Economic Highlights

New Delhi, 1 September 2005

India’s Goldmine

PUSH PROCCESSED FOOD INDUSTRY

By Dr Vinod Mehta

The Indian agricultural sector has been performing relatively better for the past ten years, notwithstanding the bad monsoon years when the sector recorded a negative or very low rate of growth. In other words, the sector can be said to have achieved relative stability and can contribute more to the economy. The path can be said to have been laid for the growth of agro-based industries.

 In fact, India can claim to be sitting almost on a goldmine of processed food, which can become a top foreign exchange earner provided we follow appropriate policies and capture foreign market. The effort is totally indigenous, does not involve any import of any inputs and with a little investment one can earn a large amount of hard currency. The world processed food business runs into billions of dollars but India's share is not even one per cent.

India, as a signatory to the WTO, has to open up its economy to imports of agricultural products from all over the world within a few years time. When the WTO agreement was signed it was said that the country stands to gain by the opening of the farm sector as its products will be relatively cheaper than similar agricultural products produced elsewhere.  The reasoning was that other countries, especially the developed ones, will be forced to eliminate or lower down their subsidies on products while the subsidies on these  products in India are already much lower than allowed by the WTO. 

 It has been almost nine years since India signed the WTO Agreement and still there are no indications that the country is doing anything in this direction. Lack of any agricultural policy is the weakest link in our economic reforms. Even though one has been hearing for the past decade that a new policy is on the anvil no such policy has been announced so far.  

 Both developed and developing countries have now increased their pressure on India to open up its economy to their agricultural products sooner as India has comfortable foreign exchange position.  For instance, Malaysia is keen to increase its export of palm oil while Mexico is keen to increase its export of soya bean oil to India.  Australia and New Zealand are looking for opportunities to export milk and milk products as well as kiwi fruit to India. The US is looking for exporting its almonds and orange juice to India. India has allowed import of agricultural products but these countries expect much more from India.

This is a minus point with our exporters which comes in our way of tapping export market.  Thailand and the Philippines are exporting Pineapple juice on a large scale for the past several years, while India is unable to do so on any significant scale because of non-professionalism of our business community. How can we enter the international markets with this kind of attitude?

 We should seize the current opportunity of record harvest and initiate steps for the all- round development of food processing industry. 

 A study carried out by the Food Processing Ministry a few years ago indicated that India is the largest or the second largest producer in the world of tea, milk, cattle, fruit and vegetables, eggs, rice and wheat. However, not much has been done to develop international markets for these products.  It is true that most of these items are being exported to West Asia but there is very large international market for these products outside West Asia. 

 It is only for the past few years that some of the companies have started marketing their products in the international markets under their brand names.  For instance, till recently the Indian tea was being auctioned in bulk to foreign buyers rather than selling them in a packaged form.  The Tatas have now started selling the Tea in a packaged form in the international market under its own brand names. 

Similarly, the cooperative sector producer of milk and milk products Amul has also started marketing its product in the international market under its own brand name.  But these are only few exercises in brand building and cannot be said to establish markets for Indian agricultural products in a very big way. 

Therefore what the country needs to do immediately is to chalk out a concrete programme for the development of processed food products industry so that India can become a major player in the international market in the next three to four years. 

As a first step India should concentrate on increasing the productivity of those agricultural products in which it has a comparative advantage.  It could be Bansmati rice or tea or coffee or it could be mangoes or bananas.  Some of the energies of our agricultural research centres should be concentrated on developing high yielding varieties of these products.  In fact, Indian agricultural scientists have successfully developed a new strain of Basmati rice which provides 25 to 30% more yield per hectare without any compromise on quality or aroma.

Third step needs to be to improve the food processing technology and bring it up to international standards.  One public sector organization is engaged in the development of such technologies but it has had very little impact till date. 

Finally, the food processing industry will have to pay attention on packaging of the processed food products.  At the moment the packaging of most of the processed food products is so repulsive such that even if we have very good product to offer it will not sell in the international market because of its poor packaging. 

India has a comparative advantage in selling its agricultural products at competitive prices in the international market but it will not be able to capture by itself the vast international market for various products without first improving the quality of its products and its packaging in every aspect.  We have a lot to learn in this respect from countries like Thailand, the Philippines and Malaysia which have well-established food processing industries. 

Successive Governments at the Centre have recognized the importance of processed food industry, but are not moving fast enough to take advantage of our comparative advantage in the agricultural sector. –INFA

 (Copyright, India News & Feature Alliance)

ECONOMIC HIGHLIGHTS

NEW DELHI, 25 August 2005

In Developing Economy

ROLE OF REGULATORY AUTHORITIES

By Dr. Vinod Mehta

As we move further towards economic liberalization and privatization,  the role of regulatory authorities as a public watchdog  becomes important.  In most of the developed countries regulatory authorities are statutory bodies with wide powers to take actions against companies and persons who willfully misuse public funds.  In the USA, for instance, regulatory authorities play an important role in protecting the interests of consumers and investors.

