News – Page 18 – Gopal Krishna Agarwal

Good Economics is Good Politics

October 5, 2018

Q1. The country is facing a challenging economic situation: a slowdown threatens, unemployment is at historic highs and manufacturing is at a standstill. How does the BJP propose to deal with the situation if it comes to power? What should be its top priority?

Answer 1. It is wrong to say that the country is facing a challenging economic situation. If you look at the macro-economic parameters they all are in a very good shape. Inflation is under control at around 4.5%. GDP growth is on a higher growth path, and is about 7.5 %. Fiscal deficit at 3.5% is under control. Current account deficit is also healthy. Tax to GDP ratio has increased to 12%. All this will allow the government to take necessary steps wherever required.

We understand that, if the economy has to grow on this strong foundation, we have to address many issues. We also have many opportunities arising from growing aspirational middle class. This middle class is having large money at its disposal for consumption and investments. One important consideration is our focus to reduce poverty to a single digit. The aspirational middle class and reduction in poverty will drive consumption demand in the economy. The top priority for the government would be to revive private corporate investment, which has been low for some years now. Once these engines work well, things like manufacturing growth and employment generation would be taken care of. Our focus will be on the manufacturing sector particularly MSME, which we have termed as the missing link. The government would be committed to take all the necessary supportive steps.

Q 2. The Goods and Services Tax (GST) has left enormous destruction in its wake. While it has formalized the economy, it has also increased the expenses of small businesses, and increased the potential of corruption. There is nothing a small trader fears more than the word ‘mismatch’. The Congress in its manifesto has promised a much more simplified version of the GST. How do you propose to do this?

Answer 2. Conceptually, no one has a problem with the GST. It does away with the multiplicity of tax structures, subsuming central, state and local taxes, it results in a reduction of indirect taxes for the consumer, it creates ease of doing business by online registration, filling of returns and assessment and creating one tax one market. For the consumer, it would reduce prices of manufactured goods, for the Government it would mean increased tax collection and fiscal consolidation and creation of a much simpler system to administer through GSTN network.

Small Businesses with aggregate annual turnover up to Rs 40 lakhs are exempt from GST. And those having annual turnover up to Rs 1.5 crore can avail the benefit of composite scheme by paying 1 percent tax and get rid of GST formalities.

Fear of mismatch is an initial hiccup, but is necessary to clean the indirect tax structure. It penalizes those who collect taxes but do not deposit it to the exchequer. Without the complete audit trail the gaps in the tax collection can’t be filled. To overcome initial problems of mismatch, government has been lenient and has allowed input tax credit on provisional basis. But ultimately black sheep in the system have to be weeded out.

India with such diverse income groups can’t have a single rate GST. We plan to integrate 12 and 18% GST slabs into a single 16 % rate with majority of items falling in this category. Only 6 item termed as sin goods remain in the higher 28 % slab. Essential commodities mostly food items are under 5 % tax slab.

With 30 GST council meetings, most of the demands for simplification have been accepted, like reverse charge. Anti profiteering provision has a sunset clause. And still if more modifications are required, government is open to those suggestions.

Q3. You have in the past expressed clear views about the role of the Reserve Bank in helping kick-start the economy. What should the RBI do now?

Answer 3. There are two issues with the way Reserve Bank of India has conducted its monetary policy and banking regulation. First is that the monetary policy committee (MPC) has always overestimated the future inflation in the economy as a result of which RBI has kept the benchmark interest rate at an elevated level. This was clearly not warranted by the level of economic activity in the economy. Second whenever the RBI cut the repo rate, it was not fully transmitted by the banking sector. As a result of these two factors the investors in India face one of the highest real interest rates in the world. Though we see an improvement in these areas in recent times, I would want RBI to continue working on these two issues. If they are taken care of, other pieces of the financial sector puzzle will fall in place and the real economy will benefit. The government and the RBI are working to resolve the issues at IL&FS and some NBFC.

The banks underwent cleansing via prompt corrective action or PCA. 6 banks are still under PCA they have to be corrected through Bank mergers or infusion of capital. We don’t need 27 public sector banks.

Q4. What are the direct tax reforms on the anvil?

Answer 4. The new government will present its first budget in July 2019. We are waiting for the report of the task force on direct tax simplification. Corporate tax has to be brought down in line with withdrawal of exemptions and incentives. Even basic income tax exemption limit has to be increased from Rs 3 lakh to Rs 5 lakh. We have promised to ensure reduced tax rates.

Earlier government had launched email-based assessment. This facility was included in e-filling portal. Later CBDT directed all cases barring certain exemptions to go for E-assessment. We would follow it up. E-assessment will help in removing widespread corruption in direct tax structure. It will smoothen the process and remove subjectivity. Income tax notices etc. will be generated through central database. The focus of all the steps would be to lower the effective tax rate for the payer and have a better compliance so that there is net increase in the tax revenue.

Q5. Should we expect another round of populist spending?

Answer 5. Your question presupposes a previous round of populist spending, which is not true. In the current term as well, there would not be any populist spending. Indians will have to understand the concept of Tax Payer’s money and its sanctity. These are governance issues involved with the exchequer.

Government is the biggest borrowers. Giving out doles, with this money will be inflationary and fiscal deficit will rise. If the government borrowing is used for asset creation, it expands the economy. When we say that in the next 5 or 10 years, we will go for 100 lakh crores of investment into infrastructure, it is sustainable and will help economy.

In fact, our focus has been on increasing the efficiency of government expenditure. For example better targeting through Jan Dhan account and direct benefit transfer (DBT)We did not announce farm loan waiver in our manifesto and still won with such a huge majority. We believe that good economics is good politics.

Q6. What should be the new government’s immediate big idea on economic management?

Answer 6. Financial resolution and deposit insurance (FRDI) has to be implemented. We also need Development Financial Institutions (DFI) to finance long-term gestation projects. We will certainly do that.

Big-ticket reforms in the factor market mobility; like land, labour and capital is very important for the industrialization of the country and would step in that direction. The Centre is pushing for digitization of land records and land lease agreement; it is helping in establishing ownership of land. On the labour front there have been efforts on the formalization of labour. 93% of our labour force is in informal sector. The working conditions in this sector are very poor. Provident Fund (PF), ESI, job security, social security etc. are not available. Government has plans for consolidated Labour Code and promotes fixed term contracts.

