Editorial 1. From doles to development
Recent Context:
- Recently Union budget 2023-24 was presented by finance minister in Parliament, the budget was regarded as a bold step to reorient support in the agri-food-rural space from doles towards development.
- Despite, Assembly elections are going to be held nine states this year and the Lok Sabha elections will be held in about a year’s time. The FM has, however, resisted the temptation to announce freebies. Instead, she has proposed a growth oriented, asset creating and inclusive budget to develop better infrastructure and create more productive jobs.
Diversion of expenditure from revenue to capital expenditure:
- Budget proposed a drastic cut in food and fertiliser subsidies, and also reduced the expenditure on MGNREGA in 2023-24 compared to the revised estimates (RE) of 2022-23. Together, these cuts amount to roughly Rs 1.7 lakh crore.
- the savings from these doles have been redirected towards more productive expenditures on railways, roads, rural housing and Jal Shakti — this will help rural India through its multiplier effects.
Raising capital expenditure in infrastructure sector:
- Railways capital outlay is up 48.6 per cent at Rs 2.41 lakh crore in 2023-24, from the revised estimate of Rs 1.62 lakh crore in 2022-23.
- Road transport and highways has a capital outlay of Rs 2.70 lakh crore in 2023-24 against Rs 2.17 lakh crore in 2022-23 (RE).
- This clearly reveals the government’s focus on Gati Shakti to reduce the cost of logistics.
- Logistics and supply chain costs account for around 12 per cent of the GDP in India compared to the global average of 8 per cent.
- Improving connectivity through rail, road, air and waterways will surely improve the competitiveness of Indian products, including that of agricultural produce in global markets and also help in taming inflation.
- This is a well thought out strategy and will pay the country handsomely in the years to come
Creating expenditure is on the PM Awas Yojana (Gramin):
- Another critical asset creating expenditure is on the PM Awas Yojana (Gramin). The overall outlay for PM Awas Yojana has increased to Rs 54,487 crore, up from Rs 20,000 crore that was budgeted in the 2022-23 budget a net increase of 172.4 per cent.
- However, if one compares the 2023-24 PMAY-G outlay to the RE of 2022-23 (Rs 48,422 crore), which was already way above the BE of 2022-23 (Rs 20,000 crore), the hike in 2023-24 seems to be only 12.5 per cent.
- The scheme was launched in 2016 to provide housing to all but it also ensures permanent asset creation for rural households and provides dignity of life while creating more jobs in rural India. This marks a big step forward in reorienting subsidies towards rural infrastructure development.
Increase in Jal Jeevan Mission (JJM) :
- There is an increase of 27.3 per cent is also seen in the Jal Jeevan Mission (JJM) from Rs 55,000 crore in RE of 2022-23 to Rs 70,000 crore for 2023-24.
- This is primarily to supply safe drinking water through taps, mostly in rural areas. This will not only help contain water borne diseases but also save time and energy of women who have to walk long distances to fetch water.
85% rise in The Pradhan Mantri Kaushal Vikas Yojana (4.0) compare to previous year:
- It aims to empower the “Amrit Peedhi” and provide skills to lakhs of youth within the next three years.
- It envisages on-job training, forging partnerships with industry and aligning courses with the needs of industry.
- The outlay for the purpose has gone up by 85 per cent from Rs 1,902 crore (RE) in 2022-23 to Rs 3,517 crore (BE) in 2023-24.
- The Pradhan Mantri Kaushal Vikas Yojana also targets to cover new age courses for industry like coding, AI, robotics, mechatronics and 3D printing. The FM has also announced that to skill the youth for international opportunities, 30 Skill India International Centres will be set up across different states. This is a commendable step.
To promote innovations and technologies in the agriculture sector:
- FM has announced an Agri-Focused Accelerator Fund. She also talked of creating digital public infrastructure for agriculture as an open-source, open-standard and interoperable public good.
- This will enable inclusive and farmer-centric solutions by providing information services for crop planning and health and improving access to farm inputs, credit, and insurance. Farmers will be able to arrive at better crop estimates and get market intelligence. These are steps in the right direction but we have to see how much funds are allocated under these schemes.
