About Pranay Kotasthane

Author Archive | Varun Ramachandra

Starting off on the right foot

Increase in capital outlay in the 2016—17 Karnataka budget is a good sign for the state

by Varun Ramachandra (@_quale) and Pranay Kotasthane (@pranaykotas)

[Note: This article first appeared in the Kannada newspaper Prajavani on 19th March 2016]

The 2016—17 Karnataka state budget was much awaited for two reasons. One, in 2015—16, Karnataka and other states had little time to respond to several important changes affected by the 14th Finance Commission recommendations. These changes had resulted in a 61% increase in unconditional transfers to Karnataka on one hand, and a decrease of nearly 50% in grants for centrally sponsored schemes on the other. Since these changes happened very close to the budget date, Karnataka could only make incremental changes last year.

Secondly, 2016—17 is the only election-free year for Karnataka. The three previous years had elections at state, union and important local government bodies respectively while next year’s budget will have to factor in the 2018 state elections. An election-free year means that the government can afford to depart from marginal changes and take decisions that might not be populist, but are nonetheless necessary for long term welfare.

So, given the importance of this budget, how did the Karnataka government fare on important areas this year? This article analyses the budget in the backdrop of this unique opportunity.

How did Karnataka’s earnings change?

The Finance Minister accounted for an increase of 11 percent in Karnataka’s own tax collections, which primarily come from taxes on sale of goods (VAT), alcohol and land duties. There was also an increase of 12 percent in Karnataka’s share of taxes collected by the union, taking the unconditional transfers received from the union to a total of 26,978 crores. Note that this number had already increased by 61% last year, as a result of 14th Finance Commission recommendations.

A big change this year was that Karnataka has budgeted for a significant increase in the loans to be borrowed from markets. This was made possible, without any change in the fiscal deficit because of a change in methodology for estimating the state’s GSDP, abruptly changing it from 7.36 lakh crores in 2015-16 to 12.13 lakh crores in 2016-17. The new methodology gives higher weightage to the IT sector’s contribution, a sector that Karnataka excels in. Since the permissible borrowing limit is calculated as a fixed percentage of the GSDP, a higher GSDP allowed the government to borrow more from the open market.

But aren’t loans always bad? Not necessarily, it depends on what purpose the loaned amount is spent on. Generally, deploying borrowed money towards long-term asset creation can have a positive impact.  

How did Karnataka’s spending change?

On the spending side, there was a 21 percent increase in the capital expenditure (money spent on asset creation) at Rs. 26,341 crores and an 11 percent increase in the revenue expenditure (money spent to meet short term expenses such as salaries) amounting to Rs. 1,30,236 crores. The areas of urban development, irrigation & flood control, police, and crop husbandry saw major increases in allotments.

The continued increase on capital and revenue expenditures for irrigation and flood control shows us that agriculture continues to be the priority area for this government and that it is willing to focus on both long-term asset creation and meeting short-term expenses in this area. Second, there is an increase in expenditure outlay for water supply and sanitation but most of this increase is towards meeting running expenses with only a small jump of about 10 percent towards capital expenditure. Third, there is a doubling of capital expenditure on social security and welfare. Finally, there seems to be a new found focus on urban development with an increased capital outlay of 1886 crores compared to 365 crores last year.

It is heartening to see that significant portions of the increased borrowing  has been utilised for long-term asset creation. At the same time, it was disappointing that only marginal changes were made in allocations towards health and education — essential services for a state like Karnataka that aspires to reap the demographic dividend.

Varun Ramachandra (@_quale) and Pranay Kotasthane (@pranaykotas) are researchers with the Takshashila Institution.

Comments { 0 }

Learning Classical Languages

In August 2006, The Ministry of Tourism laid out the guidelines to determine the eligibility of languages to be considered as a “Classical Language”

  •  High antiquity of its early texts/recorded history over a period of 1500-2000 years.ii)
  • A body of ancient literature/texts, which is considered a valuable heritage by generations of speakers.
  • The literary tradition be original and not borrowed from another speech community
  • The classical language and literature being distinct from modern, there may also be a discontinuity between the classical language and its later forms or its offshoots.