It is not that there will be no frauds or misuse of public money after regulatory mechanism is in place, but as the experience of the developed countries shows the possibility of frauds is minimized and the interests of the consumer protected to a very large extent. 

For instance, the foreign exchange management Act and money laundering legislation, which are in place now will protect the genuine players in the economy. They will be harsh on the unscrupulous people who misuse the provisions of these Acts to cheat the individuals, the companies, and the nation.  The need of the hour is to earn substantial foreign exchange and to regulate its outflow as well as check the use of funds for anti-national activities.  After FEMA, the RBI has been relaxing controls on foreign exchange.  The RBI as a regulator of foreign exchange is doing a fine job.

The regulatory mechanism for the Insurance sector has to be very stringent.  The regulatory authority, for insurance, Insurance Regulatory and Development Authority (IRDA), is supposed to see that the funds garnered by the Insurance companies are channeled into sectors as indicated in the bill and that the public who buy their policies are not cheated.  At the same time, the regulatory authority  has to ensure that the Insurance companies remain financially healthy and do not enter into any dubious deals.  This is also true of  Pension Fund Regulatory Development Authority (PFRDA) which is supposed to regulate the investment of pension funds.

It is important for the government to study the role of the regulatory authorities in developed countries and the mechanism they use to protect the interests of the customers and investing public.  In this column we had mentioned about the Insurance Regulatory Authority in Singapore which controls the Insurance business there.  Similarly developed countries like France, Japan, the USA, etc. have their own regulatory bodies and mechanisms to control the financial institutions including the insurance business. 

It may be prudent to study their regulatory mechanisms and adopt them to our own needs.  For instance, all these authorities have data bank on the fraudulent practices indulged by insurance companies to dupe the consumers and investors.  Pre-knowledge of such fraudulent practices will help the regulatory authority in India to be fully equipped to anticipate and deal with such cases before they turn out to be big financial scandals

The regulatory authorities in India are, on the contrary, treated as an appendage of the government; they are not allowed to serve the purpose for which they have been set up.  Take the instance of Telecom Regulatory Authority in India (TRAI); from day one it has been embroiled in some or the other controversy not only with the government but also with the private telecom operators, DOT, BSNL and MTNL. 

When the telecom authority fixed the upper limit of rates for local, STD and ISD calls, there was a large public outcry.  These rates were worked out on some rational basis and the idea was to discourage cross subsidies on various types of calls.  The TRAI approach on fixing tariff for various kinds of calls made economic sense but the government intervened in its functioning on public outcry thus caving into populism.  The Government is now thinking of one India one rate which is not in consonance with the TRAI approach.

The right approach should have been to allow providers of basic telephone services to improve their efficiency and bring down  the cost of local calls.  By intervening in the functioning of the telecom authority the Government only weakened its authority.   Now what regulatory role can be expected from such a regulatory authority?

The point is that when we set up a regulatory authority we must respect its autonomy. The Government must desist from interfering in its assigned role.  Such an interference not only undermines the authority of the regulators but it also provides an opportunity to unscrupulous elements to take advantage of the loopholes. 

The Government is also interfering in the functioning of IRDA. It is issuing directives to it and had some time back  nominated a Joint Secretary (insurance and banking), who is also on the Board of a nationalized insurance company, also on the Board of the  IRDA.  Once the Government starts issuing directives to it or begins interfering in its day-to-day functioning, the Government will only be eroding regulatory body’s authority and giving signals to unscrupulous elements to make hay while the sun of confusion is shining. 

An other element which needs to be introduced in financial organizations including insurance companies is to allow full transparency in their functioning.  The balance sheets of the financial institutions conceal more than what they reveal.  Since these companies invest part of their mobilized funds in Government securities and another part is lent to private companies or invested elsewhere, there must be total transparency in their functioning. 

The insurance and other financial companies like banks etc. apart from coming out with the balance sheets must be asked to reveal the names of the companies to whom the money has been lent and the names of the companies who are not repaying back their loans.  This is the only way to check the growth of non-performing assets of financial companies. 

The term "non-performing assets" is a misnomer; What the term non-performing assets simply means is that the money loaned by a particular financial institution has not been repaid by the borrower.  This outright cheating by the borrower is termed as a non-performing asset which in fact is not an asset at all, but some kind of a liability.  In fact the use of the term 'non-performing assets' must be totally banned;  instead the term 'unrecovered loans' may be used to give the true picture of the state of finances of  financial companies including insurance companies. 

