SANJEEB MUKHERJEE
In October 2019, when MalaysianPrime Minister MahathirMohamad criticised the Indiangovernment’s moves to change the sta-tus of Jammu & Kashmir in his addressto the 74th United Nations GeneralAssembly (UNGA), the domestic edi-ble oils industry took note. TheNarendra Modi government was notexpected to take Mahathir’s criticismlightly, and the industry lobbyissued an informal warning tolocal importers of refinedpalm oil to exercise “necessarycaution” in negotiating newcontracts with Malaysia.
In doing so, the industrywas recognising geo-econom-ic realities. India is Malaysia’stop buyer of palm oil and thatcountry’s efforts to pushexports have been the causeof tension for the Indian edi-ble oil refining industry.
India imports 9-9.5 milliontonnes of palm oil annually, bothcrude and refined. Of this, 2.5-3.0 mil-lion tonnes comes from Malaysiamainly in refined form, and rest comesin crude form, mostly from Indonesia.
In January 2019, India had to lowerthe import duty on refined palm oilfrom Malaysia to 45 per cent from theearlier 50 per cent under theComprehensive EconomicCooperation Agreement (CECA)between India-Malaysia), thus reduc-ing the duty differential betweenrefined and crude imports to Indiafrom Malaysia to 5 per cent from the
earlier 10 per cent.The impact on import was dramat-
ic: Data shows that between Januaryand September 2019, India imported2.40 million tonnes of refined palm oilcompared with 1.74 million tonnes inthe same period last year (an increaseof 38 per cent) largely from Malaysia.
As a result, domestic refinersfound themselves almost out of busi-ness. “India was forced to lower itsimport tax on refined palm oil and the
industry there went intoan overdrive to pushrefined palm oil intoIndia creating a bigproblem for the domes-tic refiners,” says B VMehta, executive direc-tor of Solvent ExtractorsAssociation of India(SEA), the main lobbyfor domestic oilseedextractors and refiners.From a high of almost60 per cent, refiningcapacities in January to
September of the 2019-20 edible oilyear had slumped 30-40 per cent (theedible oil year runs from Novemberto October).
The surge in refined palm oilimports prompted the SEA to appealto the Centre. In September, a 5 percent safeguard duty was imposed onrefined palm oil imports fromMalaysia for six months. This restoredthe import duty differential betweenrefined and crude palm to 10 per cent,on a par with neighbouring Indonesia.
Mahathir’s UNGA statement ini-tially caused refined palm oil
importers to cut back but when noretaliatory tariffs followed, importersre-started orders of refined palm oilconsignments from Malaysia and sup-plies started trickling in. Refined palmoil imports in November 2019 jumpedto around 122,409 tonnes, up 3.31 percent from October.
Thereafter in January 2020, Indiaunder the terms of the Asean free tradeagreement signed in 2010, loweredimport duty on refined palm oil from50 to 45 per cent and that on crudepalm oil from 40 to 37.5 per cent forthe first time, as part of a periodic revi-sion process, which brought back dutydifferential between refined and crudepalm oil to 7.5 per cent.
Simultaneously, Malaysia andIndonesia together announced exportprotection measures from January 1,2020. The combined impact of thisalong with India’s import duty cutsunder the Asean agreement meantthat the differential between crudeand refined was just 2.5 per cent forIndian importers.
Just weeks before that, Mahathir
decided to criticise the Indian govern-ment again, this time over the contro-versial Citizenship Amendment Act(CAA), questioning the need for itwhen Hindus and Muslims have beenliving peacefully in the country for thepast 70 years. This time, the Centreresponded promptly, placing theimport of refined palm oil under the“restricted” category and announcingplans to issue import licences to keepa tab on supplies.
This may not have been an examplefor skilful economic diplomacy but forthe domestic edible oil industry themove could not have been more wel-come. “For refiners and farmers this isnot blessing in disguise, but a pureblessing,” said Mehta of SEA.
Domestic farmers gained becausedomestic oilseed prices jumped aftermore than three years. Data fromagmarket.nic.in shows that in theIndore mandi average price of soyabean between September 16, 2019 andJanuary 16, 2020 stood at ~3,900 perquintal, almost 6 per cent more thanthe Minimum Support Price (MSP) of
~3,710 per quintal for the 2019-20 crop year.
Rating agency ICRA in a recentnote on the subject said that therestriction on refined palm oil importswill not only improve efficiency but will also improve margins ofdomestic refiners.
Though farmers and refiners arereaping the benefits of the govern-ment’s retaliatory moves, the uncer-tainty of this simmering trade war per-sists. Latest reports say commerce andindustry minister Piyush Goyal willnot meet his Malaysian counterpart inDavos next week, citing a tight sched-ule, though a meeting on the sidelinesis possible. Mahathir, meanwhile, isattempting some damage control byadmitting his country was too small toretaliate against India. Mehta says theindustry wants government to ensurethat the licence route is not misusedso that refined oil imports start flood-ing in again. For the time being,though, the domestic industry has theopportunity to make the best of adiplomatic skirmish.
