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Tag Archives | Karnataka

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.

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A Tale of Two Cities

Delhi is not the only city that the BBMP can learn from before implementing a trifurcation scheme

By Shobitha Cherian

 

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Much has been made about the recent proposal by the BBMP to restructure itself. While some are describing it as a move to delay the upcoming elections there is also a rational justification for it: decentralisation. Decentralisation is the administrative principle of devolving powers to local units of the government where each unit will be responsible for governance in a defined area. The main argument for decentralization is that it leads to increased efficiency in governance; making local units the nodes of governance results in a more focused deployment of services as each unit’s jurisdiction will be relatively smaller. Decentralisation also reduces the number of citizens that government representatives have to interface with, making them more accessible to their constituents.

A majority of the criticism invariably cites the failed experiment of Delhi’s trifurcation as grounds to avoid trifurcation. But this criticism fails to take into account that decentralisation has been successful in multiple countries across the world and that the current structure of the BBMP is too bloated, inefficient and is rife with many issues to continue unchanged. One of these is the many irregularities present in the collection and management of the BBMP’s funds. Aside from the usual stories of kickbacks and corruption, deeper problems exist; the BBMP has been unsuccessful in achieving the gargantuan task of satisfactorily providing services to around 10 million people. While there is a case for dividing the BBMP into separate municipal corporations, certain criteria need to be met in order for it to be successful.

The new structure must be clear and transparent in its delegation of duties. Operational irregularities like fiscal leakages must be removed and additional revenue streams must be found; no amount of restructuring will improve efficiency if the BBMPB’s finances aren’t in a healthy state. The various departments and localities must have a defined hierarchy within which they can co-ordinate towards improving the state of Bengaluru.

It is essential that the BBMP be divided in a scientific and economically viable manner. The delimitation of future municipalities must be equally balanced in terms of revenue, financial viability and administrative functions. For decentralization to work, the city must be divided in such a way that no locality is given an undue advantage for growth at the expense of the others.

Thankfully, Bengaluru is nowhere close to being a pioneer in decentralisation. Much can be gained from examining previous attempts to implement decentralisation in other cities, both in India and abroad.

New Delhi

In 2012, the Sheila Dikshit government passed a bill that divided the Municipal Corporation of Delhi into the North, South and East Delhi Municipal Corporations. The trifurcation was opposed on the grounds that equitable distribution of assets and funds amongst the corporations would be impossible without one or more corporations running into a deficit. Unfortunately, this is exactly what ended up happening. Currently, the East and the North corporations are facing severe financial crises and have been unable to pay salaries to most of their employees. In contrast, the South Corporation remains largely self-sufficient.

The reasons for this dismal state of affairs stem from poor division of the corporations. The East and North Corporations ended up inheriting most of the old Municipal Corporation’s debt of Rupees 1831 crores. In addition to this, the jurisdiction of the East Corporation included 30 unauthorised colonies from which property tax could not readily be collected. In comparison, the areas coming under the purview of the North Corporation includes many of Delhi’s five star hotels and office buildings, thus making property tax a large source of its revenue. The division was unsuccessful as certain corporations were better off than others, creating unequal channels for growth.

London

If Delhi was a lesson in what mistakes to avoid, London is more a case study of best practices. Greater London, or the total urban area of London, is divided into 32 administrative areas or boroughs. Each borough is governed by a council that is responsible for carrying out various civic amenities within their jurisdiction. Each borough is further divided into electoral wards that are used to elect councillors for that borough council. The boroughs are tied together by a strategic regional authority known as the Greater London Authority (GLA), which is responsible for tasks like policing, economic development and emergency planning.

The main take away from London is that the local governments or boroughs are empowered to be effective units of governance but are prevented from overstepping on each other’s toes by a co-ordinating agency, i.e. the GLA. The GLA ensures that the 32 London borough councils not only work towards the development of their respective boroughs but are also in sync with the development of Greater London as a whole. The GLA recognises the independence of the boroughs and listens to their respective concerns, but also prevents the boroughs from working in a completely antagonistic manner to one another. The system works on the principle of subsidiarity; that the lowest levels of government or the boroughs are given the independence to carry out functions which can be managed at the local level. Those issues which cannot be undertaken by that level are sent up the next level of hierarchy, which in the case of Greater London is the GLA. The efficiency stems from the fact that purely local issues can be resolved immediately and with a greater level of customisation or adaptability.

The second interim report of the BBMP restructuring committee suggests a three tier administration, similar to that of London. The ward will take the place of the borough as the basic unit and will be governed by a ward committee. Each ward will be split into Area Sabhas to determine the composition of each ward committee. The jurisdiction of the multiple municipal corporations envisioned by the trifurcation will be determined on the basis of these ward boundaries. Above these multiple municipal corporations it would be ideal to have a autonomous and empowered Metropolitan Planning Committee akin to the GLA and as mentioned in Article 243Z of the Constitution. This regional authority would have the task of integrating the activities of the previous two tiers and maintaining ‘Brand Bangalore’.

The restructuring committee is expected to submit its final report to the government by the end of June. According to the committee, the ideal number of municipal corporations will be determined based on a spatial analysis on multiple parameters including finance, population demographics and infrastructure indices. It can only be hoped that the committee is successful in arriving at an economically viable and equitable scheme of separation. The greater fear is that, even if the committee was successful, the government wouldn’t actually take its recommendations into consideration and conduct the trifurcation on more political grounds.

Shobitha Cherian is an intern at the Takshashila Institution.