With such a measure the defaulters will not be able to raise any further funds from the financial market and would be forced to set their house in order.  It is really surprising that the Government does not allow the financial institutions to make public the names of the defaulters.  By not allowing the financial institutions to publicly name the defaulters, the Government would actually help such companies to play with the public money. 

All the regulatory bodies, whether regulating insurance business or stock exchanges or telecom sector, must be made autonomous statutory bodies, so that they can play their role effectively to protect the interests of consumers and investors – INFA

(Copyright, India News and Feature Alliance)

But after having established the public sector in a big way we did not pay any attention to the efficient running of these units.  Because of large-scale political interference an unholy bureaucratic stranglehold these public sector units instead of either ploughing back its profits for the modernization of its units or to contribute to the exchequer they started eating into the revenue resources of the Government.  Now for the past 13 years all the attempts at disinvestment in these units have miserably failed. The latest casualty has been the BHEL. The Government has also shelved disinvestment plans in the 13 other profit-making PSUs.

We also erred on the side of giving too much protection for a very long time to our industries.  In the earlier phase of economic development the nascent Indian industries needed to be protected from foreign competition as they were not in a position to face competition.  However, this protection was envisaged only for a few years.  But as things developed over the years the Indian industry faced vested interest in the continuation of these protectionist policies as it ensured them monopoly profits in the domestic market. 

Things have changed a lot in the past few years.  The licence raj has been abolished and competition within the industrial sector has increased. Still we are nowhere close to industries in terms of efficiency compared to industries in countries like Korea or Taiwan. We are capable of manufacturing more than 80 per cent of the products we need for our domestic market but the quality is so bad that even after 58 years the consumers of both consumption and capital goods still find the foreign made goods more attractive. 

The monopolistic tendencies and an urge to work only in an uncompetitive market is still very much reflected in the attitude of our people engaged in the financial sector, like banking and insurance.  This again is the kind of attitude which this country has developed over the past all these years and is finding it very difficult to shed it even though it realizes that it is paying a very heavy cost both in the domestic and international financial markets in terms of the lost business opportunities. Even though the insurance sector has been opened up and cap on FDI in private banks has been raised, the pace of reforms is very slow.

In the agricultural sector though we have achieved self-sufficiency in food yet we have to go a long way in achieving self-sufficiency in the production of oil seeds and pulses.  Even though 70 per cent of the population is still dependent upon agriculture.  Nothing has been done in the past fifty eight years to push the development of agriculture sector including agro-based industries to international standards. 

After the Green Revolution, which was limited to only a few states in the country, nothing remarkable can be said to have been achieved in the production of various crops.  In fact the restrictions imposed on the movement of agriculture products especially the grain has worked against the high growth of the agricultural sector as a whole.  It has been observed that the agricultural policy has never gone beyond ensuring self sufficiency in food.  What the country needed was that along with self sufficiency in food production, a big technological push was provided to the production of all other agricultural crops which are in demand not only in the domestic market but products which also fetch good prices in the international agricultural market.

Today when we have entered the 59th year of our independence, we must pause, think and make a critical assessment of our economic policies and come out with a package which is in keeping with today's developments the world over and which can ensure faster economic development and more jobs so that the citizen could be ensured a good standard of living.  The perception of India across the world has changed. India is no more being perceived as a developing country but as an emerging economy which will be a relatively well developed economy in the next 15-20 twenty years. – INFA

(Copyright, India News and Feature Alliance)

ECONOMIC HIGHLIGHTS

   11 August 2005, New Delhi.

Tapping Black Money

NO MORE AMNESTY SCHEMES, PLEASE

By Dr Vinod Mehta

With the revenue earnings falling below the expectation level and the expenditure on mitigating natural disasters by the administration increasing, the Government is again mulling over the question of tapping black money to generate resources. One of the options being considered is to allow interest-free deposit scheme with the lock-in period of three years or more. The other option is to ask the depositors to furnish information even if their earning is less than Rs.5,000 per annum as interest.

Surprisingly, over the past 50 years no Government at the Centre has been able to tackle the menace of black money. A number of amnesty schemes have been announced to unearth this money but it continues to grow. This only shows that no Government had the political courage to tackle this problem, and that over the years’ black money as a percentage of the GDP has continued to grow.

There is no reliable estimate of the quantum of black money in the country. Several scholars and committees have tried to make an estimate. The first such scholar was Prof. Nicholas Kaldor, who estimated the quantum at 6% of the GDP during 1952-53. Thereafter, the Direct Taxes Enquiry Committee, known as Wanchoo Committee, put the figure at 4.2% of the GDP between 1962 to 1968-69, while its member, Dr. D.K. Rangnekar, estimated more than 8%. For 1980-81, the National Institute of Public Finance and Policy (NIPFP) estimated 18 to 21% of the GDP, while Prof. S.B. Gupta gave the figure of 45.8%. For 1987-88, he put the figure of 51.7% of the GDP.