8 ISSUES AND INSIGHTS>
MUMBAI | TUESDAY, 21 JANUARY 2020
> CHINESE WHISPERS
> LETTERS
On a cold January morn-ing, the School OfExcellence in Delhi’sKalkaji is abuzz with activity. Along line of boys on either sideof the drive-in await the arrivalof Delhi’s Deputy Chief MinisterManish Sisodia to hand out
tablets to students who haveachieved more than a certainpercentage of marks in theirboard examinations. An attrac-tive incentive to my mind for atech-obsessed generation!
I accompany the deputyminister and his small team oftwo in his vehicle, no “laal bat-ti”, howling sirens or security intow. The normalcy of it all sur-prises me, so accustomed am Ito ministers who acquire a haloand radiate power almost assoon as they take charge.
We chat all the way on thereforms his party has undertakenin Delhi government schools, thefirst and the only state govern-ment to make school educationa political issue. The UnionTerritory has 1,029 Delhi govern-ment schools with roughly 1.6million students enrolled. Thereare an additional 2.8 million-odd
students studying in the usualmishmash that we have made ofour education system: 1-1.2 mil-lion in primary schools run by thethree municipal corporations, allof them currently under theBharatiya Janata Party besidesthose in private aided, privateunaided schools, unrecognisedand so on. It’s a holy mess.
I skip the function and thespeeches once we reach to takea tour of the school and chatwith the students I find. I meeta group of boys, several ofwhom have joined the school ayear back, mostly from privateschools in the area. I questionthem for a while on when andhow they ended up joining thisschool and how they like it.
The school building itself islike a mid-range private school,closer to a DAV school or RyanInternational than an Amity or
a DPS but a far cry from a typicalgovernment school anywhere inIndia. The notice board on theday I am there is full of colourfulcharts and drawings, conveyingenergy but that may well be inview of the event in progress.
I have been hearing aboutthe Delhi education reformsundertaken for over three yearsnow in dribs and drabs but this is my first and very cursory exposure to what isbeing attempted.
The attempt is ambitiousand if it succeeds, can be far-reaching. The Aam Aadmi Partyhas embarked on the noble mis-sion of making quality educa-tion more inclusive by offeringat no cost an option as good asa private school might. In theprocess, it hopes to lure stu-dents back from the plethora ofprivate options that havesprung up as an answer to thebroken state system. To its cred-it, it is not outsourcing the jobto someone as politicians and
bureaucrats facing a broken sit-uation tend to do. Here’s myproblem, now you fix it. Sisodiaand his team have jumped inwith missionary zeal and beenat it for the last five years.
In many countries withrobust state-run and financedsystems, a majority of studentsattend a school usually in theneighbourhood that offers a highquality of education, as good asany available private options. ButDelhi’s efforts are closer to TonyBlair’s London Challenge, wherethe government- run schools inLondon when Blair took chargewere at the bottom of the barrelin national assessments. After amultipronged reform exercise,the city’s schools climbed to thetop, many parents choosingthem over exclusive private ones.
Expecting an overnightchange in Delhi schools wouldbe naïve. Fixing the rot that hasset in over the last three decadeswill take much more than fiveyears. Some of the early and eas-ier to tackle results are visible.Infrastructure in schools hasimproved, teachers are being giv-en their due importance,
accountability is being intro-duced but a visible and sustainedchange in culture is still a far cry.
To make a real dent, it isimportant that the 1-1.2 millionstudents in the city who studyin the municipal primaryschools as of now be broughtunder the Delhi governmentfold —whichever the city’s gov-ernment may be. As thingsstand, most municipal schoolstudents arrive to study in Delhigovernment secondary schoolsat the age of 11-12, far behindtheir years. Unless the changeis wider and all encompassing,it may not be impactful. A pub-lic interest litigation thatdemands this is pending.
Last but not least, the abilityof the Delhi government to han-dle the backlash as and when ithappens will be critical.Unhappy murmurs are alreadybeing heard from the budgetprivate schools but themoment, the pinch begins tohurt, the education mafia andlobbies will kick in. That’s whenthe real acid test for the Delhischool reforms will begin. Thisstory is far from over.
The long, circuitous road to successDelhi school reforms need to bring more students undertheir fold and be ready to tackle the "private" backlash
Two events and a jamWhen several parts of Delhi weregridlocked on Monday, commuters werequick to blame the protest against theCitizenship Amendment Act (CAA) atShaheen Bagh in south-east Delhi asthe reason for this. But they soondiscovered that events of the BharatiyaJanata Party (BJP) and Aam Aadmi Party(AAP) were equally to blame. Hundredsof vehicles and thousands of supportersgathered at the BJP nationalheadquarters as Jagat Prakash Naddawas made president of the party in thepresence of outgoing party chief AmitShah and Prime Minister NarendraModi. Around the same time, DelhiChief Minister Arvind Kejriwal held aroadshow in the heart of the capital onhis way to file his nomination papersfor the February 8 Assembly polls. Thefiling of the nomination was delayed. “Iwas supposed to file my nominationtoday but the office closes at 3 pm. I wasasked to file the nomination while theroadshow was on, but I asked how Icould leave the people,” Kejriwal said.People asked jokingly if the filing waspostponed after astrologers advised himTuesday was a better day to do it.
