fiscal space for manoeuvrability is no longer available. Finance Minister

Union Finance Minister Shri Pranab Mukherjee’s Address at the National Development Council Meeting

Union Finance Minister Shri Pranab Mukherjee addressed the National Development Council Meeting in New Delhi today. Following is the text of his address: “It is my privilege to address the meeting of the National Development Council, convened to consider the Approach Paper to the Twelfth Five Year Plan. I would like to congratulate the Deputy Chairman and the Members of the Planning Commission for the work undertaken in preparing this Paper. 2. The renewed uncertainty in the global economy, due to sluggish US growth and worsening of the Euro-zone sovereign debt crisis and weak business sentiments and persisting high inflation at home, poses considerable challenges to the task of making a five-year plan. The fact that this task has been done well and the Approach Paper is before us for consideration is commendable. 3. In the last decade, the Indian economy moved to a higher growth path. Between 2005 and 2008, the economy grew at around 9.5 per cent per annum. This made India one of the fastest growing nations in the world. The global financial crisis brought the growth down to 6.8 per cent in 2008-09, though even then India remained a growth leader in the world. This was followed by a strong recovery and the Indian economy grew by 8 and 8.5 per cent in the subsequent two years. Data for the first quarter of 2011-12 indicate a growth rate of 7.7 per cent. While there may be some moderation in growth in the current fiscal, the fundamentals of the economy are intact and the medium-term growth prospects remain buoyant. 4. Over the last two decades the Indian economy has become increasingly integrated with the global economy. It is indeed a matter of pride that the world views India today as a major driver of growth. But globalization also has a downside. It means that when the world sneezes, India runs the risk of catching a cold. Not surprisingly, the economic crisis in Europe and the slowdown in the US are impacting us adversely. As an important contributor to the global growth process, we are playing an increasing role in the international policy arena. In my intervention in the G 20 meet held recently in Paris, I highlighted the spill over effects of the policies of advanced economies. I pointed out that the strong injections of liquidity by Central Banks seem to have done little to stimulate lending and borrowing. Instead we are witnessing negative consequences, especially on asset and commodity prices that have strengthened inflation in emerging markets. 5. Let me at the outset say that I endorse the overall theme of the Approach Paper to the Plan, namely, “Faster, Sustainable and More Inclusive Growth”. It captures well the aspirations of ordinary Indians. There are, however, several issues that we need to focus on, I intend to briefly touch upon some of these. Growth target for the Plan  6. While making a plan, it is important to be realistic and not get carried away by flights of fancy. At the same time, when we make a plan in the midst of a difficult economic situation, it is easy to be over-pessimistic. We have to remind ourselves that a plan is not like a Budget. The horizon for a plan is much longer and we must look beyond the immediate concerns. The Approach Paper outlines two alternative growth scenarios - 9 per cent and 9.5 per cent. There are good reasons, as has been outlined in the document before us, to pitch for a 9 per cent average growth for the plan period. Yet we need to retain a certain flexibility in our planning to consider raising the growth target to above 9 per cent, should the global environment improve and we make good progress in strengthening our domestic growth drivers in the initial years of the Twelfth Plan. We have achieved 9 per cent plus growth prior to the global slowdown. Our ability to deepen and broad-base the inclusion of the marginalised and vulnerable segments of our society in the economic mainstream, hinges crucially on sustaining buoyancy in our resource mobilisation and sustaining high growth path. 7. It is also important that more of this growth takes place in the backward areas of our country. There is already evidence that some of the slow growing states in the past have improved their performance in the recent years. This trend should be further reinforced. The objective of making growth more inclusive cannot be realised unless we are able to narrow down the regional imbalances and disparities. Fiscal consolidation  8. The budgetary support for the 11th Plan was targeted at Rs 16.08 lakh crore in nominal terms and has been fully financed by the Government. However, this was possible at high fiscal costs. After bringing down the fiscal deficit to 3.3 per cent of GDP in 2007-08 we had to breach fiscal targets and incur fiscal deficit of 7.8 per cent and 6.5 per cent of GDP in 2008-09 and 2009-10 respectively. The fiscal impact of these deviations will be felt in years to come in terms of high debt servicing requirements. We could afford this deviation to tide over the global economic crisis without any solvency concerns only because of the fiscal space we had created during the period 2004 to 2008. That fiscal space for manoeuvrability is no longer available. 