There is stress in the agricultural sector.

There is stress in the agricultural sector. Food grain production in the country has moved from shortages to surplus. But the Agricultural policies are still being formulated with a deficit mind set. We will drastically change this. Earlier all our commodity import export policy was aligned with the requirement of consumers. Our import export policies are being aligned to ensure that the farmers get better price for his produce.

Is Good Economics Bad Politics!

Economics relates to allocation of resources to various segments of the economy. It can tell you the methodology or the means of allocation of resources for enhancing production, efficiency in distribution and equitable consumption. There is always a tradeoff between competing demands in any economy as the resources are limited. Good economics implies following such economic policies that pushes the ‘Production Possibility Curve’ outwards. Politics can broadly be understood as the means to the political power. Success in politics is achieved by taking steps that increases the possibility of winning elections.

Good Economics ensures larger benefits to the large population. And if political parties work towards the wellbeing of large sections of society winning elections thereby, it is good economics and good politics. The effective communication with the electorate about the outcome of economic decisions and level of awareness & education of the citizens, determine, whether good economics is good politics.

In a democracy, where demands are generated by different stakeholders, there is a political cost to every decision. Technocratic prescriptions can ignore the political economy but a politician will always keep an eye on the political consequences of any economic policy.

Political cost to economic decisions can be reduced through better communication skills of leadership; successful leaders are generally good orators. Cost reduction can also be achieved by increased educational outreach and higher level of awareness amongst the electorate. The time frame for impact assessment of economic decision will also determine the correlation between the economic decision and its political cost. Because the result of some of the steps taken by the government might take years to be reflected in changed ground realities, but the elections have to be won every five years. In India the problem is further compounded by the fact that we have multiple elections at the Centre and the States.

At times, powerful interest groups with high stakes in maintaining status quo, exists within a Nation. Their own compulsions take precedence over economic decisions leading to bad politics. Sometimes divisive forces in a society raise their head and bog down the decision making process of the state, creating chaos. Existence of strong public institutions and pillars of democracy is a safeguard for decision-making process. The selection criterion for the right candidate by the electorate at the elections, influences the considerations for decisions of the political parties. In an ideal democracies good economics is always good politics, but rarely such situations exists, otherwise how you can explain farm loan waivers and subsidies instead of investing resources in infrastructure for better quality of life.

Mostly, the form of governance and prevalent political structure, determine, whether good economics is good politics. Nations should build sustainable institutions to; safeguard

minority interest and maintaining balance of power between pillars of governance and holding free & fare elections. Countries spending on education, transparency, information sharing and disclosers establish a healthy and a vibrant political system. Then alone a positive relationship between good economics and good politics is sustained.

By Political System we mean a system of government. Political System is a complex system of categories involving the question of who should have authority and ownership of resources and what the government’s influence on its people and economy should be? And Political Structure refers, to institutions or groups and their relations to each other, their pattern of interaction within political systems and to regulations, laws and the norms present.

Out Constitution specifically says that Political Democracy has no meaning till we achieve Economic Democracy. Economic Democracy means that the benefits of economic development reach to all the segments of society, across caste, religion and geography. This equity can only be achieved by good economics.

In a mature and just nation, Good Economics is Good Politics; Economic Democracy and Political Democracy coexist in an efficient governance model. If this healthy relationship is non-existent, then there is lot to be desired from the institutions, government, political parties and the citizens, all taken together.

Gopal Krishna Agarwal,

National Spokesperson for Economic Affairs, BJP

Email: gopal.agarwal@bjp.org

NRC: The Soul of Assam Accord

October 1, 2018

Opposition parties are once again looking for political opportunities in a situation, which has the risk of blowing up because of their incendiary rhetoric. Every attempt is being made to create a crisis where it does not exist. It is grossly premature right now to speculate on the future of the people who are being authoritatively identified as illegal immigrants. Religion, region and caste have always affected politics but governance has to be above it.

A perfectly legitimate exercise by the Assam government under an Assam accord has now led to a deplorable and condemnable reaction from the opposition parties. The Congress Party and its national president Rahul Gandhi must make his stand clear on the issue of illegal immigrants from neighboring countries. Historically, both Mrs. Indira Gandhi and Mr. Rajeev Gandhi had committed, that post 25th March 1971 migrants would be detected, identified and deported. It was the Congress that had agreed to the preparation of NRC but later did nothing in this matter because these immigrants were mostly Muslims and it cultivated this group as its vote bank.

For its vote bank, Congress was encouraging illegal immigrants left, right and center. It also tried to subvert Foreigners Act 1946 by bringing Illegal Migrant Determination by Tribunal (IMDT) Act, 1983 which was stuck down by The Supreme Court in 2005 in the case filed by the present Chief Minister of Assam, Sarbananda Sonowal vs UOI (2005), by stating that IMDT “has created the biggest hurdle and is the main impediment or barrier in the identification and deportation of illegal migrants”.

The Conduct of Congress in the whole affair requires a closer scrutiny. The IMDT Act had virtually made it impossible for the government to identify and deport illegal immigrants. The constitutionality of this Act was challenged in the Supreme Court of India, in the affidavit filed by the Assam Gana Parishad (AGP) led Assam Government on 28^th August 2000, stated that the State Government has been persistently writing to the Central Government that the IMDT Act was operating against national interest and therefore the Central Government should repeal the IMDT Act. In May 2001, AGP was defeated in the Assam elections and the Congress led government came to power. On 8th August, 2001, the Congress government of Assam moved an application in the Supreme Court praying that the State of Assam be permitted to withdraw the earlier affidavit and be allowed to file a new affidavit, stating that ….the IMDT Act is constitutional and there is no question of either repeal or striking down of the Act.”

