📰 False dichotomy: On merit versus reservation
The top court’s view that quotas ensure equal opportunity is a blow for affirmative action
•The Supreme Court has once again addressed the ‘merit versus reservation’ debate, a misleading binary that has engaged public and judicial discourse for years. While ruling in favour of extending reservation to OBCs in the all-India quota (AIQ) of seats in admission to under-graduate and post-graduate medical and dental courses, the Court has concluded that the binary has become superfluous. The courts have now come to recognise the idea of ‘substantive equality’, which sees affirmative action not as an exception to the equality rule, but as a facet of the equality norm. ‘Formal equality’, or the principle that everyone competes on an equal footing, is inadequate to address social inequalities and the inherent disadvantages of the less advanced sections, necessitating provisions that help them compete with the advanced classes. The competitive examination may be necessary for distribution of educational opportunities, but it does not enable equal opportunity for those competing without the aid of social and cultural capital, inherited skills and early access to quality schooling. Good performance in an examination does reflect hard work, but does not always reflect “merit” solely of one’s own making. “The rhetoric surrounding merit obscures the way in which family, schooling, fortune and a gift of talents that the society currently values aids in one’s advancement,” writes Justice D.Y. Chandrachud, and raises the relevant question whether marks are the best gauge of individual merit. Seen in this light, reservation ensures that backward classes are able to avail of opportunities that “typically evade them because of structural barriers”.
•The provision of 27% reservation for OBCs within the AIQ was introduced only in July 2021. Implemented from 1986, the AIQ was envisaged as a domicile-free quota to access medical education in all colleges in the country. It comprises 15% of undergraduate medical and dental seats and 50% of post-graduate seats surrendered by the States for admission through a central pool. For two decades, there was no reservation in this segment. In 2007, the Court allowed the introduction of 15% reservation for SCs and 7.5% for STs. Even when the OBC quota was introduced in Central government institutions alone, there was none in State colleges. The decision to end this discrimination now has judicial imprimatur. The Court has also rejected the argument that there was no need for reservation in post-graduate medical education. The impact of backwardness, it has said, does not simply disappear because a candidate has a graduate qualification and does not create parity between advanced classes and backward classes. The latest judgment marks another notable addition to the body of affirmative action jurisprudence.
📰 A stellar fallacy: On hasty assessment of environmental costs
Assessment of environmental costs, benefits of projects should not be done in haste
•A move by the Union Environment Ministry to implement a ‘star-rating system’ has sparked controversy after one of its official communiqués became public. Under this scheme, State-level environment committees that appraise industrial projects on their potential environmental risk would be incentivised with points for “transparency, efficiency and accountability”. This idea followed a Union Cabinet meeting this month to facilitate the Government’s broader commitment to ‘Ease of Doing Business’. The Environmental Impact Assessment (EIA) is one of the cornerstones of ensuring that the ecological costs of infrastructure development are minimal. Prospective projects above a certain size and with a potential to significantly alter the natural environment must be first approved by the State Environment Impact Assessment Authority (SEIAA) comprising State officers and independent experts. Projects that are even bigger or involve forest land — category A — must be cleared by an expert committee formed by the Centre. SEIAA projects make up the bulk of projects for approval including building and construction, small mining, small industry projects, and are considered ‘less polluting’.
•The star rating system proposed is to “rank” and “incentivise” States on how quickly and “efficiently” they can accord environmental clearances. It spells out seven criteria to rate SEIAAs on “transparency, efficiency and accountability”. On a scale of 7, an SEIAA, for instance, gets more points for granting a clearance in less than 80 days than for within 105 days and no marks for more. A score of seven or more would be rated ‘five star’. However, a reading of the order gives the impression that States, in the quest for more stars, would logically vie for speedily clearing projects rather than ensure a thorough appraisal. The Environment Ministry, has said, in response to criticism, that the intention is not to hasten clearances but accelerate the pace of decision making. Rather than files being sent back for every query, all objections must be compiled and addressed at one go, it contends. While quicker decision-making benefits everyone, State committees are currently hampered by having too few independent experts and decision-making being left to bureaucrats than to environment specialists. Both industrialists and States gain from projects and, therefore, the tendency is always to elide environmental concerns. In many instances, site visits are critical to understand the potential environmental challenges. Calculating the risks and the benefits of industrial projects vis-à-vis their environmental impact is understandably hard. The way forward is to take steps to increase trust in the system and ensure that all States have competent experts who can conduct appraisals without fear or favour. A list of empty rankings is the least advisable way to bring about this.
📰 Solving the Sterlite problem
The trust deficit between Vedanta and the people of Thoothukudi needs to be bridged if the smelter has to restart.