The press release also mentioned that only Tamil & Sanskrit met thee guidelines. Later, after receiving representation from several scholars,  Kannada, Telugu, Malayalam, Oriya and Marathi were accorded the status of Classical Language. State probably has a role in helping languages but it is the people who eventually decide the ‘fate’ of a language. At a time when a lot of people consider English as the lingua franca, according the status of “classical” or otherwise does very little to the people for in such situations people are mostly motivated by economics and not emotions.

Although the intentions are good, the ‘classical language’ tag has helped very little. For someone sitting in Karnataka, it is easy to learn German/French/Japanese etc  because there are enough resources for an interested individual to pick from. While it is extremely straightforward to enrol and obtain certifications in these foreign languages, it is very difficult for a Bengali(say) to even obtain a rudimentary book like “Learn Kannada through Bengali”.

It is widely accepted that learning a new language provides a new worldview and that it opens up cultural boundaries. But how do we accomplish this when, laughably, it is difficult to procure the basic resources required to learn a language?

 

Comments { 0 }

Thoughts on water-sharing disputes

The dispute between upper-riparian and lower-riparian regions of India on the issue of water sharing is not a new one.   Sadly, the solutions being tried are also not new.

Therefore, this post aims to explore two broad structural changes that can help assuage the water-sharing disputes:

First, water has to be priced appropriately across the country, by all states. Currently, water is provided at throwaway prices and hence the scarcity value is not realised by the consumers. Also, in a perverse way, the subsidy on water is cornered by a prosperous few and is effectively a transfer of wealth to the rich. The poor, inevitably end up paying more. Pricing water has large ramifications, because the moment scarcity value is realised, consumption will be self-rationed. 

Second, institutional mechanisms to resolve inter-state disputes have to be put in place. The Inter-state council as envisaged by the Constitution under Article 263 has been unsuccessful in doing this job.  Largely because the council, housed in the Union Home Ministry(This excellent paper by Dr. M Govinda Rao provides more details), cannot be expected to negotiate for the states or be the arbiter in the disputes with the states. Therefore, there is an urgent need to establish these mechanisms that will resolve these disputes. 

 

Comments { 1 }

A song of public policy

In the hit HBO TV Series “The Game of Thrones”, the character Tyrion Lannister played by the actor Peter Dinklage has some of the best lines. Based on the books written by author George RR Martin, the show, in places, veers towards excesses of all kinds. That said, large portion of the books act like a mirror of societies from across the world. Plot elements include  prophecies,  violence, quest for peace,  food, famine, state finances, religion, deterrence, soothsaying, costs of war, alliances, etc.

Without delving too much into the story itself, a quote made by Tyrion in the latest season of the show demands attention, especially by public policy enthusiasts.

In response to another character’s question about “…what great thing has ever been accomplished without killing or cruelty?”, Tyrion Lannister says

It’s easy to confuse what is with what ought to be. Especially when what is has worked in your favor.

Essentially, this is how one can arrive at normative models to understand the dynamics of policy making. Intuitively, policy making must follow the process of selection ie., discard ideas those that do not work. However, the costs associated with a failed policy initiative are high (MNREGA is probably a good example) therefore it is imperative to evaluate and build normative models that work even in the ‘edge cases’.

Comments { 0 }

Thoughts on defence land

The Land Division of the Directorate General Defence Estates states that “The Defence forces require large areas of land for training, ranges, depots, airfields, quartering, camping, offices etc for military activities. Ministry of Defence, therefore, owns large tracts of land of approx 17.54 lakh acres, out of which approximately 1.57 lakh acres is situated within the 62 notified Cantonments and about 15.96 lakh acres is outside these Cantonments. The responsibility of day-to-day management of land is with the user services”

The Comptroller and Auditor General (CAG) undertook a performance audit of Defence Estate Management covering the period from 2004-05 to 2008-09, and submitted its report on March 25, 2011.  Some major findings of the CAG report were

  • delay in mutation of land in favour of MoD
  • increased encroachment
  • exploitation of defence lands for commercial purposes, and
  • the dismal state of lease management.

