Professional Documents
Culture Documents
SPECIAL EDITION
Investment Banking: A flawed model Pg.6 National food security Bill Pg.22
Niveshak From Editor's DesK
Volume II
ISSUE 6
July 2009
M
arkets across the globe are at their peaks since the Sub-Prime crisis en-
gulfed the world economy last September. Although it was there for some
time, it made its presence felt when the so called rock stars of high street
Faculty Mentor finance, the last four wall street investment banks, ran for cover in the second week of Sep-
tember last year. Since March this year the bull has been spotted on most of the occasions
Prof. S.S. Sarkar
but bear has capitalized on the volatility of the markets on some occasions. Since then, Bull
has pushed all the indices by more than 30%. To name a few, Nasdaq composite has moved
up by 48%, Dow Jones Composite Index up by 35%, NYSE S&P 500 by 40% and Nikkei
Editor by 35%. But the star performer has been our very own Bombay Stock Exchange-Sensex
Biswadeep Parida which has risen by more than 80% since March this year. This has been made possible
by positive quarterly corporate results, positive government reports, dwindling unemploy-
ment figure, and growth in Industrial indices, increased oil prices, increased government
spending by all countries, favourable growth projections by banks, government & non-
Team Niveshak government agencies.
Amit Choudhary Banks like Goldman Sachs, Citibank, JP Morgan Chase which were seen chasing
Nilesh Bhaiya Federal Reserve for life support a few months back booked huge Q2 profits even after
Sareet Mishra servicing debt bullets. This brought more cheer among B-Schoolers than in the market.
Sarvesh Chowdhury Corporate houses have been successful in riding this wave and have accumulated huge capi-
Sujal Kumar tal. Indian corporate which raised huge capital through Global Depository Receipts and by
Qualified Institutional Placement, were seen a few waves ahead.
Tripurari Prasad
All these news push me out of the limits of my realistic self. But as I float in opti-
mism and take a look behind my shoulders, I see lots of instances where a day of Bear Paws
upset days of Bull Run. What does this suggest? This says that there is enough pessimism
and volatility in the market; too high for comfort. Any half cooked report of a small nega-
tive projection by any non entity on any sector has upset the whole market on many ses-
sions. Macroeconomic fundamentals are projected on flowery assumptions and so are still
dicey. They have been intentionally projected to boost sentiments, financial markets & the
economy. As a result most of the markets are trading by more than twenty times their Price
to Earnings Ratio. Most of the listed companies are trading at more than fifty times their
Price to Earnings ratios. This indicates that even at such perceived low levels, the market is
irrationally upside and will slip once the dust settles and the smoke clears.
My last editorial suggested that much of India’s recovery and growth depends upon
the Union Budget. The Union Budget was passed on 6th July with a negative short term
effect on the markets. The long term effect of this budget, its effect on various sectors, its
comparison with expectations and growth parameters have been discussed in details as the
cover story of this issue.
I am very happy to note that in our next issue, Niveshak will celebrate its first anni-
versary. With your support, good wishes and contributions, Niveshak has successfully com-
pleted a full circle around the sun. Together we have witnessed the most turbulent time of the
world of Finance and learnt from it. We have seen the fall of banking stars, we have seen
iconic companies turning to Chapter 11 bankruptcy or mergers/acquisitions for survival, we
witnessed bankruptcy declaration by sovereign states and then we saw economies navigating
through the worst of recessions. To mark the success of our journey together, we shall have
a special anniversary issue capturing the roller coaster ride that we have been through, the
highs and lows of the world economy over the past year, the most fearsome fight between the
All Images and artwork
Bear & the Bull. I invite you to contribute articles on any specific event of the last year or
are copyright of IIM on “The year that was” as a whole. Yes that is the theme of out anniversary issue. Lots of
Shillong Finance Club exciting prizes are waiting to be yours. For more information, please see the declarations
page or Niveshak website.
What an awesome “Year that was”.
©Finance Club
-biswadeep Parida
Indian Institute
of Management, Shillong (Editor- Niveshak)
In The News(4)
Finsight
Investment Banking -
A Flawed Model(6)
Cover Story
Budget '09(9)
Opinion
National Food Security Bill(22)
FinLounge
FinToon(12)
FinQ(24)
July
Deflation Paradox Continues
10
Despite the fact that the prices are rising on weekly basis for the seventh straight week, still the
wholesale price index (WPI) decreased by 1.55% in the week ended on June 27. The overall price index
inched up 0.04% during the week with prices of primary articles firming up by 0.3%. Retail inflation has
increased from April to May 2009. Inflation in manufactured items, however, remained benign, hence
suggesting a poor demand environment.