Another BSP! Savitri Bai Phule(pictured),former Memberof Parliament(MP) whorecently quit theCongress, hasfloated a partycalled the
“Kanshiram Bahujan Samaj Party”.Stating that the new outfit will worktowards realising the vision ofBahujan Samaj Party (BSP) founder,the late Kanshiram, Phule said herpan-Indian campaign for “savingdemocracy” had received anoverwhelming response, whichprompted her to float a new politicalplatform. While Phule was elected tothe Lok Sabha in 2014 on a BharatiyaJanata Party (BJP) ticket, she joinedthe Congress before the 2019 generalelections and was nominated tocontest from Bahraich. However, shefailed to retain her seat and lost to theBJP candidate. Eventually, Phule gotdisenchanted with the Congress too,since she was not accommodated inthe team of the party generalsecretary in charge of UP, PriyankaGandhi Vadra.
Learning at no cost The Institute of Cost Accountants ofIndia recently organised a seminar todiscuss ways of India becoming a $5-trillion economy as well as thesteps the body could use to publiciseits work. One of the speakers began byaddressing his audience, comprisingmostly cost accountants, or CMAs, aschartered accountants (CAs). Hecontinued calling them CAs until amember of the audience, a CMAhimself, interrupted him. Aftercorrecting the speaker, he explainedhow the two — cost accountants andchartered accountants — weredifferent. The speaker apologisedbefore resuming to speak.
History repeats itself
This refers to "It's divided house atRBI over new oversight cadre". Iretired from the Reserve Bank of India(RBI) about 36 years ago after servingit for over 35 years. I was associatedwith the work of RBI supervision andcontrol of commercial banks duringmost of my years there. The contro-versy whether the RBI officers —entrusted with overseeing — shouldbe generalists or specialists arose atthe very inception, way back in 1949when this function first devolved onthe RBI. Under the then dispensation,it was decided that officers who werenot specifically trained for this workshould not be entrusted with it andthose trained for it, should not beallotted any work unconnected withbank supervision and control. Thisarrangement worked for about 19years till the specialised officers feltthat they were being deprived ofopportunities in various other depart-ments of the RBI. As a result of theirrepresentations, came what wascalled Combined Seniority Scheme orCSS around the year 1978.
From the front page report inBusiness Standard on Monday, itappears that the problem has arisenagain after some 42 years in a some-what different garb. The sub-title"Crisis in the making" indicates that
the problem this time is serious. Thesolution lies in an in-depth study ofthe problem by experts, keeping inmind the historical background andlaying down the future course. It can-not be vouchsafed that it is possibleto find out a permanent solution.With change of circumstances, newproblems would arise and new solu-tions would have to be worked outfrom time to time.
R C Mody New Delhi
Incentivise savings One tends to endorse the well-timedviews of the State Bank of India’s(SBI’s) research report Ecowrap stat-ing that the interest on the SeniorCitizens Savings Scheme (SCSS)should be given full tax rebate as therevenue foregone by the governmentcould only be ~3,092 crore, with min-imal impact on the government’s fis-cal deficit. Curiously enough, thisreport has also assessed that there arearound 41 million senior citizens’term deposits accounts (with averagedeposit per account being ~3.3 lakh)accounting for the total deposit of ~14trillion across the country. In fact,Soumya Kanti Ghosh, group chiefeconomic advisor, SBI seems to bestanding with the nation’s senior cit-izens when he pleads that “It is imper-ative that the government exemptssuch interest income from taxes/orincrease the threshold limit” as hesubstantiates his well-meaning argu-
ments with statistics.He also went on to claim that an
increase in the Public Provident Fundlimit by ~1 lakh to ~2.5 lakh for indi-vidual households under 80C willlead to additional savings of morethan ~2 trillion compared to the totalrevenue foregone of ~40,000 crore,even after adding to the interest bur-den. It could be a win-win for the rev-enue-starved government of the day.Mind you, the government has report-edly asked the central public sectorundertakings to declare a dividend of~19,000 crore apart from seekingsome hefty sums of money as interimdividend from the Reserve Bank ofIndia (RBI), representing a part of itsannual transfer of surpluses in themonth of July after finalisation of itsannual books of accounts (as on June30 each year) under Section 47 of theRBI Act. It might be in addition to thetransfer of a massive amount (out ofthe central bank’s so-called excessivecapital reserve funds) as was recentlyidentified by a specially constitutedcommittee led by former governorBimal Jalan, at the insistence of thegovernment.
Kumar Gupt Panchkula
Letters can be mailed, faxed or e-mailed to: The Editor, Business StandardNehru House, 4 Bahadur Shah Zafar Marg New Delhi 110 002 Fax: (011) 23720201 · E-mail: [email protected] letters must have a postal address and telephonenumber
> HAMBONE
On December 31, 2019, CMIE com-pleted the 18th Wave of theConsumer Pyramids HouseholdSurvey. This included the 12th Wave ofquestions related to employment andunemployment. This survey was execut-ed over a period of four months fromSeptember through December 2019 ona sample of 174,405 households. In theparas below, we discuss population esti-mates of the unemployment rate duringthis period.
The unemployment rate rose to 7.5 percent during September-December 2019.This was the seventh consecutive Wave torecord an increase in the unemploymentrate since May-August 2017 when theunemployment rate was 3.8 per cent.
As usual, the unemployment rate inrural India was lower at 6.8 per cent thanit was in urban India, which scaled up to9 per cent.