- A positive step towards promoting high value horticultural crops was announced under the Atmanirbhar Clean Plant Programme that aims to boost the availability of disease-free, quality planting material. An outlay of Rs 2,200 crore has been allocated for the programme.
- However, the creation of storage facilities and value chain infrastructure remains a challenge in rural areas.
- Finally, there is a need to double up investment in agriculture research for creating more productive, climate resilient and competitive agriculture in India.
Conclusion:
- Government has taken long-term strategic step to reduce the revenue investment and investing more into capital expenditure.
- As capital expenditure as long-term benefits over economic growth and development, employment generation and inflation control within the economy.
Editorial 2. Price cap, energy geo-politics
Recent Context:
- Last week, the US and the EU banned the purchase of petroleum products from Russia. Two months earlier, on December 5, they had imposed a similar ban on Russian crude oil.
- The ban on petroleum products will also be accompanied by a price cap, albeit at two levels. One level will be for commodities like diesel that sell at a premium to crude oil and the other for commodities that sell at a discount like fuel oil. The precise numbers have yet to be announced.
The purpose of Price cap:
- The idea of price cap was first put on the table when the price of oil was in triple digits and Russia was earning more from its exports than it had earned prior to the Ukraine invasion.
- This was galling for the US as it negated the impact of the sanctions. The purpose of the cap was twofold.
- One, to keep Russian oil flowing into the international market. This is because Russia accounted for 10 per cent of global supplies and a complete cut off would send prices into the stratosphere.
- And two, to reduce Russian export earnings by pushing down production and compelling buyers to pay less than the international price.
- The price cap accompanied by the sanction was conceptualised to achieve both objectives. The former was above the average cost of production of Russian oil of between $ 25-40/bbl, and therefore, an incentive for Russian companies to continue producing.
- The latter complicated access to essential services and constrained, therefore, the trade and shipment of Russian oil
How does this price cap mechanism will not result into expected outcomes:
- First, as was anticipated by all experts, the cap does not work. It contains too many loopholes.
- Thus, for instance, one easy way of circumnavigating the cap would be for the seller to state a price in the bill of lading at the port of loading that is at or below the cap price and then adjust it upwards vide freight and other charges. Buyers pay on the basis of the delivered price.
- More pertinently, Russia is rumoured to have gathered a shadow fleet of tankers to bypass the western insurers.
- Second, Russia’s production has fallen by between 800kbd to 1 mbd which is approximately 25 per cent of the country’s exports. This has reduced export earnings.
- But hardened traders are still transacting in Russia. Several have (re)registered their offices in countries that are not subject to sanctions like the UAE and have exploited the arbitrage opportunity to buy “low” and sell “high”.
- Third, the cut back in Russian crude (and products) has tightened the market. Prices are currently holding because winter has been relatively mild – the US has released more barrels from their strategic petroleum reserve than expected and the Chinese demand has been laggard. This trend might, however, reverse.
- Saudis and the UAE are not likely to draw on their surplus producible capacity to offset the gap created by the reduction in Russian exports
- Four, Saudi Arabia must be discomfited by the knowledge that a price cap has acquired shape and that the US may be tempted to apply it against them if prices ever reached politically uncomfortable levels.
- There are many reasons why the Saudis are looking to place their relations with the US on a transactional base and why India is regarded as an increasingly important strategic market. But one reason may well flow from this discomfiture.
- Five, Europe has been adversely impacted by the price cap. This is because they are disproportionately dependent on Russian crude and products.
- They have had to turn to the US, Middle East and India to meet their shortfall and in response the suppliers from these countries have redirected their cargoes to the European market at a premium.
- In an ironic twist, Indian refiners are sourcing crude from the eastern seaboard of Russia, shipping it to their refineries predominantly in Jamnagar and then moving the products, mainly diesel, to Europe.
- The extended trading distances have tightened the shipping markets. Tanker freight rates have ratcheted up and the stock price of shipping companies are close to historic highs.
Conclusion:
- It is expected that the t his decision of price cap will allow US companies to convert a relatively inexpensive heavy crude oil into higher value added, lighter products like diesel for export at a premium to Europe.
- Combined with the fact that US LNG has already predominately replaced Russian gas, it would be no exaggeration to suggest that Europe has been pushed into a relationship of energy dependency with the US. The price cap has redesigned the contours of energy geopolitics.