The standing committee made the following observations and recommendations:

  • Application of land norms: The Committee noted that MoD has faltered in applying norms for proper and judicious management of lands at its disposal.  It noted the inherent risks of holding vast tracts of unoccupied land, including hoarding.  It recommended that the entire ambit of defence land record keeping, mutation, sale and transfer, etc. should be bestowed upon the Directorate General of Defence Estates (DGDE).  Further, the whole issue of requirement of land by defence forces needs to be revisited so that land is put to optimum use.
  • Variation in records: The Committee expressed concern over discrepancy in land figures in the records of Local Military Authorities (LMAs) and Defence Estate Officers (DEOs).  In a survey, the land area in the records of LMA was 47% higher than that in the records of DEO for 9 army stations.  It recommended that the MoD make it mandatory for DEOs to periodically inspect the land records maintained by LMAs.  Further, there should be a comprehensive survey of all defence lands.
  • Mutation of defence land:  The Committee noted that a large portion of acquired land has been awaiting mutation for a long period, in some cases as long as 60 years.  It noted no serious efforts were made to expedite mutation of land to MoD.  It recommended that steps be taken for the same, and documents pertaining to non-mutated land be made available to the Committee within six months.
  • Unauthorised use of defence lands: The Committee noted that the CAG has repeatedly objected to the use of defence lands for unauthorised commercial purposes such as golf courses, but no action has been taken.  In addition, revenue generated from such activities has not been credited to government accounts.  The Committee recommended that the DGDE be supplied with all information relating to such activities and revenue generation.
  • Encroachment of defence lands: The Committee noted that non-mutation of land records, non-utilisation of land and existence of multiple authorities has resulted in encroachment of land.  It recommended that a single unified authority be created to look into management and protection of defence lands.
  • Dismal state of management of leases: The Committee observed that defence land is leased out at a very low rate compared to its market value.  In addition, no serious effort has been made to renew the leases, leading to loss of revenue to the government.  It suggested that the government bring out a policy in this regard within six months.

The defence services and the Ministry of Defence must act on the recommendations of the CAG as soon as possible(the recommendations were made 6 years ago). One must also take into account that a large portion of defence lands is in central business districts of major Indian cities and monetising these pockets will enable the forces to provide modern facilities with vastly improved living conditions for personnel and their families.

PS – My colleague Nitin Pai’s article  in Business Standard, argues for moving cantonments 20 km away from 20 cities

Comments { 0 }

Primer on deficits

Today’s budgetary deficits are tomorrow’s taxes. Therefore, it is important to understand what deficit means, and how India has performed on this metric over the past few years. This post provides a primer on this topic.

Budgetary deficit occurs when the expenditures[1] are more than receipts (This is true for homes and nations).There are three types of deficits

  • Revenue Deficit
  • Fiscal Deficit
  • Primary Deficit

deficit

Revenue deficit is defined as the difference between total revenue expenditure and total revenue receipts. The revenue deficit signals how much the government is spending when compared to its earnings to perform its day-to-day activities(like paying salaries etc.)

Revenue receipts are those government receipts which neither reduce assets nor create future liabilities. These are proceeds from taxes, interest and dividend from government investment, cess, and other receipts for services rendered by the government. Revenue expenditure includes those expenditures that neither creates assets nor reduces liabilities. These are expenditures on salaries of government employees, subsidies, grants (to state government and other entities), interest payments and pensions. These expenditures are short term and recurring in nature and mostly meant to ensure the daily functioning of the government.

