CUTS Centre for International Trade, Economics & Environment

Rumour mills are agog with word of a cess to be levied by the government to write off debts of suicide prone farmers. After several insignificant attempts at farmer welfare, the government has come up with this populist idea just before general elections. It is not populism in itself that needs to be criticised, though. After all, incumbent political parties are in the business of offering sops to win elections. However, once a sop decision has been made, it is advisable to be imaginative in its provision and allocation of benefits.

Very often, populist measures that gift large amounts of money to the poor fail to reach the targeted population, resulting instead in inflationary pressure that erodes the popularity of an incumbent government.

Indebtedness has been touted as a major reason for the incidence of suicides, especially among the cotton growers of Vidarbha. However, to solve the problem, we need to address the roots of indebtedness. By just “waving off debts”, as thank-you banners put it, the government would only relieve symptoms of a deeper malaise.

What is the root of the problem in Vidarbha? Lack of irrigation water. Farmers have been undertaking the hazardous task of cotton cultivation on unirrigated soil. While India’s progressive integration with the global free trade regime has led to a decline in prices of many crops, including cotton, no corresponding increase in farm productivity has happened in Vidarbha that can neutralise the effect. With the cost of cultivation also rising, as prices of pesticides, seeds and labour go up, unirrigated cotton farming has been rendered unviable.

Vidarbha has had other problems, too, notably the alleged stepmotherly treatment accorded to this region by the state government ever since Maharashtra came into being. The sugarcane districts around Kolhapur, which cover only about 5% of the cropped area, receive a lion’s share of the irrigation water supplied in the state, while cotton, with a much greater coverage, is almost denied any. It is still not too late to enhance irrigation facilities for cotton through better conservation and efficiency in other uses.

Levying a cess to rectify matters may be justifiable. However, what the government proposes to do with the funds raised belongs to the realm of myopic policymaking. It would have been more advisable to spend the sum raised through this cess on both debt financing and investment expenditure. I propose that only some part of the money raised be used to write off debt payments for the next five years or any such period. But at least 50% of the money should be spent on investments to benefit cotton farmers: irrigation projects, marketing infrastructure, warehouses and so on. Here, one must realise that monitoring delivery systems is an important part of the investment process. Facilities provided on paper must actually be made available. A disturbing aspect of India’s rural infrastructure is that very little survives the long chain of command, and there is no accountability along the way. So, a direct system of proper feedback from the intended beneficiaries and monitoring of investment benefits needs to be put in place for the proposed project.

If the government does not do away with the primary reason for farmers’ suicides—the unavailability of irrigation facilities for cotton—it would have to engage in fire-fighting measures at regular intervals by waiving debts. As a one-off, it might work. With debt payments written off over the next five years or so, suicide-prone farmers would be able to breathe easy for some time.

Five years should be enough time for the proposed public investment in agriculture to help turn farming more productive (as the saying goes, it is always better to teach a person to fish than to give him fish). Above all, remember that sudden injections of large amounts of liquidity into the economy can be inflationary. A bout of inflation might wipe off some of the benefits of the original transfer. I would advise a good hard think.

The author is Director Research, CUTS International, a leading research, advocacy and networking group and can be reached at sm2@cuts.org

This article can also be viewed at: http://www.financialexpress.com/

Revenue loss may lead to reversal of SEZ policy: Study
The Financial Express, February 15, 2008

The much-touted special economic zones policy runs the risk of being reversed, in terms of attractive tax exemptions it offers, with the Government’s finances coming under stress, a study has said.

The study noted that tax incentives extended to SEZs may lead to a loss of four to five per cent of the total tax revenues.

“The (SEZ) policy is yet to be fully tested, especially with regard to the potential adverse impact on tax revenue and an increased disparity in development across regions. This could lead to some review of policy which will clearly affect developers’ plans,” a study by brokerage and investment banking firm CLSA has said.

With the government’s finances not in good shape, the potential for large tax revenue losses arising from the SEZs has been a key concern, it said.

“While tax receipts are increasing and fiscal deficit decreasing, many are arguing that India cannot afford the loss of tax revenue from export business growth in SEZs,” it said.

