Analysis & Criticism of Annual Financial Statement

Union Budget 2015-16 and Related Issues

Land Acquisition Ordinance-various facets

(AIR News Analysis – 21 Feb 2015 – Surat singh SC Advocate, Harveer singh Editor)

·     Land Asset for the development of a country and precious thing for the farmers. Old act 1894 during colonial regime. Provisions of the 2014 LARR act been amended by Ordinance.

·     Changes

o From 1894 Act, Asymmetric - Right of the farmer vs. Need of the land – Public purpose – Fair compensation; in the name of Development government created “Land Bank” e.g. Delhi Development Authority (Not for Profit Organization) – Fixed deposit of Rs.22k Cr. Amount of compensation was very low.

o Section 70 (Urgency clause) – Govt. acquire land directly without heeding to the grievances of the affected.

§ Compensation clause & Consent

o LARR 2013 Act - Approach – Right to fair compensation and transparency in land acquisition (rehabilitation & resettlement) LARR 2013.

§ Compensation - 4 times the circle rate – Agriculture or Rural Land.

§ Compensation - 2 times the circle rate if urban area.

o Amendment to LARR 2013 via Ordinance

§ If it is government project, 70% of the land owners must give consent or it is a private project, 80% consent is required. The Ordinance exempts the five categories from this provision of the Act. Exemption of five categories of land use from certain provisions: The Ordinance creates five special categories of land use: (i) defence, (ii) rural infrastructure, (iii) affordable housing, (iv) industrial corridors, and (v) infrastructure projects including Public Private Partnership (PPP) projects where the central government owns the land.

§ The LARR Act 2013 requires that a Social Impact Assessment be conducted to identify affected families and calculate the social impact when land is acquired. The ordinance empowers the government to exempt the 5 category land acquisition from these SIA by Notification.

§ Return of unutilized lands: Section 24 of the New Act LARR Ordinance 2014 – If award has not been passed the section 4 or 6 – compensation will be given in current rate; Section 24 (ii) -If award is made 5 years ago - w.r.t two condition either compensation not provided or the physical possession with the farmer may led to the lapse of the land acquisition. The Ordinance states that in calculating this time period, any period during which the proceedings of acquisition were held up: (i) due to a stay order of a court, or (ii) a period specified in the award of a Tribunal for taking possession, or (iii) any period where possession has been taken but the compensation is lying deposited in a court or any account, will not be counted.

o  Criticism in the LARR 2013 – make it impossible for the private to acquire land – New Ordinance strike a balance between fairness of compensation to the farmer & requirement of the private for the development purpose.

o  Ordinance amended Sec.24 – Supreme Court has interpreted that if government has deposited with the tragedy – land acquisition will be lapsed if exceed 5 years. Now amendment makes it difficult to challenge the Land acquisition in the court.

·        Welfare of Farmers – Balanced?

o   Cost of the development should be shared by the entire section of the country – Market rate should be paid for compensation – Argument is put forward on Annuity to the farmers.

14^th Finance Commission Recommendations and Impacts

(AIR News Analysis – 24 Feb 2015– Participant Prof. D.K.Basu, Madras School of Economics and Aditi Fadnis, Special Correspondent, Business Standard)

1.     Structural change in the share of the states from the central taxes. Scope of Plan grant has been reduced. Statutory stands have been increased. Discretionary transfer reduced (Qualitative Change). Financial Autonomy, Financial empowerment of the states;

2.     Central pool share of tax for states increased 32% to 40%. Centre government can reallocate priority and restructuring its expenditure, ministries & department may fetch positive effects.  It is a biggest ever increases in vertical tax devolution.

3.     Shortfall – Either increase Revenue collection or Tax collection; Tax-GDP ratio of India – stagnated to 16-17% GDP – much lower than the developed/advanced countries - must improve for better public finance.

4.      The FFC has also proposed a new horizontal formula for the distribution of the states’ share in divisible pool among the states. There are changes both in the variables included/excluded as well as the weights assigned to them. The FFC has incorporated two new variables: 2011 population and forest cover; and excluded the fiscal discipline variable.

5.     Cutting government Expenditure – Subsidy cut or rationalization; Rationalization of the establishment; Redeployment of people (State & Central subject); Minimum Government, Maximum Governance; 

6.      Several other types of transfers have been proposed including grants to rural and urban local bodies, a performance grant along with grants for disaster relief and revenue deficit.