At the Centre, The Atal Bihari led NDA government filed its affidavit in the matter on 18^th July, 2000, in which has it stated that a proposal to repeal the IMDT Act was under consideration of Government of India. However, after the Congress led UPA government came to power at the Centre in 2004, another affidavit was filed in the matter on 24^th November, 2004 wherein it was said that though in the earlier affidavit a prayer was made to examine the constitutional validity of the IMDT Act, but on reconsideration the Central Government had taken a decision to retain the IMDT Act in present form in its application to the State of Assam. Ultimately Hon’ble Supreme Court stuck down IMDT act in 2005. The Court further observed: “The dangerous consequences of large scale illegal migration from Bangladesh, both for the people of Assam and more for the Nation as a whole, need to be emphatically stressed. No misconceived and mistaken notions of secularism should be allowed to come in the way of doing so”

It would not be an exaggeration to say that at the root of every socio-politico problem in the country lies the myopic politics of the Congress. The flip-flop resulting from this myopic vision is evident on its stand on Triple Talaq, Supreme Court judgment on maintenance to Shah Bano, illegal immigrants from Bangladesh, Ram Temple at Ayodhya, plight of Kashmiri Pundits, Minorities having the first right on the national resources, etc. Communalizing Indian politics to the core.

Similarly, Ms. Mamta Banerjee’s ambitions have also pole-vaulted in recent times; she sees it as an opportunity to consolidate her Muslim vote-bank in West Bengal. She has dishonestly compared this as a restriction on interstate movement of citizens of India and is trying to make it a Hindu-Muslim issue. We hope she explains her stand on the issue of illegal immigration from Bangladesh. Earlier on 4^th August 2005, she had stated in the Lok Sabha: “The infiltration in Bengal has become a disaster now. You can see the Bangladeshi as well as the Indian names in the list. I have both the Bangladeshi and the Indian voters list. This is a very serious matter. I would like to know when would it be discussed in the House?”. The silence and ambivalence of other political parties like the CPI, CPI (M), BSP, SP, RJD also reeks of hypocrisy.

Under governance parlays, how much does it matter if 70 percent of the people left out from NRC are from the Muslim community? After all, the illegal immigrants, who came in hordes into Assam, are not refugees. The movement under the banners of AASU AAGSP had emerged because the unabated influx of illegal foreigners in to Assam had raised substantive fears in the minds of the local people about its adverse effects on their social, political, cultural and economic life. The 2011 Census of India shows Assamese-speakers have become a minority in their home state. Between 1991 and 2001, their population had declined from 58 percent to 48 percent. In terms of religious communities, the Muslim population of Assam had increased from 25 percent in 1951 to 34 percent in 2011.

All political parties should express their stand on the issue of illegal immigrants into India in no uncertain terms so that we all know where they stand on this matter. Fear mongering and hyperventilation would not serve the interests of the nation, as would keeping quiet on the issue.

Gopal Krishna Agrawal

National Spokesperson of BJP

gopal.agarwal@bjp.org

The Economy Deplomacy Is a Key To Enhancing Nepal – India Relation

September 16, 2018

Gopal Krishna Agrawal,

Gopal Krishna Agrawal is the National Spokesperson on Economic Affairs for ruling Bhartiya Janata Party of India. How does he see Nepal-India economic relations? How can this relation be enhanced? Mahavir Paudyal and Kosh Raj Koirala spoke to him on Nepal-India economic ties and other aspects of bilateral relations while he was in Kathmandu last week.

How do you see the current status of Nepal-India relations?

We are working on making Nepal-India relations much better than what it is today. Nepal is very important country for India’s international relations. This is why Prime Minister Narendra Modi visited Nepal right after assuming office in 2014. We find so many common issues with regard to economy between Nepal and India. Thus we can have a very good business and economic relations. Economic relations are much important for these countries because economic relations are becoming more important between and among the countries across the whole world. Economic issues can be more easily identified and they are as easier to resolve because they are based on give and take and mutual benefits. There will be few contentions in business relations than would be with political relations. You say so but Nepal has had huge trade deficit with India.

I was recently speaking on foreign direct investment issue here in Nepal. Across the world, every country is looking to attract more FDI. FDI is one of the criteria which decide what will be the future of country’s economy. It is important for capital formation and building of infrastructures. India has been successful in attracting huge FDI over the last few years. We have been able to get 62 billion dollars of FDI, which is the highest FDI across the world. But a country cannot raise FDI rate simply by asking others to come and invest. Most of such investments come from the private sector. And private investment comes to those places where you have strong regulatory bodies. They look into which regulatory set ups are there that can come to their aid when something goes wrong with business. Foreigners are ready to invest in India because we have strong and autonomous set ups in many of the fields such as banking, capital market, insurance, telecommunications etc. For each of these sectors, we have a separate regulatory body to boost the confidence of the investors.

Thus the more you build autonomous and independent regulatory institutions the more it will raise confidence of foreign investors. And the more you will be able to attract FDI. I think this applies to Nepal as much it does to India.

The importance of FDI is obvious but how can Nepal reduce trade deficit with India?

One of the ways would be if the two countries maintain relations with industrialists with both sides, instead of focusing on only government-to-government relations. It’s better for Nepal and India to organize bilateral economic conclaves at a reasonable frequency so that they can discuss issues and find solutions. Private sector bodies of Nepal can have direct contact with Indian investors through Indian business organizations. If they talk with each other directly, many things can be settled. The government of Nepal can also communicate their policies directly with the Indian industrialists. If Nepal establishes direct contact with Indian industrialists, it would know their concerns and also find out the factors that have hindered investment in Nepal. The government will also come to know directly what their concerns are and how those concerns can be addressed. Equally important is to incentivize the investment. Creating Special Economic Zones, cluster development models, integrated supply chain models with global suppliers etc are some incentivizing factors. They have done a lot for India. Such ideas might be as useful for Nepal.

Many Indian investors are willing to invest in Nepal. Nepal has a lot of hydro potentials. After the success of Arun III more companies are interested to come to Nepal and invest. Indian companies are also interested to invest in tourism, education and many other sectors. Private education industrialists can set up their institutions in Nepal. If two countries have good business relations it will directly contribute to minimizing tensions, if any, on diplomatic and political fronts. Economic diplomacy can become a key tool in further enhancing Nepal-India relations. This is what is happening globally. Leaders across the globe are now more focused on economic issues. Through economic cooperation and considerations it is easier to build better diplomatic relations.

The demonetization drive was criticized by some sections at one time. How has it helped Indian economy?

You cannot look into any initiative in isolation. When our party took over, there was a problem with regard to tax compliance and large part of business transaction was not being channeled through financial institution mechanism. There was a need to push transaction through digital banking. We had to establish the audit trail of business transactions. And there was a need for identifying the concerns of liquidity and the issue of shifting the informal sector into formal sector. Several other steps together with demonetization helped into creating an ecosystem whereby we are moving informal sector into formal sector. The GST could not have been as successful if we had not made concerted efforts to moving towards digital economy and digital banking.