Rural India has a large 66 per cent sharein the overall estimate of India’s unem-ployment rate. Rural India has a low unem-ployment rate and this has a big impact onlowering India’s overall unemploymentrate. But, rural employment is of poor qual-ity. And grown ups, those over 30 years ofage, have a similarly large 66 per cent sharein the total population that is over 15 yearsof age. After the age of 30, people take what-ever job is available and so the unemploy-ment rate among people of more than 30
years of age falls very sharply. But, thesehave a high share in the total unemploy-ment estimate for the country.
What matters most is the unemploy-ment rate in the urban youth and in par-ticular, the urban educated youth.
The unemployment rate is very highamong the youth. It is 45 per cent for thosebetween 15 and 19 years of age. But,arguably, this is not the age at whichyoungsters should be looking for jobs.Ideally, they should be still studying atthis age. However, if, for any reason, theydo look for jobs, it is evident that they findit very difficult to find one.
Employment prospects for youngstersbetween 20 and 24 years of age who arelooking for jobs are not much better. Theunemployment rate for these has morethan doubled from 17 per cent in May-August 2017 to 37 per cent in September-December 2019. Similarly, it has risen from8 per cent in May-August 2017 to 11 percent for youngsters between 25 and 29years of age. It is this high and growingunemployment among the youth of thecountry that is very worrisome. The situ-ation gets worse in the cities.
An urban youngster in his early twen-ties had a discouragingly high unemploy-ment rate of 44 per cent duringSeptember-December 2019. It was neverso difficult in the past. A wait till theseurbanites reached their late twentiesimproved the unemployment rate theyface to 14.8 per cent. But, even this is theworst experience of this age-group.
The unemployment rate drops dra-matically from the age of 30. It falls to 2.5per cent for the age group 30-34 years andthen it falls to close to 1 per cent and thenless than 1 per cent. The problem, evident-ly is severe for the youth who are lookingfor jobs. The sudden sharp fall in unem-ployment after 30 years of age implies thatbeyond a point in age, people settle forwhatever jobs become available. A waitfor a job cannot be infinite.
Matters get worse for the educatedyouth. The educated young report a muchhigher unemployment rate. This indicatesthat the educated are looking for betterquality jobs but are unable to find them.
While youngsters in the age group of20-24 years reported an unemploymentrate of 37 per cent, graduates among themreported a much higher unemploymentrate of over 60 per cent. 2019 was the worstyear for these young graduates. The aver-age unemployment rate for them during2019 was 63.4 per cent. This is much high-er than the unemployment rate they facedin any of the preceding three years. Theunemployment rate they faced in 2016was 47.1 per cent. In 2017, it was 42 percent and in 2018 it was 55.1 per cent. 2019,therefore saw a very severe worsening ofconditions for the young graduates.
Similarly, while the age group 25-29years reported an unemployment rate of11 per cent, graduates in this age groupfaced an unemployment rate of 23.4 percent. They, too, found 2019 to be the worstof the past four years with an averageunemployment rate of 23.7 per cent. Therate in 2016, 2017 and 2018 were 21.3 percent, 18.3 per cent and 20.5 per cent,respectively.
The unemployment rate for post-grad-uates is also similarly high but it has notdeteriorated since 2016, when it was 24.6per cent. In 2017 it rose to 25.4 per cent,then fell to 22.3 per cent and rose again to23 per cent in 2019.
An overall unemployment rate ofaround 7.5 per cent does not reflect thereal challenges faced by India. Graduatesbetween 20 and 29 years of age, face amuch higher unemployment rate of 42.8per cent. This is India’s real challenge.An equally important challenge is thatgraduates of all ages put together alsohave a very high unemployment rate of18.5 per cent.
The author is managing director & CEO, CMIE
The real unemployment challenge
MAHESH VYAS
ON THE JOB
Mahathir speaks, India gainsWhy Malaysian premier’s criticism of Indianpolitics is good news for domestic edible oilrefiners and oilseed farmers
OUT OF THE BLUEANJULI BHARGAVA
TAKETWOANALYSIS BEHIND THE HEADLINES
60
40
20
0
Crude palm oilRefined palm oil
Sep ‘16 Jan ‘20
7.5
15.0
45.0
37.5
BOTTLED UPImport duty trends for palm oil (%)
*Import duty on Malaysia was 45%; 50% for other countries; **Levy of 5% safeguard duty on import from MalaysiaSource: ICRA Research Report
FY‘16 FY’17 FY’18 FY’19 FY’20 (Jan-Sep)
27
73
35
65
29
71
28
72
36
64
SHARE OF CRUDE AND REFINEDPALM OIL IN INDIA’S TOTALPALM OIL IMPORTS (%)n Crude palm oil nRefined palm oil
***
OPINION 9> STAY INFORMED THROUGH THE DAY @ WWW.BUSINESS-STANDARD.COM
The real possibility of a massive slippage in the disinvestment targetof ~1.05 trillion in the current fiscal year is pushing the governmentto look for alternatives. It is now reportedly looking at selling assetsowned by the Centre and central public sector enterprises (CPSEs)
and raise about ~1 trillion by March-end. Assets that are being consideredinclude land and brownfield operational assets such as pipeline, roads,mobile towers, and electricity transmission lines owned by CPSEs.