9. Our recent experience has shown that sustained high growth and fiscal consolidation can be mutually reinforcing. The fiscal consolidation path as envisaged in the Medium Term Fiscal Policy Statement in the Budget 2011-12 has to be followed. As Finance Minister, I stand committed to this path of fiscal consolidation. However, I do recognize that to sustain growth along with fiscal consolidation, we will have to take our due diligence beyond monitoring the quantitative parameters. The quality of expenditure and its multiplier effect on growth must get our attention. 10. The States’ finances have been improving steadily in recent years. The fiscal consolidation brought about through implementation of the Debt Consolidation and Relief Facility in the Twelfth Finance Commission award period, 2005-10, has been built upon through higher devolutions under the Thirteenth Finance Commission award. Plan assistance to the States through the Centrally Sponsored and Centrally administered schemes has also expanded over the years. The States’ share in central taxes has been showing an upward trend: this share was 29.5 per cent during the Eleventh Finance Commission period (2001-2005); it was raised to 30.5 per cent during the Twelfth Finance Commission period (2005-2010) and currently stands at 32 per cent for the period 2010-15. The current Finance Commission award also aims to fulfil identified specific needs of States through grants of nearly Rs.28,000 crore over the next four years. 11. The flow of resources to the local bodies has been stepped up and made more buoyant during 2010-15, as the Thirteenth Finance Commission has linked grants to local bodies with the quantum of taxes collected by the Union Government. Reforms at the local body level have been incentivized through additional grants. The local body reforms have been uneven across States, but I am sure that the States are working at strengthening local bodies through improved devolution of funds and functions. The capacity of local bodies has to be enhanced by making higher devolutions through the State Finance Commissions. 12. These steps, and the States’ own efforts, have led to improvement in the States’ aggregate fiscal parameters. There has been a decline in the aggregate debt to GDP ratio for the States from 28.4 per cent in 2007-08 to an estimated 23.7 per cent in 2011-12. The estimated aggregate fiscal deficit of States in 2010-11 was 2.5 per cent of GDP, which was within the FC-XIII target of 2.6 per cent. The 2011-12 Budget Estimates of the States show an aggregate fiscal deficit of 2.2 per cent of GDP, which is well within the target of 2.5 per cent set by FC-XIII. The aggregate revenue surplus of States in 2011-12 is about 0.3 per cent, again ahead of FC-XIII projections. It is expected that the improved fiscal health of the States will result in their taking up more responsibilities for developmental activities at the State level, particularly in bridging the infrastructure gap during the Twelfth Plan period. 13. One area of concern which some States need to address relates to tax revenues of States’. The States’ tax to GSDP ratios show wide variations. In the 2008-09 actuals, the tax to GSDP ratios of General Category States ranged from 4.1 per cent to 9 per cent, with the average being 6.7 per cent. The top two States had tax to GSDP ratios of 9 per cent and 8 per cent and the bottom two 4.1 per cent and 4.2 per cent. These ratios point towards the need for more work by many States to rationalize tax rates, improve compliance and widen the tax base. Infrastructure Development  14. In the Eleventh Plan, the investment target in infrastructure was about Rs 20.5 lakh crore, with an attendant objective of increasing the share of private sector in the total investments, from around one-fourth to one-third. We have been successful in scaling-up infrastructure investments. According to Planning Commission estimates, in the first four years of the current Plan, the infrastructure investment will be around Rs.15.26 lakh crore. Gearing up to sustain the momentum during the next plan period commencing in 2012, would be a greater challenge. Issues like land acquisition, environment clearance and resettlement and rehabilitation will have to be addressed to de-risk both green-field and brown-field project development. We have to be focused on creating an enabling environment to facilitate investments. 15. A major challenge in this context would be to manage the funding requirement of the sector. We have to collectively plan for meeting the investment target of US $ 1 trillion during the Twelfth Plan, with half of the proposed investment coming from the private sector. Power sector  16. In the context of Power generation, the recent concerns relate to supply constraints regarding fuel, coal and natural gas. Issues like land acquisition, deteriorating health of the state electricity boards and environmental clearances have also been adversely affecting this sector. On the distribution front, the efficiency as measured by the aggregate technical and commercial (AT & C) losses remains woefully low. On date the losses, on an average, exceed 40%. This is not acceptable. The operational efficiency of the distribution utilities has to be improved. The States will have to review and revise the tariffs regularly to ensure the financial health of these utilities. Urgent action is needed on both fronts to ensure that the cumulative losses of utilities do not ultimately devolve on State Governments. 