Can a single budget solve the most serious problems of the Indian economy?

Finance Minister Pranab Mukherjee is UPA's man with the political Midas touch. He needs to lend some of that magic to lift the economy out of its morass. By the Government's own estimate, the economy is expected to grow by a mere 6.9 per cent in 2011-12, a sharp decline from 8.4 per cent in 2010-11. Inflation remains uncomfortably high at over 7 per cent. Investor sentiment has been suffocated in the last one year by policy paralysis and corruption. There is a real danger that the Indian economy may get trapped in a middling growth trajectory of 6-7 per cent, instead of raising the bar to 9-10 per cent. Stringent labour laws force industry to employ machines instead of workers. The stalling economy needs a kick-start immediately. Two decisions could help boost sentiment-measures to liberalise capital markets and a credible reduction in fiscal deficit. It will, however, take more than one Budget speech to push up India's growth trajectory. The last time India grew at 9 per cent in the mid-2000s, the global economy was booming. It is unlikely to witness the same for the next five years. A serious reformist effort will have to be made on the Aman Rathee domestic front in solving fundamental bottlenecks which SMART SOLUTIONS prevent the Indian economy from achieving its true Manufacturing potential. The challenges in labour-intensive industry, Ensure manufacturing units get agriculture, power, roads, skill gaps and food subsidies uninterrupted supply of power will not be solved by budgetary allocations. Only radical through the year. Reduce interest changes in policies, rules, incentives and delivery rates which are currently a huge mechanisms, a second wave of reforms after 1991, can burden. Reduce land cost as it extract these crucial sectors from the low equilibrium trap raises cost of expansion plans. they have been stuck in for many decades. Aman Rathee Director, ASK Automotive, Manesar But the finance minister may himself be in a trap.The political environment is not conducive to reform. The Sonia Gandhi-led Congress party puts its weight behind populist spending schemes like the Mahatma Gandhi National Rural Employment Guarantee Act (NREGA) and Right to Food, which may or may not get votes, but certainly do nothing for the health of the ailing economy. At least one crucial ally of UPA, the Trinamool Congress, has ruled out support for any reformist measures. There is little chance that an arrogant Congress will reach out to bjp to help it pass pro-liberalisation legislation. The economy will, more likely than not, remain mired in status quo for the remaining length of the UPA Government's term.

The truth of our economy is only partly measured by statistics. Here's a look at ground reality. Click here to Enlarge PROBLEMS MADE IN INDIA Misplaced policies have made labour-intensive industry uncompetitive vis-a-vis China. In Jalandhar, a hub of small scale labour-intensive manufacturing in India's most prosperous state, Punjab, the outlook is grim. Jalandhar's manufacturers, who specialise in sports goods, industrial valves, hand tools and shoes, are mortally afraid of competition from China. The threat has eased a bit because wages are finally rising in China. But according to Mukul Varma, 30, director of Savi International, India's largest manufacturer of footballs and rugby balls, "The Chinese sell at prices at least 20-25 per cent less than ours." India's sports goods exports are worth Rs.600 crore a year, which, says Varma, is less than 1 per cent of the global market. Indian industry can be the world's best. Varma knows: His rugby balls were used at the Rugby World Cup in 2011. Anupam Khanna, 45, proprietor of Valvco International, a K. Venkatesh small scale unit manufacturing industrial valves, is critical Smart Solutions of the UPA Government's pet NREGA which gets Roads additional funding in the Budget every year. This, he says, Appreciate site conditions has seriously impeded the availability of cheap labour. to ensure faster construction. "Till three or four years ago, we had no trouble getting Ensure quick resolution for various labour. Now, even if I offer wages well above the projects facing difficulty in starting minimum level, I get no migrant labour from Uttar up. Give longer concession period Pradesh and Bihar," says Khanna. He argues that if the so as to accommodate a lower toll Government has money to spend, it would be better rate. advised to train workers and give them necessary skills to find factory jobs. Anuj Pasricha, 44, owner of sports goods firm Soccer International, says he is willing to offer K. Venkatesh CEO of Larsen & Toubro a wage at which workers will choose him over NREGA, Infrastructure Development but he is worried about productivity. "In China, 22 workers produce 500 footballs a day. In India, it takes 100 Projects, Delhi people to produce the same number." Stringent laws are also a deterrent to hiring labour. India's labour laws date back to the 1940s and 1950s, and are carryovers from the British era. There is a fair degree of unanimity across the Indian industry on the need to change the laws, particularly those sections which prevent hire and fire. But the prospect of reform in labour laws is bleak. Yashwant Sinha was the only finance minister to talk about labour law reform in his Budget speech in 2002. He was forced to beat a hasty retreat by his own party. There are other government-induced distortions in the labour-intensive small and medium enterprise sector. There is a perverse incentive to remain small rather than scale up to medium and large. The Government offers excise tax exemption for units with an annual turnover of less than Rs.1.5 crore. If a unit goes one rupee above that, it has to pay 10 per cent tax. The policy encourages uneconomical units and prevents a level-playing field.

