2014-15 An in-depth look

1. 2014-15An in-depth look Prof. ManasiPhadke

2. QuotableQuotes... “The verdict of the people shows their exasperation with status-quo” “Its not wise to expect everything that can be done to be done in the first budget announced within first 45 days of formation of the Government” “Sabkaasaath, sabkaavikaas”

3. Overall themes of the budget • Fiscal consolidation: Can’t expect future generations to pay taxes for our excesses today • Infrastructure development • Growth revival in manufacturing • Expenditure on agriculture, better PDS towards food security • Tax relief for the AamAdmi • Sustainable livelihoods for economically disadvantaged, differently-abled people • Long term soft programs like sanitation, health care, technical education, management education • Cultural revival: Sacred rivers, art and craft, sports and spirituality • Use of technology for smart cities, neo rich middle class

4. Expectation vs. Delivery

5. Expectation vs. Delivery

6. Overall rating on the budget: 4/5  FM loses a point on: • Overdoing the fiscal consolidation story • Not doing enough on subsidies • Not enough guidance on how the PPP routes will come in • No numbers on expected FDI flows to insurance and defence • Only fleeting mention of FCI and PDS reform; no specifics on the food security • Will he walk the talk?

7. Fiscal consolidation • Takes on 4.1% target as a challenge thrown by Chidambaram • Unnecessary bravado when the economy is in a slowdown mode • No external pressure from rating agencies as well • Also suggests 3.6% and 3% as FD for FY16 and FY17, while himself saying that a growth of 7% can only be achieved in 4-5 years • This reduces the potential spend on infrastructure • Puts more pressure on delivering on taxes

8. Direct / Indirect taxes: The Maths • Net impact of give-aways through raising exemption limit, PPF limit and interest incentive is Rs.22,000 crores on the negative side • Net impact of indirect taxes is additional Rs. 7525 crores • There is Rs.14000 crores pressure on the negative side • On top of it, he increases the overall subsidy burden to push the revenue deficit to 2.9% of GDP

9. Comparison in subsidies (FY14 and FY15 )

10. Plan vs. Non Plan expenditure • Plan expenditure includes that which is included in the 12th Plan blue print: Typically includes capital expenditure • This is at 46.7% of the Non-Plan expenditure which includes subsidies, salaries and interest outgoes • Interest payment eats a typical 40%, which is unavoidable • Subsidies account for 19% of the expenses, which should have been capped at 2% of GDP • A reduction of Rs.50,000 cr on subsidy account would have helped to reign in the revenue deficit at 2.5%, offering significant benefits to the account

11. Some quick facts on fertilizer subsidies • Major fertilizers used are urea (nitrogeneous based), MoP (potassic) and DAP (phosphatic) • While urea is sold at around Rs. 5360 per tonne, MoP and DAP are 4 times its price • Main feedstock in urea is natural gas, the price of which was increased to incentivize producers and to ease up the supply to a fuel starved power sector • This increases the cost of urea subsidy by Rs. 12000 crores, if prices are not hiked

12. Since 2000, urea prices have seen only 16.5% hikes whereas MoP and DAP have seen tripling and quadrupling of the prices • This leads to indiscriminate usage of urea by farmers with serious ecological impacts • 92% of the urea sold in India is produced in India whereas 8% needs to be imported • Since the farmers use more urea, the level of subsidy increases even more: Add on burden of subsidy estimated to be Rs.50000 crores

13. Announcements pertaining to fertilizers • “New urea policy and an overhaul of the subsidy regime” is about the only thing he said in the budget • While stocks are up on the news of an “overhaul” the real problem of the fertilizer industry is the under-recoveries of the dues from last year • Unless the overhaul includes a mechanism to repay the dues quickly, the industry won’t be able to improve margins • More clarity was definitely expected on this issue

14. PPP as a mode of financing infrastructure • A large chunk of the smart cities, trains and ports are to be developed using the PPP route • What is the history we have with regards to the PPP model? • Only started using the PPP model after reforms were ushered in 1991 • From 1991 to 2006, hardly any progress made in PPP models • Primarily at state level and only witnessed in roads and urban development

15. 2006- 2014 record not very encouraging • This is the phase where the PPP shows some movement, though its not very encouraging • Only 758 projects worth Rs.3,83,300 crores have started under the PPP mode in India so far • Main deterrents: No regulatory authority for PPPs, the commissioning authorities often do not have full clarity about timelines and targets associated with the projects, private sector dependence on the cash trapped banks is probably the biggest hurdle in the process • While the budget announces reliance on PPP mode, it does nothing to address any of the above issues

16. FDI in insurance.. • Less than 5% of Indian population is insured • A move to the rural hinterland will require capital, that could potentially come from foreign partners looking to increase their stake • Winners could be Standard Life (Scotland), Lombard (France) and Allianz (France) • Local banks to benefit as the move may require piggy backing on their rural network • The industry estimates that $3 to $5 billion could come in the next 6 months, but no guidance from the budget

17. Where the budget scores: • Thrust on infrastructure: The BJP PMGSY revived, Power, Rural Drinking Water, Health and Sanitation, Education Girl Child • Growth revival in industries: Tax rationalization, industrial cities and parks to be notified, SEZs revival, fund for start-ups, credit for MSMEs, investment allowance upto Rs.25 crores investment in plant and machinery • Food security: Farm credit targets, interest rate subvention, irrigation outlay, agriculture infrastructure fund, warehousing fund • Power sector: 10 year tax holiday instead of 1-year differential tax treatments, separating power feeders for farms and households, fund allocations for ultramodern solar projects, or development of solar parks on the banks of canals (Gujarat model copies!), dovetailing solar energy to drive irrigation pumps, impressive outlays given in the budget. Input costs for solar panels have been reduced through reduction in the customs and excise duties of components

18. Other long term plans • Total sanitation for every household by 2019 • Drinking water and health spends are very healthy indeed • AIIMS in every state, 5 new IITs and IIMs • Skill development in the youth • Thrust on sports • Ancestral skills, art and craft villages, cleanup of the sacred rivers

19. KyaAcche Din Aayenge? Thank you!!! This is a pictoral representation of the policy uncertainty index created by economists Scott Baker and Nicholas Bloom High score on blue line indicates an uncertain environment that adversely Affects GDP: Hopefully the blue and the red will cross over soon!

20. Acche Din Aayenge! Thank you! manasi.phadke@gmail.com