The idea of asset monetisation is worth pursuing as there are vast tractsof land held by government wings, such as the armed forces and railways,in metropolitan areas that developers might be willing to bid big bucks for.But completing the sale process in the given timeframe is almost impossible.Besides, the way it is being approached is fundamentally flawed. For one,the targeted assets belong largely to CPSEs, which would be forced to selland transfer the proceeds to the government as dividend. This goes againstthe basic idea of giving functional autonomy to state-owned companies.Second, the asset sale is being considered at the near end of the fiscal year,solely to meet the Budget targets. This can affect valuations and realisation,and lead to legal complications.
Evidently, the government is considering this option because it is unlikelyto complete the privatisation of companies such as Bharat PetroleumCorporation and Container Corporation of India in the current year, primarilybecause of poor planning. Since revenue collection is likely to fall short sig-nificantly, lacklustre performance on the disinvestment front will furthercomplicate fiscal management. The government has raised only ~18,095 crore,or about 17 per cent of the disinvestment target, so far in the current year. Thebiggest reason why the government often struggles to meet the disinvestmenttarget is because it does not approach the issue systematically. For instance, ifthe government wanted to go for large-scale strategic disinvestment, it shouldhave selected the names early in the fiscal year. Such transactions take timeas the potential buyers want to do their due diligence. The idea of asset sale ofthe CPSEs is another example of impromptu policymaking.
Therefore, the right approach would be that the government keeps aready list of CPSEs that it intends to divest in the medium term, both strate-gically or through a minority stake sale. The process should be extended toother assets, such as land as well. This approach will not only allow the gov-ernment to proceed more systematically but will also give market participantsthe necessary time to prepare and bid for assets. Such a process will resultin higher competition among bidders and lead to better valuation. This willalso give the government a fair idea as to how much money can be raisedover the medium term, compared to the current system of deciding a targetto plug the fiscal gap and then look for assets to sell. Ideally, asset sale shouldnot be seen purely as an option to plug the deficit. The proceeds should beinvested in creating new assets, which will help increase potential growthin the medium to long run.
Grim scenarioClimate-related financial risks should be mainstreamed
Every year, on the eve of its high-profile conference at Davos, theWorld Economic Forum releases a report that outlines what itsstakeholders believe are the major risks to the global order and togeo-economic stability. This year’s report is somewhat unusual, in
that all top five risks, as estimated by the report, are related to climate change.The headline concern of the report is: “Climate and corresponding economicrisks threaten a 2008-style systemic collapse unless net human-caused carbondioxide (CO2) emissions fall by 50 per cent by 2030 relative to 2010, and tonet zero by 2050.” The report outlines the multiple axes upon which climatechange and weird weather will impact societies, conflict, and economic sta-bility. Health impacts of extreme weather and greater heat stress will directlyimpact the poorest societies that already have over-stretched health systems,such as India. Food production and water availability will be under increasingpressure, which again has major consequences for an India that is alreadystruggling to equitably and efficiently distribute water. Internal and cross-border migration will inevitably increase — the current conversation aroundthe National Register of Citizens and the Citizenship Amendment Act onlyprefigures the political disputes in the decades to come as climate-inducedmigration swells to a flood. The report points out that there is essentially adecade left to deal with the problem.
Yet, in some ways, it is the direct economic threat of climate change out-lined in the report that deserves immediate attention, as climate risk simplydoes not figure enough in discussions of macro-economic stability and vul-nerability. This risk operates on several levels. For instance, there is thedamage caused to the economic base by extreme weather events. Of the $165billion of damage caused by natural disasters in 2018, about half was to assetsthat were uninsured. In fact, as climate-related damage becomes both morecommon and less predictable, insurance may not be able to keep up. Entiresegments of assets — for example, coastal infrastructure and housing —might become effectively uninsurable. The effects on labour productivitybecause of heat stress and the spread of disease to new areas opened up byglobal warming will also effectively reduce the economic base. Again, alabour-surplus and less developed country like India will find its ability togrow severely compromised by an increase in heat stress and a further reduc-tion in health indicators.
Financial regulators, policymakers, and investors need to mainstreamclimate risk into their analysis. In the Indian case, for example, infrastructureinvestment needs to routinely analyse the effect of more extreme climate onthe value of the asset. Companies need to start revealing their exposure toclimate change risks — in some jurisdictions, listed companies are nowexpected to do so routinely, and the Indian market regulator should lookinto how soon similar disclosure requirements can be announced in thiscountry. A whole-of-economy look at climate risks in India is overdue. Forexample, to what degree are existing “dirty” assets — old coal power plantsand unextracted coal mines — likely to lose value as India undergoes itsgreen transition? What will be the effect on banks and government finances?Given the compressed time-frame for climate action, preparing the financialground for proper risk assessment is overdue.
VOLUME XXIV NUMBER 113
MUMBAI | TUESDAY, 21 JANUARY 2020
On February 1, Finance Minister NirmalaSitharaman will present in Parliament whatwill arguably be the most important Budgetthis government has formulated to date. Investorswill go through the document and the Budget speechwith a fine-tooth comb, looking for any indicationon how the government will tackle the slowdownand the path forward. Investors are keen to see acoherent economic game plan.