July
Banks opting for “take-out financing”
07
For a long time, banks like SBI and IDBI have been trying to transfer some of their infrastructure
loans to finance companies like IDFC and LIC. Now, India Infrastructure Finance Company (IIFCL) plans to
pick up infrastructure loans from banks’ books after a few years of disbursement. With four ultra mega
power projects (UMPP) proposed by the government, the enormous loans required for a longer period
necessitates the take-out financing option.
July
Budget for “aam aadmi”
07
On 6th July, Union Finance Minister Mr. Pranab Mukherjee presented the Union Budget for the
year 2009-2010. The budget concentrated mainly on policies to augment the economy with a focus for
increasing the GDP growth rate to 9 percent per annum. Fiscal deficit was 6.2 percent of the GDP for
year 2008-09. Allocation for rural and urban infrastructure was increased by a large amount of almost 87
percent. GST would be applicable from April 1, 2010. It also concentrated on the upliftment of the weaker
sections. This budget had considered all the sections which affected the economy. This Budget has been
discussed in detail as the cover story of this issue of Niveshak
July
Mamta’s unique Rail Budget
03
Railways Minister Ms. Mamata Banerjee, on 3rd July, unveiled a massive plan to revamp railway sta-
tions in the country, saying that 50 stations in large cities would get world class facilities, while 50 more
would have multi-functional complexes. Though the financial stress was high, Ms. Mamta Banerjee did
not change passenger fares or freight cost. Passengers may cheer as the Rail minister has promised to
start 11 new non-stop trains and also improve on the other rail facilities on the various routes. But with
gross traffic receipts expected to grow at a slower 7.3%, while total working expenses are set to climb
by 12.7%, the operating ratio is set to deteriorate to 92.5% in 2009-10 from 88.3% in the revised estimates
for 2008-09.
June
Cuts in SBI rates
30
SBI promotes its market share in dealer financing by reducing the interest rates by 50 basis points
that is 0.5%. This sink would depend on the bank’s internal rating scale for each individual customer.
This new scheme started from July 1 and will be open till December 2009 and would help to double the
bank’s market share. It would also provide roaming current account and multi-city cheques facility to
dealers.
-Tanvi Arora
Page 5
Investment Banking
By Utkarsh Bindal
without any personal financial risk. This effectively provided
them sufficient incentive to take more and more risk, as the risk
was the organizations’ and they were counting on the diversity
of such risks to hedge their bets. MDI, Gurgaon
Page 6
BU
D GET ' 09
T
he Union Budget for the year 2009-10 was 3,250b from INR 2,870b in FY09), continuation of interest
announced by Finance Minister Mr. Pranab rate subvention for farmers (short term crop loans up to
Mukherjee on 6th July 2009. He had the INR 300,000 at 7%).
twin responsibility of meeting the expectation of the Aam PSU disinvestment as a source of funds has not been
Aadmi who had delivered a clear mandate to the Con- considered aggressively, moreover diluting the disinvest-
gress led UPA and the responsibility of taking India back ment plan over a period till 2014. The government chose
to the 9% growth bracket. Lets us see how he fared the to increase the fiscal deficit to 6.8% of GDP (from 6.2% in
expectations. FY09). The market borrowing target increased from INR
The budget for FY10 clearly focused on boosting de- 3.1trn in the interim budget to INR 4trn – raising con-
mand and enhancing infrastructure investments. This is cerns about an increase in bond yields and interest rates.
reflected in: Moreover, GDP for BE 2009-10 has been projected at INR
1) An increase in plan expenditure by 34% from the 58.57t assuming 10.05% growth over the revised estimates
revised estimate in FY09, and an increase in non-plan ex- of 2008-09 (INR 53.21t) as released by CSO, leading to the
penditure by 37%. risk of slippage from the fiscal deficit target.
