government is in a minority) suggest that government ownership in any amount detracts from the commercial nature of business.
4. Economic friction in the form of ill conceived taxes (FBT, dividend tax, cash withdrawal) and the discretionary nature of multiple tax rates have crept in the taxation system over the past few years. While the nineties had established a clear road map of tax reforms, the previous UPA tenure marked the reversal of the trend towards simplification and instead returned ad hocism in tax matters. This needs immediate rectification. Another key area remains the implementation of GST – where the time frame of implementation does not seem feasible given the lack of preparedness of the government. Another key area of friction is the restriction on capital flows. The present FII registration requirements serve little purpose. In fact, with limited control over foreign institutions, government has less knowledge of who is the final investor than if it were to allow the normal “know your client” requirements of brokers to work in the case of foreign clients. We need to now drop “I” from “FII”
5. Land and labour reform remain glaring unfinished agenda for faster economic growth. While labour reforms are contentious, land reforms need not be so. Clarity in land titles, and land use planning are two areas that, if sorted out, can reduce corruption significantly.
The Judicial sector needs serious attention. The pile up of unresolved legal cases renders the system incapable of being used. While this is not an agenda for the budget, this has to be one of the key areas of focus for the government if they are serious about increasing the economic growth of India on a sustainable basis.
Monday, June 22, 2009
Sunday, June 14, 2009
I'm Ok, the markets are NOT
After a gap of over a year, I decided to accept CNBC's offer to be a speaker at an investor camp in Agra. The city of the Taj and the opportunity it offered to visit the beautiful monument played no small a part in my decision. Another reason for accepting was the opportunity it provides to interact with retail investors.
Once again, I was struck by the picture that most retail investors have of the stock markets. It seems, most think of the markets as the playground of manipulators - with no "logic" applying to it. This, despite the fact that the Indian equity markets are one of the best regulated and technologically most advanced in the world. The preponderant impression is that since the investor has lost money (or atleast failed to make money despite a huge rally), the problem must lie with the markets since the investor cannot be irrational. In other words, I'm ok. you're not.
As any market participant knows, the markets are far from perfect. There are sharks, and manipulators operating in the market. However, these form the minority. Further, the market operates with a logic of its own, that investors can understand and make money off. That requires effort and patience, and like every other art, a lot of practice - something most investors are loathe to do. Instead, it is much easier to blame the system.
An analogy comes to mind. Most non-swimmers would not jump into a rapidly flowing river without help or proper equipment. They would also not blame the tides, rapids, or whirlpools that they may encounter along the way on malicious forces. Instead, they would blame themselves for not making the effort to learn how to negotiate these. To me, the markets are like the river. You either figure out how to swim, take a boat, or use the bridge. You don't jump in if you cannot swim. I wish schools would make personal financial management courses mandatory early in life.
Till then, we as market participants, are doomed to be looked upon with suspicion and opprobrium albeit tinged with a bit of envy
Once again, I was struck by the picture that most retail investors have of the stock markets. It seems, most think of the markets as the playground of manipulators - with no "logic" applying to it. This, despite the fact that the Indian equity markets are one of the best regulated and technologically most advanced in the world. The preponderant impression is that since the investor has lost money (or atleast failed to make money despite a huge rally), the problem must lie with the markets since the investor cannot be irrational. In other words, I'm ok. you're not.
As any market participant knows, the markets are far from perfect. There are sharks, and manipulators operating in the market. However, these form the minority. Further, the market operates with a logic of its own, that investors can understand and make money off. That requires effort and patience, and like every other art, a lot of practice - something most investors are loathe to do. Instead, it is much easier to blame the system.
An analogy comes to mind. Most non-swimmers would not jump into a rapidly flowing river without help or proper equipment. They would also not blame the tides, rapids, or whirlpools that they may encounter along the way on malicious forces. Instead, they would blame themselves for not making the effort to learn how to negotiate these. To me, the markets are like the river. You either figure out how to swim, take a boat, or use the bridge. You don't jump in if you cannot swim. I wish schools would make personal financial management courses mandatory early in life.
