Archives: Publication

Business confidence falls sharply in Q1 FY16: NCAER

Business sentiment fell sharply in the first quarter of the current fiscal as smaller companies are experiencing the worst deterioration in business sentiments says a NCAER survey.

“The 93rd round of Business Expectations Survey (BES) carried out in June 2015 reveals that business sentiments have not only continued to decline but are declining at a more rapid pace.

“The Business Confidence Index (BCI) decreased by 11.9 per cent over the previous quarter on a quarter-on quarter basis and by 15.1 per cent on a year-on-year basis” said the survey by economic think-tank National Council of Applied Economic Research (NCAER).

All components of BCI showed negative change between April and July 2015 it added.

Commenting on the survey NCAER fellow Bornali Bhandari said “The decline of business sentiments specially related to the investment climate is particularly worrisome because this may be perceived as a signal for lower future investment and thereby for economic growth.”

“Further the fact that smaller companies are experiencing the worst deterioration in business sentiments is a matter of concern both for growth and equity” he added.

As per the survey the services sector showed a marginal improvement in the BCI (2.6 per cent).

The manufacturing sector showed double digit decline in all four sectors – consumer durables non-durables intermediates and capital goods.

The fall in BCI for consumer durables was the steepest.

The survey further said the Political Confidence Index (PCI) continued its slide downwards from last quarter.

“The PCI fell by as much as 17.7 per cent over the last quarter on a q-o-q basis and 16.2 per cent on a y-o-y basis.  All components of PCI show a deteriorating trend” it said.

NCAER has been conducting Business Expectations Survey (BES) every quarter since 1991.

It tracks the business sentiments of over 500 Indian companies to compute the composite index—Business Confidence Index.

Mahatma Gandhi National Rural Employment Guarantee Act: A Catalyst for Rural Transformation

Using unique data from the India Human Development Survey, a large, repeated, national household survey conducted by researchers from the NCAER and the University of Maryland before and after the implementation of MGNREGA, this report examines changes in the lives of rural households and in the rural economy against the backdrop of changes brought about by the programme.

Economic Benefits of Dynamic Weather and Ocean Information and Advisory Services in India and Cost and Pricing of Customized Products and Services of ESSO-NCMRWF & ESSO-INCOIS (Phase III)

The Ministry recently requested NCAER to estimate the economic benefits of dynamic Weather and ocean state forecasts and the resulting advisories provided to users. This report, the third in the series of NCAER’s work with MoES, consists of two parts. The first part estimates the potential economic benefits of ESSO-NCMRWF dynamic weather forecasts (coordinated with the Indian Meteorological Department) for the farming community, ESSO-INCOIS’s ocean state forecasts to different users for strategic purposes, its Potential Fishing Zones advisories to marine fishing communities, and its “No Tsunami Threat” advisories. The second major part of this NCAER Report develops costing and pricing approaches and templates for the development of NCMRWF and ESSO-INCOIS products and services.

Column: Getting NITI Aayog to work

This column published in the Financial Express is written by Prof M. Govinda Rao Non-resident Senior Fellow NCAER.

Media reports about the boycott of the nine Congress chief ministers and the non-attendance of those non-UPA non-NDA ones-of Odisha Tamil Nadu Uttar Pradesh and West Bengal—in the recently held meeting of the NITI Aayog to discuss the issue of land acquisition does not come as a surprise. On the contentious issue of land acquisition on which the main opposition party has taken a contrarian view the Congress chief ministers are expected to play hard-ball. However the issue’s scope goes beyond just that. It has to do with the trust and credibility of the institution and what it can offer to the states on a sustained basis. The Planning Commission was tolerated by the states because it had the purse and could patronise the states by luring them with promises of grants. They even got their annual plans approved by the Planning Commission although it made little sense for the Union government to approve the plans of the states when the Constitution demarcates the responsibilities in terms of Union state and concurrent subjects. Indeed coordination in overlapping policies and their calibration is important and it is doubtful to what extent the Planning Commission succeeded in this task. In any case NITI Aayog does not have the patronage purse and although it is vested with the responsibility of policy coordination and promoting cooperative federalism and the chief ministers are on its Governing Council it is viewed essentially as a Union government institution. This underlines the basic shortcoming in the present institutional architecture of NITI Aayog and it is important to make corrections if the Aayog has to play an important role in promoting inter-governmental bargains resolving issues and coordinating policies between the Union and states in the spirit of co-operative federalism.

