Budget 2014-2015: Free Trade Agreements

Free Trade Agreements
Government of India has entered into free trade agreements with many countries but most of the FTAs are not in favor country and those needs to be reviewed. From the trend line of the below graph for the period of 2008 to 2013, it is clear that country’s balance of trade situation has worsen in these years. This indicates that we have imported more from the other countries and exported less and this gap is widening although free trade agreements have been entered into with aims of plugging this gap. And this increasing gap is not good for the exchange rate for Indian rupee at all.
There are a number of economists who favor and advocate free trade agreements claiming that it is beneficial for both the economies. With the opening up economy a lot of foreign money comes to economy and this has been the case with India too. And it helps economy to huge extent. But it seems to be not true in case of India.

If we look as longer period from 1991 when liberalization of Indian economy started, it is clear that situation has worsened more during this period. From the below trend line graph, it can be concluded that it has negative impact on net export from India. Till 2003-2004 there was no huge gap in exports and imports but once India followed the path of bilateral economic ties and free trade agreements in 1998 with Sri Lanka, the gap between export and import rose sharply. In most of the trade agreements (bilateral or multilateral) are tilted in favour of the other countries resulting extra burden on Indian rupee. So on the basis of balance of trade one may say that free trade agreements had not been beneficial for Indian economy as a whole.  Although it is not possible to scrap these agreements but time has come when these agreements must be reviewed (mainly FTA with China).

Budget 2014-2015: Infrastructure, Taxes and Subsidies and Social Security Programs

Government needs to improve the overall infrastructures in the country from roads to training lines to ports. Also there are numerous infrastructure projects from sectors like power generation, roads and industrial zones etc that are pending at different stages because of leniency on the part of government. Also government needs to formulate a better policy that incentivizes timely execution of infrastructure projects. For this there should be efficient land acquisition and rehabilitation policy in place.

The government should cut a clear path in the Budget for the implementation of the Goods and Services Tax (GST) as this is pending for long time and it will help taxation more smooth and justified. So central government must address to issues raised by state governments in this regards. Also as a measure to help the common man, income tax slabs need to be raised.
Subsidies and Social Security Programs
It is important that government must try to bring down the level of subsidies. There are a number of people in the government who opposes and advocates cutting and scrapping any kind of subsidies on the basis of different theories. But such decisions on more dependent on socio-economic profile of the country than any theory. When millions of people are living below poverty line in India, any such demand cannot be good for the country. Instead of cutting subsidies, it should distribute in more efficient ways. Previous government was advocate of direct cash transfer of different social security benefits such as pensions and subsidies under Right to Food Act, LPG subsidies etc so that it can plug the leakage but it has more negative aspects than positive ones. Instead it should make public distribution system more efficient and transparent. Basically government is required to focus of good quality fiscal consolidation that restructures away from wasteful and distorting subsidies.

Budget 2014-2015: Investment, Manufacturing and Agriculture

Investment by Corporate
According to the latest data available, it is clear that the investment by corporate has been falling since long and this needs to be taken care of, as without and very low of investment by corporate, government would not be able to increase growth. So the government must ensure that there are some stimuli for the corporate to encourage them to reinvest their earnings back into the economy.
Manufacturing sector in India has been lagging for many years and its contribution in total GDP has been falling. From the following graph it is clear that the manufacturing sector has been growing at a rate of around zero per cent for the past two years. The national aspiration is to increase the share of this sector in the GDP from the current 14 per cent to 25 per cent in the next ten years. For this, we need to seriously incentivise the formation of manufacturing enterprises mainly medium small and micro enterprises as these enterprises cannot do their best without government supports. If MSMEs are promoted properly, millions of jobs can be created for youth.
We have been witnessing very high food inflation for many years in economy and this is creating huge ruckus and it does not seem that this is going to over so easily and soon without well thought strategy execution. So for the government it becomes imperative to take right actions some short term and some medium to long term. Short term measures can include MSP restraint, sell-off of excess food stocks, reducing import duties etc. But in the medium to long term strategy, government must focus on increasing farm productivity and changing some of corps patterns in different parts of country. Apart from this government needs to put in place a well thought strategy and plan to boost the agro-processing industries. And this only cannot work for the farmers alone. There is need for a number of agricultural produces companies that promotes and sells farm produces across the country and these needs to promoted and encouraged by the states governments as well as central government. NABARD can be made nodal agency for the same. While establishing such companies government must take care of stiff taxation and lack of policy support. Also there is need to link agriculture research, university and farmers for better results. Water management and harvesting must be encouraged. Crop diversification, and "more crops per drop" should be the mantra.