2) Increasing disposable income by abolishing sur-
charges on personal income tax and by marginally in- Market response
creasing (by INR 10,000) the tax exempt income bracket. The BSE benchmark index, Sensex, tanked 5.83% on
The estimate is that this will increase disposable income the budget day. The market was disappointed primarily
in the upper and upper-middle income brackets (i.e. an- because there were no targets set on disinvestments, no
nual income above INR 10m) by 4.5-5%. announcements on increasing FDI limits on various sec-
3) Allocation to key infrastructure projects increas- tors. But the budget has to address a much larger con-
ing sharply – for example the National Highway Develop- stituency than what the markets address. In addition to
ment Program (23% increase over FY09), Jawaharlal Neh- the market concerns, the budget looks at rural spending,
ru National Urban Renewal Mission (87% increase) and infrastructure, education and health. Also, the decline in
Accelerated Irrigation Benefit Program (75% increase). Sensex may be because of the fact that the market may
4) A larger target for agricultural credit flow (INR have misinterpreted some of the specific tax proposals.
Page 8
due to successful NREGS implementation in those states, pushed up the cost of borrowing. In the second half, the
the day wages of labour would improve in states like Pun- sharper-than-expected global slowdown had an impact
jab and Haryana. Also the budget points out that NREGS on employment and income growth, especially in export-
would be merged with other social sector schemes in- oriented sectors. As a result, private consumption growth
volving farming, land resources and rural roads. NREGS, slowed down considerably in 2008-09.
PMGSY, IAY, would stimulate rural demand for products The budget of 2009-10 aims to stimulate private
like cement, steel and fast moving consumer goods as consumption by increasing plan expenditure by Rs 400
well as services like mobile telecommunication services billion over and above that was announced in the interim
and direct-to-home television. budget in February. A large portion of this outlay would
The government wants to ensure an annual growth be channelled through schemes such as National Rural
of 4.0% in the agricultural sector. The government has in- Employment Guarantee Scheme (NREGS) and Jawahar-
creased allocation to Rashtriya Krishi Vikas Yojana (RKVY) lal Nehru National Urban Renewal Mission (JNNURM).
by 30% to INR 41b. The outlay for the Accelerated Irriga- The enhanced provisions for these schemes are aimed at
tion Benefit Program (AIBP) has been increased by 75%. boosting demand and generate employment in the do-
The flow of institutional credit to farmers has been in- mestic economy. In addition, an increase in the threshold
creased to INR 3.25t. With 60% of population in India liv- level for paying income tax by Rs 10,000 for general tax-
ing on agriculture, government has paid special attention payers, and by Rs 15,000 for senior citizens would raise
to this sector. The performance of the sector is highly disposable income, albeit marginally. The removal of the
depended on monsoons and with the impending short- 10 per cent surcharge on income above Rs 10 lakh for per-
fall in rainfall this fiscal, the robustness of the govern- sonal income tax payers should also encourage consumer
ments’ plan would come under severe test. The Budget spending. However, In spite of these measures, private
is silent on Plan-B to achieve projected 10.05% nominal consumption growth is unlikely to recover significantly
GDP growth in FY10 should the agriculture sector falter in the current fiscal as job and income uncertainty con-
given deficient monsoon conditions. The cascading ef- tinues. In addition, interest rates on retail bank credit
fects would be seen in the manufacturing sector as well. have not come down to the level necessary to boost
The government has not tackled the slippery wicket household consumption.
of subsidy yet again. The total subsidy bill is around INR 2) Government consumption
1.06t. The government plans to move towards a nutrient In the second half of 2008-09, the government effec-
based subsidy regime instead of the current product-pric- tively used the fiscal policy as a tool to provide a boost to
ing regime in the fertiliser sector. The unshackling of the domestic demand and counter the negative impact cre-
fertiliser manufacturing sector is needed to attract fresh ated by the global financial crisis. Government expendi-
investments. Also government plans to move towards a ture is once again expected to be a leading growth driver
system of direct transfer of fertiliser subsidy to the farm- in the current year. Total expenditure of the Central gov-
ers. This only means shifting of subsidy from the indus- ernment is budgeted to increase by INR 1.199t or by 13.3
try to the farmers, whereas the problem of subsidy still per cent y-o-y, primarily on account of higher plan outlay
remains. With improvements in farm product pricing, to boost domestic demand and increased food subsidy
rural transportation, rural roads, irrigation, rural electri- Until 2007-08, the most encouraging feature of govern-
fication and warehouses, government can embark on a ment finances was an improvement of government sav-
slow reduction of agricultural subsidy and making the ings and the increasing fiscal responsibility it exhibited.
