Column on Reviving Indian Agriculture, Businessworld, 30 April

The recent political discourse has centred on the many woes of the Indian farmer, and has become particularly amplified following the suicide of a farmer at a political rally in the capital. While the government has stood its ground on the proposed Land Bill seen by opposition parties as fundamentally “anti-farmer”, it is increasingly clear that the BJP and its allies will have to confront the core issues at stake. Even if the successive failures of previous governments in assuaging the farmer’s challenges are not reason enough, a gridlock on the economic reforms mandate as a result of political developments should provoke a comprehensive response.  

 

Despite the elevated status of the services sector post economic liberalisation, agriculture remains critical to the Indian economy. The sector accounts for the largest share of jobs. Yet, it also accounts for adwindling share of value added. The National Sample Survey suggests that the number of rural workers in agriculture has dropped from a share of 74 per cent of total workers in 1999 - 2000 to 61 per cent in 2010 – 11, and to even fewer today. 

 

While states such as Madhya Pradesh have shown stellar agricultural performance in recent times, many others have not. Unseasonal rains and hailstorms have diminished farm yields. To make matters worse, a slew of ‘legacy policies’, such as Minimum Support Prices (MSP), have created perverse incentives to farm low value, highly susceptible crops. Rice and grains account for account for over two thirds of agricultural produce. They simultaneously account for around a fourth of the value of all agricultural produce. Concomitantly, the cropping of high value produce such as vegetables and fruits remains restricted, leading in turn to lower farm incomes. 

 

As a result of inefficient market functioning on both the input and output side farm profitability has suffered. The proliferation of intermediaries in the sector is a well-recognised problem with few systemic solutions or so it seems. As are other aspects such as low productivity and fragmented production owing to factors such as small land holdings and low levels of farm mechanisation. 
There is certainly no panacea for the ailing sector; however the government may find it prudent to focus its energy on five areas.

 

First, the rejuvenation of the agricultural sector merits a deeper look at how the state has (mis)conducted natural resource management. Agricultural policies must be assessed through multi-disciplinary lens. This has not been the case and as a result, despite the acute land scarcity in the country, low value crop production has been encouraged; and despite acute water scarcity, India is the largest exporter of water through agriculture (through exports of basmati rice in particular). The government shouldtherefore strive to articulate an agricultural policy framework premised on an integrated natural resources management approach. 

 

Second, small and marginal farmers across the country require extension services, ranging from technical training to weather and market related information. Extension services come under the scope of Departments of Agriculture across states, as well as other government entities such as Krishi Vigyan Kendras, private entities such as the seed industry, farmers’ groups, registered producers associations, NGOs etc. There is a need to consolidate the efforts of different stakeholders across states, and build upon existing capacities. There is also a large opportunity in the waiting, for private sector interventions. The key here is for the government to showcase successful case studies, of which there are more than a few, and provide the requisite incentives for private sector participation. 

 

Third, an important determinant, of agricultural growth is the availability of infrastructure in rural areas in the form of roads and power in particular. Perhaps it is time to look at schemes that are analogous to the ‘Provision of Urban Amenities in Rural Areas’. The key question here too would be that of financing. However, most Indian states are fiscally sound – and have greater room to manoeuvre than intuition would suggest. For instance, Bihar, which is one of the poorest states in the country on a per capita basis, is also a state which has budgeted for a revenue surplus of INR 11,980 crore, which is expected to be invested into physical infrastructure. The states should therefore lead the charge on creation of infrastructure in rural areas, and the centre should in turn, play a facilitators role. 

 

Fourth, an increased emphasis on high value activities such as animal husbandry and fisheries is warranted given the high profit margins and the visible investment demand for industries such as dairy, both domestically and internationally. Capital intensive animal husbandry and fisheries should be promoted through mezzanine financing schemes. 

Similarly, there is a need to actively develop the agricultural supply chain for high value agricultural produce, such as cold storage and transportation, through investment programmes. It is imperative for local entrepreneurs to get involved and this will require government to focus on market efficiency. Rent seeking and business cartels act as barriers to entry that demand and supply economics cannot reasonably explain. 
 