17. I have recently reviewed the progress of the power projects requiring funding of Rs.5000 crore or more from Indian banks. A large number of cases are held up because of the delay in obtaining clearances from State Governments and some departments of the Government of India. While I am working with my colleagues at the Centre, I strongly urge Chief Ministers to set up a mechanism for according early clearance to such projects. GST and DTC  18. We have initiated two major steps in the area of tax reforms. The first pertains to the DTC and the second to the Goods and Services Tax (GST). The DTC Bill was introduced in August, 2011 and has been referred to the Parliamentary Standing Committee. I am hopeful that the Committee will submit its report by the Winter Session of the Parliament, and thereafter we would seek to get the legislation passed during the Budget session. By amalgamating several taxes levied by the Centre and the States at different stages of the value chain, the GST would mitigate cascading and make Indian industry competitive in domestic as well as international markets. It would also improve compliance and make the level of taxation transparent to the end consumers. The introduction of GST requires a Constitutional Amendment to enable the Centre to levy a tax on the distribution of goods beyond the manufacturing stage and to empower the States to levy a tax on supply of services. A Constitutional Amendment Bill to this effect has already been introduced and is currently with the Parliamentary Standing Committee. I seek full cooperation of the States in supporting this Constitutional Amendment Bill to pave the way for the early introduction of GST. Food Security  19. Ensuring the food and nutritional security for all Indians is the collective responsibility of the Centre and the States. After initial consultations with States, Ministries, expert advisory bodies and other stake holders, the Department of Food and Public Distribution has prepared a draft National Food Security Bill. 20. The draft Bill has been sent to all States and Union Territories and the Central Ministries for their comments and suggestions. It has also been put on the website of the Ministry of Consumer Affairs, Food and Public Distribution. So far, only a few States and UTs have sent their comments. Since this is an important legislation, I request the States to send their views at the earliest to help us finalize the bill for introduction in the Winter Session of the Parliament. 21. The implementation of the Food Security Act will be the joint responsibility of the Centre and States. Both have to work together to procure the required quantity of food grains and ensure distribution of the food grains to the beneficiaries through an effective delivery system. 22. Revamping the PDS is a necessary pre-requisite for the effective implementation of the proposed National Food Security Act. The Supreme Court has also directed an end-to-end computerization of PDS. The Task Force under Shri Nilekani is working on direct transfer of subsidy that will eliminate leakages and will minimize the distortion of prices. As soon as this is available the States/UTs should draw up a time bound action plan for computerization of Supply Chain Management. APMC reforms  23. It is important to reduce the gap between producer prices and retail consumer prices through an efficient supply chain management. The APMCs were established to protect the interest of farmers. However, in reality, the APMC system has led to monopolistic behaviour and reduced the choices available to small farmers. Reforms in APMC Act could play an important role in reducing the supply side constraints. I would urge upon this august gathering to consider these proposals on merits without any delay. Plan Size and Centrally Sponsored Schemes  24. There is at present excessive focus on plan size and greater demands for resources. What is important is the plan outcomes; there is a need to correlate outlays with outcomes. The number of Centrally Sponsored Schemes needs to be rationalized. There has been some progress on this front over the years but there is scope for much more streamlining of these schemes. 25. Let me take this opportunity to make an appeal to all our leaders, cutting across party lines and regional identities. No matter which party each of us belongs to, our first commitment must be to India. As politicians we like to win elections. Let me confess that I too like to win elections. But our own election victory must never take precedence over India’s victory. I say this because there are some important reforms, which need legislative action and cannot be brought in by an executive order. We all agree that reforms like this are important for India’s development and can happen only if we all work together. We must remind ourselves that if India wins, we all win.” ***