sector more responsive to market dynamics. Of course The pattern altered completely last year. As noted in the
this won’t happen overnight but still an early step in this previous section, given the large size of stimulus already
regard should have been taken. underway and more under consideration, importance of
The overall Plan budget for higher education is to a clear commitment to long-run fiscal discipline is criti-
be increased by Rs 20 bn over Interim B.E. Government cal. In the absence
introduced new scheme to provide full interest subsidy of such a perceived
to cover loans taken from scheduled banks to pursue any commitment, expan-
of the approved courses of study in technical and profes- sionary fiscal actions
sional streams from recognised institutions. can lead to increases
in long-term interest
Growth drivers - 2009-10 rates, which would
tend to offset the
1) Private consumption
stimulus effects of
During the 4 years of accelerated growth between the fiscal actions on
2004-05 and 2007-08, increase in private consumption GDP.
made the most important contribution to aggregate de-
mand. But the picture changed dramatically during 2008-
09. In the first half, the monetary tightening measures by
the RBI to control inflation and inflationary expectations
Page 11
By Arun Saluru
well as urban infrastructure. The increased government
spending, although necessary at this juncture, has further
weakened the government's fiscal position. The current
deterioration of the public sector finances could have an IIM, Shillong
FIN TOON
Expectations
Budget of 2009-10 was expected to take the econo-
my on a growth trajectory. The Budget was expected to
provide the necessary demand side push. Due to this the
GDP would grow and the economy will move towards
full capacity and employment.
Expectations from Budget -
1. India needs a massive infrastructure up grada-
tion. Development of infrastructure would not only im-
prove the supply side bottlenecks but also provide the
requisite demand side stimulus to growth. This would Sector-wise growth rates that influenced the Budget
create jobs, public wealth, conductive environment for
Spending more money in rural sector and lower income
business and a good return for investment. Investment
grow will create larger multiplier as they have a greater
plan regarding investments in nuclear power genera-
marginal propensity to consume.
tion was expected to be announced.
8. India's exports have fallen for the ninth month
2. Disparities in India are stark. 35% of Indians are
in a row, beginning October 2008 under the impact of
illiterate. The condition of health care in the rural areas
the global downturn. Export based industries that ex-
is dismal. Most of the hospitals are without the basic
pect a decline in growth should be supported. Credit
equipment. Spending in education and health sector
facility, tax incentives, export promotion are some mea-
was expected to increase. Improving the quality of hu-
sures that will boost exports and create jobs.
man resource will result long term growth.
9. Direct and Indirect tax burden on private sec-
3. The huge Central Government fertiliser subsidy
tor should not be increased as it would affect the senti-
is one of the main reasons behind imbalance and over-
ments of the sector. Also high taxes will result in lower
use of synthetic nitrogen fertilisers in India. Replacing
private investments. Introduce GST to demolish tax bar-
the current subsidy with nutrient base fertilizer subsidy
riers between states and have uniform tax rates and
was required. Performance of food grains, oil seeds, sug-
policy within the country.
ar and cotton was dismal during 2008-09 compared to
2007-08. 10. Cautious disinvestment was expected. Disin-
vestment will cause decrease in revenue account re-
4. Increased allocation of funds for defence and na-
ceipts due to loss of dividends (especially high perform-
tional security.
ing companies like BSNL). Therefore government should
5. A comprehensive policy on water and food se- try to increase the efficiency of PSUs. Disinvestment can
curity was expected especially due to climate change is- be done in some selective PSUs.
sues.
11. Auction of 3-G spectrum should bring in addi-
6. Reforms were expected in both fertilizer and tional revenues. Loan from World Bank, borrowing from
food sector. There are urgent non-merit subsidies using public should be other big sources of funds for the gov-
step ladder approach. These subsidies are huge burden ernment.
on revenue account. With stable UPA govt at the centre
12. FDI limit in some sectors like in insurance
this was best opportunity to initiate the reforms.
should be increased and FDI should be allowed in re-
7. Promotion of NREGA, funding to SMEs and SHGs tail and aviation. This would increase the foreign invest-
should be done more aggressively as it would create ment.
employment in rural sector and increase in demand.
13. Roadmap to reduce fiscal deficit was expected.
Page 11
Page 11
Growth strategy
1. Increase in private consumption (C) - Large por-
tion of this outlay would be channelled through schemes
such as NREGS and JNNURM.
2. Government consumption (G) – Government
expenditure will be leading growth driver in the cur-
rent year. Total expenditure of the Central government
is budgeted to increase by Rs 1,199 billion or by 13.3 per
cent y-o-y.
3. Investment(I) - Budget announced a number of
key initiatives to increase public sector investments, es-
pecially in infrastructure sectors such as highways and
railways as well as urban infrastructure
4. Trade(NX) -Provision of enhanced export credit
and guarantee cover and the extension of the interest
subvention of 2 per cent on pre-shipment credit.