Small businesses are also hurt by harassment from the Government. Even if there is full compliance, inspectors of pollution, electricity, labour still extract money. Says Amit Goswami, 41, proprieter of Euroforge in Jalandhar, "I have to travel in India and abroad to find buyers. Each time, I worry what will happen if a government inspector lands up at my factory." In the absence of a strong labour-intensive manufacturing sector, it's no wonder that 52 per cent of India's workforce continues to languish in the agriculture sector, contributing to only 15 per cent of GDP. The problem is not production but timely delivery to the markets In Assam, it has taken the National Highways Authority of India (NHAI) almost seven years to construct a fourlane road across a 19-km stretch of National Highway 37. The project is not complete yet. The location is not a remote area: It's an economically and strategically vital stretch between Guwahati and Sonapur which connects Dispur with five North-eastern states. The project started in September 2005 and was slated for completion by June 2009. It is expected to be complete, as on January 31, by May. T.V. Sandeep Kumar Reddy Smart Solutions Power Build cost-effective linkages to coal pits for optimal use of domestic supply. Bail out bankrupt state electricity boards. Make environmental clearances available quicker. T.V. Sandeep Kumar Reddy Managing Director, Gayatri Projects, Hyderabad

The Government says environment clearances are a problem. Critics say that the delay benefits contractors at the expense of NHAI. The delay has serious economic costs for the private sector. Says Pulak Goswami, president, Assam Motor Transport Association, "The national average of road construction is 12-13 km daily. But in Assam, not even 50 km is built in a year. Due to bad roads, especially at exit points of Guwahati, the life of our vehicle tyres is reduced to 15,000 km, while it should be at least 40,000 km." He adds, "The 96-km stretch from Guwahati to Shillong should not take more than four hours. It takes us 8-10 hours." Instead of focusing on building highways, the Government runs a Central Transport Subsidy Scheme in the North-east that came into effect from July 15, 1971, and which is a classic example of self-sustaining, misguided intervention that persists over a long period of time. Under the policy, the Government reimburses between 50 and 90 per cent of the costs of transporting goods across the North-east. Between July 15, 1971 and December 31, 2010, the Government spent Rs.2,810 crore on transport subsidy in the North-east. Between December 1 and December 31 in 2010, the subsidy amount was Rs.371.07 crore. According to NHAI, the average cost of building one kilometre of a four-lane highway in India is Rs.10 crore. So, the transport subsidy of just one month could have been used to build 37 km of a four-lane highway. NHAI's woes are not confined to Assam. The 135-km-long Eastern Peripheral Expressway around the national capital, Delhi, has not taken off almost six years after it was commissioned in