Time to separate equity Investment ( E.L.S.S.) and Tax Saving

The Direct Tax Code has removed the Equity Linked Tax Saving Scheme popularly know as E.L.S.S. as the Tax Saving Instrument from the Financial Year 2012. Naturally, the present tax saving schemes shall become ' Dormant ' Schemes and shall commence there Sunset thereafter. This Schemes gave Huge advantage to Small Investors like me, for last 2 decades and are the MOST Beautiful tax saving instruments till today. The Changes from the Governmental Stance as of now on this Schemes is for sure, unless declared otherwise.

However, the sudden Death of E.L.S.S. may put Mutual Fund Houses, Fund Managers and the Investors in a very difficult zone of inconvenience and possibly  future Losses. 

1) End of Liquidity : Naturally, the Lack of Fresh Investment triggers this open ended scheme into a Sunset schemes, wherein no new investment likely to come. The Investment Corpus of the Fund is Just Frozen from April 2012 on wards

2) Fund Management difficulties : ( Likely )

   1) Redemption Only : The Sunset Schemes may have only Redemptions, as investors may switch over to new Schemes increasingly

    2) Larger Cash Holding : The Cash Component maintained by the Fund Managers is likely to Increase in Anticipation of the Likely Redemption by the Investors of the Scheme. This may affect the fund management potential of the Fund Manager and in turn the Performance of the particular Fund.

   3)  Fund ( Under ) Performance :

       A) Falling Market Conditions :
                   In the Falling Market conditions, Asset Under Management ( A.U.M.) of the Fund falls down and Fund Managers make a Huge Efforts to maintain the Net Asset Value ( N.A.V.) thus safe guarding the Investor's Wealth.  However, the extra Cash Call of Sunset Scheme may put a limitation and hesitancy on the Manager. Moreover, in Panicky conditions many Investors sell the press button, putting redemption pressure/ Stress on the A.U. M.of  Fund. This may put enormous pressure on fund and the task of maintaining  ' Beta ' of the Fund with its Underlying Index be stressful. Some Funds may under-perform significantly over the market.

      B)  Rising Market Conditions : 
             
                  The rising market conditions may ' Cushion ' the A.U.M. of the Fund. But, the defensive posturing of Fund's asset allocation i.e. A Larger Cash Calls may affect the fund failing to give Market Performance leave alone the ' Alpha ' i.e. performance better than Market or the Underlying. This again may find opportune Investor to switch or Redeem the FUND. Thus Accentuating under performance of Scheme.

     C ) Volatile Markets may make the conditions from the Bad To Worse for the Obvious reasons

3) Fund Expenses :  Rising Expenses..?

Obviously, the Fund Managers may well have to take calls on market often, for better Fund management and if so, the ' Turnover Ratio' of the Folio may rise and expenses  in many cases may rise. The SEBI Ceiling of expenses if reached, may hamper the fund management perversely.

4) Quality of Management : 

This ' DEAD WOOD ' Fund management may affect the Aspects like  ' Investment Calls' ,  ' Sectoral and Asset Allocation' and '  'Liquidity Management ' and Several other nitty' gritty's involved in better fund management. In Short, Many Funds may find this Task beyond Control and may feel  ' Trap Door' conditions insurmountable.

5) Disinterest by Fund Houses : 

    Some Fund houses may simply ignore this Schemes, for one or all the above reasons. As Such there is no any precedence that I know, but Some Houses were reportedly 'dumping ' in this Schemes, in the ' Haydays' of 2007-08. Even, though the morality of Indian Mutual Fund Industry is not doubtable but the circumstances may turn daunting and difficult to protect investors' wealth.

6) Investor protection :

The best Guy to protect an Investor is Himself. However, even if one takes up the call to invest in E.L.S.S, THE FUND with LOW AUM be Best Avoided for the reason of culpability to the Hostile Circumstances. The track record  and Portfolio Analysis are worthy tools. Investors may take an Independent advise.