•Sterlite Copper of Thoothukudi in Tamil Nadu has become a moral issue after the police firing on protesters resulted in the deaths of 13 people in May 2018. Over some 20 years of plant operation, the company had violated many pollution regulations and faced at least two major allegations of excessive emissions. It also faced consistent protests against pollution from the plant. It had been ordered shut many times only to reopen and expand capacity.
Complaints against the plant
•Residents around Sterlite say that when the plant was operating, there would be release of gas at 3 a.m. every day. They would wake up short of breath and to a foul smell. Even cattle were refusing to drink groundwater since it was contaminated by Sterlite effluents, they say. Now, the air is cleaner, they contend. The business community complains that Sterlite did not employ enough local people and did not give enough contracts for local businessmen. It was a high-handed management that talked down to them.
•Though Sterlite has constructed toilets, water tanks and community centers, it has not invested much in serving the educational or health needs of the local population.
•Distrust of Sterlite is so much that many people now credit good rains to the shuttering of the plant. During the 2018 protests, WhatsApp videos of a grieving widow of a cancer patient demanding shutting of Sterlite went viral. There has not been any study to link cancer with Sterlite emissions. But people were only eager to believe the talk. Sterlite representatives have faulted protesters for spreading rumours and serving hostile vested interests. But the company’s record has not been above board. It is unapologetic about the 13 deaths in firing.
•Sterlite’s product, copper, is a strategic metal. Important applications are energy, electrical equipment and electronics. Nations are switching more and more to wind and solar. This means new projects and transmission lines. There is a push for electrical vehicles. Globally, and in India, copper demand is only set to ramp up. Imports can cause supply bottlenecks. End consumers such as electrical equipment manufacturers sometimes pay a high premium as a result.
•There are more than 120 copper smelters across the world. All major copper-consuming countries have copper smelters within their country. Copper production provides strategic balance and price stability. The shuttering of the Sterlite plant quickly made India, a copper exporter, an importer. Domestic copper price is typically higher than the landed price of imported copper, increasing forex outgo. India now imports copper at the rate of 3 lakh of tonnes a year and the figure is only likely to grow. Volatile global copper prices are now at least 50% more than what they were when the plant shut.
•A copper smelter would serve India well. The only other major smelter in India is Hindalco. Thousands of jobs were lost when Sterlite shut. Real estate and local businesses serving the employees were hit. Imports through the Thoothukudi port fell by 25% the year Sterlite was shut and have only slid further since then. The port lost some 120 calls of vessels every year carrying copper concentrate. Port dues, berth charges, wharfage, etc. took a hit. In 2018-19, the operating income of the port fell by 15% and operating surplus reduced by 20% compared to the previous year. Without Sterlite’s copper exports, the port’s container terminal has been struggling. The business of some 20 stevedores and 100 clearing and forwarding agents came to zero. On average, 5,000 lorry trips were needed to transport the concentrate import from each ship to the plant. A whole lorry ecosystem had developed in Thoothukudi sustaining thousands of families. In 2020, the Madras High Court, while upholding the 2018 State government order closing the plant, said, “when economy is pitted against the environment, environment will reign supreme.” Sterlite has gone on appeal to the Supreme Court.
An opportunity
•While the economic and national interest case for a copper smelter is proven, the trust deficit between Vedanta and the people of Thoothukudi needs to be bridged if the smelter has to restart. The framework for a solution could focus on adherence to norms and creating harmony between the company, government and the people. Sterlite presents an opportunity for the people of Thoothukudi to move forward in national and local economic interest. It is an opportunity for a corporate group to act responsibly and take people along while conducting its business. The process, however, needs someone who can help bridge the trust deficit. An assurance from him, her or an agency should guarantee any settlement. And it’s not something governments can do.
📰 Budgeting for the education emergency
It is astonishing that public expenditure data on the education sector are not easily available
•In the current Budget session, how much money the Central and State governments will allocate to education and for what purpose should be a matter of public concern and debate. Even before the pandemic, public spending on education in most States was below that of other middle-income countries. Most major States spent in the range of 2.5% to 3.1% of State income on education, according to the Ministry of Education’s Analysis of Budgeted Expenditure on Education. This compares with the 4.3% of GDP that lower-middle-income countries spent, as a group, between 2010-11 and 2018-19. Low-income countries increased their spending from 3.2% to 3.5% of GDP in the same period (World Bank, Education Finance Watch, 2021).