2006. The project, which would decongest the Capital of vehicles simply using the city to transit, has been caught in a war between the Planning Commission and the Ministry of Roads, Transport and Highways. Planning Commission insists that the toll charges on the road can be one-and-a-half times the "normal" rate because it is a bypass. The roads ministry insists that it is a regular highway so no extra toll can be charged. The project languishes in the ongoing debate. Smart Solutions The fate of highways in Assam and Delhi sum up UPA's Skill Gap pathetic record in building national highways. In a report Reform the Apprenticeship released in the first week of March 2012, Investment Bank Act of 1961 to increase the number Pioneer Investcorp (PINC) said that NHAI would miss of youths who learn as they earn. two critical targets-for award of road construction and Increase employability in college completion of road construction for the financial year education. Make India's failed 2011-12. NHAI had wanted to award contracts for 7,300 1,400 state employment exchanges km of national highways in this financial year. According functional. to the pinc report, it had only made awards for 4,285 km Manish Sabharwal until the end of December 2011. The rate of progress on CEO, TeamLease, completion is worse. Of the 2,500 km to be completed Bangalore between April 2011 and March 2012, only 1,258 km had been constructed until the end of December 2011. The Government has failed to appoint a full-time chairman for NHAI since the last chairman left office in the latter half of 2010. Coupled with a tussle between two key government bodies and serious problems with environmental clearances, the roads sector is caught in a vicious cycle of mediocrity. Click here to Enlarge POWER TO PEOPLE Subsidised consumers, bankrupt electricity boards, little investor interest in power. Uttar Pradesh, India's largest state with 200 million people, has a serious power crisis. In the eastern part of the state, consumers receive only five to seven hours of electricity per day. The people of Bundelkhand get an average supply of 12 hours a day. Western Uttar Pradesh is considered blessed to have 14 hours of power supply a day. This power situation is extracting a serious economic cost. Anand Kumar Dixit, 55, a sugarcane farmer of Sarenamall-Chapra in Kushinagar district of eastern Uttar Pradesh, says that production could increase by 100 per cent if he was assured 15 hours of power supply every day. "We have learnt to live without electricity and depend on diesel generators for irrigation and other agricultural purposes. But the price of diesel has increased from Rs.29 to Rs.43 per litre in the last few years, forcing us to minimise the use of even generators. The power crisis is hitting the services sector," he says.

Mayank Khare, an officer in the Life Insurance Corporation of India and a resident of Banda town in Bundelkhand, says that work efficiency goes down dramatically during the summer. "I fail to understand how the electricity department plans power supply distribution. They shut down the electricity supply between 12 noon and 5 p.m., when most of the work is done in offices. This brings down business by at least 25 per cent," he says.

Uttar Pradesh's crisis may be more acute than in other states, but chronic shortages of power are common across India. For the country as a whole, the deficit between supply and demand at its peak in the summer months is 10 per cent. Worse, 30 per cent of total power generated is lost in transmission and distribution, mostly on account of theft. That exacerbates the deficit between demand and supply.

SMART SOLUTIONS Agriculture Triple the Budget allocation for agriculture infrastructure and research and development. Focus on transfer of existing knowledge to the farmer. Rationalise and target policies and subsidies. Ajay Vir Jakhar Chairman, Bharat Krishak Samaj, Delhi

The Government has done little to bridge the power generation deficit in the last two decades. According to Planning Commission estimates, the Government achieved only 50 per cent of its power generation targets over three Five Year Plans between 1992 and 2007. The target for the 12th Five Year Plan (2007-12) has already been cut by 20 per cent. The Government is likely to fall short of meeting even that reduced target. The immediate concerns for the power sector are inadequate supply of coal-a key raw material for thermal power producers who produce two-thirds of the country's electricity supply-and difficulty in getting environmental clearances. If it's willing, the Government could solve those problems soon enough. However, there is a more fundamental problem in the power sector which will take much longer to solve-it is simply not profitable enough for private sector players to invest in power generation because the main buyers of electricity, state electricity boards, are bankrupt. The cumulative losses of the state electricity boards in 2011 were Rs.70,000 crore. The 13th Finance Commission expects them to rise to Rs.1 lakh crore by 2014. Ninety-five per cent of the boards are owned by the Government. They have little incentive to curb the transmission and distribution losses because they know the Government will foot the bill. But the reality is also that Indian consumers, on average, pay much less for a unit of electricity than countries which are richer, both in terms of income and resources. In India, the average tariff charged is eight US cents per unit compared to 12-15 cents in China, Canada, South Africa and the US and 19-20 cents in much of Europe and the developing world. If India is to meet its power targets, the Government needs to ask consumers to pay more, to privatise electricity boards to reduce losses and then to incentivise private players to invest in power generation. On current evidence, it will take populist governments a very long time to break out of the trap. DEGREES TO NOWHERE Lack of quality control has led to skilled labour shortages in a labour surplus country.