The Best Advise to Investors would be to Separate the Equity Investment particularly through Mutual Fund  E.L.S.S. and Tax Saving. Unless, of Course the Finance Ministry extends the Scheme even if, it is on Exempt-Exempt-Tax basis. 


And, It will be highly advisable to take good advise, create prudent strategy and Keep yourself HAPPY.



At Present the only Guy who can tell you further.
   
   
   
 

G-20 Agenda by India. Is it tug war..?

Dealing Effectively with Interrelated Issues of Global Imbalances, Financial Regulations , and the International Monetary System Central to Agenda of G - 20 : FM

Union Finance Minister Shri Pranab Mukherjee  has said that one of the central objectives of the G-20 has been to address the root causes of the global financial crisis, prevent a recurrence and, going forward, to take measures to achieve strong sustainable and balanced growth. Dealing effectively with the interrelated issues of global imbalances, financial regulation, and the international monetary system are central to this agenda,  he said. The Finance Minister was speaking at the international conference on ‘Global Cooperation on Sustainable Growth and Development, here today. He said that the conference had been organised around 5 broad thematic areas - global imbalances, financial regulation, international monetary system, development and commodity markets. He said that in each of these areas, the world is facing several immediate challenges and these issues are therefore the subject of ongoing discussions in the G 20.  He congratulated ICRIER and its partners for organizing this timely conference and bringing together eminent academics and policymakers from across 14 countries, to deliberate on these critical issues.                             Finance Minister said that the G 20 demonstrated its relevance to international policy making with the success of its coordinated response on the fall-out of the global financial crisis.  He said that the economic downturn was moderated and growth resumed in the second half of 2009 in most economies, although the pace of recovery remained uneven. The Finance Minister said that it appeared that policy makers had learnt theirs lessons from history by honing and harmonising the use of macro-economic policy and keeping markets open.  At the same time, countries in the developed and the developing world adopted revival strategies in keeping with the needs of their respective contexts, he said.                             Shri Mukherjee said that developments in recent months have been less encouraging and  there is widespread apprehension that even the tepid global economic recovery that we have seen so far is stalling. Growth in most advanced economies has declined in the second quarter of 2011 and emerging markets are witnessing a combination of moderation in growth and rising inflation, he said.                             The Finance Minister said that advanced economies, the Euro zone and the US, are seized with sovereign debt problems  which  is making financial markets nervous. He stated that elevated fiscal deficits and public debt have always followed deep recessions in the past, which could be overcome with stronger recovery in output and in the present instance,   the nominal output is yet to reach the pre-crisis levels. Shri Mukherjee said that there are structural constraints coming in the way of advanced economies returning to their trend growth path. As a result, their fiscal position looks increasingly unsustainable. He said that despite the aggressive fiscal and monetary policy, unemployment continues to be at its highest in many advanced countries. The question is what more can policy makers do to improve growth or to avoid another downturn, he said.             The Finance Minister said that emerging markets recovered quickly from global slowdown, but are facing elevated commodity prices, inflation, moderating growth and volatile capital flows all at once. Central banks have been forced to raise policy rates repeatedly, potentially compromising growth in the short-term. While raising rates may help stabilize growth, it may also invite more capital inflows. It is true that emerging economies are relatively better placed with regard to their public debt and fiscal deficit due to their stronger growth momentum and relatively robust banking systems. Their downside risks are on account of high oil and commodity prices and volatility in capital flows, partly due to the easy money policies in advanced countries, he said.             Shri Mukherjee said that unlike at the outset of the global financial crisis, when G 20 led policy coordination across economies could be achieved rapidly, it may be more difficult now. The advanced and developing countries are at different stages of the business cycle.  It is important, therefore, to       pause and think about what the G 20 agenda has been thus far and how it needs to evolve in future, he said.                           Shri Mukeherjee said that most observers believe that the proximate cause of the recent crisis lay in a small, sub-prime segment of the UShousing market. The ultimate reasons included the growing weaknesses in financial regulation and the build up of global imbalances. Since the international monetary system does not have an effective mechanism for preventing the build up of global imbalances, the G 20 took up the issue of its reform on a priority basis, he said. The Finance Minister stated that there is an understanding that the G 20 Framework for Strong, Sustainable and Balanced Growth may be the mechanism for adjusting these imbalances. This work-stream, in which India plays an important role as co-chair of the Framework Working Group, is vital for the success of the G 20, he said.               