AGENDA : DEBATE-CUM-DISCUSSION ON BUDGET 2018
DATE : February 8,2018
PARTICIPANTS :
TEAM A- FOR THE MOTION (Swati, Priyansh, Pranjal, Vinay, Abhishek)
TEAM B – AGAINST (Akshay Vir Panwar, Kaavya, Jyotsna, Akshay, Deepika)
MODERATORS : Rahul Kulkarni and Apoorvi Srivastava
ORAGNISERS : Prachi, Sumanjay, Ishita
VENUE : G2, MADRAS SCHOOL OF ECONOMICS
The arguments made along with the motion are as follows:
CAN MSP PROP UP FARM ECONOMY?
For the motion : Swati Singh
Minimum support price (MSP) is a form of market intervention by the government to protect the farmers against any price fluctuation. MSPs are important as they increase the food production, help in the distribution of food grains, increase the buffer stock and also bridge the demand and supply gap which has an impact on inflation.
MSP is any day better than other non-price factors like technology, market reforms, infrastructure and farming institutes as all these take time to raise growth and farmer income. The effect of better price results in immediate effect and thus is of greater help. Other benefit of such pricing policy is of direct procurement and payment even if farmer faces losses. The main objective of MSP is on generating productive and gainful on-farm and non-farm employment. Public Distribution System (PDS) also comes to a benefit with MSP as the buffer stock is raised through it and two government schemes can be beneficiary.
Announcement by the finance minister about the 1.5 times hike in MSP on input cost of farmers is considered to be an ameliorating step towards farm economy. The list of MSP crops covers close to 90% of cultivated area, thus leaving only a small segment without benefit. Past exposures have shown that kharif crop production where the MSP was already 1.5 times had shown tremendous turnout. Data reveals that income as a whole has doubled in the farming sector after proper implementation of MSP at ground level. MSPs are actually set to a variety of conditions, keeping in mind the interest of producers as well as consumers and government.
There is not a problem in the planning of MSP rather implementation of it that has to be corrected. Proper examination of the working of MSP scheme has and will benefit the farm economy.
Against the motion :- Akshay Vir Panwar
I spoke against the motion and, was able to convince everyone that government’s policy of focusing more on the MSP in price interventionist policy has been a big flaw in recent years. Literature shows that both price and non-price interventionist policies are complements rather than substitutes. I put my argument by dividing 1981-2009-time period into two parts namely, pre-liberalisation (1981-1991) & post-liberalisation (1991-2009). Majorly Rice & Wheat have been taken into account for obvious reasons. Pre-liberalisation period was characterized by decreasing trend in MSP and government focused more on non-price interventionist factors. While opposite happened in post liberalization period. Results show that, in 1981-91 cost of production(COP) fell and productivity improved while, COP and MSP continued their upward trend in 1991-2009. I also explained how rising MSP brings in food inflation (overall inflation eventually) by relating it to cobweb model and, how focusing on MSP traps both farmers and government into a vicious cycle.
Suggestions from my side were to give more weightage to non-price interventions as they help by bringing down COP or, increasing farmer’s productivity. If we focus on price interventions then, farmers are not rational enough to build expectations. So, they are unable to squeeze out profits from it. Shielding our farmers from cheap imports, incentivizing people to set up cold storages/warehouses so that farmers can hedge their surplus/shortages are some indirect price interventions which government should follow.
THE GOVERNMENT WILL MEET THE FISCAL TARGET OF 3.3%
For the motion :- Pranjal Rawat
I believe that the government can manage to keep the fiscal deficit within 3.3% of GDP in the 2018-19 year. The formula for the Fiscal Deficit is:
G-T+r(past debt)/Y
where G is the real government expenditures, T is the real tax revenue (indirect and direct), r is the ex-post real interest rate, and Y is the GDP. The G-T component is the primary deficit and the r(Past Debt) is the interest payments.
Now in this year (2017-18) Y grew very slowly, because we had the GST rollout and the aftereffects of demonetisation. We also had weak global growth which hurt our exports. But this coming year (2018-19) Y is projected to be a full percentage point higher (IMF, SPF, RBI). The signs are evident:
(a) capacity utilisation is now about 72% (close to the 73% mark which RBI thinks is the point at which the output gap turns positive)
(b) reversal of a year long fall in current and future consumer confidence index
(c) major jump in ease of doing business
(d) rise in global growth, boosting our exports.
No wonder that IMF, survey of professional forecasters and the RBI predict that growth in the coming year will be a full percentage point higher (about 7.4%) than what it was this year (about 6.5%). We also know that when growth returns fiscal deficits fall fairly quickly. For instance; during the 2003-08 high growth period, we saw fiscal deficit as percentage of GDP fall from 8.5% to 7.5% to 6.5% to 5% to about 4% of GDP.