Yad = C + I + G + NX
Equilibrium condition will be reached when output
supplied (Y) will be equal to quantity demanded (Yad)
Page 11
By Atul Gupta
automobiles.
Budget'09
E F F E C T ON Financial sector
The Finance Minister, Mr. Pranab Mukherjee’s by 144 percent
Budget Speech talks of three main challenges to Indian i) Allocation for BHARAT NIRMAN programme in-
Economy at present:- creased by 45 percent
i) Lead the economy back to the high GDP growth j) Overall Plan budget for higher education to be
rate of 9 percent per annum at the earliest. Growth of increased by Rs 20 billion.
income is important in itself, but it is as important for k) Retaining 51 percent govt. equity stake at PSUs,
the resources that it brings in. These resources provide still estimated proceeds from Disinvestment for Busi-
us with the means to bridge the critical gaps that re- ness year 2009-10 stands at 11.2 billion.
main in our development efforts, particularly with re-
gard to the welfare of the vulnerable segments of our
Impact factors and their impact
population.
ii) Deepen and broaden the agenda for inclusive de- FARM CREDIT
velopment; and to ensure that no individual, community Government has directed banks to lend Rs. 3,250
or region is denied the opportunity to participate in and bn to the farm sector. Interest subvention scheme for
benefit from the development process. short term crop loan at a subsidized rate of 7% per an-
iii) Re-energize government and improve num is going to continue for the current fiscal year. Un-
delivery mechanisms. Indian institutions must provide der the debt relief scheme, farmers having more than
high quality public services, security and the rule of law two acres of land were given margin upto 30 June 09
to all citizens with transparency and accountability. to pay 75% of their overdue. In the current budget this
period was extended to 31 Dec 09 because of late arrival
The Finance Minister has tried his best to main-
of monsoon.
tain a tight balance between all these three objectives
throughout the various nitty-gritty’s of his Budget. Let REFINANCE SCEHME
us try to analyze some of the important steps that he There is also a proposal to provide a special fund
has mentioned from the point of view of the problems of Rs. 40 bn for supporting micro, small & medium en-
mentioned above, and how far do they have the poten- terprises (MSME). This will incentivise the banks & state
tial to be successful in achieving the objectives as men- financial corporations (SFC) to lend MSFE by allocating
tioned above. about half of the incremental lending to small and me-
dium enterprises. Also Rs. 20 bn is allocated for the ru-
Key points of budget'09-10 ral housing fund to National Housing Bank (NHB) will
broaden the pace of rural housing.
a) Real and Nominal GDP growth assumed at 6.5%
FINANCIAL INCLUSION
and 10.05% respectively
To ensure provision of atleast one centre for bank-
b) Revenue Deficit projected at 4.8 percent of GDP
ing services in every part of the country, one time grant
c) Fiscal Deficit projected at 6.8 percent of GDP in aid of Rs. 1bn was proposed to set aside. This project
d) Total expenditure increased by over 36 percent is expected to be completed in 3 yrs. It has been pro-
to Rs 10,208.38 billion over 2008-09 posed to relax the Branch Authorization Policy. These
e) IIFCL to refinance 60 percent of commercial proposal are a part of the large financial inclusion drive,
bank loans for PPP projects in critical sectors over the providing banks with an opportunity to expand their
next 15-18 months core banking business.
f) Allocation to NHAI for NHDP, JNNRUM, APDRP HARDENING YIELD
all increased by large extent. Lower returns on G-Sec in the back drop of revised
g) Rebate for Farmers paying loan on time at a low- estimates for fiscal deficit will have a negative impact
er rate of 6 percent proposed. on the banks’ investment portfolio. On the other hand,
h) Allocation under NREGS programme increased the investment activities will pick up due to the growth
Page 11
Where
the
neighbours
spend
T he current global economic scenario presents
several challenges and opportunities to the
world’s emerging economic powerhouses - China and In-
million hectares giving China an irrigated to arable land
ratio of 0.44 while India a modest 0.34. In order to correct
this anomaly, the Indian budget proposed a hike of 6.8%
dia's economic developments. The repercussions of the for irrigation and flood control and a 5.5 % growth in
financial crisis has manifested itself in terms of reduced agricultural allocation this year. In comparison China has
GDP growth rates in China from 13% in 2006-07 to 9% in boosted spending on agriculture and allied activities with
2007-08 and from 9% in 2006-07 to 6.7% in 2008-09 for In- a 43.6% y-o-y increase in 2008-09 followed by a healthy
dia. Sustaining high growth rates would require increased 27% increase in 2009-2010.