Cumulatively, demonetization has created an ecosystem that has greatly helped minimize corruption. We have been able to establish audit trail of all transactions. The government has deregistered around four hundred thousand companies found in money laundering. Because of these steps, we now have more transparent and corruption-free eco system and it’s easier to do business in India. Most of all, tax compliance has increased, thanks to audit trail.

Demonetization has affected a lot of Nepalis. The government of India has refused to exchange Indian currency possessed by many Nepalis.
I think this is for Reserve Bank of India to decide. Central banks of Nepal and India should work to resolve issues related to Indian currency in Nepal.

One of economic issues in India at the moment is depreciation of Indian rupees against US dollars. This might have direct bearing on Nepali economy for our currency is pegged with Indian currency.
Rise of petroleum price and depreciation of Indian rupees against dollars are two issues facing us at the moment. There are global factors behind it. This could have been addressed by direct intervention by the central bank but the government has decided it is not yet time for intervention for domestically we are in better situation. Our GDP grew by more than 8.2 percent. Inflation is well under control. It is 3.6 percent at the moment. Our foreign exchange reserve is more than 24 billion dollars, which is very healthy. Our current account deficit is well within the limit. And we are getting a lot of FDI. Depreciation is largely driven by external factors. Our domestic factors do not require us to act for immediate strong measures.

Exporting ginger to India from Nepal has rarely been a hassle-free undertaking. Now and then Nepal-bound containers are held up in Kolkata port.

You should not take one or two sporadic incidents and make a judgment. The intention of the Indian government is very clear. Our focus is on smooth trade between the two countries and establishing even better connectivity for this. We are developing connectivity infrastructures including with Nepal to enhance trade relations. India has put BBIN in priority for the same purpose. The government is open to resolving all kinds of issues. Media reports sometimes create completely different perceptions. We need to read them critically. We have good trade relations even with countries with which India does not have so special relations. We have special relations with Nepal. There is no reason why we cannot have smooth trade with the neighbor with which we have a special relations.

One of the persistent concerns of your party has been regarding Hinduism in Nepal. One of the former Nepali prime ministers recently said India imposed blockade on Nepal in 2015 because Nepali leaders failed to address India’s concern related to Hindu state.

I think it is unwise to link what you call blockade with Hindu concern. Indian government has consistently denied blockade. Yes, India showed some concern for people of Tarai but at the same time India has always maintained that it’s up to Nepal to do whatever is best for Nepal. The opinions of general people should not be equated with opinions of the government. As for Hindu state, we had always appreciated Nepal as a Hindu state because over 85 percent of Nepalis are Hindus. India is also a Hindu dominated country. So there have always been positive sentiments among Indians regarding Hindu state status of Nepal. But that too, like I said, is the public opinion. India is a secular country. We cannot say what should be the status of Hindu religion in Nepal. It’s for Nepal to decide. The government does not have any position on this. What individual leaders say are individual opinions. They should be understood as such.

Fuel Price Crisis: Issues Behind Petroleum Rates Explained in 7 Points; Lowering Dependency On Oil a long Drawn

September 12, 2018

India imported 256.32 million metric tones of crude oil and petroleum products in 2017-18 and paid Rs. 6, 52, 896 lakh crore. The import dependence of India in the case of crude oil is over 80 percent.

What is the benchmark crude price for India and how is it determined?

The Indian basket of crude oil represents a derived basket comprising of Sour grade (Oman & Dubai average) and Sweet grade (Brent Dated) of crude oil processed in Indian refineries in the ratio of 72.38:27.62 during 2016-17. The price of Indian crude oil basket was $106.85 per barrel (1 barrel=159 litres) in May, 2014. It fell down to $39.88 per barrel in April 2016 and has gradually increased since then and is around $78 per barrel.

What is the tax structure on petrol and diesel?

On 3^rd September, 2018, the price build-up for Diesel and Petrol in Delhi was as follows

Every dollar increase in the international price of crude oil increases the cost of petrol and diesel in India by Rs. 0.50/ litre and a fall in the exchange rate of the Indian rupee against US dollar increase the cost of petrol and diesel in India by Rs. 0.65/ litre.

What is the revenue generated by taxes on petroleum products?

The contribution to central and state exchequer by the petroleum section in the last few years is as follows:

42 percent of the Basic Excise Duty collection at the Centre is given to state governments for infrastructure and welfare programs and 60 percent of the balance 58 percent of the Basic Excise Duty collection is spent on Centrally Sponsored Welfare Schemes in the States i.e. total amount transferred to States is (42+34.8)= 76.8 percent.

Every one rupee reduction in central duty leads to a loss on about Rs 14000/= crores to the central exchequer.

How does the picture of under-recovery in the oil and natural gas sector look like?

Under Administered Price Mechanism (APM) earlier Petrol /diesel prices were not market linked and prices were being modulated, the steep increase in international prices of oil used to exert severe pressure on the oil marketing companies (OMCs). The retail prices of these commodities were kept below the cost resulting in large under-recoveries for OMCs.

From the year 2004-05 to 2013-14, the total under-recoveries was Rs. 8,53,628 crores.

Why oil bonds issued and what were is their current status?

During the period of 2004-08 when the international crude prices were increasing rapidly, the government started subsidizing petroleum products proved grossly insufficient but since the fiscal position of the government was already precarious, it could not increase the subsidy to this sector. The government resorted to the issuance of ‘oil bonds’ to the OMCs. These interest-bearing bonds were not even reflected on the balance sheet by the UPA government, resulting in artificial measurement of the burgeoning fiscal deficit.

Between 2005-06 and 2009-10, oil bonds worth Rs. 1,42,202 crore were issued by the government with the rate of interest on them ranging from 7.33 percent to 8.4 percent per annum repayable up to 2024-25 by successive governments. Oil companies have either sold these bonds or used them as collateral to raise cash. OMCs have sold oil bonds worth Rs 1,24,536 crore and had to bear a loss of around Rs 5,000 crore in selling of these bonds at a discounted rate because the bond market did not have much appetite for these bonds. Till date the government has repaid around Rs. 70,000 crore to the holders of these bonds and out of this amount, only Rs. 10,000 crore (approx) has gone into the repayment of the principal component and the rest towards the interest obligation. Thus the outstanding principal amount on these bonds is Rs. 1,30,000 crore. Most of these bonds will be matured by 2024-25.

