The truth behind the fancy numbers
Hope. That is the binding force holding together the set of grand numbers put together by Finance Minister P. Chidambaram in the interim budget for 2014-15. Leave that out and all you are left with is a set of figures that only a magician could have conjured up. These estimates will not even be truly tested because they will be relevant only for the next three months before another Finance Minister comes by and springs his or her own set of numbers on us.
The biggest questions on the interim budget relate to the assumptions on the four aspects that are at the core of the budget-making exercise — GDP growth, fiscal deficit, revenue collections, and expenditure targets. Mr. Chidambaram has assumed a 13.4 per cent nominal GDP growth rate for 2014-15, a highly optimistic 4.1 per cent target for fiscal deficit, 19 per cent growth in tax revenues and a significantly lower subsidy burden. Each of these can be questioned.
Bursting the bubble
Let’s take the growth assumption first. The Finance Minister’s nominal growth rate assumption should translate into a real growth of at least 6 per cent unless he’s assumed a runaway inflation in the next fiscal, which is hopefully not the case. Given that the quality of the growth estimate of 4.9 per cent for this fiscal is itself suspect — the assumption is that the economy will grow by 5.2 per cent in the last two quarters of fiscal 2013-14 — only the most ambitious can take the 2014-15 growth estimate at face value.
Agriculture proved to be the saviour in the current fiscal and given the unpredictable monsoon cycle, it will be a gamble to bank on this next fiscal. This means the industry has to rebound, and if the data of the last few months and the prevailing sentiment in business and industry is anything to go by, only the brave can assume that the industry will lend its shoulder to GDP growth in a big way next fiscal. At best, we might see a start of the recovery process subject to a stable government being voted in.
If the growth assumption is fanciful, the revenue collections are more so. Mr. Chidambaram’s assumption of an 18 per cent growth in tax revenues for 2014-15 should be seen in the context of a 6 per cent reduction in the revised estimate for 2013-14 compared to what was originally budgeted.
Mr. Chidambaram has also assumed a 15 per cent growth in corporate tax and 12 per cent in excise duty. These estimates again assume that corporate activity will rebound and companies will start showing a stellar growth in profits, which is highly optimistic.
Besides, we also need to factor in the impact of reduction in excise duties, even if only for a three-month period, until June 30, on automobiles, capital goods and consumer non-durables, which the Finance Minister has estimated at around Rs. 800 crore.
Non-tax revenues next year are also likely to be lower with the Finance Minister forcing public sector companies to declare interim dividends to make up the shortfall this fiscal. In effect, he has drawn down next year’s revenues this year. Historically, every Finance Minister has over-estimated disinvestment revenues and except for a couple of years, these revenues have never exceeded the target since the exercise first began after liberalisation.
In the current fiscal, against an estimated Rs.40,000 crore from disinvestment, the government could garner just Rs.16,027 crore but that has not prevented Mr. Chidambaram from projecting Rs. 36,925 crore for 2014-15. Given the present state of the markets, no coherent policy on privatisation, and the fact that it will be well into the next fiscal before the next government settles in, it is unlikely that this target will be met.
The fairytale numbers further extend to expenditure estimates. The most notable of this is subsidies where the Finance Minister seems to have underestimated the outgo for the next fiscal by a significant margin. Fuel subsidy for 2014-15, for instance, is budgeted at Rs.63,427 crore compared to an outgo of Rs.85,480 crore in the current fiscal, which is by itself way above the budgeted Rs.65,000 crore. This, keeping in mind that the Finance Minister has rolled over Rs.35,000 crore of fuel subsidy from this year to the next, which means that the next government will have just Rs.28,427 crore to play with on this count!
The story of underestimation repeats itself in other subsidies such as fertilizer and food. It is on these set of ambitious numbers that rests the fiscal deficit projection of 4.1 per cent.
What makes this projection worse is that the quality of even this year’s projected fiscal deficit of 4.6 per cent — assuming that it is not overshot before this fiscal-end — is dubious, with large expenditure cuts and revenues shored up by one-time gains such as that from spectrum sale.
Eyeing the polls
Given the above, can the Opposition be blamed for calling this an election-eve interim budget? There can be only one possible explanation for Mr. Chidambaram’s claims: he has used the freedom that comes from the knowledge that neither he nor his party is going to be picking up the pieces after the elections and run the finances of the next government.
