2011 Budget: 'Quietly Laying the Groundwork'

India's 2011 Budget: 'Quietly Laying the Groundwork' for Reforms

Published: March 10, 2011 in India Knowledge@Wharton

Last year, when India's finance minister Pranab Mukherjee had presented his Budget for 2010-2011, he had sought the blessings of Hindu deity Indra -- the king of the gods, and more specifically, the god of the weather. He got the bountiful monsoons he wanted. This year, he added another deity to the proceedings. "I would pray to Goddess Lakshmi [the goddess of wealth and prosperity] as well," he told Parliament. "I think it is a good strategy to diversify one's risks."

Indra is essential: The Indian economy is still very dependent on the monsoons. Lakshmi is coming into her own: According to figures released by the Central Statistical Organization in Delhi in February, the economy will grow at 8.6% in 2010-2011, boosted principally by agriculture, which is likely to grow at 5.4% against just 0.4% in 2009-2010. Per capita income will rise 17.3% to US$1,200, which makes India a middle-income country, according to World Bank classifications.

According to the Capgemini-Merrill Lynch 2010 Asia-Pacific Wealth Report, India's HNWI (high net worth individual) population and its wealth grew 50.9% and 53.8% respectively in 2009. In absolute numbers, India is still low (with 126,000 HNWIs against China's 477,000). "Going forward, China and India are likely to remain the fastest-growing HNWI segments in the world," says the report. World Bank data shows that India will overtake China as the fastest-growing major economy in 2012, and the number of HNWIs is expected to increase.

Mukherjee's Budget did not cater much to these dollar millionaires, nor was it expected to. But surprisingly, it didn't offer much for the other end of the spectrum -- social sector spending. It was essentially a patchwork of proposals, none of them going far enough to set a tone for the Budget. "This is not a marquee budget, as the finance minister himself concedes in the speech," says Rajesh Chakrabarti, assistant professor of finance at the Hyderabad-based Indian School of Business (ISB). "But it is a good one, since it shows policy continuity in many areas and quietly begins the groundwork in many reforms, albeit in a gradualist manner." Adds New York-based Rajinder Sabherwal, who manages a macro fund called Magister Ludi Global: "The follow through on reforms and policy moves will be carefully watched."

Reform Measures Need a Push

Follow through will be urgently needed on several bills that have been stuck in the system for several years. The government does not have the numbers to push these through Parliament. But several opposition parties -- including the Bharatiya Janata Party -- support them in principle; they need to be wooed to support them on a case-by-case basis. Mukherjee specifically mentioned seven bills in the finance sector. They relate to insurance, pensions and banking. A couple of days after the Budget, the Union Cabinet approved the Banking Regulation (Amendment) Bill, which shows that the finance minister is not batting alone on the reforms front.

The other place where there has been some limited action is foreign investment. Foreign investors can now invest directly in mutual funds; it was earlier restricted to foreign institutional investors (FIIs). The FII limit for investment in corporate bonds has been hiked from US$5 billion to US$25 billion. But the big-ticket changes -- in retail and insurance, for instance -- were missing. There has long been a call to relax the foreign direct investment (FDI) limits in these sectors. An initiative on the controversial FDI in the retail sector (it will kill mom-and-pop stores, say the critics) was regarded as a certainty. Food inflation has been galloping. "The total food inflation declined from 20.2% in February 2010 to less than half at 9.3% in January 2011, but it still remains a concern," noted Mukherjee. FDI in retail is expected to filter down to the back end -- cold chains and logistics -- and reduce food prices. According to government figures, annual wastage in foodgrains is 10% and in horticulture 30%-40%, totalling up to US$18 billion.

But, again, Mukherjee may have sidestepped the issue to avoid another confrontation in Parliament. (This was one of the most peaceful Budget speeches ever, with hardly any interruptions from rambunctious members.) Just four days after the Budget, Mukherjee told a meeting of the Institute of International Finance in Delhi that discussions were underway to further liberalize the FDI regime. "There was not much expectation [of FDI in insurance and retail] going into the Budget this year," says Chakrabarti of ISB. "The expectation is there in the years to come."

Response from Foreign Investors

How have foreign investors reacted to this? Over the past couple of months, FII money has been pulling out, and the Bombay Stock Exchange Sensitive Index (Sensex) has tumbled from a high of more than 21,000 on November 5 to a closing of 17,823 on Budget day. (At one point that day, it had reached 18,296.)

"India has looked ungovernable and unattractive to foreign investors the past three to four months," says Sabherwal of Magister Ludi. "The budget is a step towards regaining the lost confidence. Our assessment is that India could regain its luster in the second half if it manages to wrestle down the key issues. We believe it will -- and foreign fund flows will follow." Nandan Chakraborty, managing director of institutional equity research at Enam Securities, points out that Mukherjee has promised a comprehensive FDI policy review. "He has implicitly committed to most of the reform agenda, without creating political controversy by mentioning some of them explicitly," he says. "The Budget has done what was in its control."

