Cash subsidy: Identify the needy

India’s perennial challenge of wasteful government expenditure and mounting subsidies has surfaced again with worsening state of fiscal management. Rampant corruption in social schemes is also compelling government to go for a complete revamp of   welfare programs. India has just initiated a radical overhaul of welfare schemes that would see the government make cash payments direct to the needy.  The government is launching an ambitious scheme for direct electronic transfer of cash to beneficiaries that is expected to cover one quarter of households of the country. After several trials of cash transfers in different areas of India this is the first major initiative at national level. Direct cash transfer of subsidies is a welcome move as long as government system can handle the colossal task of identification of true beneficiaries and bringing them in to formal banking network.

 Bloating subsidies and inefficient expenditure has become a lasting bane for India’s fiscal health. Indian Government has always been generous in providing fuel, food, power and fertilizer on cheaper rates than the actual costs. Subsidies are meant to address poverty in India. There is no uplift of poor and below poverty line people as most of the government benefits never reach to the needy populace. The current emergence is how to plug the leakage of subsidies and target the subsidies for poor. The government has pegged its outgo on food, fuel and fertilizer subsidies in the 2012-13 fiscal at over Rs 1.79 lakh crore, nearly 14 per cent lower than the revised estimates for the current fiscal. According to the Budget proposals, the government's subsidy bill on food, petroleum and fertilisers is estimated at Rs 1,79,554 crore for the 2012-13 fiscal as against Rs 2,08,503 crore in the revised estimates for this fiscal.

 The debate to cut subsidies has become more prominent after the recent  report of Dr Vijay Kelkar Committee on fiscal consolidation. Report  says the economy is on the edge of a "fiscal precipice" and if the government does not cut subsidies on fuels, food and fertlisers, the budget deficit could go out of control in current fiscal year. The report notes that whereas Budget 2012-13 sought to limit subsidies to 2 percent of GDP, that number will likely be overshot. Report cautions in an unequivocal terms that  “A do-nothing approach would mean the risk  of a much larger adjustment of incomes and spending forced by the markets, both domestic  and international, with a spiraling fiscal deficit and its consequences for much slower growth,  rising unemployment, and higher inflation.”

 The plan to start  direct cash transfer of subsidies has come in this premise.  Against the backdrop of corruption and pilferage in various schemes, the government has been thinking about direct cash transfers to genuine beneficiaries to plug leakages as it is expected to bring down the subsidy burden.
 The beneficiaries will include poor people. Of them, the Unique Identity (UID) Mission (Aadhar)  has already enlisted 200 million people and the number is expected to go up to 600 million in the next six month. The program will initially cover scholarships, pensions and unemployment allowances and later MNREGA and Public Distribution Schemes. A Cash Transfer System can be used for transferring cash benefits such as MNREGA wages, scholarships, pensions, income support of other types and health benefits.  The program is inspired by such successful schemes existing in countries like Brazil and Mexico and cities like New York and Washington.

  The whole idea of cash transfers must be seen into the context of few bottlenecks. Indian economic and social planning is marred with critical data gaps. The unavailability of a credible income data is the oldest inhibiting factor in the implementation of welfare schemes. India still lacks an authentic data of people living below poverty line as host of official poverty estimates are just in the chorus of mutual contradiction. The governor of the Reserve Bank of India has recently complained about the quality of data made available. The credibility deficit about Indian socio-economic data has been created because of the glaring errors but also because of the unnecessary politicization of the data. So much so that today nobody trusts our employment estimates, industrial production estimates, inflation estimates and certainly not the ones on poverty. We must have a credible income data  at the earliest to identify beneficiaries for getting cash transfers. The next big challenge is that a large part of Indian population is just out of formal banking network. As proposed move aims to transfer individual benefits from the government directly into the bank accounts of beneficiaries, lack of financial inclusion will be a major roadblock. Indian banking sector is required to gear up to reach out with the poor.  

  The success of this plan will largely depend on the government’s efficiency in dealing with the fundamental issues like the basis of targeting, definition of poverty line and identification of intended beneficiaries. Devising a methodology to transfer the cash subsidy to the poor is going to be a tough task. Central government will also need a proactive support of state governments in taking up fundamental reforms required in refurbishment of welfare system. Direct transfer of subsidies to poor is a far-reaching move. The new system is expected to reduce the cost and subsidy bill through better targeting providing the government could identify the needy in a transparent manner.

FDI in retail : Enter consumer !

Excuse me!!!  Aren’t we being too touchy about FDI in retail? Is this a country of farmers only? Is the interest of only kiranawalas paramount? What about India’s largest socio-economic class? What about us? We, the ubiquitous consumers.  It is high time now to bring the largest stakeholder in the discourse.