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Farmers as businessmen

My association with the Takshashila Institution took me on a field trip today to trace the story of the not-so-humble potato. The journey actually started last night, as we checked out potato prices at retail stores near our respective homes. And we continued the journey this morning, in reverse order as we went first to the APMC Mandi in Bangalore and then to the potato growing areas near Arkalgud, in Hassan district. As an aside, today was the first time I visited (or rather passed through) my mother’s native place Holenarasipura (the H in her initials stood for that).

When we build narratives about farmers in India, we talk about the “humble farmer”, the “poor farmer”, the “farmer dying in Vidarbha”, the farmer exploited by zamindars, and of India itself as a “nation of farmers”. The one part of a farmer’s job that never makes it to the popular narratives is his role as a businessman and entrepreneur. A farmer we met at the APMC yard at Bangalore this morning had delayed his journey from Bettadapura by four days, only to realize a lower price than what he would have got on Tuesday. Another near Arkalgud had grown tobacco late in the season, not knowing the complications that could arise due to rainfall patterns.

Back in school when I studied Hindi, I read a story by Munshi Premchand about a young man who moves to a village because he wants to be a farmer. That story ends with him returning disgruntled to the city, claiming there is more to be done by the farmer in the city than just doing his job as a farmer. That story, which I remember as being beautifully written (though I don’t remember its name), is a good primer into how much of a business farming really is.

Consider the decisions that a farmer has to make, and decide if this is closer to being a businessman or being a tiller. First he has to decide what crop to plant. Next, he has to decide what exact variety to sow, and what variety of seeds to procure. Then comes the rather big decision about the timing of the sowing of the crop, comes as it does with dicey predictions and forecasts of rain which even the Met department can’t get right. That done, the farmer has to decide on the labour he needs to employ for the sowing season, and whether he needs to hire a tractor. Then towards the end of the season, there are decisions about hiring of labour with respect to harvest, decisions on where to sell and most importantly, timing the market right in order to realize the best possible price for his crop. And the farmer is his own salesman also, having to negotiate the price at which he sells.

Commenting on the pittance that the farmer stands to make (in terms of a profit) on what he grows, one of my colleagues on today’s field trip said it was a  no-brainer – in the long line of businessmen who stand between a crop and the customer, he said, the farmer is the worst businessman, so it is no surprise that he is the one who gets squeezed the worst.

From a “corporate strategy” standpoint, the amount of management required in the farming profession suggests that it makes eminent sense to separate the roles of the farm manager (who plans inputs , labour hire, sales, crop mix, etc.) and the farmer (who does the day to day job of tending to the farm and looking after the crops). Unfortunately, the fragmented nature of land holdings in India doesn’t allow us this luxury. In fact, there is evidence to suggest that back in the days of unequal (and supposedly unfair) land-holdings, this was perhaps actually the case, with farm managers (zamindars) taking the risk and making the big decisions, while leaving the actual farming job to the specialist farmers. Unfortunately, supposedly pro-farmer initiatives such as the Land Reforms Acts and the “land to the tiller” movement served to defeat this separation of responsibilities.

The other big problem with farming is the amount of risk in the business. At one of the farms, we saw heaps of potatoes which had been cast aside because of blight (wasn’t that the same culprit that caused the Irish potato famine back in the 1800s?). In another farm, lack of timely rain had meant that potatoes hadn’t grown to the size to which they had been expected to grow, thus resulting in much lower realizations in terms of output. Even with the best possible management, exposure to the elements means there is always a significant amount of risk in farming. Current land holdings, though, don’t allow a farmer to diversify his risk by planting more than one crop.

Fragmented land holdings creates a further problem – the produce from one farm is usually way too small to make it viable to take it to the market 200 km away in Bangalore, where an auction at the “mandi” can help the farmer realize the best possible price (more on this auction in another post). Instead, the farmer is forced to sell to local aggregators and simply accept the price the latter is willing to offer (in small centers such as Arkalgud, there isn’t much choice the farmer has in who he sells to). We met a local farmer there with considerably bigger holdings than others in his area, and he told us that he had enough to make a trip to Bangalore viable, and there was no reason he would sell locally.

From a purely business perspective, the logical way forward for farming in India would be consolidation. Consolidation of land holdings would solve several of the problems that I’ve mentioned above, and also make it viable for the farms to appoint specialist managers. One possible way forward I see would be for a bunch of farmers with contiguous farms to get together and form a private limited company (with their respective shares being proportional to their land holdings). The farmers can continue managing their own pieces of farmland, while they appoint a professional manager to do business for them (think of it as being similar to geeks Sergey Brin and Larry Page bringing in professional CEO Eric Schmidt to run Google).

Yes, that paragraph might sound too grand and fantastical, but I don’t see any other way out for Indian farmers to do better. It is time that policymakers recognize the amount of management that goes into farming, and understand that keeping farm sizes small does no good for the lot of the farmer. A comparable example would be the Indian textile industry, where labour laws have served to keep manufacturers tiny, and has resulted in them losing out to larger competitors from the Far East (who have no such constraints, and are thus able to do better business).

So what policy interventions do we need to enable better management of Indian farming? Undoubtedly, the one decision that can potentially go the farthest in this direction is to make purchase and sale of farmland easier. So far, laws that have been designed to keep “evil capitalists” out of the noble farming profession have sought to make farm-holdings illiquid, and hard to purchase or sell (making farm land sales more liquid will also ease land acquisitions for industrial purposes and infrastructure projects). However, the fact of the matter is that there is a significant amount of management skills required to successfully run a farm, and the best way to achieve that would be to be inclusive of “evil capitalists”.

The narrative about the Indian farmer needs to change, and change in a way that recognizes him as being a businessman. The sooner our policymakers recognize the business aspect of farming, the easier it would be in making farming a viable profession in India.

Karthik Shashidhar is a faculty at the Takshashila Institution and blogs at Pertinent Observations.

 

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