Given this, revenue deficit shows how much the government is borrowing to finance its daily functioning. In the past few years, eliminating the revenue deficit has been the priority for both the Union and State governments. The Fiscal Responsibility and Budget Management Act, 2003 recommended elimination of revenue deficit by 2009.

Revenue deficit = Total revenue expenditure – Total revenue receipts

Fiscal Deficit is defined as the difference between total expenditure and total receipts (excluding borrowings) ie., any loans received as money are not counted as receipts.. Therefore fiscal deficit actually represents the amount of borrowing that the government must make to meet its expenses(this is the reason why the fiscal deficit is the most discussed number and a keenly observed number during the budget and by commentators.

Fiscal Deficit = Total expenditure – Total receipts(excluding borrowings)

Primary deficit is defined as the difference between fiscal deficit and interest payments ie., if the primary deficit is zero then, the governments borrowings will be used just to meet its previous borrowings. If the primary deficit is positive and significant, it feeds back into the interest payments in the following years, as fresh debt is created, for which interest has to be paid.

Primary deficit = Fiscal deficit – interest payments

 

deficit gdp

[1] There are two types of expenditures: Revenue expenditure and Capital Expenditure. Revenue expenditure is a cost that is charged to expense as soon as the cost is incurred.

Varun Ramachandra and Anupam Manur are Policy Analysts at Takshashila Institution. Varun tweets at @_quale and Anupam tweets at @anupammanur

Comments { 0 }

DRDO exists to protect the nation and not the other way around

It is not in India’s national interest to continue to run public sector organisations like DRDO if they are inefficient and not meeting their objectives

— Varun Ramachandra and Nitin Pai

Recently, the Defence Institute of High Altitude Research — a Defence Research and Development Organisation(DRDO) laboratory — inked an agreement with Patanjali Ayurveda Limited for a non-exclusive license through transfer of technology on nutritional products.

The agreement was signed under the DRDO – FICCI Accelerated Technology Assessment & Commercialisation programme which “aims to create a commercial pathway to deliver technologies developed by DRDO for appropriate commercial markets for use in civilian products and services.” Previous deals under the programme have been with business houses like Dabur Ltd, Gujarat Fluorochemicals Ltd, Bhilai Engineering Corporation to name a few.

The DRDO is not involved in production of equipment, instead it is primarily responsible for research and development till the transfer-of-technology(ToT) stage. The move to rope in Patanjali to popularise DRDO’s  seabuckthorn based nutritional products is well within its mandate. But it must also be noted that many critical projects under DRDO that have a direct bearing on combat preparedness like the Light Combat Aircraft and Kaveri jet engine are delayed by several years.

Therefore, it is important to examine the raison d’être for DRDO in the first place. The organisation was set up in 1958 with the objective of providing the Indian armed forces with indigenous scientific and technological support. In 2015, 57 years after the formation of the DRDO, India continues to rely on imports to meet its domestic defence demands. This clearly indicates a mismatch in the said objectives and the achieved outcomes of the DRDO(and other public sector undertakings that are involved in defence).

In 2007, the government set up a committee chaired by Dr. P Rama Rao to specifically improve the operations of DRDO. The committee’s report suggested a breakdown of the organisation into smaller manageable units along with merging several of its laboratories with other institutions. The committee’s recommendations have been implemented in a half-hearted manner. The DRDO is far from reaching the operational efficiency of similar organisations from across the world and successive governments have continued to spend money, inefficiently, on DRDO.

From a financial point of view, national security is a delicate relationship between the taxpayer and the armed forces. Hence, it is incumbent upon the armed forces to equip itself with the best available technologies, be it domestic or international. In such a scenario, if Indian organisations are unable to meet the armed forces’ requirements it is natural and expected of the forces to look elsewhere to meet its primary goal of national defence.

The operational costs of running an organisation like DRDO run into several thousand crores. If such an organisation is inefficient and not meeting its objectives, it is not in India’s national interest to continue to run these organisations, especially when taxpayers money is involved. The same money can be used elsewhere to meet other national objectives.