On one hand, Commerce Department’s refrain has been that without suitable tax concessions, developers would not invest and that corporate tax concessions apply to export incomes, while on the other questions have been raised by the Finance Ministry, RBI, IMF, WTO and OECD about “financial feasibility of the scheme”.

According to the Finance Ministry estimates, revenue loss from SEZs could be over 25 billion dollars, more than the earlier estimate of 23 billion dollars for the period 2007-10.

“Nevertheless, should revenue losses become too great there is a risk that the government could reverse the policy and reduce exemptions,” the study said.

However, the study goes on to add that a pick up in organised sector employment arising from the new SEZs should lead to improved tax administration which could partly offset losses due to tax concessions. So far, more than 600 SEZs have been cleared, of which 187 have been notified.

Another study conducted last year by think-tank CUTS had found that the revenue loss concerns of the Finance Ministry were notional and benefits accruing from the tax-free zones would exceed the potential tax losses.

The CLSA study further identifies extension of export schemes such as Software Technology Parks of India and Export Oriented Units beyond March 2009 as a factor that could affect the growth of zones.

Both the schemes provide similar incentives as the SEZs and industry has been lobbying with the government for their extension, the study said.

“More than 50 per cent (226) of the formally approved SEZs are IT/ITeS sector specific and the reversal of these schemes could cause a mismatch in supply and demand from IT and export manufacturing businesses, potentially affecting the ability of the developers to attract tenant businesses to their SEZs,” it said.

Land acquisition has also proved to be the biggest hurdle for SEZs, the study says. Amid rising land prices across the country, the SEZ policy has come under fire as a means of land grabbing by developers, allowing the removal of land in return for inadequate compensation and “conversion of valuable fertile farm land into industrial zones”.

The study estimates that projected investment in SEZs over the next 10 years could be 213 billion dollars, if 75 per cent of the formally approved zones and 25 per cent of the in-principle approved SEZ land is developed and operational.

Exports from the SEZs during the 10-year period could touch 352 billion dollars, nearly half of India’s total annual exports, with IT and ITeS SEZs contributing 30 per cent at 105 billion dollars.

The zones are also projected to create 14 million direct and indirect jobs, leading to a 30 per cent rise in the current organised employment....

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Let us take a leaf out of China's book in WTO'
The Hindu Business Line, February 05, 2008

By G. Srinivasan

We should have a similar strategy as China and quietly advance our interests instead of mouthing collegially on behalf of people who may or may not want us to represent them.

There is no doubt that the US slowdown will have an impact on India. But compared to China, where more than 60-65 per cent of its GDP is trade, for us, it is still 35 per cent on goods plus another 5- 10 per cent on services. We are less relatively exposed than China.

Prof. T. N. Srinivasan of Yale University is a person familiar with global trade policy issues, though he has his theoretical underpinnings on econometrics with his early grounding in mathematics at the Madras University. Over the last four decades, he had taught at various academic institutions of repute, including MIT, Stanford University and Indian Statistical Institute, Kolkata.

A recipient of Padma Bhushan award in 2007, Prof. Thirukodikaval Nilakanta Srinivasan was also a former Chairman of the Department of Economics at Yale University where he was teaching since 1980 and is currently in the Yale University Economic Growth Centre, holding the Samuel Clark Jr. Professor of Economics chair.

Recently in the capital to take part in a half-day symposium organised by the civil society, CUTS, on Preferential Trading Arrangements (PTAs), Prof. T. N. Srinivasan spoke to Business Line at the sidelines on a range of issues that have a bearing on national and international trade policy.

While Mr T. N. Srinivasan does not see any major slowdown in the Indian economy in the shortterm, he has doubts over its sustainability beyond the next three or four years, depending on how infrastructure and other constraints are addressed.

Describing the current slowdown in India's second generation of economic reforms in the words of the Finance Minister, Mr P. Chidambaram, in another context (FRBM Act) as a "temporary pause", Mr Srinivasan said that this is not surprising. "I am hopeful that reforms will continue, regardless of who wins the elections and regardless of positions they take in electoral competition. Once they are back in power and are reasonably sure that they can stay for five years, reforms will go on".