The Finance Minister said that strengthening domestic drivers of growth in developing and emerging economies is necessary for rebalancing of the global economy. As a result, the development agenda has become a central theme for the G 20 since the Seoul Summit. Moreover, as financial markets were seen to be destabilizing commodity markets, commodity price volatility and food security were also added to this agenda, he said.             Shri Mukherjee said that while welcoming these initiatives, we need to be cautious regarding the danger of working with a one-size-fit-all approach. Basel III is a good case in point.   He said that it is quite demanding on developing country banks. Different stages of economic development require different levels and quality of support from the financial sector. If capital adequacy standards become too high, there is a danger of inefficient dis-intermediation in markets. Emerging markets should use prudential regulation and close supervision rather than merely high capital standards, he said.             The Finance Minister Shri Mukherjee said that Global macroeconomic imbalances are at the heart of destabilizing sustainable economic growth at the international level.  He stated that    all imbalances are not bad as some of them reflect multi-paced growth, different savings-investment behaviour and productivity levels across economies and such differences may not be destabilizing per se. Shri Mukherjee said that at the same time, some imbalances reflect structural inefficiencies usually created by policy distortions relating to the external sector, trade, capital flows and exchange rate policies, financial markets, tax and subsidy regimes, which have to be addressed. The Finance Minister said that the reform of the International monetary system is high on the agenda of the G-20 and various issues including capital flows management, financial safety nets, measuring global liquidity, composition of the SDR basket are currently under discussion, he said.             The Finance Minister emphasised upon a few specific issues for the deliberations.  Firstly, he said that an issue of immediate concern for emerging economies is managing large capital flows. Large and volatile capital flows to  emerging markets can be destabilising as they lead to high exchange rate volatility and in some cases make it incumbent to maintain high levels of foreign exchange reserves as an insurance against sudden or large-scale flight of international capital, he added. Large and volatile inflows are also associated with asset price booms and encourage excessive risk taking by traders and investors and therefore threaten financial stability, said the Minister.             Secondly, the Finance Minister said that recent commodity and food price rise and their volatility have induced considerable threat to economic growth and food security in energy dependent emerging, as well as, developing economies. Factors behind recent price hikes are yet to be pin pointed. Even the G-20 is undecided on the role of speculation and global excessive liquidity on the international commodity prices. He said that though it does seem odd that commodity prices should be so buoyant even as the outlook for global growth is weak. He stated that we need more research and debate on whether speculation in currency and commodity markets has been playing a role in recent price rises.               Thirdly, the Finance Minister said that G 20 development agenda is understandably very vast and  covers areas that are also being handled by a number of developmental agencies. While we are committed to concerns of ‘development’ and of sharing the fruits of economic growth, it is imperative to prioritize among various development needs, he said. Shri Mukherjee said that one development issue that deserves priority is the recycling of global savings for infrastructure investment.Enhancing infrastructure investment in emerging economies and developing countries would have positive spin-off for rebalancing global demand. It would result in real investments with tangible growth. The G-20 is well placed to coordinate various stakeholders including governments, especially the ones that have large surpluses, the private sector, and multilateral development banks, for investment in developing economies, he said. He hoped that the conference can suggest innovative ways to recycle global savings and identify viable strategies to overcome the presumed hurdle of ‘lack of enabling environment’ for infrastructure investment in emerging and developing countries.             In his concluding remarks, the Finance Minister said that even though there are no simple answers or magic solutions to some of these issues,  he did not  see any reason for despair.  He hoped that the    deliberations would help in addressing global challenges at the current conjuncture and also the structural problems that confront us, in an innovative and cooperative framework.   He said that the need of the hour is global reforms with an eye on medium to long-term sustainability of economic growth. DSM/SS/GN (Release ID :75945)