Also T is expected to grow faster. Both direct and indirect tax receipts are directly linked to Y, and they were low this year (2017-18) because growth was low and GST was being rolled out. But this coming year indirect tax receipts are expected to rebound because:
(a) growth will return
(b) GST rollout effect will subside and
(c) GST will have brought many informal firms into the tax bracket.
One of the benefits of Demonetisation was that tax buoyancy (% change in direct tax to % change in income) rose sharply, so every unit of growth is giving more direct taxes due to better compliance.
Lastly, inflation is projected to be higher, because of:
(a) MSP hike
(b) HRA rollout
(c) higher oil prices
(d) positive demand pressure due to positive output gap this will reduce the real interests (r) and the debt burden.
With Y growing fast, T rising and r falling; we can expect the fiscal deficit to meet the target if G does not grow too much.
Therefore it will be very easy to achieve the 3.3% target, as long as the government does not splurge in the election. This was common in the Congress regime. I believe that the current NDA government will not do that as its vote-banks are very different to that of the congress. Its vote banks also include the middle class, the rich and the business community. Appeasing these vote-banks does not require fiscal splurges. There is also hope that the current government is a break from the past.
Against the motion :- Jyotsana Kala
Fiscal consolidation means pinning down the fiscal deficit to a pre-decided level.
Fiscal deficit is the extent to which government needs to borrow so that expenditure = receipt.
Argument 1
To finance a deficit, the government borrows by issuing bonds. Prices of government bonds fall, yields rise. (Fact: yield on 10 year government bond shot up by 15 bp to 7.6% and is expected to stay between 7.45-7.55%)
In t, govt. borrows
In t+1, govt. has to repay the borrowing with interest rate (which rises as shown above)
So a deficit in t è a deficit in t+1
2014: Government said we would reach FRBM deficit level of 3% by 2019.
2018: 3% is expected to be reached by 2021
Reason: Government consistently missing its deficit target. For e.g., last year, deficit target = 3.2% (5.44 L cr), realized deficit = 3.5% (5.95 L cr); difference = 51,000cr. Arun Jaitley said, the only reason behind this was that the GST revenue for March will come into account in April. However, that GST revenue of March is expected to be only 50,000 cr.
So challenge for next year is not only reducing the deficit to 3.3% but also cover up for this 1000 cr of unaccounted gap which the government has no idea how to generate.
Thus, difficult to limit deficit to 3.3%
Argument 2
Expenditure (as compared to last year, not in absolute terms) > Revenue
Massive expenditure hike proposed on:
· NHPS
· Digital India flagship program
· Defense
· Department of Space
· Railways
Expenditure is not bad, but expenditure without internal capacity generation is toxic. For eg, out of 1.48L cr dedicated to railways, 93,000cr come from borrowed funds
Decrease in revenue: corporate tax rate reduced to 25% for MSMEs. MSMEs constitute about 99% of companies filing tax returns. Estimated revenue loss = 7000cr
NPAs and twin balance sheet problem led the government to introduce recapitalization bonds. However, govt. of India accounting practice lists such bonds as an above the line transaction, thus leading to an increase in deficit.
External factors (expected rise in oil prices) + Massive expenditure commitment = increasing deficit.
Thus, difficult to limit deficit to 3.3%.
WILL IMPOSING LONG TERM CAPITAL GAIN DENT THE EQUITY MARKET.
For the motion :- Abhishek
The government's decision to impose 10% Long Term Capital Gains seems to be a hasty one that will affect investor sentiment. Even the markets have not taken it well and both the major indices the Nifty and Sensex have seen steep declines in their levels.
Investors take decisions about their allocation according to the returns they expect from the particular market, and now the governments' decision has surprised and spooked them- this will force them to look at other markets as alternatives. Big ticket foreign investors will also look to routing their inflows through Mauritius, Singapore or other tax haven to avoid taxes- in these cases the portfolio investors will be able to avoid the taxes, altogether defeating the purpose of the tax.
India is the only country to have both securities transaction tax and a long term capital gains tax - double taxation will only discourage investors from investing in India.
For a growing economy like India, savings and investments are very important. The LTCG tax negatively affects saving behavior that will consequently reduce investments and hinder growth of the economy in the longer run
Against the motion :-Deepika
• LTCG was reintroduced after a span of 14 years.
• Finance Secretary Mr.Hasmukh Adhia said that the dip in the market was/is not because of LTCG but because of global markets going down.
• The BSE index fell by more than 1000 points in the last 4 days after the FM’s LTCG announcement.