And finally, no agricultural sector framework would be complete without a consistent focus on agricultural credit and micro-insurance. While the MUDRA bank may be a good idea, the government is not necessarily a good manager of money. Moreover, the existing micro – insurance products in the market, particularly weather based insurance products, are not necessarily effective tools to mitigate price and income risks faced by farmers. The reasons for this include lack of product awareness and simply bad product innovation – more than a few credible studies already exist meticulously enumerating the flaws and how to address them. Aside from seriously deliberating on the credit challenges, the government would also do well to provide channels for global capital, available at historically low interest rates, towards the agricultural sector. This would benefit food processing and mega food park plans that are capital intensive andare perhaps only unattractive owing to high domestic rates of interest. 

 

The author, Vivan Sharan, is Partner, Koan Advisory Group, India

- See more at: http://businessworld.in/news/economy/agriculture/reviving-indian-agriculture/1834720/page-1.html#sthash.OxXZIxsC.dpuf

Co-Authored Policy Brief for the T20, April 2015

http://www.t20turkey.org/images/pdf/Infrastructure%20Financing%20and%20Sustainable%20Development.pdf

This policy brief stems from the joint work of the Think 20 Turkey Infrastructure Working Group that includes Amar Bhattacharya (Brookings Institution), Zhongyi Yin (China Institute for Reform and Development) Pelin Yenigun Dilek (EDAM), Tristram Sainsbury (Lowy Institute), Vivan Sharan (ORF), Richard Manning (Oxford University), and Ussal Sahbaz (TEPAV) and but does not necessarily represent the views of the individual authors. Think 20 (T20) Turkey is chaired by the Economic Policy Research Foundation of Turkey (TEPAV). For more information about T20 Turkey and its work, please see www.t20turkey.org.

Behind the Lines of Credit: Co-Authored Op Ed, Business Standard, 28 March 2015

http://www.business-standard.com/article/opinion/samir-saran-vivan-sharan-behind-the-lines-of-credit-115032800908_1.html

Last year Indian PM Narendra Modi announced a $1 billion concessional line of credit (LoC) on his maiden visit to Nepal. More recently he announced a concessional LoC in his March visit to Mauritius of $500 million for civil infrastructure projects, and a similar line to Sri Lanka of $318 million for development of railway infrastructure. Clearly, LoCs are becoming a key arrow in India's economic diplomacy quiver.

The Indian government subsidises the interest rate on concessional LoCs under its Development Cooperation Programme. Since LoC projects are demand-driven, recipient countries first have to make a request for a LoC to the ministry of external affairs, which considers political and economic aspects before handing over the structural and disbursement process to the ministry of finance and the Export Import Bank, respectively. The sheer size of the LoCs committed to Nepal and Mauritius in particular is indicative of the shift in India's foreign policy priorities towards its neighbours.

The importance given to LoCs comes at a critical juncture in the global development discourse. There is little agreement on a 'universally applicable' global development agenda. The heydays of structural macroeconomists arguing for deficit reduction as a precondition to 'development assistance' are perhaps behind us. In the aftermath of the global financial crisis, OECD countries are racking up large debts in an attempt to spend their way out of deflation. As world leaders prepare to negotiate Sustainable Development Goals to succeed the Millennium Development Goals, key development questions will be up for debate.

The negotiations will be rough and tough. A number of politically sensitive questions must be addressed if a truly inclusive and sustainable development agenda is to be crafted: What should be the measure of effectiveness of financial flows, such as LoCs? Who or which body should have the mandate to measure this effectiveness? How critical a role will financial markets play in the maximisation of development impact? What should be the criterion for assistance? How can economic incentives between development partners be aligned?

 

A study by the Observer Research Foundation on India's concessional LoCs to East Africa has helped shed light on some of these issues. One of India's largest LoC tranches, of $640 million, has been given to the Ethiopian government for expanding sugar refining operations. According to the Ethiopian Sugar Corporation, production from three assisted plants, which would total close to 1.6 million tonnes of sugar annually, would help Ethiopia become a net sugar exporter. The effectiveness of LoCs, therefore, is closely tied to the shift away from structural import dependence. The Ethiopian exchequer could earn $376 million annually through sugar exports from 2015, but the qualitative impact is perhaps wider. The credit extended will help generate livelihoods both directly and indirectly through infrastructure and supply chain creation; it will generate additional revenues for development objectives and create a new industrial ecosystem. Given that this entire process was demand-led, local stakeholders are perhaps best-equipped to measure the developmental and economic impact of the LoC.