Differences in estimates notwithstanding, the important points highlighted by these studies are that: the quantum of black money has not only been growing in absolute but also in relative terms as a percentage of the GDP; black income has grown from 6% to 51% of the GDP in the past 50 years; the rate of growth of black income generation is faster than the rate of growth of the GDP, and finally there has been no political will to tackle this problem. It’s not that there is no tax evasion in other countries, but it’s not to the extent of 51 per cent as is here. For instance, the tax evasion in the US is about 2% of the GDP.

In 1998, the Voluntary Disclosure of Income Scheme, (VDIS) was introduced to mop up black money. Under it, the Government was able to garner over Rs 10,000 crore as tax revenues on disclosed income. This was hailed “a great success”, as earlier amnesty schemes could all together collect only Rs.500 crore. But, this made no dent in the black money. It is, therefore, surprising that the Government is considering coming out with some sort of another amnesty scheme. What is the guarantee that it will mop up the black money in circulation? An amnesty scheme will be viewed by honest tax payers as an award to evaders for concealing their income. But it needs to be tackled once for all.

The nation will seriously need to think of how to handle the problem.  Apparently, it will need to be tackled at two different levels. One, it will have to see how to drastically reduce the black money in circulation and, two, how to stop its generation. Therefore, taking into account the quantum of black money in circulation, the country will have to adopt a mix of fiscal and administrative measures. Amnesty schemes are unethical and, in fact, penalise the honest tax payers.

The easiest way to tackle the problem of black money is to demonetize the currency.  But, this is unlikely to achieve the desired result, as a large sum of this has been invested in real estate, gold etc. Also, the cost of printing new currency for immediate circulation may be quite prohibitive. But, this option may need to be used to knock out a large proportion of black money around. A few countries have done it in the past, with Russia being the latest.

However, it would be more useful to use administrative methods to tackle black money, even if these may appear to be harsh. The Income Tax Department may be strengthened with trained staff to specially detect black money and book the culprits. Perhaps, a special kind of intelligence bureau to detect economic crimes, like tax evasion, may be set up. Thus, the revenue administration would be able to first gather facts about tax evasion from this agency and corner the tax evader, rather than carry out raids on hunches.

Similarly, harsh measures such as attaching of property of the tax evader, denying of Government contracts to evaders, compulsory jail and so on, could be adopted by the administration. One may ask: why such harsh measures? The answer: soft measures have not worked in the past and even the disclosures in the 1998 VDIS, according to some analysts, were only tip of the iceberg.

As for stopping the generation of black money itself, the Government will have to work on various measures simultaneously. As a first step, the entire tax structure will have to be revamped.  The proportion of indirect taxes in the total revenues will have to be reduced, while the proportion of income taxes will have to be increased.  To begin with, there is a case for reducing excise duty and other taxes on items of daily use such as edible oil, soaps, toothpastes, biscuits, etc. and on processed food items like frozen vegetables, fruits, meat, canned juices, jams, soups etc.  These items are not consumed by the rich alone but also by those on limited incomes.

As for income tax, there is not only a case for further reduction in tax rates and widening of tax net but also simplification of the tax system. While reducing the tax rates, the tax net should be spread wider to cover incomes of agriculturalists, small traders, shopkeepers etc. 

It has also been observed that there are many companies which have not paid a single paisa of tax for the past several years, because of loopholes in the tax rules, especially the ones relating to depreciation. This needs to be looked into seriously. The loophole should be plugged and these companies forced to pay taxes.

An administrative measure, which can go a long way in curbing the generation of black money, is to assign every individual and a corporate entity an identification number (different from PAN number), like the one assigned to houses or vehicles and make it mandatory that all payments, above a certain amount, be made through banks.

The identification number will have multiple uses once it is all computerized. It can be used for admissions in schools and colleges, for electoral rolls, for opening bank accounts, for getting passports and so on.

If the use of this number is made compulsory for every single financial transaction--be it sale and purchase of goods and services, loans, gifts, payment of medical bills, purchase of air or rail tickets, payment of wages, salaries and perks etc.--as well as on other occasions, it will make tax evasion very difficult, for both an individual or a corporate entity.

Since the registration of births and deaths has been made compulsory, it should not be difficult to administer the identification system, especially in this age of computers. Identities could be established within minutes of individuals or corporate entities conducting business anywhere in the country. And, it would be easier for the revenue administration to get requisite information on their financial transactions by asking institutions such as banks for details. This system is not new. In the US, the social security number has similar multipurpose uses.

The rooting out of black money and stopping its generation should be high on the Government’s agenda. There is no need to show mercy to tax evaders; no more amnesty schemes. Enough, is enough.--INFA

(Copyright, India News & Feature Alliance)