Cloaking reforms under patriotism or indigenisation has resulted in a state where India imports large chunk of its equipment, but is reticent to allow FDI in defence manufacturing. The Indian defence establishment too has called for indigenisation to avoid being coerced by exporters in the hour of need, a problem that can be solved by developing strong economic ties with all exporting countries and/or by procuring from countries where the economic ties are already in place. It is worth reinforcing the fact that defence is a sector where anything short of excellence is a failure.

The dogmatic approach towards indigenisation since independence has yielded limited fruit. It has largely resulted in policy capture by public sector undertakings in the name of indigenisation. The net result is that the domestic industry is incapable of meeting India’s defence requirements and the political economy of reforms has ensured that many PSUs are in a rut.

Indigenisation is a lofty goal that is worth pursuing. Until the goal is reached, defence requirements continue to exist. Therefore, the path towards indigenisation need not be studded with inefficient public sector undertakings. Instead, actively allowing private players and FDI in the defence sector can inject competition and contestability. This will also allow Indian industries to acquire the necessary competence to deliver world-class results.

The government must urgently implement the recommendations of the P Rama Rao committee to restructure DRDO. The DRDO must focus on projects of importance and align its project priorities with that of the defence establishment. India can ill afford inefficient institutions for they have far reaching fiscal and social consequences. Moreover, DRDO exists to protect the nation and not the other way around.

A modified version of this piece was translated to Hindi and appeared in BBC Hindi 

Update: A translated version of this piece appeared in the Kannada daily Prajavani

Varun Ramachandra and Nitin Pai are with Takshashila Institution, a Bangalore based independent think-tank and a school of public policy. Varun tweets @_quale and Nitin tweets @acorn

Featured image credits: The Surya Kiran Aerobatic Team (SKAT) at Aero India 2011 by Ruben Alexander, licensed under creative commons

Comments { 0 }

The reform train

The previous post explained the idea of Overton window. This post aims to understand the concept through the example of a push-pull locomotive. A Push-Pull train is one where locomotives at both ends of a train are used at the same time to move the train in one direction — both the locomotives are controlled by one pilot.

Push-pull train[1]

push pull

push-pull locomotive

 

Government reforms operate like the Pull- Pull model ie., locomotives on both sides are pulling the train apart in opposite directions. Both the directions are pulled by separate pilots, and the reform train stands still.  The train can be thought of as the Overton window whose motion is dependent on which side the force is stronger. The force required to pull the train on either side depends on what the societal majority prefers. Needless to say, like social change, reforms are slow and deliberate that take enormous effort and conviction.

pull pull

This analysis might lead us to make fatalistic conclusions. It is here that newspapers, opinion makers, social media et al play an important role in the moulding public opinion and thus help move the Overton Window. Which side the window moves depends on how public opinion is moulded, but it for certain that these elements are unconstrained by electoral calculations and therefore are critical; a politicians motto might be to win the elections, but a common man’s motto is to lead a happy and a prosperous life and this is only possible through an efficient government.

PS – The famous “push-pull” night train between Mysore and Bangalore takes 5.5hours to travel 140km.

PPS- The original Overton window was presented with a vertical alignment to avoid the “right”/”left” connotation. Although horizontally aligned, the author does not assume right/left connotations in the locomotive example.

[1] The image is taken from wikipedia

Comments { 0 }

ದೇಶಕ್ಕಾದ ನಷ್ಟ ಗೊತ್ತೇ

Kannada translation of the blog post “Cost of a non-functioning parliament” appeared in Prajavani on 21st August 2015.