How crucial are petroleum products in our energy mix?

In the year 2015-16, the source wise share in consumption of energy was as follows:

How can India reduce its dependence on crude oil?

Petroleum products are important because one cannot readily switch between them and other sources of energy. To make our economy less dependent on oil would be a long drawn process, which can be accelerated by conducive government policies. Modi government is working on this long-term solution.

It is evident than in order to reduce our dependence on imported oil, we need to generate more energy from coal and lignite, which we have in abundance and also focus on electricity generation from hydro and other renewable sources like wind and solar. Since the government is focused on having 1 GWh of installed solar capacity by 2022, we will see an increase in its share in the source wise energy share in the coming years.

Why Renewable energy is so vital for India

September 8, 2018

Petroleum prices have always been a contentious issue in India. Historically, political expediency overrode economic considerations. The central government has some compelling reasons not to interfere with market forces, which are currently being affected by global factors.

India imported 256.32 million metric tonnes of crude oil and petroleum products in 2017-18, for which it paid Rs 6.53 trillion. India’s import dependence in crude oil is over 80 per cent. The Indian basket of crude oil represents a derived basket comprising of sour grade (Oman and Dubai average) and sweet grade (Brent dated) of crude oil processed in Indian refineries in the ratio of 72:28 in 2016-17. The price of the Indian crude oil basket was $106.85 per barrel (1 barrel = 159 litres) in May 2014. It declined to $39.88 per barrel in April 2016, and has gradually increased since then and is around $78 per barrel now.

It is important that we look into the tax structure and petroleum prices. On September 3, 2018, the prices of diesel and petrol in New Delhi were Rs 71.15 and Rs 79.15 respectively (rounded off). With every one-dollar increase in the international price of crude oil, the cost of petrol and diesel in India increases by Rs 0.50 per litre, while a fall in the exchange rate of the rupee against the US dollar increases the cost of petrol and diesel by Rs 0.65 per litre.

The revenue generated by taxes on petroleum products is vital for both central as well as state governments — the total contribution to the central and state exchequer was Rs 4.93 trillion in 2017-18.

It is important to remember that 42 per cent of the basic excise duty collection at the Centre is given to state governments for infrastructure and welfare programmes and 60 per cent of the remaining 58 per cent is spent on centrally sponsored welfare schemes in the states. The total amount transferred to the states is thus 76.8 per cent (42+34.8). Every one-rupee reduction in central duty leads to a loss of about Rs 140 billion to the central exchequer.

Earlier, under the Administered Price Mechanism (APM), when petrol and diesel prices were not market-linked and prices were being modulated, the steep increase in international prices of oil exerted severe pressure on the oil marketing companies (OMCs). The retail prices of these commodities were kept below cost, resulting in large under-recoveries for OMCs. Between 2004-05 and 2013-14, total under-recoveries amounted to Rs 8.53 trillion and there were significant subsidies.

Subsidies for these under recoveries during the period 2004-08, when international crude prices were increasing rapidly, proved grossly insufficient. Since the fiscal position of the government was already precarious, it could not increase the subsidy to this sector. The UPA government then resorted to issuance of “oil bonds” to the OMCs. These interest-bearing oil bonds were not even reflected in the balance sheet of the UPA Government, resulting in artificial measurement of the burgeoning fiscal deficit.

Between 2005-06 and 2009-10, oil bonds worth Rs 1.42 trillion were issued by the government, with a rate of interest ranging from 7.33 per cent to 8.4 per cent per annum, repayable up to 2024-25 by successive governments. Oil companies have either sold these bonds or used them as collateral to raise cash. OMCs have sold oil bonds worth Rs 1.25 trillion and had to bear a loss of around Rs 50 billion in selling these bonds at discounted rates, because the bond market did not have much appetite for these bonds.

So far the government has repaid around Rs 700 billion to the holders of these bonds. Of this amount, only about Rs 100 billion has gone into repayment of the principal component and the rest towards the interest obligation. The outstanding principal amount on these bonds is thus Rs 1.3 trillion. Most of these bonds will mature by 2024-25, imposing a heavy burden on current as well future governments.

An important part of the solution to the problem will have to be a focus on alternative energy sources. In 2015-16, coal and lignite accounted for 46.28 per cent of India’s energy consumption; crude petroleum for 34.48 per cent; electricity from hydro, nuclear and other renewable sources of energy for 12.75 per cent; and natural gas for 6.49 per cent.

Therefore the policy of the NDA government is to move towards renewable sources of energy. But one cannot readily switch between them and other sources of energy. To make our economy less dependent on oil will be a long-drawn-out process, which can be accelerated by supportive government policies. The Modi government is working on this long-term solution. It is evident than in order to reduce our dependence on imported oil, we need to generate more energy from coal and lignite, which we have in abundance, and also focus on electricity generation from hydro and other renewable sources such as wind and solar. Since the government is focussed on having one GWh of installed solar capacity by 2022, we will see an increase in its share in the source-wise energy consumption in the years ahead. Until then economic prudence should override political expediency.

Vote-banks and foreigners

August 14, 2018

Opposition parties have sensed a chance after the release of the final draft of the NRC. Every attempt is being made to create a crisis where none exists. However, it is grossly premature to speculate on the future of those identified as illegal immigrants. Religion, region and caste have always affected politics but governance should be above such considerations.

A perfectly legitimate exercise by the Assam government, under the Assam Accord, has precipitated condemnable reaction from the Opposition parties. The Congress — and its president, Rahul Gandhi — must make its stand clear on the issue of illegal migrants from neighbouring countries. Both Indira Gandhi and Rajiv Gandhi had committed that immigrants to Assam after March 25, 1971, would be detected, identified and deported. The Congress had agreed to the NRC. But the party did nothing in this respect when it held office at the Centre or in Assam because the immigrants are mostly Muslims and the party has cultivated this community as its vote bank.

The Congress also tried to subvert the Foreigners Act 1946 through the Illegal Migrant Determination by Tribunal (IMDT) Act, 1983. The IMDT Act was stuck down by the Supreme Court in 2005. The Court’s verdict came in response to a petition filed by Assam’s current Chief Minister Sarbananda Sonowal. The court noted that the IMDT “is the main impediment or barrier in the identification and deportation of illegal migrants”.