  Farmer’s interests are important. Role of small traders is not less significant. But we are a country of 1.25 billion people. Consumers, especially middle class consumers are the largest mass directly influenced by the happening in retail arena. Producers are also consumers in a practical manner. We can’t deny the fact that the recent growth of Indian market is a gift of nation’s emerging consumer culture. Constant and strong growth in individual consumption expenditure over last few years has upped growth of Indian market. Private consumption expenditure is rising at an annual rate of 8-9 percent since last seven years as per the Economic survey of 2012.

   Organized retail has already become a ten year old experience in India and consumers have developed their own perspective about retailing. A host of researches and surveys are there to support the fact that organized retail has qualitatively improved shopping paradigms in India. A recent survey of renowned consulting agency has found that the growth of modern trade ushered in several benefits for consumers, some of which include better prices, increased product choice and an improved quality of life. Consumers are experimenting with products, brands and categories, and are trading up in their purchases, wanting to use products of good quality. Modern trade retailers, on their part, will also help consumers understand how to use products.

    Greater supply of products, increased competition, new product launches, etc., increase the flow of products into the market. As a result, prices tend to fall and become more competitive. Locally sourced products and commodities also help keep prices cheaper. Basic food of the urban poor is cheaper in supermarkets of Delhi than in traditional retail shops: rice and wheat are 15% cheaper and vegetables are 33% cheaper, just because of scale of retail operations and better supply chain management. Indian consumers have got a proactive support from organized retail during the recent bout of high inflation. This support came in the form of innovative packaging and bundling/discount offers.   

India’s organized retail experience has remained by and large satisfying for the largest socio-economic class ie consumers. Is it really true that organized retail have put danger to the survival of small retailers? Or farmers have suffered coz of retail opening? It is time to look for the ground realties and debate practically. Let the consumer enter in the debate, the bona fide stakeholder of India’s growth story. 

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Savings – Bigad gai aadat !!

Thrift conscious Indians are fast becoming spendthrift and vague saver. Robust savings, an internationally acclaimed Indian phenomenon is taking a disturbing trend of slide owing to the uncertain and suspicious economic ambience around. It is just not that Gross domestic savings as the ratio of GDP is declining but composition of Indian savings has also become somewhat alarming. Financial savings instruments are losing their sheen   while non-liquid assets like gold, land or home are catching up quickly. This trend is not at all favorable for the growth of Indian economy as it reduces the stock of savings available for development expenditure.

Indian savings are registering a consistent decline since last few years.  As per the Economic Survey of 2011-12 the gross domestic savings have declined from 33.8 per cent of GDP in 2009-10 to 32.8 per cent in 2010-11. This decline is accounted for by a reduction in household savings in financial assets.  It is clearly evident that households have been putting less money in financial savings. Two more recent reports on the macro economy have drawn attention to this development, which has deep implications for the economy. The Economic Outlook, of the Economic Advisory Council of the Prime Minister (PMEAC), headed by C. Rangarajan, and the Reserve Bank of India’s  Annual Report (2011-12).  According to the Economic Outlook, gross financial savings which were at 15.4 per cent of gross domestic product (GDP) in 2007-08, fell to 13.6 per cent in 2010-11, and could have possibly fallen to below 12 per cent in the next year (2011-12). The RBI’s estimate is even less upbeat: household financial savings fell to 7.8 per cent (of GDP) in 2011-12, the lowest since 1989-90. During the preceding three years, it averaged 11 per cent.

Indian’s lure for gold not a new phenomenon but recent development is a bit more serious. Indian households have withdrawn from financial savings to put more money into gold. Indian investors are now more aware about the investment potential of gold. Even ordinary investors buy gold, hoping it would protect them from inflation. Gold investment is ranging from physical gold to exchange traded gold funds. Spurt in gold import is clearly a confirmation of the investment led gold buying. Real estate is the next asset class catching up to investor fancy. With rising income levels and bank credit support, real estate has become a high profile destination of Indian household savings. Gold and property savings are not available for economy as both are non-liquid assets. The non-transparent market of these assets also results in a huge tax loss to the govt

Rising inflation pinches from all the directions. Not only does it reduces the consumption on account of low income but also increases the expenditure. Consequently very less amount remains for savings. Inflation is one of the major factors behind a mass disenchantment from financial savings. Inflation is robbing return on savings while interest rate on bank deposits no way a cushion for common investor. Recent spate of reduction on saving banks interest rate has resulted in an all-time low growth in bank deposits. Present tax policies on insurance and MFs are also a dampener to the investment spirit.

Household savings are major source of investment for the nation. Reduction in common man’s thrift is a loss to economy as it forces govt to borrow to meet investment needs. That results in higher deficits.  It is very important to bring Indian savers back to the financial savings as the tendency to invest in non-liquid asset will surely fabricate grave repercussions in near future. 