7.     Parallel scheme of Taxation - roll out of GST – compensation for the state; Now with the recommendation of the FFC, Objection from the state may diluted with increased fund devolution;

8.     Dismantling of the Planning commission – took away the confusion on Plan & non Plan expenditure; Consumption expenditure vs. Asset creating expenditure;

Expectation of General Budget 2015-16

(AIR News Analysis – 27 Feb 2015 – Participant Aravind Prasad, FICCI and Sanjay Thappur, Economic Journalist)

1. First Vision document – as the first full fledge budget;
2. Growth & Employment must be addressed in the Budget; 53-54% dependent on Agriculture which contribute only 14%– there is a need to skill large population;
3. Budget must be Pro-Entrepreneur, Pro-Employment & Pro-Growth; Focus is on Ease of Doing Business, Digital India, Make in India, Skill Development & Entrepreneurship;
4. It must Boost Individual saving and thereby improving the Investment;
5. Fiscal deficit – 3.6% - critically affect the spending for Growth;
6. Economic Survey demand RBI to reduce interest rate; It could boost the investment on Growth; Supporting Make in India programme;
7. MAT 18.5% when it was introduced it was 7.5%; Industries demand for reduction; it may be reduced to 10%;
8. Social welfare scheme – Economic Survey refer JAM Trinity number;
9. Economic Survey emphasis – Public sector investment must give impetus to private sector investment; Golden rule of switching from Non-productive investment to Productive Investment;

Details of General Budget 2015-16

(AIR News Analysis – 28 Feb 2015 – Participants -

1. Fiscal deficit target and Fiscal consolidation deadline extended one year;
2. Various scheme – Infrastructure, Agriculture, Skill India, Digital India;
3. Reformist part – Black money;
4. Corporate Tax brought down from 30% to 25%;
5. Wealth tax abolished;
6. Insurance Accident coverage as the part of Jan Dhan Yojana.
7. Atal Bima Yojana – Insurance penetration and Social Security for the Rural Population.
8. Monetaization of the Gold – India with high Household saving – diverting this physical assets to the financial side; Bringing them in the main stream of investment;
9. Establishing Public Debt Management independent of RBI and Finance Ministry;
10. MUDRA bank – Micro Small Enterprises – Funding SC/ST;
11. Reforms in Agriculture Productivity – creating common market for Agri produce, Putting FMC under the purview of SEBI;

India needs a booster dose for Health for all

Budget concluded with quote from Upanishad “Sarve Bhavantu Sukhinah, Sarve Santu niraamayaah”

v  India’s Public Health care spending at about 1% of GDP whereas in China it is 3%, Brazil stand 4% and US 8.3%;

v  Twelfth Five Year Plan estimated for Rs.2,68,000 Crore Health care spending for the period of (2012-17) But last three year (2012-15) has made only for Rs.70,000 crore. Last year (2014-15) Budget cut the Health care spending in order to meet Fiscal Deficit target; This year Budget (2015-16) also allocated only Rs.33k Cr;

v  India’s Pharma – Largest supplier of Generic drugs to the world – It is being challenged by lack of political will & low priority accords;

v  Budget 2015-16 – didn’t lend support to capital Investment, nor incentivize R&D Investment. Atal Innovation Mission announced in the Budget is not up to the expectation;

Game changers – core impetus for National Development

Almost decade back, finance ministers & G20 Bank Governors – “There is no uniform development approach that fit all countries” – “each country should choose the development approaches & policies that suit its specific characteristics”

1.     “Fund the unfunded” – 58 million micro & small business – non formal sector; Micro Small Business are unique to India – It generate millions of rural & semi-urban entrepreneurship; Kamadhenu of Job creation – 2/3 of the units are operated by SC/ST; Committee to structure a new financial architecture – recommended modern Banking system to fund the MSE Sector – MUDRA (Micro Units Development Refinance Agency);

2.     Monetisation of Gold – creating & circulating money based on Gold – India’s Private gold consumption is as high as a fourth of the world’s consumption. Full potential can be realized if Full Tax Immunity is granted; Sovereign Gold Bonds – generate a substantial interest on gold deposit accounts in Banks;

Framework for recovery & growth

1.  Policy paralysis – decades of decay – growth 8.4% (2003-04) came down to 4.8%(2013-14)

2.  End to Participatory Notes – perifidious financial derivative – crony facilitator for black money based portfolio investment.