Till then, we as market participants, are doomed to be looked upon with suspicion and opprobrium albeit tinged with a bit of envy
Building Perspective among journalists
India boasts perhaps the largest number of news channels and newspapers in the world. However, for all that, the news that is delivered is surprisingly uni dimensional and lacking in perspective. Most journalists think that being shrill replaces being analytic.
A case in point is the recent coverage of the "swine flu". A popular english news channel would have you believe that India is "battling" the Pandemic, and not too successfully - as all of 22 cases have been reported across India. Without advocating a lackadaisical attitude on the part of the medical authorities, one wonders whether this is headline making news at prime time. To put it in perspective, India has 20% of the world's 37 million estimated blind - and another study suggests that 15% are curable - this makes it a case of 1 million untreated patients. People suffering from Malaria and Tuberculosis make up similar orders of magnitude. When is the last you have witnessed a mention, much less a discussion on these diseases. I guess this too is a function of the prevailing "fashion". Perhaps one of the negatives of having a oh-so-young population. Serious issues are passe, sensational is in
A case in point is the recent coverage of the "swine flu". A popular english news channel would have you believe that India is "battling" the Pandemic, and not too successfully - as all of 22 cases have been reported across India. Without advocating a lackadaisical attitude on the part of the medical authorities, one wonders whether this is headline making news at prime time. To put it in perspective, India has 20% of the world's 37 million estimated blind - and another study suggests that 15% are curable - this makes it a case of 1 million untreated patients. People suffering from Malaria and Tuberculosis make up similar orders of magnitude. When is the last you have witnessed a mention, much less a discussion on these diseases. I guess this too is a function of the prevailing "fashion". Perhaps one of the negatives of having a oh-so-young population. Serious issues are passe, sensational is in
Outsourcing India's interest to the USA
The Prime Minister wants to re-start the Indo-Pak dialogue in anticipation of Washington's advise to do so. Since the Mumbai attacks, the government has been claiming success of India's diplomatic initiatives to exert international pressure on Pakistan to cease and desist from its support to jihadists and other terrorists in India. The reality is exactly the reverse. India seems to have lost the plot completely.
M J Akbar's article in the Times describes the problem of US perception and its own imperatives. As outlined by Brahma Chellaney , Pakistan attempts to portray itself as a failing state and extract international ransom has been hugely successful. By falling in line with the US demands, India continues to do itself a disfavour. This weakness is now apparent in the economic policy sphere as well - where USA is able to "persuade" Indian companies to toe its line in international markets.
If only we had a leadership that REALLY had a vision for a strong Indian state.
M J Akbar's article in the Times describes the problem of US perception and its own imperatives. As outlined by Brahma Chellaney , Pakistan attempts to portray itself as a failing state and extract international ransom has been hugely successful. By falling in line with the US demands, India continues to do itself a disfavour. This weakness is now apparent in the economic policy sphere as well - where USA is able to "persuade" Indian companies to toe its line in international markets.
If only we had a leadership that REALLY had a vision for a strong Indian state.
Politics as a profession
Many years ago, a friend in school remarked, at the end of a heated discussion on the future of Indian democracy, that no youngster in India from a "good" background aspired to the position of Prime Minister - when planning his/her career. The implication was that Indian democracy would remain the playground of the opportunists.
I was reminded of this conversation from my own childhood while watching an interview on NDTV recently.The anchor was interviewing a topper of one of the board exams. When asked about what he aspired to do in his career, the young boy remarked that he desired to enter politics as it was a way of serving society. If this indeed reflects the desire of more of India's educated youth, we can only be more sanguine of the future of Indian democracy.
I was reminded of this conversation from my own childhood while watching an interview on NDTV recently.The anchor was interviewing a topper of one of the board exams. When asked about what he aspired to do in his career, the young boy remarked that he desired to enter politics as it was a way of serving society. If this indeed reflects the desire of more of India's educated youth, we can only be more sanguine of the future of Indian democracy.
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