There is consensus among global investors thatthe time has come for a serious push to improve thebusiness climate. If we do not see major reform stepsto boost the economy now, given the economic weak-ness and the majority this govern-ment enjoys, there is little chanceanything significant will happen lat-er. For investors, this Budget will bea litmus test for judging the reformcredentials of the government.
A few things are clear. We willhave a significant fiscal slippage.Most investors expect a revised fiscaldeficit of 3.7-3.8 per cent of GDP, com-pared with the targeted 3.3 per cent.We have a slippage of 11 basis points,3.3 per cent to 3.41 per cent, simplydue to a lower nominal GDP. Anadditional 30 or 40 basis points of fiscal slippage overthat will be acceptable to most, given the weakness inthe economy and the need to maintain governmentspending in the absence of a revival in either con-sumption or exports.
Investors would like to see this fiscal space be usedfor capital expenditure. For the following year, though,they do expect efforts to get the fisc back on track, anda target of 3.3- 3.5 per cent of GDP for 2021 seems real-istic. No one expects the 3 per cent fiscal target to behit anytime soon.
Given the lack of space on the fiscal front and con-straints on monetary policy, now is the time for genuinereforms. The finance minister would be well advisedto go sector by sector and try to implement the policychanges needed to boost investment and exports, withthe hope that consumption will follow. Here’s whatinvestors are hoping for from the Budget.
For global investors, one important step would be
the scrapping of the long-term capital gains (LTCG)tax on equities. LTCG tax has not yielded much rev-enue and administratively makes life complicated forglobal funds. Many of the truly long-term investors(the endowments, sovereign wealth and foundations)pay no tax in their home jurisdictions and considerIndia an outlier in levying capital gains taxes on them.
It would not be feasible to totally scrap capitalgains taxes but at least long-term capital gains maybe exempted. This would raise the expected post-tax returns of investing in Indian financial markets,and lower the cost of capital for companies. Thismove for equities can be easily funded by marginally
raising the securities transactiontax. This step, while not costing thefisc much, would boost risk appetite,encourage the financialisation ofsavings and send a positive signalto global capital providers.
Another step in the Budget mustbe to provide funding to implementa scrappage scheme for old vehicles.Any commercial vehicle over 15 yearsold must be scrapped, and incentivesprovided to do so. This will not costthe exchequer more than ~10,000-~15,000 crore, but provide a huge
boost for the auto industry. It will dramatically lowerpollution and vastly improve fuel efficiency of thecommercial fleet. This is a win- win for everyone.
The auto industry is a big employer with a sig-nificant multiplier for the economy, but it is currentlydoing poorly. Cash for clunkers schemes have beenimplemented across the world, especially during thetime of the financial crisis. They have been provento work. There is no reason why India cannot godown this path. The only constraint is money.Whatever fiscal leeway is available must be used toimplement schemes like this.
Another area where we should see governmentaction is start-ups. We now have a robust start-upecosystem, with money available across the maturityspectrum of companies. From angel rounds to seriesD, E and F, money is available. While the governmenthas done a lot to encourage start-ups, clearly recognisingtheir importance, more can be done. They should be
allowed to carry forward losses for 15 years, rather thanthe eight years permitted today. The median start-uptoday will remain a private company for 12 years (USdata), compared with six or seven years earlier. Theywill also most likely lose more money, for longer thanin the past, before turning profitable. Extending theirperiod of carry forward losses, improves their cashflows and net margins when they finally turn the tideon profitability. A case can also be made to tax employeestock options on sales, rather than on exercise. Thiswill make options more attractive for employees andease their cash flow burden. A final point would be toexempt the start-ups from provisions of Article 42 ofthe companies Act, wherein under certain conditions,these start-ups can be considered as public companies.
Exports have been a big disappointment over thepast few years. Till such time as domestic demandrecovers, exports would be a good way to tap into globaldemand. Higher utilisation will eventually trigger aninvestment cycle. A comprehensive package of incen-tives and policies to improve export competitivenessmust be announced.
For the telecom and power sectors, we needindustry specific interventions. On telecom, the gov-ernment has to find a middle path and provide somerelief to the beleaguered industry from the wholeadjusted gross revenue fiasco. We cannot have onlytwo private players surviving.
On power, the state electricity boards (SEBs) remainbankrupt. The UDAY scheme has not worked. Whywill anyone invest in a sector where your principalcounterparty is bankrupt? The SEB debt to private pow-er players has once again ballooned to ~46,000 crore.
When it comes to direct taxes, many expect that wewill see significant cuts in rates. Realistically, the bestwe can hope, though, is some rationalisation in theexemptions, simplification and a marginal rebalancingof the slabs/ rates.
The disinvestment targets for 2020 will be missedbut 2021 should be a big year as the BharatPetroleum Corporation, Container Corporationof India and Air India transactions will get com-pleted. The government must sell its stakes in TataCommunications and Hindustan Zinc, and othersuch residual holdings and monetise whatever ispossible. In both these companies, the governmentis not involved in day to day management, why keepthe stakes?