• LTCG is not retrospective
• Grandfathering essentially says that all the gains one has made till the 31st of January 2018 will not be taken into account while calculating the LTCG. For instance,
• If an equity share is acquired on 1st of January, 2017 at Rs.100, its fair market value is Rs. 200 on 31st of January, 2018 and it is sold on 1st of April, 2018 at Rs.250. As the actual cost of acquisition is less than the fair market value as on 31 of January, 2018, the fair market value of Rs.200 will be taken as the cost of acquisition and the long-term capital gain will be Rs.50 (Rs.250 -Rs.200).
• So, this basically reduces the impact of this tax by a huge value.
• Booking the profits and losses carefully and on a regular basis is another smart way to keep tax liability under control.
• It is also important to harvest losses also because then, the investor can set off losses against LTCG tax.
• With all this information and smart moves, I think that the investor can save himself/herself from having heavy tax liability and thereby not create a dent in the equity markets.
SHOULD WE CONTINUE TO PAY ATTENTION TO STOCK MARKETS TO EVALUATE BUDGET?
In favour of the motion -: Priyansh Minocha
I produce my arguments by breaking down the topic in parts. By evaluating budgets, we mean how we believe the budget will impact the performance of the economy judged by the macroeconomic variables. So the best way to evaluate the budget is by aggregating the consumer sentiments about the performance of the future macroeconomic variables. So the question ultimately boils down to the predictive ability of stock markets i.e how well do stock prices reflect the consumer sentiments about the economy.
To answer this we go back to the fundamental stock price valuation models. Stock price depends on the discounted expectations of profitability i.e how profitable we expect it to be in future which is directly linked to economic activity. Hence fluctuations in stock prices are thought to lead the direction of the economy i.e if the economy is expected to enter into a recession, the stock markets will anticipate this by bringing down the stock prices.
A lot of research has been done to analyze the causal relationship between the macroeconomic variables and stock prices. Granger causality tests on past data point out that significant information about future economic performance can be provided by the current stock prices. Well Granger causality tests try to explain the causal relationship by showing that lagged values of X i.e the independent variable provide statistically significant information about Y i.e the dependent variable. Here X is stock prices and Y is a macroeconomic variable.
Hence so long as the expectations are formed rationally, stock markets do the best job in capturing the consumer sentiments real time and hence are instrumental in judging fundamental economy altering decisions like the Union Budget.
HAS THE BUDGET LEFT THE ENVIRONMENTAL SITUATION IN COLD ?
In favour of the motion :- Vinay
We can discuss growth, MSP, Financial markets but any change in the environment could wipe all of us out. It’s the single most powerful disaster that has the capacity to devastate an entire country. Now it has been statistically proven and world leaders (Except the guy in the white house) have realized the gravity of the issue that yes, the climate is changing for the worse. Carbon dioxide in the atmosphere has risen more than 40%, the arctic ice cover has shrunk 40%, Global sea levels have risen by 3.2 mm/year, which was 1.7 mm/year before and Global average temperature have already risen by 0.7 degree Celsius and are expected to rise by a further 0.6. Paris agreement 2 degree Celsius. India being a predominantly agrarian economy would obviously be the worst hit by this phenomenon. An extreme temperature shock in unirrigated areas reduces yields by 7 per cent for Kharif and 7.6 per cent for Rabi. Similarly, extreme rainfall shocks lead to 14.7 per cent and 8.6 per cent reduction in yield for Kharif and Rabi, respectively. These losses could rise significantly in the coming years as the warming level reaches 1.5 degrees Celsius in the next 10 years and could lead to loss in farm income by 25%. While all this statistics should be enough to serve as a warning sign, the finance minister simply relegated this grave matter from this year’s budget. Thankfully, the economic survey does give some hope by pointing out that climate change could lead to an agrarian crisis and that the average temperatures would affect the yield. In fact, the recent floods in Chennai, Large and uneven rainfall are testimony of the fact that it’s very well a scientific reality.
If all this was not enough we are even ranked 177th out of 180 just three shot of achieving the last position on the environmental performance index.
In the face of this backdrop the budget still kept for the climate change action plan and the national adaptation fund has more or less remained the same as the last year at about Rs 150 crore. The low budget for climate change indicates lack of ideas to address this issue. The allocation for ministry for environment and climate change remains unchanged at 2675 crores.
The National Clean Energy Fund, financed through a cess on coal consumption, has been diverted to compensate states for losses incurred due to GST.The water cess, which charged industries for water consumption, was withdrawn. The water cess was the major source of funds for the state pollution control boards to monitor and control pollution. In the budget there is no mention of how these cesses would be replaced or compensated. This budget, therefore, is unique; it has actually taken away money from clean energy and environmental protection instead of investing in them. Though it has increased the allocation to the ministry of new and renewable energy (MNRE), by 8.4%, however this is insufficient to achieve even the medium term outcomes of the budget.