The absence of a credible institution for inter-governmental bargaining and conflict resolution on the one hand and coordinating the policies of the Union and states on the other—one that can accelerate economic growth and promote sustainable developmental agenda—has long been felt in Indian federalism. The patriotic euphoria after Independence the credibility and trust in the leaders who were in the forefront of the Independence movement and the single party rule in both Union and states culminated in—besides centralisation of policy making—an informal mechanism to deal with functional overlaps and inter-governmental disagreements. Thus formal systems of inter-governmental coordination and conflict resolution were not found necessary and as centralised planning gained currency the Planning Commission was called upon to perform the function of coordinating plans. Over time with the different parties (sometimes regional ones) ruling the Union and state governments and with the emergence of coalition governments at both Union and state levels the informal system of conflict resolution could no longer succeed underlining the need for formal institutional mechanism. The Sarkaria Commission on Centre-State Relations recommenced the establishment of the Inter-State Council but the institution failed to take off as its location in the Union home ministry robbed it of the sense of non-partisanship and autonomy and the failure to assign the due importance to the institution undermined its significance. The National Development Council (NDC) created to coordinate development plans became mainly a body where the state chief ministers delivered prepared speeches. In the last 10 years there were only two meetings of the NDC. Even the regional councils like the North Eastern Council which were created to collectively represent the common interests in their dealings with the Union government have failed in this task.

The Cabinet Resolution establishing the NITI Aayog states that the Aayog would promote “…co-operative federalism through structured support initiatives and mechanisms with the states on a continuous basis”. There are a number of areas requiring coordination due to considerable overlap in carrying out legislative and executive functions in concurrent subjects. The recent years have shown the need for co-operation in areas such as energy and environment education and poverty alleviation where the need for coordinated action and speedy decisions are critical for pursuing the developmental agenda. Further the Union government may have to intervene in the national interest even if these areas are in the state or in the concurrent list. The subject of land is in the concurrent List and given the contrarian stands taken by the ruling and opposition parties the government perhaps thought that NITI Aayog is the right forum to discuss the issue before it is debated in Parliament. Perhaps it was thought that assigning the responsibility to the states like in the case of labour laws is a strategic move as the forces of inter-state competition might create a “favourable” climate for land acquisition. However it remains to be seen how the policy will shape. The issue complicated as it involves a variety of interests representing land holders and industrialists.

The most important issue which the NITI Aayog will have to deal with is the rationalisation of centrally-sponsored schemes. The committee appointed by the Aayog with the chief minister of Madhya Pradesh as its chairman is reported to be finalising the report and consolidating the number of schemes to about 30. This comes in the wake of the Union government reclassifying the schemes in the Union Budget after the 14th Finance Commission increased the states’ share of taxes in the divisible pool to 42% as compared to 32% by the previous commission. The problem with this arrangement is that the states’ committee is likely to recommend the continuation of the same level of assistance if not higher. This will catch the Union government in a bind because acceptance of the recommendation will erode its own fiscal space and not accepting it will undermine credibility of the process. Perhaps the Union government should have thought more seriously about implementing the recommendation of the Finance Commission which recommended that the schemes should be designed and implemented with representations by the Union states and domain experts in the spirit of cooperative federalism.

