End of Neo-Colonialism

The babel around the Budget and the XIV Finance Commission and subsequent comments and analyses have now ebbed. There are some States and stakeholders who are critical based on inadequacies of allocation in the social sector. But there is a consensus that the Budget represents a credible balancing act and gives a decisive momentum to the economic upturn which has already commenced. Thomas Sowell has said “The first lesson of economics is scarcity: There is never enough of anything to satisfy all those who want it. The first lesson of politics is to disregard the first lesson of economics.” So which lesson did the Budget pursue?

In retrospect, there were some overarching policy options to leverage that the Finance Minister had.

One, the classic choice: growth versus inflation. How much of fiscal flexibility was acceptable to enhance public outlays in infrastructure – railways and highways? The budget has adhered to the path of fiscal rectitude by meeting the fiscal deficit target of 4.1% this year.  It has postponed the terminal fiscal deficit target of 3% by an additional year with somewhat higher intermediate targets. The rating agencies prefer a closer adherence to the fiscal roadmap.  Of course the new time path must be adhered. I have for long argued that parliamentary approvals must be ex-ante than ex-post. The recommendation for a Fiscal Council contained in the Finance Commission’s recommendations is sensible.  This along with the new Monetary Policy Framework Agreement between the Finance Ministry and the Reserve Bank of India would act in congruent ways. It will ensure harmony between monetary and fiscal policy and thus Mint Street and North Block.

Two, subsidy rationalisation. There are significant gains in rationalising petroleum and fertilizer subsidies by de-regulating petrol and diesel and moving over to the Aadhar based LPG subsidy.  Further action is needed on fertilizers, particularly Urea. There must be pari-passu progress as JAM (Jan Dhan-Aadhar-Mobile) gathers momentum.

Three, congenial external environment to be harnessed. Oil prices have dramatically declined from $82 to $59 with soft commodity prices. The current account deficit is acceptable even though in the long run sluggish export behavior needs innovative action beyond conducive exchange rates.  We could have used this opportunity to create greater fiscal space for the future. Public debt could have been retired or a Consolidated Sinking Fund for amortisation of debt created. The Finance Commission suggests this can “tide over, roll over risks and the weak cash management practices.”. A middle path has been preferred. Substantial benefit has been passed to the consumers enhancing their purchasing power, allowing oil companies to recoup some losses and raise revenues to meet fiscal targets. Given the opportunity, this must be pursued.

Four, the XIV Finance Commission’s recommendations. There is overwhelming precedence that on devolutions they have been treated as awards than recommendatory. Consequently, total devolution to the States is now 62% of which 42% is from common divisible pool of taxes. The rise in tax devolution to States and the Non Plan grants to local bodies together represent a sharp cut of ’206292 crore from the Centre’s resource block. In the shrunken resources for the Central government the funding pattern of schemes has under gone a structural shift.  The Budget at a Glance again highlights the middle path. It classifies public outlays in three categories – schemes to be supported by the Union,  schemes to be continued with change in sharing pattern and those fully de-linked from Central support. The major flagship programmes of the government remain in the Union list like the Sarva Shikaha Abhiyan, MGNREGA, Pradhan Mantri Gram Sadak Yojna. There are others which would be financed with a changed sharing pattern. Schemes de-linked from Central support, leaving it for the States to decide are rather small. The most contentious being the Backward Region Grant Fund to Bihar, KBK and Bundelkhand.

There has been misplaced criticism that social sector outlays have been drastically pruned.  In making such comparisons a methodological error has crept in.  Analysts have compared the Budget Estimates of 2014-15 with the Budget Estimates for the current year. Those familiar with public finance know that normally the comparison is between the RE (Revised Estimates) with BE (Budget Estimates). Such comparison would suggest that allocations have been kept more or less intact. In the case of Integrated Child Development Scheme (ICDS) the reduction is sharp, but the pattern of funding is yet to be decided.

Thus the Budget and the Finance Commission are two sides of the same coin. It emanates from the design and conception of a new financial architecture of Centre-State relations. It is a giant step in promoting federalism where much larger untied resources become available to the States for selecting, designing and implementing programmes best suited to their needs. The Government had little option given the shrunken envelope after accepting the Finance Commission’s recommendations.  After all you cannot have the cake and also eat it. States cannot have both the cake of large untied resources and eat the Centrally Sponsored Schemes as originally conceived.  One can argue of whether this was the best approach or could the recalibration have been somewhat different? 

Will this new model of Fiscal Federalism work? There are inherent risks but also existing opportunities for Team India. The risks are well known if the State Governments act irresponsibly or promote fiscal profligacy. But in the end, the Government at the Centre and the States are judged by the improvement and development of life quality by the Electorate whose periodic mandate they seek.

The new fiscal architecture eliminates the form of neo-colonialism like what Rudyard Kipling described as the White Man’s Burden  viz. the Centre knows what was good for the States. A new social compact between the Union and the states has been ushered.

Thus, the adoption of the XIV Finance Commission’s recommendations and the Budget reflect that the Government has accepted both, the first lesson of economics and the first lesson of politics. A credible balancing act is what the budget is all about.

Grasping ‘Pravasiye’ Opportunities

The 13th meeting of Pravasi Bhartiya Divas was concluded last week in Ahmedabad. This congregation of Indians every year presents the diversity of Indians living and working abroad.