The government must also go through the list ofpublic sector units and see where value can be captured.NMDC is an obvious example. Another example ofpotential value unlocking is Hemisphere Properties.The land is worth thousands of crores and there has tobe a way to monetise its value, rather than wait yearsto develop the asset. The big one, however, will be theLife Insurance Corporation of India (LIC). This is prob-ably the most valuable wholly-owned asset of the gov-ernment. Given that LIC has done a reasonable jobhandling private sector competition, there is significantvalue. Will the government list LIC? It cannot be astrategic sale, but a listing and gradual sell-down ofstake while maintaining control.
There are many other sector-specific thingswhich can be announced in the Budget. Real estateand the NBFC space are other areas of focus. ThisBudget needs to revive confidence in the Indianeconomy, and convince investors and India Inc thatthe economy and reforms are once again a top pri-ority for this government.
The writer is with Amansa Capital
After decades of intensive agriculture, farms andfarmers are in a crisis, food markets remaindistorted, and consumers do not have accessto nutritious diets. India needs a shift towards sus-tainable food systems. Among many alternative farm-ing techniques is natural farming, with the potentialto improve sustainability and also meliorate govern-ment finances.
Natural farming is an alternative to chemical fer-tiliser-based and high input cost agriculture. It embod-ies principles of agroecology, activating microbial lifein soil via bio-inoculums (prepared using cow dung,cow urine, jaggery, etc.), thereby improving both soiland plant health. The practice advocates completeelimination of synthetic chemical inputs and encour-ages natural inputs, mulching practices and symbioticintercropping.
Andhra Pradesh has had a state-wide natural farming programmesince 2016, now covering 580,000farmers. Other states — Chhattisgarh,Himachal Pradesh, Karnataka, Kerala,and Uttarakhand — have shown inter-est. The central government has helddiscussions. In her Budget speech ofJuly 2019, the finance minister high-lighted natural farming, its potentialto contribute to the goal of doublingfarmers’ incomes and allocated �325crore for its study and promotion. InSeptember, at the meeting of the UNConvention to Combat Desertification,the prime minister also promoted“Indian natural farming practices”.
Researchers at the Council on Energy,Environment and Water (CEEW) have estimated that,at scale and properly implemented, natural farmingcould potentially impact a quarter of the 169 targetsunder the Sustainable Development Goals. But thereare gaps between promise and practice. Not all farmersswitch to natural farming entirely. Not all farmers havebeen practising it for long, so there remain uncertain-ties about yields. Not all farmers have access to func-tioning markets to secure higher returns.
A central proposition of natural farming is thatchemical fertiliser use and related input costs couldbe significantly reduced. CEEW’s latest study investi-
gated this claim — and the impact on fertiliser subsi-dies*. Evidence appears promising. Based on a surveyof 600 farmers across all agro-climatic zones in AndhraPradesh, the study found significantly lower fertiliserconsumption (more than 95 per cent reduction inmost cases) for naturally farming rice and maize. Aconventional farmer uses 74.46 kg of urea per acre.The expected urea use for a natural farmer was foundto be 0.59 kg/acre. Farmers also reported 90-93 percent lower expenditure on fertiliser and pesticideinputs compared to conventional farming, or savingsof �5,000-7,000 per acre.
India is the world’s second largest producer of urea(and the largest importer in 2016). Fertiliser subsidiesare budgeted to be �80,000 crore in 2019-20. AndhraPradesh, alone, received more than �3,500 crore in2018-19 as fertiliser subsidy. In 2019, the government
spent $3.2 billion as additional sub-sidy on imported gas used in fer-tiliser industries. This representedabout 8 per cent of the total subsidy(food, fuel and fertiliser) budget forFY2019-20. Further, subsidies haveresulted in urea imports jumpingfrom 0.2 million tonnes in 2000 to6 million tonnes in 2017.
Reducing fertiliser use with nat-ural farming has significant fiscalimplications. With complete pen-etration of natural farming acrossAndhra Pradesh, the state couldsave almost �2,100 crore in fertiliser
subsidies annually (based on report-ed consumption by farmers). Even
with low penetration of 25 per cent, estimated savingscould be �517 crore annually. These estimatesacknowledge that some farmers continue to use chem-ical inputs for a portion of their land during a transitionphase. This could be thanks to behavioural inertia,hesitation with wholly adopting a new practice, orlack of natural inoculants in sufficient quantity. If theyswitched completely, then fertiliser subsidy savingswould range between �539 crore and �2,154 crore inthe low- and high-penetration scenarios, respectively.Such savings could finance full rollout of natural farm-ing in Andhra Pradesh (estimated to cost �17,000crore) within 8-10 years.
Adopting natural farming more widely needs moreresearch, deployment and evaluation. There is urgentneed to conduct a long-term comprehensive impactevaluation of natural farming methods on food pro-duction (quality and quantity), farmers’ incomes andwelfare (lower debt burden, for instance), and envi-ronmental outcomes (soil health, water conservation,and carbon sequestration).
Research should cover several agro-climatic zonesacross the country. Data from crop-cutting experi-ments must be analysed against the social and eco-nomic conditions under which the practices wereadopted. Are there commonalities in the circum-stances of high-performing farmers that could bescaled up in other regions as well? Is there a relation-ship between prior ecological conditions and subse-quent improvements, which could indicate the regionswhere natural farming is more likely to succeed?