That this was a budget done with an eye on the polls is also borne out by the giveaways on automobiles, consumer non-durables and education loans, all of which concern the urban middle-class voter. Unless, of course, the Finance Minister was taken in by the Random Acts of Kindness Day, which fell on February 17, the day he presented his interim budget.
India's Green Industrial Policy
Pursuing Clean Energy for Green Growth
Keeping with the global trend, India seems to be executing a "Green Industrial Policy" that seeks to prioritise production and consumption of clean energy. Will it lead to green growth and sustainable development?
The views expressed are personal.
The current global financial crisis demands swift action by governments to support, restructure and sustain industrial activities. Simultaneously, addressing the global climate change requires significant modifications in industrial incentives and regulations. Both the events have forced the state to bring industrial policy back to the core of policy agenda. Consequently, the new industrial policy – called green industrial policy (GIP) – seeks to make industrial growth green, inclusive and economically dynamic.
GIP, seeking to develop new industries and adopt new technologies, involves essential policy changes. It is different from conventional industrial policy in two ways: first, it requires different policy instruments; second, it involves stronger state engagement in markets. Under GIP, states seek to promote sustainable patterns of production and consumption by pricing resource consumption and promoting efficient technologies through market transformation.
There is a global upsurge in adoption of GIP by both developed and developing states. The underlying rationale for its adoption is to create globally competitive domestic firms, while it promises a range of spin-off developmental and environmental benefits. Considering the fact that energy is a major input for industrial process and major contributor to industrial emissions, GIP seeks to tame energy consumption and hasten the development of low-carbon alternatives to fossil fuels. Will the alleged GIP, with its emphasis on clean energy production and consumption, lead to green growth and sustainable development?
Bundling Policies and Interests
Keeping with the global trend, India seems to be pursuing the GIP, particularly since the past decade. India is not only a major emerging economy with high industrial growth prospects, but also a major consumer of energy resources. Consequently, production and use of clean energy have rightly been prioritised in India’s GIP for achieving the goals of green growth and sustainable development. India has been promoting renewable energy (RE) as an alternative to fossil fuels to meet rising industrial energy demand, and energy efficiency (EE) measures to tame the demand.
The country has set a target to raise its RE capacity to 74 gigawatts (GW) by 2022, including 22 GW of solar capacity. With a renewable installed capacity of 27.7 GW (13% of total installed capacity), the country is already a global leader. Over the Twelfth Five-Year Plan period (2012-17), it aims to install 30 GW of renewable capacities with a federal outlay of around $4 billion. The country has certainly set an ambitious target for RE development. The private sector has a strong role to play in executing the plan; in fact, much of RE development so far has taken place with the private sector. Nearly one-third of the planned investment in infrastructure sectors over the Twelfth Five-Year Plan period has been earmarked for the electricity sector; about half of this investment is sought from the private sector. The state has been engaged in setting up a favourable policy environment, with complementary policies, regulatory interventions, incentive mechanisms and research and development (R&D) support, to facilitate RE development.
While wind constitutes a large share (about 70%) of India’s existing RE installed capacity, considering the potential of solar energy, the country has developed a strategy to tap it. A national mission – the Jawaharlal Nehru National Solar Mission (JNNSM) – has been set up to facilitate solar energy development to achieve the target of 20 GW grid-connected and 2 GW off-grid solar capacities by 2022.
The state has made several policies to mandate and incentivise RE production at national and sub-national levels. Renewable Purchase Obligation (RPO) is a key policy to create demand for RE. Each sub-national electricity regulatory commission has set a specific RPO for the utilities in their respective states. The national target was set at 5% for the financial year 2009-10 and was to be increased by 1% each year for the next 10 years, with the aim to procure 15% of consumable electricity from RE sources by 2020. The policy also makes a provision for solar-specific RPO set at 0.25% in 2012, to be raised to 3% by 2022. The Renewable Energy Certificate (REC) programme is being implemented to penalise the utilities that fail to meet their RPO; they have to compensate by purchasing equivalent RECs (Charnoz and Swain 2012).