There are basically two categories of the Indian Diaspora - Non Resident Indian ((NRI) i.e. “a citizen of India who holds an Indian passport and has temporarily emigrated to another country for six months or more for employment, residence, education or any other purposes”) and Person of Indian Origin ((POI)  i.e. “ a person who was born in India or whose ancestors were born in India or other states who have Indian ancestry but is not a citizen of India and is the citizen of another country.”)

Indian has the second largest Diaspora in the world, spread across 200 countries. The Gulf Cooperative Council (GCC) accounts for the largest share of Indian Diaspora accounting for over 6 million Indians followed by Europe. United Kingdom, alone is a home to close to 2 millions of Indian Diaspora Population. The United States has 1.5 millions of Indian Diaspora population.

The geographical spread of Indian Diaspora across the globe and the reasons contributing to migration of people from India have evolved overtime. Historically, Indians left the country as indentured labourers to the destination countries of Caribbean, Fiji and Mauritius. In contrast, the current migratory flows from India comprise of students and qualified professionals and intellectual personnel to developed countries, particularly, UK, USA, New Zealand, Canada and Australia. The movement of skilled personnel has accelerated particularly from 1990s following the rapid development of Information-Technology. There is an outflow of semi-skilled and unskilled workers too, which remains biased towards the Gulf.

The NRI community traditionally had a nostalgia and attachment to their homeland but felt alienated and ignored by the government. They often felt that the Indian embassies paid scant attention. Sieglinde Lekme has said “Sometimes diaspora art expresses a longing for home, and frequently it tries to construct a collective identity out of its mostly heterogeneous reality.”. So how can we convert these longings into tangible investment opportunities?

Overtime the Diaspora Community has also metamorphosed itself. They have reached second and third generations. Also they have integrated themselves well with their destination countries. In United States they have acquired advantaged positions and entered the political arena of the country. The US Administration has more than 50 Indians in it including Mr. Rajiv Shah who has acquired the highest position in US Aid as the admin of the US Aid. In United Kingdom also the status of the Indian Diaspora has changed. There are 18 Indians in the House of Lords and 6 British Indians in the House of Commons. This part of Indian Diaspora has showcased significant influence in policy changes. Integration of Indians abroad with the destination countries’ top layer of entrepreneurs and politicians has helped India in increasing its political reach and strategic influence globally.

How can this Diaspora be most effectively harnessed for India’s development?

The Overseas Indian Community contributes to country’s GDP by the way of remittances. India is one of topper recipients of remittances. It received a total of $70 billion as remittances in 2013, two thirds of which came from the Gulf Countries and North America. The remaining one-third is significantly accounted for by the European Countries of UK and Canada. The shares of major source countries in the total remittances flowing to India have remained more or less the same for almost a decade now.

These remittances play a crucial role in creating consumption demand domestically by directly lending purchasing power to the migrants’ families. Besides, the inflow of remittances provides a cushion against the current account deficit and thus helps in managing country’s Balance of Payment (BoP) Account. Of late, there has been a gradual increase in the inflow of remittances as savings in the bank accounts facilitated by the moderated cost of transferring remittances and deregulated interest rates on bank deposits by NRIs in the Non Residential Ordinary Accounts and Non Residential External Accounts.

Albeit increased remittance and investment inflows, yet the Diaspora involvement in country’s development matrix remains below its potential. How can the Indian Diaspora be enabled to contribute to the development of their motherland?

First, though the use of remittances for purposes other than consumption has somewhat increased but there is ample scope for better channelisation of this monetary contribution of the Diaspora. Increased inflow of remittances to the directed to savings accounts in the banks can be leveraged for increasing the liquidity in the economy. Alternatively, these funds can be loaned out towards funding investments in the economy. This would inturn create new employment opportunities, infuse new income followed by new consumption and investment in the economy through remittance multiplier effect.

Second, electronic transfers are the most preferred and easy mode to transfer remittances for Indians living abroad. Thus, improved basic technological know-how at the home country to receive electronic transfers can enhance the inflow of remittances through formal channels.

Third, the Indians living abroad can also take part in country’s development by making direct investments and also by making available their intellectual and entrepreneurial expertise for the country. Countries like China have been successful in attracting its trained and qualified Diaspora in the developed countries to return and play a role in Chinese think tanks and universities.  Similar arrangements can be made in India wherein the Indian personnel abroad can come and undertake some specialized activities like major surgeries; teach for a semester or for sometime if resettlement in India is not feasible and collaborate with the research departments of Indian academic institutions. They can help in finding innovative solutions to improve the outcome through public outlays.

Finally, while the 13th Pravasi Bhartiya Divas in Ahmedabad had a very robust presence given the attraction of the new government and Prime Minister Modi’s appeal to Non Resident Indians, this cannot be said of many other states in India. Gujarat is a shining example but other parts of the country need to emulate the story. Innovative ways to integrate the Diaspora and making them partners in development are required.

Indians abroad are now players in influencing the political and economic discussion making in US, UK and Australia. It is a challenge on to harness and leverage their new found political and economic power to India’s advantage to garner greater investments, inward capital flows, technology cooperation and counteract the growing influence of some other competing countries.

As India matures, so does the Indian Diaspora. We need to build virtual circles on their new strengths. The challenge is of grasping these new opportunities.