3.  Tax free Infrastructure bonds.

4.  Non plan expenditure increased 11% whereas plan expenditure stagnant. Loans from PSBs to pay for overall deficit in the budget – require a major recapitalization of banks to meet Basel III norms else PSBs will go bankrupt by 2017;

Financial sector Innovation in Budget 2015-16

1.     Monetising Gold – channelizing savings from physical assets to financial ones.

2.     MUDRA – enable micro-finance institutions to lend to individual run Micro-enterprises.

3.     REITS (Real Estate Investment Trust) & InvITs (Infrastructure Investment Trust) benefits real estate players having lease-generating commercial assets and infrastructure developers with operating projects.

4.     NIIF (National Investment & Infra Fund) taking equity in Infrastructure projects – will catalyse the Infra Investment;

5.     GIFT (Gujarat International Finance Tec-city) – developing Global Finance centre;

Three facets of Union Budget 2015-16

1.     Conscious push towards spreading the social security net.

a.      Retirement pension coverage, using Jan Dhan platform.

b.     Pradhan Mantri Suraksha Bima Yojana (Rs. 2 lakh accident coverage @ Rs.12 premium per year)

c.     Pradhan Mantri Jeevan Jyoti Bima Yojana (Life coverage Rs.2 lakh @ premium Rs330 per year)

d.     Retirement Coverage – with generous Tax breaks.

2.     Investor friendly initiatives

a.      Corporate Tax cut (reduced from 30% to 25%)

b.     Deferment of GAAR for 2 years.

c.     Electronic Bill discounting platform for MSME.

3.     To address Black money (Parallel Economy) Issues.

a.      Tough law against those holding undisclosed assets abroad – 10 years rigorous imprisonment and 300% penalty – commitment to curb illegal foreign accounts.

PDMA to monitor utilization of public fund

1.     Development of Bond market and to prevent leakages of public fund.

2.     PDMA (Public Debt Management Authority) – to bring India’s external borrowing and domestic debt under one roof.

3.     It will be able to do risk analysis of debt and completely monitor the debt, its cost, its use and its repayment.

Comprehensive Bankruptcy Code

·        To be unveiled/implemented in this fiscal.

·        Legal certainity & speed, has been identified as a key priority for improving the ease of doing business;

Currently: SICA (Sick Industries Companies Act) & BIFR (Bureau of Industrial & Finance Reconstruction) – failed – Govt. in the process of establishing an electronic trade receivable discounting system (TReDS)  financing of trade receivables of MSMEs, from corporate and other buyers through multiple financiers.

Recommendations by successive Finance commission

• Zero Revenue Deficit.
• Emergence of Revenue surplus.
• Lowing debt: GDP ratio.
• State to shoulder their own financial burdens.
• Fourteenth Finance commission: Recommend Big rise in the state’s share of Tax collected by the centre. State demand to raise statutory rather than discretionary grants.

Make in India Defence

• India –US military partnership;
• Military-Military ties determine the degree of Trust & collaboration between countries.
• DTTI (Defence Technology & Trade Initiative) – to advance co-production and co-development efforts – supports for strong & self sufficient India.
• Product Nation Imperative
• India has successful service companies, it need to improve product companies.
• It has Airlines (like Jet, IndiGo) but no Airlines maker (like Boeing – which almost generate as much profit of all global airlines put together)
• It has Health care ( like Apollo, Manipal) but no Pharma companies (like Pfizer who’s profit is more than those of top 100 hospitals of US)
• It has mobile phone service (like Airtel, Idea) but no Network equipment makers (like Cisco which earn profit more than all European mobile operators)
• It has many IT services (like TCS, Infosys) but no software product (like Microsoft whose profit is more than top 20 pure play global IT service firms)

Challenges in Railway Reform

Refer: Bibel Debroy Committee.

1.       Investment in Infrastructure to reduce public cost.

2.       Salary level of the employees.

3.       Non core activities ‘Health care’ and ‘manufacturing of Rolling stocks’

4.       Revenue fornt, constraint in a remunerative pricing for passenger traffic.

5.       Cross subsidization through freight traffic earning has its limitation – beyond which traffic would be diverted.

6.       Question of Privatization of Indian Railway

Refer: Rakesh Mohan Committee (2001)

a)      Private Investment without competition would led to oligopoly

b)      Multiple train operation – system of franchise – Bureaucratic state –to- contract state.