Budget 2014-2015: Employment and Skill Building

At present the unemployment situation in the country is alarming, with 4.7 crore youth (between 25 and 34 years of age) unemployed. Further it is notable that there are more than 350 millions of young people who are ready to enter the job market in next few years. If not managed the so called demographic dividend may turn out to be curse for the economy. And there is only way to decrease unemployment rate and increase opportunities for jobs for young people.
Skill Building
India at present can use the opportunity of the large number of Chinese labour force and their rising wages to establish itself as a low cost manufacturing hub for the world. This will help us to increase share of manufacturing sector in GDP and provide more employment opportunities to millions of youth. But for this it is important that government put basic infrastructure and policy in place for training and skill building and if India wants to achieve higher growth rate and gain for demographic profile, it cannot do without proper and efficient skill building strategies. It must be ensured by the government that the training institutes are providing contemporary vocational skills and there is flexibility in curriculum, recruitment of teachers, their salaries and placement of their students so that training institutes can adjust according to needs of the market.

Budget 2014-2015: Growth

Growth is another aspect of Indian economy that needs to be taken care of by the Indian government. In the last two five year plans, the average GDP growth rate in Indian economy was around 8%; however, the same is revolving around 4.5% now, which is hardly sufficient in view of the challenges faced by Indian economy. We need to accelerate growth back into the bracket of 8-10% to gain from the demographic profile of India. For this it needs to bring a lot of changes in overall economy.

Fiscal Deficit
From the below graph it is clear that there had been very high level of fiscal deficit and this is upsetting picture for a slowing economy. Therefore, the government instead of going for populism must ensure fiscal prudence.
The fiscal deficit must be brought around 4-4.5% or at max 5% (subjected it converts deficit into revenues) for better exchange rate and other economic parameters. From the newspaper reports about the revenues collection, the path the fiscal prudence by the government seemed to be a difficult choice by government seeing the proposed expenditures and promises made by BJP during recently concluded election as at present it does not have too much scope for higher fiscal deficit.

Budget 2014-2015: Inflation

Inflation in Indian economy has been very high for long time and this is challenging for the economy as it is eroding the value of Indian rupee in national as well as international market and making life difficult for wages earners. Also considering the social and political unrest in Iraq and other West Asian nations, the problem of high inflation in Indian economy becomes more acute as oil prices would show upward trend leading to higher food and overall inflation in the economy. Government is required to take fiscal initiatives to contain as only monetary policy cannot help government in this regards. From the above graph it is clear that the average inflation during 2012 – 2014 has been around 10% and this is very high for any economy.
Food Inflation
Food inflation in the economy is on higher side and government needs to take initiatives for agriculture sector for better results in medium to long term as no short term strategy would work for because there has huge difference in Indian society of early 2000s and today’s India. India is witnessing tectonic shift in its eating habits across the country either its metro cities or rural areas. This has resulted in changes in demand for agricultural foods but most of farmers are following and cultivating old ways and corps. Government needs to bring the required change in the overall farming sector by promoting some important and vital corps so that it does not have to depend on imports.

Budget 2014-2015: Introduction

For any country, budget is an important vision document and for newly elected government perhaps the most important tool in hand to keep its people’s hopes and expectations sustained for longer time. The present day government with the help of a promising but deliverable budget can keep its own as well as its people’s morale high. Our finance minister is expected to present budget on 10th July 2014. So to keep the morale of India at higher level he must take of few issues as inflation, food inflation, growth, fiscal deficit, employment and skill building, investment by corporate, manufacturing, agriculture, infrastructure, taxes, subsidies and social security programs and free trade agreements etc.
Government can use tax and expenditure policy to address cyclical issues such as food inflation and low industrial and job growth. For example, government as short term tactical decision can cut import duties on food but raise them on manufactured consumer goods; give tax credits and interest rate subvention for domestic entrepreneurs, promoting MSMEs, encouraging self help groups to establish micro and small industries across the nation, establishing small clusters for MSMEs, building cold storages; re-look FTAs. With the help of these, government can improve the overall economic position of the country. Also at the same time government must aim to increase private and public investment (PPP model) in different sectors (mainly infrastructure) through temporary tax credits.
Government has an opportunity to show to its people that it is dedicated to people of India and will do all required for the betterment of country on all sectors and budget can be used indicate this. If government makes deliverable promises, it can easily achieve those goals (if intends to).
In next few post I will discuss different Issues mentioned above in detail.