Another link is between natural farming and cli-mate adaptation and mitigation. Chemicals and fer-tilisers account for 12 per cent of greenhouse gasemissions from India’s manufacturing sector. Apartfrom reducing manufacturing emissions, studies ofsoil carbon retention and resilience of naturallyfarmed crops against climate stresses could be doc-umented in state climate action plans. New infor-mation from field surveys could be used to updatethe plans. Robust studies on carbon sequestrationcould link farmers to climate finance mechanisms,creating new channels for investment in naturalfarming or additional income for farmers.
A systemic shift in agriculture would mean vastlyupgrading resource productivity, increasing economicviability of alternative practices, and greater socialinclusion of the small and marginal farmer. More infor-mation is needed to definitively say whether naturalfarming increases yields and farmers’ incomes. Butthe impacts on fertiliser use and lower subsidy burdensuggest that we encourage more experiments and sci-entific evaluation — at scale — towards sustainablefood systems.
Ghosh is CEO and Gupta is Research Analyst, Council onEnergy, Environment and Water (http://ceew.in). Follow@GhoshArunabha @CEEWIndia *Gupta, Tripathi,Dholakia (2020) Can Zero Budget Natural Farming SaveInput Costs and Fertiliser Subsidies? Evidence from Andhra
For a book that argues that smaller isbetter, the title is more than a mouth-ful. Too Small To Fail: Why SomeSmall Nations Outperform Larger OnesAnd How They Are Reshaping The Worldpresents the idea that economic power isno longer linked to maintaining giantarmies and navies. It is a matter of winningtrade battles and global contests for attract-ing professional talent.
“For centuries, a country’s status hasbeen measured by the size of its territorialreach, its military might and its naturalresource endowment,” writes the authorR James Breiding. “While still importantto the global balance of power, thesephysical metrics are waning today inrelevance in the face of increasing globaleconomic interdependence, drivenlargely by rapid developments ininformation technology,telecommunication and transportation.”
Part A of this book, called “SecretSauces”, focuses on the qualities andattitudes valued in smaller countries thathave overcome physical limitations tomake progress in several spheres. MrBreiding believes that their success lies intheir alertness to risks, their willingness toadapt, and the fact that their investment
in human resources reflects industryneeds. They are adept at using soft power,and skilled at resolving geopoliticalconflicts through negotiation. It issurprising, therefore, that Mr Breidingchose to include Israel, which profits fromits occupation ofPalestine.
Smaller countriesprefer to attainprosperity throughinnovation ratherthan annexation ofterritory, expansionof borders orenslavement ofpeople. “In Sweden,”Mr Breiding writes,“all employees have astatutory right to takesix months off work and start their ownbusiness. No wonder Sweden is dubbed‘Europe’s start-up capital’ and hasproduced more unicorns …such as
Klarna, Spotify and Skype than anywhereoutside of Silicon Valley.”
What is most enjoyable about thewriting style is that, apart from giving yourelevant statistics to back up observations,it also brings you anecdotes from the
author’sconversationswith leaders fromacademia,industry andgovernment. Hisexpertise lies insynthesising theirinsights on thehistories,economies,political systemsand social normsof their respective
countries. For example, he cites aninterview with Ralph Eichler at the SwissFederal Institute of Technology (ETH),who feels that excessive time pressure and
over-measurement discourageinnovation. He told the author thatresearchers in Asian countries tend to picklow-risk projects because they fear lookingfoolish if they are unable to measure up tothe prescribed key performanceindicators.
Part B, titled “Leading By Example”,looks closely at specific countries and theiraccomplishments despite their seemingdisadvantage with respect to size. InFinland, all citizens get access to the sameeducational opportunities regardless oftheir family wealth, stature, ethnicity, orplace of residence. In the absence ofadmission restrictions, parents do not feelpressured to game the system to get theirchildren into the best schools. Educationis also free right up to and including highereducation. Apart from tuition, this covershidden costs such as meals, textbooks andhealthcare insurance. Moreover, there areno elite private schools and no stigmaattached to specialised crafts and trades
because people who excel at them arevalued in their society.
In Part C, titled “The Future ofNations”, Mr Breiding notes that citizensare becoming more mobile thanks tocountries that use residence permits andcitizenship to attract the most desirableimmigrants such as top scientists,executives and the ultra-rich. Many ofthese are TSTF countries. He predicts thatcountries will be smaller, more cohesivebecause that would make it easier to craftand implement policies. There would befewer degrees of separation betweengovernment and the citizens. This soundslike the perfect world but Mr Breidinggives us a reality check: smallness is noguarantee of success as evident in the caseof Haiti, Lebanon and Zimbabwe. Eachcountry grapples with its owncircumstances and must find its own path.
A longer version of this review appears on the website
Natural farming for fiscal prudence?
Small powerhouses
Asset sales for raising ~1 trillion is a mirage
A flawed strategy
TOO SMALL TO FAIL:WhySomeSmallNationsOutperformLarger OnesAndHowTheyAreReshapingTheWorldAuthor:R. JamesBreidingPublisher:HarperCollins
AKASH PRAKASH
ILLUSTRATION:AJAY MOHANTY
It will be a litmus test for the government’s reform credentials
Investor expectationsfrom the Budget
INFLEXION POINTSARUNABHA GHOSH &NITI GUPTA
BOOK REVIEWCHINTAN GIRISH MODI
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