government spending to support key areas in economic The Indian budget has also been seen a big push
and social development like agriculture, infrastructure, for rural development in 2009. There has been a 144 per
education, healthcare, etc. Diminishing revenue sources cent jump in the allocation for the flagship job guarantee
due to the slowdown would make it difficult for gov- scheme, NREGA to Rs. 39,100 crores, and a 45 per cent
ernments to finance expenditures necessary to enhance hike for the Bharat Nirman programme that seeks to
the economic wellbeing of the country and its people. improve infrastructure in villages. There is also mention
Targeted fiscal deficit for 2009 is at a six-decade high about efforts to merge the scheme with other social sec-
in China while for India it is at an uncomfortable 6.8% tor schemes involving farming, land resources and rural
of GDP, the widest in sixteen years. While acknowledg- roads. China has also boosted its spending on rural areas
ing these economic pressures, the article tries to look at by 20% over the previous year.
how being in a period of strategic opportunities, the two
Infrastructure
countries plan to continue to promote steady and rapid
Developing infrastructure is the key to sustaining
development in three aspects – the rural economy which
economic growth and poverty reduction. Throughout the
supports majority of the population, infrastructure – that
last decade, China has invested heavily in infrastructure.
would provide continued stimulus to growth and educa-
A lack of a facilitating policy framework had been the
tion – that determines the future of the two countries.
major roadblock in infrastructure development in India.
Rural Economy However, the last two years have seen India boosting
The sector is very important to both India and China spending on building highways, modernising ports and
since they have a huge proportion of rural population to airports. Despite significant improvements most infra-
support which are directly dependent on agriculture for structure services are at a level far below that what is
their livelihood. However, the China-India differential in required to sustain high rates of economic growth. While
the average growth rate of agriculture (4.8 per cent ver- most of China’s infrastructure was developed by state
sus 2.9 per cent) is like a mirror image of the differential owned companies and would continue to be so, India of-
in the overall growth rate of GDP (9.5 per cent versus 5.6) fers huge scope for opportunities for Public-Private Part-
averaged over the last twenty five years. There is wide nerships, private firms and portfolio investors.
consensus on the rule of thumb that for China and India, The Union Budget in India had but limited provi-
an X% growth in agriculture will result in a growth of sions for infrastructure. It is only the power sector that
2X% overall. received an increase of 160% through the Power Develop-
China has 933 million hectares of total land, a little ment and Reform Programme. It is interesting to note
over three times of the Indian land area of 297 million ha. that over the past two years allocation towards transport
Yet, the Chinese are constrained by an arable land area infrastructure in India had increased 57.1% in 2008-09 and
of 124 million ha, which is three quarters of the Indian 20.4% in the last budget. The corresponding figures in
endowment of 162 million ha. However, the amount of ir- China had been 28.1% and 17.8% respectively. Also, spend-
rigated land is the same in both the countries at about 55 ing on transport Infrastructure in India is budgeted to be
Page 22
about US $20 billion in 2009 while in China it is US $ 27.7 tance to students from poverty-stricken families and for
billion. state education assistance loans and subsidies apart from
The issue that arises is, even if China is the bench- provisions for higher education.
mark and our allocations towards infrastructure are in- At an overall level, planned expenditures for edu-
creasing every year, is the pace sufficient to sustain a 8-9 cation in the Indian budget have increased at 20% over
% growth rate. While spending on roads in India would 2008 and 24.5 % in 2008 over 2007. The corresponding fig-
increase by 23 %, spending on national highways other ures for China are as high as 23.9% and 48.5% respectively.
than those implemented by NHAI would reduce .The bud- Out of the US $54 billion budgeted for planned ex-
get has mainly increased allocations on ongoing projects penditure in China, funds have not only been allocated
like Jawaharlal Nehru National Urban Renewal Mission for building rural highways, airports and trunk railway
for urban infrastructure and Bharat Nirman. lines but also for subsidizing urban public transportation,
Education rural passenger transportation and taxi services. More
Education is a fundamental driver of a society’s de- than half the planned expenditure would be allocated to-
velopment. Both China and India spend roughly the same wards rural development and infrastructure construction
percentage of GDP on education. This implies that in per like roads.