To encourage private sector engagement, the state has made provisions for capital subsidy and interest subsidy for setting up RE production units. RE generators have the choice to trade electricity at a preferential tariff or to trade RECs separately after selling the electricity at a competitive tariff. In addition, the state is providing tax benefits to both generators and manufacturers on import of RE technology (e g, solar panels) and additional support on R&D. Simultaneously, the state has enforced local content requirement (LCR) – raised to 75% in the second phase of the JNNSM – to promote growth in domestic manufacturing.
India has an equally ambitious target for EE, with a target to save 10 GW by 2014-15 and, thus, avoid 19 GW of additional generation capacity. The National Mission on Enhanced Energy Efficiency (NMEEE) has been set up to facilitate the process with mandatory provisions and incentive mechanisms. The perform, achieve and trade scheme targets energy-intensive industries, which account for 60% of India’s total primary energy consumption, and are required to meet a certain level of EE in a specified time period. Those who achieve EE gains beyond their target are rewarded with energy saving certificates (ESCerts); those who fail to meet their target can buy ESCerts to make up the difference, or pay a penalty (ibid).
With the launch of the scheme last year, India has become the first developing country to adopt market-based mechanisms to trade EE. Simultaneously, the state is using market transformation strategy to promote production and use of energy efficient appliances in designated sectors. While manufacturers are being incentivised to manufacture super-efficient appliances, products are being labelled to raise consumer awareness and demand (Swain 2013). The Standards and Labelling Programme being implemented seeks to raise consumer awareness and demand for energy efficient equipment. The Super-Efficient Equipment Programme is a rebate programme that incentivises leading manufacturers to produce super-efficient equipment on a large scale and market them at a competitive price. Both the programmes, implemented by the Bureau of Energy Efficiency, aim to hasten energy conservation while giving a boost to the manufacturing industry.
The Indian approach seeks to ensure domestic energy security and dynamic industrial growth catering to domestic developmental needs, while accruing mitigation co-benefits to address the global call for climate action. Unlike in the past, when the state retained control over the market, under the GIP, the state seeks to actively engage with the market by creating a favourable policy environment. Realising the limitation of state capacity to implement the strategy, the state is seeking to build non-state (market) players and offer incentives to hasten the process (Harrison and Kostka 2012). An initial high capital subsidy to generators and enforcement of LCR to kick-start the solar industry, and setting-up a market for energy service companies are two good examples.
The Way Forward
India’s GIP holds good promises for green growth and sustainable development. Achieving the JNNSM target will result in mitigation of 95 million tonnes (Mte) of CO2e annually by 2022. Simultaneously, NMEEE has potential to achieve mitigation of 98 Mte of CO2e annually. While promoting dynamic clean energy industries, GIP is expected to reduce carbon intensity of Indian industries. Clean energy-based industrial growth is expected to be inclusive by promoting regional development, employment generation and improved energy access.
Though India has ambitious targets, and the right policies and incentives in place, it is too early to make any judgment on the outcome. Yet, two fundamental challenges weigh upon India’s GIP, viz, finance gap and lack of market transparency. While access to private finance is crucial for development of the clean energy industry, current interest rates remain too high and financing institutions remain reluctant to invest. A comprehensive financing strategy optimising various funding sources is a key prerequisite for scaling-up the clean energy industry. Prevailing lack of market transparency in the sector may result in rent-seeking and market distortion. A study by the Centre for Science and Environment reveals how a major conglomerate has subverted rules to acquire a stake in the JNNSM much larger than allowed legally (Bhushan and Hamberg 2012). The state needs to provide real-time, credible and usable information that the public can trust and use to hold it and private actors accountable. Simultaneously, the state needs to strengthen the monitoring and evaluation mechanisms to ensure that rules and norms are not disrupted.
Addressing these challenges, which are not insurmountable, will largely depend on state-business relations, private sector capacity, bundling of interests and policies, and creative manoeuvres taken by the state. Much depends on the extent to which the private sector shares the state goals, and the way they are organised and their capacity for collective action. At the same time, the state needs to build the confidence that private activities will be supported – not frustrated – and rent-seeking will be avoided. The process will shape, and be shaped by, state-business relations and build new forms of developmental coalitions. Since the policies are not self-implementing, independent electricity regulators would emerge as key facilitators (or blockers). The regulators have key roles to play in implementing these policies and would affect the pace and pattern of transition. If successful, India could lay out a path for green growth in other developing countries too.
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