In order for the NITI Aayog to play an effective role in inter-governmental coordination and conflict resolution the states will have to see it as a non-partisan institution facilitating the process by working with both Union and state governments objectively. This requires appropriate structure status and trust. It is important that the Aayog is given statutory status and powers if it has to function effectively. Unlike the Planning Commission the NITI Aayog does not have the powers to give grants and if that is given then it will only perpetuate the patronage system. It can play the role of impartial arbiter and adviser only when it is given the statutory powers and status and the inter-state council is placed within the Aayog. In the absence of this it would be difficult to see the Aayog effectively playing the role assigned to it and the states developing confidence and trust in it.

Can plastic money replace cash?

Given the level of indirect taxes there’s an incentive to evade them. The proposed tax breaks for using e-money may not help
The objective of the proposed policy on facilitation of electronic transactions is to replace cash transactions with e-transactions. These have several advantages including macroeconomic effects and benefits to merchants and consumers.
Macroeconomic benefits include financial deepening reduction of unaccounted income increases in tax base and reduction in currency with the public. Both merchants and consumers benefit from avoiding risks associated with handling cash while the former gain from more purchases thanks to credit cards.
However there are several issues that could block the success of this initiative and therefore need to be addressed upfront. Such issues include tax burden compulsion of unpleasant disclosures transaction costs security and potential debt burden.
The share of indirect taxes in the total tax revenue of the country is more than 66 per cent mainly because of high rates and a large tax base where almost every product is taxed.
Indirect taxes do not differentiate between rich and poor. While direct tax can be designed on the basis of income structure it is extremely difficult to implement the same strategy in the case of indirect taxes.
Therefore there is always an incentive for consumers belonging to the stressed income groups to negotiate with merchants for a middle ground that allows them to avoid indirect taxes and obtain cash discounts. Given the large consumer base merchants can negotiate effectively.
The trade-off
The impact of these taxes is much higher than the tax break proposed in the draft proposal. The success of implementing a cashless economy would depend on whether the benefits to merchants and consumers exceed the loss associated with disclosures on the true volume of transactions. Any move to forcefully expose consumers to e-transactions without taking care of the tax burden is likely to increase the cost of living which may push economically stressed consumers further into poverty.
Thus effective use of e-transaction by consumers is best brought about by a substantial shift in the tax structure of the economy. The burden of value added tax (VAT) or the proposed goods and services tax (GST) should be so low that there is minimum incentive for consumers to avoid it.
Globally GST rates are in the range of about 10 per cent against 27 per cent proposed in India. This is too high. Moreover the tax structure itself needs to be changed such that direct taxes take the lead in revenue collection while GST is moderated below the global average.
While a reduction in indirect taxes would motivate consumers to use e-transactions merchants who wish to avoid direct taxes may feel differently. At times these merchants also have to part with large sums as extortion or speed money to the officials concerned. Therefore a corruption-free governance is another important requirement.
It is expected that e-transactions would be preferred by consumers than merchants particularly if tax rates are reduced.
However willing consumers can take advantage of e-transaction only if there is a law that compels all merchants to maintain the facility for e-payments. Therefore a law to this effect will need to be promulgated so that plastic money can be popularised to the extent required.
Avoiding pitfalls
There are many operational costs associated with ownership of payment terminals such as installation fee cost of printing paper for transaction receipts and cancellation rental fee costs of broadband transaction fee and costs of opening and operating a business bank account. In addition due to compatibility problems between payment terminals and transaction service providers a merchant might be required to keep several types of payment terminals.
The impact of such costs is associated with scale of business. This would be negligible cost for large companies but for small ones it may be worthwhile to subsidise such equipment.
Transactions with plastic money have yet not proved to be completely free from fraud and forgery. With the expected large-scale application of e-transaction security measures with respect to data protection early detection and punishment need to be put in place in order to address apprehensions of potential losses.
The effective use of plastic money requires a huge amount of restraint and planning on the part of the user and this comes with experience. Many families have suffered due to the rampant use of credit cards.
The interest rates on outstanding credits are among the highest even more than the informal cash market. Many card users abandon the use of cards due to these costs. Therefore the risk of indebtedness has to be reduced to encourage participation in electronic transactions .
The writer is a senior fellow at NCAER. The views are personal

    Get updates from NCAER