capita terms, China spends more than India on this front. Conclusion
It is also a well known fact that India well lags behind The Chinese model of development has stood it in
China in primary education with literacy rates more than good stead, with agriculture first getting transformed and
85% compared to India’s less than 65%. While China has growing rapidly, creating the funds and manpower sur-
achieved universal basic education, India has much left to pluses for fuelling industrial growth, notably in the small
do. Although primary education is compulsory and there and medium industrial sector. For India reform began in
is legal guarantee of free education, the gross enrolment the external sector. Purchasing power in the rural areas
ratio in primary education is low in India at 98.1 as com- remained low for years, with a tremendous impact on
pared to China (116.2). Also, China has acquired a consid- the overall growth rate. The rural poor in India continue
erable lead over India even in higher and professional to be around 30 per cent of the population as against
education. less than 5 per cent in China. The link between Chinese
The Indian Union Budget 2009 has laid emphasis agricultural expansion and the overall market expansion
on education through a Rs.900 crores provision for the for all sorts of non-agricultural goods and services is only
Scheme ‘Mission in Education through ICT’ and higher al- obvious. All this happened in a country with less arable
locations under the Skill Development Mission .There has land than that of India.
also been enhancement for higher education and alloca- Over the past decade, economic growth in rural In-
tion of Rs 2,113 crores for IITs and NITs especially in J&K dia has outpaced growth in urban areas by almost 40 per
and the North Eastern States. The Mid Day Meal Scheme cent. Rural India now accounts for half of the country's
has been extended to upper primary classes which will GDP. Hence, the emphasis on the rural development with
benefit 2.5 crores additional number of children. How- an increase of over 117% over the previous year makes
ever, spending on school education under Sarva Shiksha strong economic sense. Also, this would further cushion
Abhiyan has not been increased. Public expenditure on India from external crisis due to increased dependence on
schooling would be inadequate for the number of chil- domestic consumption whereas the Chinese ‘economic
dren entering school-going age every year. The budget miracle’ is hugely dependent on export-led growth and
also makes no mention of issues related to implementa- state-led fixed investment. Importantly, agriculture in ru-
tion of the programmes. The Budget has also introduced ral India now accounts for only half of rural GDP and is
a new scheme to provide full interest subsidy for loans to declining.
the weaker sections of the society. However, infrastructure and education need further
The Budget in China is more focused on compulsory reforms in India as both hold the key to poverty reduc-
education and implementation. It has provided for a 16.1% tion. Infrastructure development would take place only
increase in for operating compulsory education in rural with stronger political will, greater transparency and
areas which includes a wide range of allocations from an environment conducive to the private sector. Invest-
providing tuition and other education-related expenses ments in infrastructure, primary education and higher
for compulsory education, maintenance of buildings, to education that foster innovation are indispensable to lay
implementing a performance-based salary system for the foundations for more developed economies in future.
teachers in compulsory education. Funds have also been India has much to learn from China here.
• In a country where agriculture is the mainstay of the traditional grain banks (The famed Gola system in Bihar), which
economy, all efforts must be directed towards strengthening need to be replicated through a nationwide programme involv-
low external input sustainable agricultural practices and revi- ing self-help groups and NGOs.
talise the natural resource base, restore groundwater levels, and 5. International commitments:
provide higher incomes to farmers. • Global commitments and neoliberal economic policies
• The NREGA has to be integrated with agriculture, and like the World Trade Organisation (WTO) agreements, the Free
the interest on micro-credit for the poorest of the poor has to Trade Agreements (FTAs) etc should not be allowed to displace
be brought down to 4 per cent from the existing 20-48 per cent. farming communities and play havoc with national food secu-
3. Dismantling the Public Distribution System: rity.
• India’s PDS technically caters to 316 million people. If 6. Other Implementations:
the PDS had been even partially effective, India shouldn’t have • A system of direct cash transfer to beneficiaries should
been saddled with the largest population of hungry in the be adopted instead of resorting to the "complex Public Distribu-
world. Hence, there is an urgent need to dismantle the PDS tion mechanism" which is fraught with possibilities of default
except for the Antyodya families. and errors of inclusion and exclusion.