Mukherjee hasn't ruffled any feathers even on sensitive issues like public sector disinvestment. He has kept his target at US$8 billion, the same as last time. (The actual mobilization so far this year has been a little more than US$4 billion.) "The government is committed to retain at least 51% ownership and management control," Mukherjee assured the House.

A New Way to Subsidize

There was one announcement that could have huge implications for the long run. The government has decided to stop subsidizing kerosene and fertilizers and "move to a system towards direct transfer of cash subsidy to people living below the poverty line." A committee under Nandan Nilekani of the Unique ID project has been appointed to work out the modalities. It will take at least a year for the scheme to launch.

There were a few other odds and ends -- some dollops for education in the form of grants to specific institutes; US$100 million for the National Skill Development Council which has a mandate to create 150 million skilled workers by 2022 (it is running ahead of schedule, says Mukherjee); airfares will increase US$5 if you are travelling abroad and US$1 at home; and senior Senior Citizens -- those above 80 -- will be now known as Very Senior Citizens and be entitled to some tax concessions.

The Math Does Not Add Up

If the Budget was such a mild affair, why did the Sensex gyrate more than 600 points that day? (It went up 623 points the next day.) The answer lies in Mukherjee's numbers; many critics don't believe them. "The math does not add up," says Gaurav Dua, head of broking house Sharekhan. "The equities market was pleased with the government borrowing figure of US$75 million (against an expected US$85 million) and the aggressive fiscal deficit target of 4.6%, as against a target of 4.8% under the revised Fiscal Responsibility and Budget Management Act. However, the achievement of the stiff fiscal deficit target is based on the assumption of a fairly healthy 17.9% growth in the net tax revenues but a muted increase of just 3.4% in total expenditure. The growth in total expenditure has been managed through depressed provisions for subsidy expenditure (despite spiraling crude oil prices) and lower allocation for social services. Consequently, the Street would take the fiscal deficit target with a pinch of salt."

According to Chakraborty of Enam, oil will be a major variable: The Indian economy is hugely dependent on the price of crude as it imports most of its needs. Continued problems in Egypt and Libya could derail it.

"In the face of structurally high food and energy prices, the robustness of the growth and fiscal projections is questionable," says Sabherwal of Magister Ludi. "They don't provide comfort that India will be able to sustain a growth rate of 9%." Adds Chakrabarti of ISB: "Indeed, the estimates look a bit optimistic. But higher growth, raising revenues, could possibly make it happen."

Last year, the fiscal deficit was lower because of the US$15 billion collected through the auction of spectrum for 3G telecom services. There could be another bonanza from this sector as the government has been thinking of asking telecom firms to pay up for the 2G spectrum they received for a low price. (See India's 2G Telecom Scandal Spans the Spectrum of Abuse.) The government has already okayed the e-auction of FM radio licenses, which could bring US$500 million.

"Expect the budget speech to signal a more transparent way of doing business. At a basic level it means that you will see decisions increasingly being taken through auctions -- spectrum, mining rights, drilling permits, licenses, land and so on," wrote Amit Tandon, managing director of Fitch Ratings India, in The Wall Street Journal two days before the Budget.

"I see the Budget for 2011-2012 as a transition towards a more transparent and result-oriented economic management system in India," said Mukherjee in his speech. "At times, the biggest reforms are not the ones that make headlines, but the ones concerned with the details of governance."

Notes on the meeting on January 19, 2011

Dear Friends, 

Table Topics was by me. Subjects included the revitalization of Wednesday Club and whether Keralites view the late Chief Minister K. Karunakaran with love, affection or contempt.

Suggestions for Wednesday Club by Nirmala: Encourage all the members to make presentations. Compulsory assignments should be given. One member should call at least three members. If a person is backing out, he should ensure that another member comes in his place. 

Venugopal: It is not a club only to improve public speaking skills. It is a place where you can develop your leadership qualities. Wednesday Club should not be positioned against Toastmasters. The secretary should be calling all the members to inform them about the meeting.  

Grilling was of Johnson who spoke on the concept of whether 'justice delayed is justice denied'. He also gave details about the new law journal he has brought out. 

 

There were soapbox contributions by Nirmala Lilly on the high turnover of professionals in the service industry. Johnson described the various ways to keep staff happy, while I spoke about spending a day in a Kochi gurudwara.

Shevlin

A New Invocation

Desiderata

Go placidly amid the noise and the haste, and remember what peace there may be in silence. As far as possible without surrender be on good terms with all persons. Speak your truth quietly and clearly; and listen to others, even to the dull and the ignorant, they too have their story. Avoid loud and aggressive persons, they are vexations to the spirit.

If you compare yourself with others, you may become vain or bitter; for always there will be greater and lesser persons than yourself. Enjoy your achievements as well as your plans. Keep interested in your own career, however humble; it is a real possession in the changing fortunes of time.

Exercise caution in your business affairs, for the world is full of trickery. But let not this blind you to what virtue there is; many persons strive for high ideals, and everywhere life is full of heroism. Be yourself. Especially do not feign affection. Neither be cynical about love; for in the face of all aridity and disenchantment it is as perennial as the grass. Take kindly the counsel of the years, gracefully surrendering the things of youth.