Excerpts from the interview:

Excerpts from the interview: On rising global food prices and food subsidies by the rich world: It is well known that if some countries in the world trading system subsidise foods and that results in lowering the world prices, food-importing countries will gain and food-exporting countries will lose.

That is a standard argument. But what you have to distinguish is whether one is talking about temporary fluctuations in food prices due to circumstances of that particular period - for example, in 1974, world food prices went up because of concatenation of circumstances, with the Soviet Union suffering a major failure of harvest and so on and so forth.

Since then, food prices have come down. So if you take a longterm perspective of the trend in food prices relative to manufactured prices or services prices, the trend has been downward.

So, one should not make a trade policy judgment based on shortterm fluctuations, but should look at it in terms of long-run perspective.

India is right in saying that the intervention policy by the US and the EU in agriculture is deleterious to the global trading system and that it should go.

It is fine. But we should apply the same principle to ourselves. What do we do?

In 2001, there was a huge buildup of food stocks in the public distribution system (PDS) and we allowed exports of food by private traders and subsidised some of the exports.

Now, wheat prices are high and we import it. What we are doing is responding to short-term exigencies about rising domestic stocks/ prices in deciding our trade policy - whether we are going to allow import or export. This is not a policy that is enunciated or dictated by our long-term comparative advantages in agriculture.

There are many areas where significant comparative advantages have to be exploited. That is what we should look at, and set up an enabling environment for these advantages to be exploited. Sometimes, it is believed that the government gives support price to foreigners which is much higher than what it gives to domestic farmers.

But after the harvest, giving farmers higher prices is not going to bring more food into the market. Right now, we need more food in the market and we have to get it from elsewhere; this would add to the supply in the shortterm.

So you have to think in terms of what kind of intervention brings in the long-run beneficial results. Our agricultural trade policy is based on short-term domestic considerations rather than longterm ones.

On resumption of Doha Trade talks under WTO umbrella: Unless there is a change in the position of major actors, particularly the EU and the US, as well as Brazil and India, there is unlikely to be any progress in talks.

But one glimmer of hope is with the possibilities of recession looming on the horizon, the US producers might want to have a global market and trade liberalisation done elsewhere would be beneficial to them.

Their lobbying might lead the US to reconsider some of its positions to get a deal in Doha. It is likely that the prospect of a US recession might also lead others to reconsider their positions.

On India's move in WTO:

Don't you notice that China has not been saying anything? All the noises have been made by Brazil and India.

We should have a similar strategy as China and quietly advance our interests instead of mouthing collegially on behalf of people who may or may not want us to represent them anyway.

So we must tone down the rhetoric and not beat too loudly the drum of special and differential treatment; let us take a leaf out of China's book by adopting quiet diplomacy in the WTO.

On services liberalisation: India has a number of advantages in services and we should press for opening up labour-intensive services in GATS negotiations. We should also be willing to open our services sector.

Right now, construction contractors such as Larsen and Toubro do not want to compete for the major infrastructure projects because they cannot find adequate number of needed workers.

I understand that the Chinese bid was the lowest for one of our port projects because China wants to bring its own labour to do the work as they are sure of what they can get from the labour, which is more productive than India.

We have qualms about letting the Chinese labour work on the construction contracts. To change this requires political will and rethinking.

Our reservations are based on the fear that we have no instrument to monitor labour and ensure that all the Chinese labour does not disappear into the Indian economy.

But the potentials from a liberal regime for labour-intensive services are enormous.

In services negotiations, we will have to give as well as take. Simply harping on what we want to take is not going to get us anywhere - whether it is NAMA (non agriculture market access) or services or agriculture. I would like to see India more forthcoming in opening up its economy.

On US slowdown and India's prospects: There is no doubt that the US slowdown will have an impact on India. But compared to China, where more than 60-65 per cent of its GDP is trade, for us, it is still 35 per cent on goods plus another 5- 10 per cent on services. We are less relatively exposed than China.

Whether the US recession will be short and revival will take place soon is difficult to predict.

By and large, given our large reserves and our situation, we can tide the crisis of a recession but, on the other hand, what is of concern to me is whether the turmoil in the global financial market reflects something deeply wrong that is yet to come out. If it is, it can put an entirely different complexion.

This article can also be viewed at: http://www.thehindubusinessline.com/

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