• The reason is that the existing PDS, with a network of Studies show that instead of physical handling of grains,
at least 400,000 fair price shops, suffers from large leakages. The conditional cash transfers to the poor, especially women, are
Planning Commission’s study of 2005 shows that roughly 58% much more cost-effective ways of helping the poor.
of grains issued from the PDS do not reach BPL families due to • New technologies can be used to issue biometric cards
problems ranging from targeting errors to corruption all along to the poor for their entitlements through food vouchers. These
the chain. food vouchers can be used to buy a number of food items from
• The Wadhwa committee looked into the operations of any grocery shop, who in turn can get these reimbursed from
PDS and recommended, in its report submitted in 2009, an end- post offices or banks on a commission basis.
to-end computerization of PDS operations, from procurement • To identify the poor, one can combine high-tech meth-
to distribution of grains. ods with social audits. The criteria must be simple, and to the
• It also suggested using radio frequency identification extent possible, foolproof.
devices to track the movement of grains to stop large-scale cor- For example, one can say that all those who have a motor-
ruption and diversion. ized vehicle, or a cell phone, or a land line with a minimum bill,
• Even the present classification of BPL and APL (‘below or a job in the organized sector, etc., are not BPL.
poverty levels’ and ‘above poverty levels’) needs to be done away However, these people will have every incentive to make
with. For e.g. The recommendation of the National Commission false claims to poverty so the leakages to the non-poor will be
on Enterprise in the Unorganised Sector (NCEUS), which states massive.
that 836 million people in India spend less than Rs 20 a day,
A better way to improve targeting would be to use gram
could be the criteria for a meaningful food-for-all programme.
panchayats to identify the poorest families in each village, and
4. The Community Food grain Bank Model: restrict cheap food to them, as in the Antyodya programme,
• The dismantling of the Public Distribution System has which has a decent reputation for reaching the truly poor.
to be followed by the setting up of food grain banks at the vil- For instance, in poor districts, panchayats could be given
lage and taluka levels. Any long-term food security plan cannot enough cheap food to distribute to the poorest 60% of families,
remain sustainable unless the poor and hungry become part- while in rich districts panchayats could be given enough cheap
ners in the fight against hunger. food for the bottom 10% of families.
• A Community Food Bank could be maintained by the This will eliminate the incentive of households to lie to
community with withdrawals according to need in times of surveyors — beneficiaries will be selected by panchayats, not
stress. surveyors. Such a scheme will restore honesty to surveys, and
• The subsidy involved is barely Re1 per kg, as compared reduce leakages of food and cash transfers to the undeserving.
to the Rs7-10 per kg for wheat currently being shelled out by the Thus the National Food Security Act which works on the
Food Corporation of India under various schemes. "cheap wheat and rice" model, would not only be more expen-
• This system has the advantage of cutting down on food sive, in terms of economic cost, carrying cost and transportation
miles. The shorter the distribution channel or food pipe, the but will also ignore the nutritional needs and the existing food
smaller the possibility of leakage. culture among two-thirds of our population.Also, it artificially
• Coarse grains and pulses, despite their low cost and inflates the demand for wheat and rice and does not involve or
nutritional superiority, have not been a part of the public dis- empower the community in any way.
tribution system on account of their limited shelf life. However, Thus unless the UPA-II government comes up with a de-
this argument is easily overcome by making production and tailed and well-studied implementation plan, the NFSA or, for
consumption local. that matter, ANY such schemes will erode, rather than enhance
• Thus, it would also provide traditional, nutritionally the self-reliance of rural communities!
superior, culturally acceptable fare based on coarse grains and
FinQ
1. Which word was derived from the French word Bougette meaning 'Little Bag'
2. In Indian economic scenario what significant reform was introduced by the Indian Government on
April 1, 1957?
3. Name the first private sector corporate launched the gold fund in India?
4. Which is the only country having paper currency and have no coins and it introduced cheque only in 1997?
5. X has its headquarters in Zurich, Switzerland. It opened its first branch outside of Switzerland in 1942. In 1988,
it gained a controlling stake in The First Boston Corporation. In 1993, Credit Suisse Group bought Schweizerische
Volksbank (People's Bank of Switzerland). Identify X
6. Which company had its world Headquarters located at 383 Madison Avenue, between East 46th Street and
East 47th Street in Manhattan?
7. The founder of which brand, now a part of P&G, once said, ''I have done more than anyone else to change the
face of mankind''?
10. This is a mathematical algorithm for scheduling a set of project activities. It is used commonly in the fields
of construction, engineering, plant maintenance among others. It was developed by the DuPont Corporation in
the 1950s. What is this technique?
All Entries should be mailed at niveshak.iims@gmail.com by 10th August 2009 23:59 hours
One lucky winner will receive cash prize of Rs 500/-
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