From the Indian perspective, two aspects must be revisited to exponentially increase the impact of such LoCs. First, the role of the local agency is central. Often, countries from where LoC demands originate require handholding and technical support. The commercial sections of Indian missions in countries to which large development flows have been committed require support of experts and technocrats. Since the Indian Foreign Service is smaller than New Zealand's, it is vital that the government breaks down silos reserved for diplomats, and supplements its missions with professionals possessing the requisite expertise in handling and supporting commercial projects. Prime Minister Modi would know that economic outcomes are not going to wait for the Indian bureaucracy to reform or for officials to reconcile themselves to the fact that horizontal hires need to be paid market wages. Billions of dollars are at stake, important relationships need nurturing and none of this should be jeopardised by a handful of egos.

The second key issue is the involvement of Indian vendors in funded projects. Under the concessional LoC framework, recipient countries have to procure a variable proportion of goods and services (between 65 and 75 per cent) from Indian firms towards project implementation. Anecdotal evidence gathered for the ORF study suggested that the pre-tendering and tendering processes have much scope for improvement. Given this government's emphasis on expanding the Indian industrial base, there is an opportunity to make the LoC-linked tendering process more competitive and inclusive. Many stakeholders privately confessed that the process is not transparent and is geared to cater to a select few. The government must, therefore, use the new commitments to Nepal and Mauritius as an opportunity to revise the tendering process and to offer a level playing field. The bureaucracy must be kept at arm's length from market operations in order not to replicate the very system of state patronage that the Indian PM hopes to dismantle.

In 2012, the total amount of open LoCs crossed $10 billion and this instrument is only likely to gain further prominence. Yet India is itself a developing country with urgent development needs of its own, and a limited budget. Thus the Modi administration must extract maximum 'bang for the buck' from LoCs, while making sure that the concessional lending programme can stand the strictest tests of public scrutiny. For this, the first step is to institute a stakeholder feedback process that would include the private sector, civil society and perhaps even unbiased voices from recipient countries. Recipient governments rarely critique the Indian government, as it would be considered 'undiplomatic'. What would distinguish the new administration from its predecessors would be the willingness to actively solicit criticism and refine existing processes for the larger public good and efficacy of its primary instrument for economic diplomacy.

In the early post-independence years, the thrust of India's external engagements and economic diplomacy (not necessarily described as such) was with countries with similar colonial experiences and economic realities in the neighbourhood and Africa. More recently, its engagements in groupings such as BRICS have resulted in new development financing instruments like the recently announced New Development Bank. The country's involvement in the G20 following the financial crisis compelled India to commit to an IMF-led euro zone-focused stabilisation fund. The new government must now attempt to transition India's economic engagements towards a more deliberate, durable and definitional framework. Well-administered LoCs offer a great avenue to do this - and therefore must be given commensurate strategic priority and attention.

Union Budget 15-16: Hopes for a market driven rebalance, Vivan Sharan and Manmath Goel, 28 Feb 2015

Finance Minister Arun Jaitley read out his Budget speech on Saturday (February 28) amidst great expectations from his government to signal a progressive, non-populist agenda. With 800 million living at less than two dollars a day and one million entering the job market every month, India's myriad socio-economic challenges seem to have converged - and can prove to be overwhelming for a state which is not able to achieve targets. 

In the final few years of the erstwhile UPA Government, it had become fairly apparent that a complete revision in the government's approach to the Indian economy would be required -- to build the requisite capacities to address the scale of incumbent challenges. This revision of approach is precisely what has been attempted in the 2015-16 Budget. One of the key challenges of policymaking in India is no doubt the requirement to cater two vastly different constituencies. The first is the burgeoning numbers of rural and urban poor, who also form a large part of the political base. And the second is the business elite and rating agencies that are ever watchful of the balancing act of successive Finance Ministers between populist spending and prudent management. 

As a result of the shriller and louder voice of the latter constituency in the political and financial capitals of the country, much is often made of India's fiscal deficit targets in contemporary intellectual discourse. This overlooks the fact that India's public debt is largely manageable, particularly since only a small proportion is in the form of external debt. Of course less emphasis on prudent fiscal policy requires growth to be on track - which seems to be the case if the revised GDP numbers are to be believed. In fact the Economic Survey has been bold enough to proclaim that double digit GDP growth is now achievable, despite the fact that industrial production is near stagnant. 