Nurture strength of spirit to shield you in sudden misfortune. But do not distress yourself with dark imaginings. Many fears are born of fatigue and loneliness. Beyond a wholesome discipline, be gentle with yourself. You are a child of the universe, no less than the trees and the stars; you have a right to be here. And whether or not it is clear to you, no doubt the universe is unfolding as it should.

Therefore, be at peace with God, whatever you conceive Him to be. And whatever your labors and aspirations in the noisy confusion of life, keep peace in your soul. With all its sham, drudgery and broken dreams; it is still a beautiful world. Be cheerful.

Strive to be happy.


--- Max Ehrmann, 1927

Notes on the meeting of January 5, 2011

Dear Friends, 

President Kurian Abraham spoke about corruption in the first, second, third and fourth estates of the country. “The whole country is talking about corruption,” he says. Kurian also spoke about the change in global weather and how it is upsetting the calculations of all.

Table Topics was by me. Subjects included the rise in the price of onions and the performance of Chief Minister V.S. Achuthanandan.

The guest speaker was Sunita Rappai, a Kerala-born woman who grew up in England and now lives and works in Cairo. She spoke about life in Cairo and of the similarities between Egypt and India. “Both are ancient civilizations and have suffered from colonialism,” says Sunita. “There is a strong sense of family and male domination. Egypt, like India, is a deeply hierarchical society.”

Sunita then spoke about her life in England and her love-hate relationship with India. “I am probably a BBCD (a British-born confused desi),” she says. “I don’t belong anywhere.”

She also criticised Kerala and called it “an ideologically bankrupt state. There is a brain drain. In many families that I visited, all the children are either in America, Canada or the Gulf. There is a lack of opportunity for the youth here.”

Sunita’s mother, Mrs Mary Rappai also spoke about how she went to England many years ago and the experiences there as a newcomer.

It was a wonderful and thought-provoking evening.  

Thanks to all those who took the trouble to come. It was a full house!

New Year Resolutions: Some suggestions by Venu.

More members, training programmes, guest speakers, tours and get-togethers.  

The time to renew the annual subscription has come. Please bring a cheque next week. 

Notes on the meeting on December 22, 2010

Dear Friends, 

President Kurian Abraham spoke about his meeting with V.P. Nandakumar, one of Kerala’s most successful businessmen. He is the chairman of Manappuram Finance. If you had invested in shares worth Rs 10,000 many years ago, it would have been worth Rs 55 lakh now. Kurian said, “Nandakumar realized that in order to be successful, he had to do business differently from his competitors. He provided more services for his customers and gave better quality products.” 

But the most important reason for Nandakumar’s success is because the firm’s accounting system is transparent. “So when he wanted to expand by taking a loan, the bank asked to see his accounts and were happy at the transparency and felt confident enough to give him money,” said Kurian. “In order to be successful, it is important not to fudge the accounts.” Many people show low income in their accounts, just so that they can skim off the money and hence banks will not lend to them. In the long run, it becomes counter-productive.

Table Topics was by me. Subjects included the high rate of divorce in Kerala and the plus and minus points of author Arundhati Roy.

In soapbox, Patrick Xavier, a surprise guest, spoke about his experience in handling the logistics for President Pratibha Patil’s five-day visit to Laos.   

Nirmala spoke about her encounter with Roald Hoffmann, who won the 1981 Nobel Prize for Chemistry. A multi-faceted character, Hoffman has published two collections of poetry. Hoffmann stayed at the Ramada Resort and Nirmala spoke admiringly about his humility and friendliness.  

I spoke about the many theories of success from the Malcolm Gladwell bestseller, ‘The Outliers’.

This time, the lectern and the table had been removed. It led to a marked increase in freedom of movement and vitality in the speeches.

Thanks to Nirmala for bringing a Christmas cake.

   

Notes on the meeting of December 15, 2010

Dear Friends, 

In the absence of Kurian Abraham and Venugopal, C.M. Daniel presided over the meeting. “The other day we were listening to a short-duration public speaking workshop by Dr. Venugopal Reddy, where he said that applied knowledge is power,” said Daniel. “There are two ways to acquire knowledge. One is by your basic qualifications, and the other is by reading. This will help increase knowledge and vocabulary.”

Table Topics was by me. Subjects included the rise in petrol prices and whether Karunankaran was a good chief minister.

Grilling was on Nirmala Lilly who was feisty as usual.

The introduction of the main speaker, Agarwal, was by me.

Agarwal focused on the talk given by the renowned preacher of Hinduism, Prema Pandurang, who spoke about the Sreemad Bhagavatha.

There were two innovations in this meeting.

At the suggestion of Venoo, in Table Topics, strips of folded paper was put on a table. People came up, took one, and spoke on the subject.

The second innovation was to follow the suggestion given by Dr. Reddy in our public speaking workshop. He said one must speak without the use of a lectern.

So, the lectern and the main table were pushed back. Daniel and I became part of the audience. Agarwal walked sideways, back and forth, stopped, held forth, and there was a dynamism in his talk, with many gestures, smiles, and forceful statements.

It looks like Dr. Reddy was right about a lectern inhibiting a speaker’s vitality.  

Shevlin