A significant mention was the proposal to launch “Operation Green”, which is more a comprehensive scheme for the management of Farmer Producer Organisations (FPOs), logistics and management for the all-round supply of basic vegetables such as potato, onion and tomato. Pulses and Kharif crops, which are more likely to be hit by climate change impacts have been neglected in the budget. Additionally, the budget allocates Rs 2,600 crore for ground water irrigation projects for 96 irrigation-deprived districts without allocating any sum for replenishment of ground water which is an urgent necessity in the wake of increasing water scarcity.
As the Stern Economic review points out, it’s the greatest and wide ranging market failure we have seen. The government needs to step in and ensure that we are safeguarded from these world events. Now agreed that the responsibility to tackle climate change is not just ours alone but the whole worlds and all our actions affect each other. But that does not mean we sit back and watch our own country getting affected. More importantly, I don’t propose fiscal profligacy as a measure of protecting the environment. Contrary to that, its one of the most lucrative opportunities for the government. An increase in taxes on environmentally harmful goods would generate ‘double dividends’ as you would be reducing the amount pollution but on the other hand you could lower the taxes on income and investment and this ensures that markets do not suffer. Subsidies and ease of credit could be granted towards adopting environmental friendly technology. The budget has only gone so far as to admit that the Pollution in Delhi has reached hazardous levels and thus provided subsidy to adopt subsidy for dealing with insitu waste management. But pollution is a much deeper problem and its widespread across country, it should be a sustainable practice cannot be an ad-hoc measure. Another interesting fact is that environment legislations come under criminal offence, thus the question boils down to compliance vs. non-compliance and not the extent of compliance ie. There could be a cap on the permissible level of emissions. EU gets 6-7% of its revenue from environmental taxes. Transport, energy and waste generation these are the three main areas where the government needs to step in and regulate. Some psych, why no one cares about climate change? Why is no one scared? Arun Jaitley left it out in the budget, no protests about it. Espen Stoknes, norwegien psychologist comes up with – 5 D’s to explain this behavior.
The more facts, the less concern
1) Distance : time and space, too far to get psyched about.
2) Doom: tell me about it. Sigh ! loss averse, lack of practical solutions, helplessness. Can’t take your girlfriend out on a date and talk about death/
3) Dissonance: what we know but what we do. Downplaying or doubting what we know and chilling! “In the long run we are all dead!”
4) Denial: self-defense ! not intelligence or ignorance. Refuge in fear and guilt and not acknowledge anything unsettling, heard people saying “big deal” Scientists will come up with technology!
5) iDentity: conformity, with our existing values. Can’t change routine behavior. Your customs and values hold you back
Solution is in Nudge interventions. Because these doom messages aren’t working, so behavioral economists are figuring out ways to ensure people consume less. Lessons to be learnt from the ozone experience. How are we so concerned about the Ozone layer!
Against the motion :- Akshat Jain
When we look at this year’s budget decisions, it should be looked as a continuation of last 4 budgets.
Big announcements -
1. Solar Electricity/Irrigation-To incentivize farmers to shift to solar power pumps, excess solar electricity produced by the farmers shall be bought by State dis-coms. 5% custom duty on solar tempered glass has been eliminated. 43% increase in budget allocation for Renewable Energy in comparison to expenditure in previous year.
2. Air Pollution in North India- Machines required for in situ management of crop residue is subsidized.
3. Smart city Projects- With this year allocation of Rs. 6169 crores, total allocation now increased to Rs. 2.04 lakh crores. Smart cities are required to work on reduction of air pollution, sustainable sewerage treatment plant, smart public transport systems etc.
4. Railways-In the last budget, Govt. announced its plan to electrify the entire rail network by 2021.Rs. 1.48 lakh crores allotted for capital improvement in Railways. A total of Rs. 51000 crores and RS. 17000 crores has been allotted for Mumbai Local Trains and Bengaluru local rail network respectively.
5. Clean Ganga –Rs. 20,000 crore was allocated in 2015 for Namami Gange Project for a period of 5 years.4465 Ganga Grams declared open Defecation free.187 projects sanctioned till now.
Some small yet significant announcements include
· Free Gas connections extended to 8 crore women, reduces dependence on firewood, coal.
· Organic farming by FPOs and VPOs will be promoted in large clusters of 1000 hectares.
· GOBAR-Dhan scheme launched for solid waste management and conversion to Bio-CNG.
· AMRUT project-allocation of Rs. 12,429 crores for sewerage infrastructure.
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