Mr. Jaitely has promised to stick to a fiscal deficit target of 3.9 per cent of GDP. This seems to be a distinct feature of his government - its actions in recent days seem to suggest that it is heavily influenced by the need to maintain positive perceptions. 

What Mr. Jaitley seems to have overlooked, is the fact that the fiscal health of India's states is in fact very good - which means the government could have looked to dilute the rhetoric on prudent fiscal management and looked to jump start growth through aggressive capital expenditure in key sectors such as infrastructure. In 2013-14 the states' gross fiscal deficit was only 2.2 per cent of GDP. The average debt to GDP ratio over 2010-2014 was 22.2 per cent, a full eight percentage points lower than in the period 2000-2005 when India first began to experience rapid economic growth. 

This is not to say that Mr. Jaitley has not emphasised the right issues in his speech. One of the key developments in the thinking of the government seems to be on the area of Public Private Partnerships (PPPs). The government seems to have correctly realised that the PPP model of infrastructure investments has not worked, largely because the private sector has thus far been taking the risk of such investments, which are almost never properly assessed. Mr. Jaitley has admitted, in what is a positive sign for things to come, that the sovereign will have to take on a larger share of the risk in PPP investments. After all, private sector cannot simply gloss over the investment risks that are tied to the relative unease of doing business in this country. Furthermore, low global oil prices have given the government fiscal room to manoeuvre and therefore convert excise duty on petrol and diesel to a cess of four rupees per litre towards road projects. 

Another promising development is the recalibration of tax policy in the country. The government earns the largest proportion of its tax revenue from direct tax on corporates, accounting for 3.56 per cent of GDP as per 2014-15 Budget Estimates (as compared to 2.25 per cent of GDP in the case of income tax). Mr. Jaitley has rightly stated that this has made "domestic industry uncompetitive". A sustainable and resilient Indian economy would have to rest on the pillar of strong corporate performance. Given that the effective collection of corporate tax is around a lowly 23 per cent, the proposal to reduce the rate of corporate tax to 25 per cent over the next four years has been a long time coming. Likewise, so has the abolition of the Wealth Tax and the substitution of this with the surcharge of two per cent on the tax liabilities of the super-rich (who earn over one crore per annum). 

While other positives include the reemphasis of the adverse impacts of retrospective taxation, liberalisation of some of the framework rules for foreign funding including "tax pass through" on 'Alternative Investment Funds', and recognition of the "transformative" role that the Goods and Services Tax can play in tax administration, a lot rests on implementation capacity of the government, which has not yet been proven.

Although Mr. Jaitley has promised a "non-adversarial tax administration", it is not quite clear how the government will deliver on this front. Indeed if the experience of Nokia or e-commerce companies is anything to go by, the day when the central government will have better policy oversight over state tax administration is still very far. Moreover, the Rail Budget, which has put additional stress on coal freight, is indicative of the fact that the government has not been able to think through some structural challenges of the Indian economy. Thermal power generation is already stressed because of the lack of coal evacuation capacity. More taxes on the coal supply chain means that the burden will eventually have to be passed on downstream. 

Indeed it is unfair to expect the government to have a fool-proof budget framework - there will always be losers. However, significant implementation challenges can be reduced in the social sector in particular, if the government's vision of the "JAM trinity" -- of Jan Dhan, Aadhar and Mobile is realised in the context of Direct Benefits Transfer (DBT). Subsidies account for around two per cent of GDP,which is larger than the share of capital expenditure. If the efficiency of social spending can be improved upon in a substantive way through DBT, it may prove to be a real game-changer. 

The premise of this Budget seems to have been a market oriented growth strategy - wholly fair given that the government will struggle to fund the growth needs of the country otherwise. This has already been evidenced in the slow delivery on the Smart Cities agenda - compromised because of a lack of both funding availability and more importantly,viable ideas. A lot therefore rests upon the leadership and institutional capacity of the government to deliver. One should hope that this budget has set the controls for a larger shift in the government's approach towards administration and efficacy.