CM5uUXMUcAA4U0j

Comments { 0 }

Cost of a non-functioning parliament

The impact of a non-functional parliament goes beyond mere attendance or the cost incurred to run the houses of the parliament – Varun Ramachandra(_quale)

“An Introduction to Parliament of India” is a document produced by Dr. Yogendra Narain a former Secretary-General of Rajya Sabha to acquaint the lay reader with the organisation and functioning of the parliament. (The pdf can be accessed from the Rajya Sabha website). The document describes the parliament variously as: a magnificent manifestation of democratic ethos, a body that encourages nurturing and participatory democracy, a body that has functioned as the ‘grand inquest’ and ‘the watchdog’ of the nation.

One must remember that the primary function of the Indian parliament is to enact laws. In addition, the parliament is also entrusted with the duties of discussing the finances of the nation and people’s grievances through various parliamentary mechanisms that are in place. To accomplish these tasks, the parliament is in session 3 times each year for the budget session, the monsoon session, and the winter session. The parliamentary committees however transact throughout the year.

The current Lok Sabha(16th) was scheduled to meet for its monsoon session between 21st July and 13th August 2015. This session has been a complete dud i.e., no meaningful business was transacted in this session. For various political reasons, the opposition stuck to boycotting the session, the ruling party failed to negotiate, and the speaker suspended 25 members of the parliament for ‘persistent and wilful obstruction’ of the house.

A simple assessment shows us that the parliament has lost 33.3 per cent of the available time this year. Pedantically speaking, the present Lok Sabha, the lower house, has lost 6.67 per cent of its total available time in the parliament.

5824656111_79d9abbd3c_b

Naturally, the din in the media is about how a non-functioning parliament is a waste of taxpayers’ money. Various numbers based on the parliament’s budget are bandied to drive home this point. Flippant statistics about the price of the food being served in the parliamentary canteen, salaries of the members of the parliament is discussed too. While these are all valid assessments, the real story remains untold.

The impact of a non-functional parliament goes beyond mere attendance or the cost incurred to run the houses of the parliament.  For instance, the list of important bills that were scheduled to be passed during this session included The GST bill, the child labour amendment bill, the prevention of corruption bill and the right to fair compensation and transparency in land acquisition bill to name a few.

Each of these bills are likely to have a profound impact on the way India will progress over the next few years. Various news reports have suggested that the introduction of GST has the potential to add anywhere between 1 – 2 per cent to India’s GDP (an addition of 20 billion to 40 billion dollars). The prevention of corruption bill which deems the act of bribing a public servant a criminal offence can dampen the flow of unaccounted money in India. Lastly, the child labour amendment bill can enable a large number of children — who are bound by the shackles of employment — to attend school.

With respect to the land acquisition bill, the government and the opposition had a chance to debate the fundamental questions on property rights and land titles. Instead, theatrics has taken center stage, leaving the voters and the public in a state of confused frustration.

Therefore, the actual cost of the parliament not functioning is the 2 per cent that would have been added to the GDP thanks to GST, the lack of education of those kids who are working instead of going to school, and the addition of unaccounted money into the economy thanks to corrupt public servants. Economists term this as “opportunity cost” — the value of the alternative that is given up. When viewed through this lens, a non-functioning parliament has far reaching consequences on the economy, society, and democracy.

Along with the passing of the aforementioned bills, the parliament was also scheduled to introduce several other important bills in this session. An important aspect of law making that is worth our notice is that enacting laws and implementing them takes time. There is a delayed effect and the real impact of a law is palpable only after several months of its enactment. Now that the session is washed out (for all practical purposes) these bills will be introduced at a later stage, discussed and passed/withdrawn even further in time.

Needless to say, the rhetoric around the loss of taxpayers money due to the parliament without regard to opportunity costs is penny wise and pound foolish. Perhaps, it is also wise for our parliamentarians to read “An Introduction to Parliament of India” with care.

(The author would like to thank MR Madhavan from PRS Legislative research for his inputs)

Varun Ramachandra is a policy analyst at the Takshashila Institution — a Bengaluru-based independent think tank and school of public policy. He tweets @_quale

Image credits: Simantik Dowerah (Creative commons)

Comments { 1 }