The Congress’s conduct in the affair requires close scrutiny. In an affidavit filed before the Supreme Court on August 28, 2000, the then Asom Gana Parishad (AGP)-led government pointed out that it had been asking the Centre to repeal the IMDT Act because the law was against national interest. In May 2001, the AGP was defeated in elections to the Assam Assembly and a Congress-led government assumed office. On August 8, 2001, the new government moved an application in the apex court praying that the state be permitted to withdraw the earlier affidavit and be allowed to file a new affidavit. The application stated that “the IMDT Act is constitutional and there is no question of either repeal or striking down of the Act”.

The Atal Bihari Vajpayee-led NDA government at the Centre had filed an affidavit in the matter on July 18, 2000, stating that a proposal to repeal the IMDT Act was under its consideration. However, the Congress-led UPA government which assumed office at the Centre in 2004 file another affidavit in November that year. It said that the Centre had decided to retain the IMDT Act in its present form. But the Court stuck down the Act in 2005. It observed, “The dangerous consequences of large-scale illegal migration from Bangladesh, both for the people of Assam and more for the nation as a whole, need to be emphatically stressed. No misconceived and mistaken notions of secularism should be allowed to come in the way of doing so”.

It would not be an exaggeration to say that at the root of all socio-political problems in the country lie the Congress’s myopic politics. The party’s position on several issues, including the triple talaq issue, the Supreme Court judgment on maintenance to Shah Bano, illegal immigrants from Bangladesh, Ram Temple at Ayodhya and the plight of Kashmiri Pundits, testify to its myopic vision. The party is responsible for communalizing Indian politics.

West Bengal Chief Minister Mamata Banerjee’s political ambitions have grown in recent times. She sees the NRC issue as an opportunity to consolidate her Muslim vote-bank. Banerjee has dishonestly described the NRC as a restriction on the inter-state movement of Indian citizens. She is trying to turn the NRC into a Hindu-Muslim issue. We hope she explains her stand on the issue of illegal migration from Bangladesh. It is another matter that on August 4, 2005, she had stated in the Lok Sabha: “Infiltration in Bengal has become a disaster now. You can see Bangladeshi as well as Indian names in the list. I have both the Bangladeshi and the Indian voters’ list. This is a very serious matter”. The silence of other political parties like the CPI, CPM, BSP, SP, RJD reeks of hypocrisy.

The illegal immigrants are not refugees. The movement under the banners of the AASU and AAGSP had emerged because the people of Assam feared the adverse social, political, cultural and economic impacts of the unabated influx of foreigners. Census figures show that the percentage of Assamese-speakers in the state declined from 58 per cent in 1991 to 48 per cent in 2001. The Muslim population of Assam increased from 25 per cent in 1951 to 34 per cent in 2011.

All political parties should express their stand on the issue of illegal immigrants in no uncertain terms. Fear-mongering and hyperventilation would not serve the interests of the nation as would keeping quiet on the issue.

Petroleum Prices, Why They Are So Important For Our Economy

July 26, 2018

By Gopal Krishna Agarwal,

For understanding petroleum pricing in India: We have to break it into following aspects:

1. Petroleum prices component

2. Issues of under recovery and oil bonds during UPA

3. Revenue to Central and State governments from the petroleum section.

4. Alternative Sources of energy and future planning for reduced dependence on oil

Petroleum products pricing is always a contentious issue. It has a large impact on inflation and also a major source of revenue for the Central and State governments, we import about 80% of our consumption needs. An increase of one dollar in the international price of crude oil increases the cost of our petrol and diesel by Rs. 0.50/ litre and one rupee fall in exchange rate against US dollar increase the cost by Rs 0.65/litre of petrol and diesel. We can conclude that the prices of petroleum products are determined in India by external factors. India imported 256.32 million metric tones of crude oil and petroleum products in 2017-18 and paid Rs. 6,52,896 lakh crore.

Earlier under Administered Price Mechanism (APM) followed by UPA, petrol and diesel prices were not market determined. Steep increase in international prices of oil used to put severe pressure on the oil marketing companies (OMC). Still their retail prices were kept below the cost, resulting in under-recoveries for OMCs. Between the year 2004 to 2014, the total under-recoveries was to the tune of Rs. 8,53,628 crores.

When the international crude prices were increasing, during the period of 2004-08 the subsidy by the government on petroleum products became insufficient. Since the fiscal position of the Government was very bad, there was no scope for increasing the subsidy. The government started issuing ‘oil bonds’ to the OMCs instead of giving cash subsidy. These interests bearing Oil bonds were not even reflected in the Budget provision by the UPA Government, resulting in distortion of fiscal deficit figures. During 2005 to 2010, oil bonds for Rs. 1,42,202 crore were issued,

with rate of interest on them ranging from 7.33 to 8.4 % per annum repayable up to 2024-25 by successive governments in the future. This was a case of postponing current liabilities on the future generation.

Bad fiscal prudence under UPA government resulted in increasing of the interest rates affecting borrowing and investment in the economy and higher inflation for the common men. While the petrol and diesel prices were artificially kept low, people were paying higher prices for almost every other thing. The burden sharing mechanism devised by the UPA government had also led to a depletion of cash reserves of oil companies like ONGC, GAIL and OIL and destruction of their intrinsic market value.

The argument that high taxed on petroleum product in India needs to be brought down to control the spiraling prices has to be closely looked into.

Firstly, this revenue is required for catalyzing India’s economic growth, for building infrastructure for better quality of life and providing social security to the poor classes and in the backward areas. Secondly, large component of Central government duties on petroleum products i.e. 42% of the Basic Excise Duty is given to State governments and 60% of the balance 58% of the Basic Duty is spent on Centrally Sponsored welfare schemes in the States i.e. total amount transferred to the States by the Centre is (42+34.8)= 76.8 % of the Basic Excise Duty. It is also estimated that a one rupee reduction in the excise duty at the Centre would reduce revenue collection by Rs 14,000 crores.

Increase in the petroleum prices has different effect on the tax collected by the Centre and the States, which also has to be analyzed properly.