7.       Railway reforms Need of the hour

a.       Separate company to handle suburban passanger traffic.

b.      Independent regulator – automatic revision of tarrif.

c.       Better port connectivity – private investment – for freight terminals and dedicated high speed corridors.

d.      More investment required to augment rolling stock, improve quality of coaches, upgrading electronic signaling.

e.      Railway should cease to be a departmental enterprise – it should be built as separate companies with equity participation of state govt. and special purpose vehicle.

Dream without a vision – Railway Budget 2015-16

ü  Missed huge opportunity to push forward GDP growth by at least 2.5%

ü  Proposed to invest of Rs.8.56 Cr over a period of 5 years. But failed to explain funding mechanism.

ü  Four essential goals for the transformation of Indian Railway

o   Improvement in customer experience safety.

o   Expansion of capacity.

o   Making railway self sufficient in terms of finance.

ü  Overcrowded compartment & state of art Infrastructure not focused.

ü  Kakodkar committee report summated in Feb 2012 and April 2015 is fixed as a deadline to examine.

ü  Challenges

o   Under investment

o   Improving system velocity by upgrading signaling, powering up, underpowered freight train, converting all local trains from MEMU to DEMU.

o   Competition from roadways resulted in freight share; Road increase to 50% whereas Railways down to 34%.

o   Even passenger traffic volume gone down 3% in last year.

o   Ahmedabad- Mumbai Bullet train – land acquisition issue – (7-8 years)beyond gestation period – distant dream.

o   Operation expenditure still 9/10

ü  Positive of Railway Budget.

o   Good beginning turning towards corporatizing the existing organization. Making it commercial enterprise get rid of 92% operation ratio. Falling global oil price provide opportunity to reduce operation ratio.

Railway Budget Expectation

AIR – 25 Feb 2015 – Participant: Shanti Narayan, Former member/Railway Board, Sushil Sinha, Hindu BL

Focus on the pending project or new project?

4.5 Lakh crore – fund required to complete pending project - How to fund?

Many committee – researched the performance of the sector - Diagnosis of the challenges – passenger traffic – Railway share dropped from 80% to 30%; Freight & passenger traffic in same track ; capacity building & Financial Requirement;

3 -4 fundamental flaws – need to be addressed

-           Second class passenger Fare – not rose for past 10 years – Tariff ratio (Freight rate for one tonne to that of passenger Fare per km) 0.3 which is 1.2 in china, in most of the developed countries it is above 1.5; 30k crore cross subsidization – must be reduced to 50% within next 5 years;

-          Timely delivery of service – average speed of passenger train – capacity 100 kmph – transit time should be reduce – improving productivity of the rolling stocks; Dedicate Freight Corridor would be the right solution; capacity creation is imperative;

-          Bringing in technology – Bullet train versus ordinary train – project cost 30 crore versus 2 crore per km – source of fund? – FDI might be one route – which need some supporting infrastructure to lure the investor; PPP mode of project – structural problems –

o   private investment demand 3-4%  profit over the bank borrowing – viability gap need  to bridged;

o   Govt. agency want to take the bulk of the profit giving only infinitesimal things;

o   Private capital in basic infrastructure – viability gap;

-          Multilateral funding

o   Attracting the investor - Two fold strategy

§  Share the return in favour of the private sector;

-          Green Technology

o   Renewable energy – solar/wind;

o   Conservation of Energy – Railway traction;

Railway Budget 2015-16

AIR – 25 Feb 2015 – Participant: Suresh prabakar prabhu, Minister and Rajiv lal, Exe Chair Infra Development and Sharma, TV anchor;

1.      No new train proposal? Focus is to Operating ratio – revenue generation – reducing freight charge;

2.      Pending project – 50% of the 600 proposed projects? Sustaining railway service – regenerating railway – creating revenue – fare hike – in the opportunity of Falling diesel price; Dedicate freight corridor;

3.      Budget for all the stakeholder – Railway budget care the economy – financial/fiscal prudence – opportunity to all stakeholders;

4.      Funding the Railways – to improve basic infrastructure – PF fund, Sovereign wealth fund, Bond, Borrowing; financial self -sustainability;

5.      New partnership with the State government – improve the ability to deliver – Special purpose vehicle – multiple agency – with coal, petroleum ministry etc.

6.      Reorganization of the Railway Department – Work culture & Work ethics – organizing on the basis of authority – big ticket announcement – attracting Private to develop Railway Station ; Regulation through independent agency to regulate the private investment & functions;

7.      Service delivery &Customer satisfaction – creation of PSU like IRKON – better & effective performance with track record – provide with financial & administrative autonomy;