Transparency; Missing link of India's reforms

Indian governance is witnessing an unprecedented fall in its global credibility, across the spectrum of economy to polity. Global credit rating agencies are constantly downgrading India’s rating resulting in loss of investor’s confidence while global media is critiquing India’s political leadership in harshest ever accent. The level of corruption and mis-governance has reached to an extent which speaks for itself and is readily perceivable by all. With an acute economic mismanagement, fragmented collation government, at the helm and practically non-functional democracy is bedrock of India’s fresh global indignation. India is now a victim of a major reform deficit ie transparency.

India has plummeted three ranks from the last year in the recent global competitiveness report and ten places since it peaked in 2009. This is a sign of loss of global trust in India’s competitive abilities and transparent markets. S&P (standard and poor) has already downgraded India’s investment outlook and a further demotion is highly a likely event. It is double whammy for India’s image as economy is going to tail spin while high offices of government and political leadership are getting termed as hopeless and corrupt. None other than but the poster boy of India’s economic reforms, Prime minister of India, Dr. Manmohan Singh is regarded the silent and inefficient leader of his corrupt government by Washington Post. Time magazine has also criticized Manmohan Singh by calling him an underachiever in its cover story.  This decay is the result of acute non transparent governance and stagnant polity.

Fact of the matter is that India has grown quite impressively in last eight years. This growth story is magnificent and unmatched. An average growth of 8% in the last decade has created job opportunities and higher income, new technologies and changed lifestyle. The irony of the India is not thus lack of growth but quality of the growth. India has never seen such a rampant frequency of scams in its recent history. Natural resources allocation is specifically marred with corruption and scams. Reform stories are darkened by various scandals from sports to space and mines to marine.

Opening of several sectors and markets for new services and products, foreign capital and all paid us well but somehow our policy makers ignored the fundamental core i.e. the transparent execution of laws for reform processes. Our laws have fast become archaic with the changing time. Watchdog institutions of economy have lost their relevance and grip over the expansion of markets while constitutional bodies have degenerated due to political power-play. This is highly disheartening that we’ve not seen any major reforms in last 15 years to increase transparency in governance. A scam tainted governance has finally culminated at a policy paralysis, ie no positive forward movement.

India politics has reached to the level where parliamentary democracy has come to a standstill. Political parties are settling the score ignoring crux of the problem. It’s a high-time for Indian polity to bring the house and order and seriously start a new reform process for achieving transparency in governance. Clean governance is the biggest competitive advantage and transparency is now an emergency for India.  Our contemporary successes are at a grave risk now.

Inflation : An urban cry

A stubborn high Inflation has become a perpetual phenomenon of India’s daily life. Prices of essential commodities have been rolling high since last four years. Partially failed monsoon is just the latest trigger to it , although prices have been high for last few years despite robust crops repeatedly. Government efforts don’t seem to be taming it in near future and supply side constraints are making it harder to contain its persistence.

Inflation is a complex pro-poverty portent. A sustained rise in the prices of commodities leads to a fall in the purchasing power which in turn increases poverty. It is severely affecting the already grave situation of destitute living in rural as well as in urban areas.

Indian poverty discourses are bit over focused towards rural poverty while urban poverty is catching up fast and it has become a more intricate challenge to fathom with. The intensity of poverty is more severe in urban milieu due to high-cost of living up there. Some 81 million people live in urban areas on incomes that are below the poverty line. At the national level, rural poverty remains higher than urban poverty, but the gap is closing. Urban poverty is over 25 percent and it is projected to reach 50 percent by the end of 2030.

Indian cities have become magnet for internal migration thanks to high economic growth and job opportunities. Rising education is making rural youth inspire for greener pastures in urban markets as rural job market is confined to unskilled labor.  Heavy influx of population in urban areas is a major cause behind the changing levels of urban poverty.

High inflation seems to have a more severe impact on urban poverty levels due to majority of factors exclusive to urban living. Lesser prices of basic food stuff and subsidies make life somewhat easier for rural populace comparatively. Urban living has a host of other factors directly adding to inflation woos. Rented housing and public transport are basic features of city life. House rents are skyrocketing in urban areas while fuel price rises have made commuting highly expensive. Urban masses have to bear the direct brunt services inflation because of their consumption profiles.  

Inflation is increasing misery of urban poor, already  lack access to basic services like clean water, sanitation and health care facilities. Some 54 percent among urban slum dwellers don’t even have toilets and public facilities are unusable due to lack of maintenance. All this result into health hazard which requires them to avail medical-aid and rising medical expenses worsens the situation deeper.

Standards of living are changing rapidly in India with stark variance in income levels. Inflation has increasingly become an urban crisis as city populace has no direct protection from the market vagaries and absence of social security. Urban living has also sans direct government intervention like MNERGS to fight with poverty in cities. India will witness an explosion of urban poverty few years from now If Inflation is not contained.