In a decontrolled regime now being followed in India, any change in international crude price is passed on to the consumer. Higher prices are likely to reduce consumption. The taxes imposed by the Centre are specific tax, i.e., fixed in terms of Rs per unit. So, if the consumption falls, the tax collected by the Centre goes down. The States, however, levy ad valorem taxes i.e. percentage based on prices and therefore with the increase in petroleum prices, its tax collection does not fall even with fall in consumption. Therefore, if the taxes on petroleum products have to be reduced in wake of the rising international prices, it should be done by the States first than by the Centre.

The solution to this teething problem on the long-term basis, is to change the share of petroleum products in energy consumption mix (34.48%, year 2015-16) We need to generate more energy from coal and lignite (46.28%), which and also focus on electricity generation from hydro, nuclear and other renewable sources like wind and solar (12.75%).

Shri Narendra Modi government is working on this line. In the coming years we will definitely see a fall in the contribution of petroleum products in the overall energy share in our consumption.

Higher Education in India – Key to Inclusive Economic Growth

July 7, 2018

The large scale inequalities that we see in India today is mostly resulting from inequality of opportunities and not on the basis of choices or abilities alone.

Education is the greatest leveler. It is a potential tool in the empowerment of those sections of our society that suffers from various forms of exclusion even after seven decades of independence. It can also have strong equity enhancing and inequality reducing impact if it is easily accessible and affordable. Education also empowers individuals and society and promotes true public involvement in the development process – making it robust and participatory.

India’s higher education system is the third largest in the world, after China and the United States. This, however, is only in terms of numbers. So far as the quality of higher education is concerned, India compares very poorly. According to the World University Ranking for the year 2018 United States has 62 universities in the global top 200, China has 7 and India has none. It shows that while India has made great strides in terms of numbers, it has not paid adequate attention on the quality aspect of education. Another problem is that most students going for higher education from reputed institutions leave the country and go outside for work, resulting in brain drain.

Ancient India had paid great attention to education and ‘Gurus’ commanded respect even from the mightiest kings. The system of ‘Gurukulas’ was accessible to everyone and the prince and the pauper studies under the same roof. It was also free and at the completion of the education process, each student paid according to his capacity. During the later periods, India also had institutes of higher studies at Taxila and Nalanda, which attracted students from all over the world. The education system gradually withered away during the medieval era. The present education system in India is a legacy from Britishers, who developed the system to meet its own needs.

Education has been a focus area since independence because it was seen as a tool to promote rapid economic development of the country. Higher education was also supposed to remove social barriers and provide upward social mobility but India’s patchy record in this field has ensured that our economic growth remains far from inclusive. It is thus imperative that access to affordable education at all levels i.e. from elementary education to higher education is ensured to achieve the goals of inclusive growth.

Investment in human capital

Education empowers people with skills and knowledge and gives them access to productive employment in future. The productive capacity of an economy depends on three factors of production i.e. land, labour and capital. Quality of labour i.e. human capital is primarily based on the skill and knowledge embodied in its population. The development of a strong nation requires that the human resources of the country be endowed with higher level of education, skill and specialization, in addition to good health.

Literacy as a qualitative attribute of the population is one of the most important indicators of its preparedness to skill and specialise. As per our decadal census our literacy rate has been going up which shows that a large part of our population is in a position to embody higher human capital. What is needed is a focused approach by the government to boost investment in education and health to build human capital.

The expansion in the number of institutions of higher education and their intake capacity has not been able to ensure simultaneous sustenance of quality. There is a severe shortage of well-qualified faculty, teaching facilities and proper infrastructure. As such, the quality parameters associated with teaching and research needs sustained attention and policy focus by the government. Kothari Commission had recommended that the expenditure on education should be 6 percent of GDP but the Government has consistently failed to achieve this target. The expenditure on education in India hovers around 2-3 percent of GDP.

Tapping the demographic dividend

Demographic dividend is superficially understood as the increasing share of the working age population in the total population of a country. The positive effect of this youth bulge can be realized only if this population is healthy and educated and finds gainful employment. Failure to provide employment to youth having ‘degrees’ is a recipe for social disaster as their angst and frustration can lead to destructive outcomes.

According to the AISHE survey, 2015-16, the Gross Enrolment Ratio (GER) in Higher education in India is 24.5%, which is calculated for 18-23 years of age group. GER for male population is 25.4% and for females, it is 23.5%. For scheduled castes, it is 19.9% and for scheduled tribes, it is 14.2% as compared to the national GER of 24.5%. Thus our GER is not only low, it also has a class character. It is lower for females and even lower for disadvantaged sections of the society like schedule castes and schedule tribes. It must be borne in mind that if the our degree holders fail to get remunerative work, it is likely to deter others, especially those from the lower strata of the society, from pursuing education because it entails a huge opportunity cost.

The demographic dividend can be tapped by educating our youth (increasing the GER) but doing more of the same is not going to help matters. India faces a paradoxical situation in having a mass of educated unemployed while at the same time industries facing acute shortage of skilled workmen. The situation can be resolved by coming up with educational courses that will fill the skill gaps in the industrial sector.

Enhancing effectiveness of governance

Education is a crucial instrument to make humans aware of their rights and duties. This awareness leads to a more demanding populace and ensures better governance. An educated population leads to participatory governance and better & more informed policy-making. It is generally seen that countries, which have achieved higher educational levels for their population have better respect for the rule of law, constitutional norms and niceties.

Market-oriented and skill intensive

A chief problem of Indian education is its defective and unbalanced curriculum. The curriculum, which is prescribed for the study emphasizes only bookish knowledge and rote learning. It is, therefore, not surprising at all that Indian education system churns out millions of unemployable graduates year after year while the economy suffers from lack of manpower with requisite skill-set, while there is lack of research and development skill set in higher education. According to the All India Survey on Higher Education (AISHE) 2015-16 only 10 programmes out of approximately 180 cover 83% of the total students enrolled in higher education. It further showed that maximum numbers of students are enrolled in B.A. program followed by B.Sc. and B.Com. programs, only 1.7% colleges run Ph.D. courses.