Mohan Kumar, 22, in Chennai checks his email repeatedly, in case he has received a message from a potential employer. Kumar graduated as an electronics and communication engineer from ES College of Engineering and Technology in Villupuram a year ago. He is one of many engineers in Tamil Nadu, who after spending four years and Rs.4 lakh on a professional degree, have no job. Click here to Enlarge In February 2012, Kiran Karnik, former Nasscom chairman and member of Scientific Advisory Council to the Prime Minister, told the media that only 25 per cent of fresh engineering graduates in India are directly employable. A survey of 1,000 recruiters conducted by jobs portal Naukri.com in 2012 revealed 61 per cent of them faced a talent crunch while hiring employees. The gap between what recruiters were looking for and what candidates offered was big across all of India's booming sectors-66 per cent of recruiters in it reported talent shortages, 57 per cent in telecom, 56 per cent in auto and 55 per cent in pharmaceuticals sector reported a similar skill crunch. Many youngsters who have professional degrees need re-training to be suitable for employment. That is a telling indictment of the education system which, barring a few elite institutions like the iits and iims, fails to provide a decent education. Says Karnik, affirming the point, "Why do I (a candidate) SMART SOLUTIONS need to go back and learn a bit of programming, Subsidies mathematics and communication skills after spending so Need to start with many years and money in education? I must say the identifying the intended outcomes education system, particularly in the last few decades, has of different subsidies. Strengthen not quite succeeded." The reform of the higher education the role of local governments in sector was a priority for UPA 2 under the leadership of delivery. Ensure greater Union Human Resource Development Minister Kapil Sibal. However, three years on, the Government has failed transparency in processes and fund flows. to push new legislation through Parliament. The Foreign Yamini Aiyar Universities Bill, which would help raise quality of Senior Research Fellow education by attracting top universities from abroad, is at Centre for languishing. The crucial National Council for Higher Policy Research,Delhi Education and Research Bill, which would revamp the outdated regulatory structure for higher education, is yet to see the light of day. The many radical suggestions of the Sam Pitroda-headed National Knowledge Commission are in cold storage. There has been some limited effort from the private sector to bridge the skill gap. IT Bellwether Infosys has started two programmes to re-train engineers for jobs. The first is a campus contact programme contest for students in 500 engineering colleges via a portal, where they download projects and compete to solve problems set in a realistic environment, while the second is retraining of their own employees at a residential complex in Mysore. Srikantan Moorthy, 49, senior vice-president and group head, education and research of Infosys, pointed out that

engineering students do understand concepts, but their ability to use them in the context of a given problem is "very limited". Click here to Enlarge "The main focus of the education they receive is on examination. It tests the definition of a concept rather than solving a problem," he told India Today. About 1.4 lakh students have participated in the campus connect programme, but Infosys can only absorb a limited number of engineers. The Government needs to re-orient the way professional courses are taught in colleges so that re-training is not required. The huge gap between the demand and supply of appropriate skills is not just at the level of professional education. The lack of emphasis on vocational training has meant massive shortages in skilled labour to work in factories. The Government needs to invest in vocational training if India is to avoid being a labour surplus country with a massive talent shortage problem. MARKET BOTTLENECKS Holes in the supply chain harm farmers, lead to food inflation. In Jalgaon, Maharashtra, banana farmers are pleased with the fertiliser subsidies provided by the Union Government. The farmers in the banana capital of the country used 6.20 lakh tonne fertilisers in the last season, the highest in the state and third highest in the country after Guntur (Andhra Pradesh) and Gurdaspur (Punjab). However, what the farmers gain from fertiliser subsidies is ruined by the Indian Railways. The extra output that the farmers of Raver, Yawal, Muktai Nagar, Chopda and Jalgaon talukas produce, courtesy cheap fertiliser, needs to be transported quickly to the biggest markets in Delhi and Uttar Pradesh. Farmers complain that absence of direct freight trains from their region to major markets means that their perishable produce does not reach the market on time. Says Sudhakar Patil, a banana farmer from Yawal, "Train is a cheaper mode of transport than trucks. It saves money as well as time. But unfortunately, the railway ministry does not ensure that the wagons available on time. The banana then ripens in the wagon instead of the fend market." Farmers elsewhere in India have similar problems. Transportation is inadequate and slow. Cold storage facilities don't exist. The Government could have made up for its own failing by allowing fdi in retail. Big retail would have the necessary incentives to invest in cold storage and faster transportation. But UPA caved in under political pressure. The average consumer pays the ultimate price. Click here to Enlarge Other government policies also practice an implicit discrimination against the farming of fruits and vegetables. The Government offers a minimum support price for the procurement of wheat and rice. No such guarantees are