It is evident from the above data that most of our students are taking traditional courses. These courses are not tailored to the needs of the economy. Even professional courses like Engineering lack the dynamism needed to respond to the changing needs of the job market. The present government has tried to address it by focusing on making education, market oriented and skill intensive, emphasizing on vocational studies. Under the ‘Skill India’ initiative of the Government of India, the goal is to empower the youth with skill sets, which make them employable and more productive in their work environment. Skill India offers courses across 40 sectors in the country and are aligned to the standards recognised by the industry and the government under the National Skill Qualification Framework. The courses help a person focus on practical delivery of work and help him enhance his technical expertise so that he is ready from day one of his job and companies don’t have to invest into training him for his job profile. Under the Atal Innovation mission, government has set up Atal Tinkering Labs to encourage experimentations at the school level and Atal Incubation Centres provide hand holding to give industrial linkages to technological innovations.

Technological advancement

The spatial distribution of institutes of higher education also poses a challenge for inclusive economic growth. College density, i.e. the number of colleges per lakh eligible population (population in the age-group 18-23 years) varies from 7 in Bihar to 60 in Telangana as compared to all India average of 28. Except for a few top universities and colleges, ensuring quality education in other institutions has also been one of the biggest challenges for the government.

Technological advancements provide us with an opportunity to overcome these challenges. With the increasing penetration of high-speed Internet connection in India, higher education in India need not be location or college specific. High quality videos on various regular and professional courses can be made and shared online for them to be freely accessible. Students can watch these videos and then take exams at their convenience. For this to materialize the government should provide conducive regulatory environment. Educational institutions should be well regulated, having good infrastructure facilities and there is growth in the sector, attracting requisite resources for development.

Conclusion

The state of higher education in India leaves much to be desired. Though governments’ initiatives have created islands of excellence like the Indian Institutes of Technology (IIT) and Indian Institutes of Management (IIM) etc., most of the other universities and colleges are not up to mark. Admission to such colleges is not always possible due to issues of accessibility and affordability. Students also lack proper guidance on the available educational facilities and carrier counseling. The central and the state governments need to focus on higher education to make it more inclusive, purposeful and skill oriented. It will go a long way in making India’s economic growth more broad-based and inclusive.

Fuel for development

Revenue from Centre’s taxes on petroleum products goes to states, welfare programmes.

There has been lot of hue and cry over the rising prices of petroleum products in recent months, but it seems that the central government is not going to oblige. The statement by former Finance Minister P Chidambaram, that the prices of petrol and diesel could be reduced was rejected by Arun Jaitley. The Centre has some compelling reasons not to tinker with the prices of petroleum products.

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The pricing of petroleum products is always a contentious issue. On the one hand, it has a large impact on domestic inflation and on the other, it is a major source of revenue for the exchequer. The dependence on imports — over 80 per cent of our consumption needs — undermines our capacity to determine its prices. A one-dollar increase in the international price of crude oil increases the cost of petrol and diesel in India by Rs 0.50/litre and a fall in the exchange rate of the rupee against the US dollar increase the cost of petrol and diesel in India by Rs 0.65/litre. Thus, for all practical purposes the price of petroleum products are exogenously determined.

During UPA rule, under Administered Price Mechanism (APM), petrol and diesel prices were not market-linked and the steep increase in international prices used to exert severe pressure on the oil marketing companies (OMC). The retail prices were kept below the cost, resulting in large under-recoveries for OMCs. From the year 2004-05 to 2013-14, the total under-recoveries was Rs 8, 53,628 crore.

During 2004-08, when international crude prices were rising rapidly, the government subsidy on petroleum products proved grossly insufficient. Since the fiscal position of the government was already precarious, it could not increase the subsidy. The government resorted to issuing “oil bonds” to the OMCs in place of cash subsidy. These interest-bearing bonds were not even reflected on the balance sheet by the UPA government, resulting in the artificial measurement of the burgeoning fiscal deficit. Between 2005-06 and 2009-10, oil bonds worth Rs 1,42,202 crore were issued by the government interest on them ranging from 7.33 per cent to 8.4 per cent, per annum repayable up to 2024-25 by successive governments.

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This worsening fiscal situation under UPA led to the hardening of the interest rates affecting borrowing and investment for the corporate sector and runaway inflation for the common people. Thus, while the people where getting petrol and diesel at comparatively lower prices, they were paying much higher prices for almost everything else. The burden-sharing mechanism devised by the UPA government had also led to a depletion of cash reserves of upstream oil companies like ONGC, GAIL and OIL and the destruction of their intrinsic value.

This brings us to the argument that petroleum products are highly taxed in India and they need to be brought down to control the spiralling prices. The contribution to central and state exchequer by the petroleum sector in the last few years is as follows: The Centre received Rs 1,26,025 crore, Rs 2,09,354 crore, and Rs 2,73,225 crore in 2014-15, 2015-16 and 2016-7 respectively, and an estimated Rs 2,84,442 crore in 2017-18. While the states received Rs 1,60,526, Rs 1,60,114, Rs 1,89,587 and Rs 2,08,893 in the same years.

India needs this revenue for catalysing economic growth, building infrastructure for better quality of life and providing social security to the poor and in backward areas. Second, a large component of central government duties on petroleum products — 42 per cent of the basic excise duty — is given to state governments. Also, 60 per cent of the remaining 58 per cent of the basic excise duty collection is spent on centrally-sponsored welfare schemes in the states. Thus, the total amount transferred to the states is (42+34.8)= 76.8 per cent. It is estimated that a Rs 1 reduction in the excise duty would reduce revenue collection by Rs 14,000 crore.

The effect of increasing petroleum prices on the tax collected by the Centre and the states needs to be understood clearly. In the decontrolled regime that India is currently following, any change in international crude price is passed on to the consumer. Higher prices are likely to reduce consumption. The taxes imposed by the Centre are specific — fixed in terms of Rs per unit. So, if the consumption falls, the tax collected by the Centre also goes down. The states, however, levy ad valorem tax and it is likely that with the increase in petroleum prices, its tax collection goes up even with falling consumption. Therefore, if there is any merit in the argument that the taxes on petroleum products should be reduced in wake of the increasing international prices, it applies more forcefully to the states than to the Centre.

Ultimately, the long-term solution to this teething problem is to change the share of petroleum products in energy consumption mix (34.48 per cent in 2015-16). We need to generate more energy from coal and lignite (46.28 per cent), which we have in abundance and also focus on electricity generation from hydro, nuclear and other renewable sources like wind and solar (12.75 per cent). The Narendra Modi government is working on this long-term solution and in the coming years we will see a fall in the contribution of petroleum products in the source-wise energy share.