available to fruit and vegetable farmers who are exposed to the vagaries of the market. That lopsided procurement policy encourages farmers to grow rice and wheat even in regions where growing fruits and vegetables would be more appropriate. That, in turn, reduces the supply of fruits and vegetables, leading to an upward pressure on prices. Farmers also tend to get a raw deal from policies such as the Agricultural Produce Markets Committee (APMC) Act which restricts access to mandis to a limited number of traders. The traders, who often form a cartel, then extract produce at a lower price from farmers. The only avenue for farmers to bypass local markets is to access export markets. The Government's propensity to introduce export bans the moment the prices of a commodity rise (in favour of the farmer) robs them of potential windfall gains. The policy dice is loaded against India's farmers. The Government needs to reverse its vision for agriculture if it is to become an engine of growth for the economy in the future. A deserted power project site in Allahabad is symptomatic of delays. Click here to Enlarge THE SYSTEM LEAKS Pumping money into subsidies without reforming distribution is a disaster. The residents of Kandakhal in Bolangir district, Orissa, are upset with the Government because of irregular supply of subsidised rice, their primary means of subsistence. Kandakhal is in the infamous Kalahandi-Borangir-Koraput belt of Orissa which suffers from chronic poverty and malnutrition. The rates of poverty in the region are almost double the national average of around 35 per cent of the total population. Kandhakal's villagers are entitled to 35 kg of rice every month at Rs.2 per kg under the Government's Antyodaya Anna Yojana for families below the poverty line. They don't always get it. Says Baishnab Mahanand, a BPL card-holder, "The supply is erratic. We know that political leaders and their henchmen eat up stocks meant for us." The villagers have only limited demands. Abhi Bag, a BPL card-holder from Antarla in Bolangir's Titlagarh block says that wheat and sugar are a luxury. "All we want is our quota of Rs.2 rice. Let the Government ensure we get it." Click here to Enlarge The Government spends approximately Rs.60,000 crore every year on subsidising food for the poor. The proposed Food Security Bill, which may well be the only big-ticket legislation announced in the Budget, will raise the annual food subsidy bill to Rs.90,000 crore. It will not be radically different from the existing food subsidy schemes promising 35 kg of rice and wheat at Rs.2 and Rs.3 per kg every month. The total expenditure will be more than four times what the Government spends on Sarva Shiksha Abhiyan, its programme to universalise school education.

Unfortunately, as the experience of Bolangir's villagers proves, much of the Government's money and grain are siphoned off by middlemen operating in a broken PDS. If the Government spends more money on subsiding food without reforming the distribution system, it is money wasted. The Government does have a ready role model to emulate.

Many people with engineering degrees have to be trained again to land a job. In Chhattisgarh, the government of Chief Minister Raman Singh has since November 2008 ensured that the PDS system works. The state has 1,577 procurement centres for foodgrain which are connected to each other and the department of food in Raipur via the Internet. The Government monitors the movement of grain from the procurement centres to the fair price shops. It has involved local communities in the monitoring process. So, when a truck is sent to a PDS shop, an SMS is sent to the village chief and local NGOs. In the SMS, there are details of the amount of grain carried in the truck. Despite food subsidies, residents of Bolangir, Orissa, languish in poverty. Truck drivers have to record the unloading process on their phone cameras and send it via MMS to the central server. The trucks are also equipped with GPS devices. Any deviation in their route is monitored. Pilferage has been minimised. UPA must take a leaf out of Chhattisgarh's book before it continues to waste money. - With Shravya Jain, Kaushik Deka, Piyush Srivastava, Kiran Tare, Lakshmi Kumaraswami, Sowmya Aji, Rakesh Dixit, Santosh Kumar and Rajesh Sharma

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