Spending on education
•Faced with an unprecedented education emergency, this is the time to substantially ramp up public spending on education and make it more effective. Inexplicably, however, in the 2021-22 Budget, in the midst of the gravest education crisis, the trend was in the opposite direction for the Central government and many State governments. The Central government’s allocation for the Education Department was slashed compared to the previous year, even though the size of the overall budget increased. Of the major States and Delhi, eight either reduced or just about maintained their budget allocation for education departments in 2021-22 compared to 2020-21. Seven States marginally increased their allocation by 2%-5%. Only six States increased their allocation by more than 5%, though it remains to be seen how actual expenditures compare with budget allocation.
•The education system now needs not only an infusion of resources for multiple years, but also a strengthened focus on the needs of the poor and disadvantaged children. The vast majority of the 260 million children enrolled in preschool and school, especially in government schools, did not have meaningful structured learning opportunities during the 20 months of school closures. They have lost basic literacy and numeracy skills, and even the habit of learning. Millions have disengaged from education, due to lack of contact with teachers. Even when schools started re-opening in October, they were operating only at half schedule. Some States have still not opened primary schools. In anticipation of the Omicron wave, State governments rushed to close primary schools first in early January 2022, contrary to all international trends.
•Increased public spending alone is a necessary but not sufficient condition to address all these problems. What it is spent on and how effectively resources are used are important. It is clear what additional resources are required for. The needs include: back-to-school campaigns and re-enrolment drives; expanded nutrition programmes to address malnutrition; reorganisation of the curriculum to help children learn language and mathematics in particular, and support their socio-emotional development, especially in early grades; additional learning materials; teacher training and ongoing support; additional education programmes and increased instructional time during vacations and weekends; additional teachers and teaching aides, where required, in part to cope with transfer of students from private schools; and collection and analysis of data.
•Many State governments and the Central government have been spending public resources to use technology in education. This is a good time to ask how much of public resources was/is being spent on technology and how effective it was during the pandemic, when less than 20% of all students could access even prerecorded videos. How does expenditure on technology compare with the amounts spent on teacher training, which represents just 0.15% of total estimated expenditure on elementary education? Teachers are central to the quality of education, so why does India spend so little on teacher training?
•The disaster caused by the pandemic could be the opportunity to reverse the chronic under-funding of India’s public education system. UNESCO’s 2030 framework for action suggests public education spending levels of between 4% and 6% of GDP and 15%-20% of public expenditure. A recent World Bank study notes that India spent 14.1 % of its budget on education, compared to 18.5% in Vietnam and 20.6% in Indonesia, countries with similar levels of GDP. But since India has a higher share of population under the age of 19 years than these countries, it should actually be allocating a greater share of the budget than these countries.
Opacity of data
•How does India’s public education expenditure “effort” compare with the UNESCO indicative benchmarks? The opacity of education finance data makes it difficult to comprehend this. For instance, the combined Central and State government spending on education was estimated to be 2.8% of GDP in 2018-19, according to the Economic Survey of 2020-21. This figure had remained at the same level since 2014-15. On the other hand, data from the Ministry of Education indicates that public spending on education had reached 4.3% of GDP in the same year, rising from 3.8% of GDP in 2011-12.
•The difference in the figures is due to the inclusion of expenditure on education by departments other than the Education Department. Including expenditure on education by, for example, the Ministry of Tribal Affairs, the Ministry of Social Justice and Empowerment (on Anganwadis, scholarships, etc.), the Ministry of Science and Technology (for higher education) is of course legitimate. But many of the other departments comprise a smorgasbord. No fewer than 43 Ministries and Departments of the Central government are supposed to be spending on education. Education expenditure by other departments has been rising faster than that by the Education Department, at both Central and State level. They constitute one-quarter of the education expenditure by the States in 2018-19, and half of the Centre’s expenditure on education.
•However, the composition of these expenditures is not readily available. Public expenditure on elementary education (about 1.8% of GDP) and for other levels of education are rough estimates. The reason is that other than the Education Ministry, education expenditures of departments are not shown by level. They are somewhat arbitrarily assigned to different levels of education and estimated by the Central government. The estimation of education expenditure by other departments of the State governments is even more crude, as they do not even provide separate expenditures on education. The ratio of education spending in other departments at the Central level is used to estimate this for each of the States.
•In an era of data deluge, it is astonishing that public expenditure data on the education sector are not easily available. But the questions for this Budget should be clear. How much additional funds are being allocated for different levels of education by the principal departments in 2021-22? Are the funds being spent on the specific measures required to address the education emergency facing the children who have been deprived of learning opportunities?
📰 A chance to support growth, fiscal consolidation
Two years of real growth in economic activities have been wiped out by COVID-19, which the Budget must take note of
•The National Statistical Office (NSO) released the first advance national accounts estimates for 2021-22 on January 7, 2022. India’s real GDP growth in 2021-22 is estimated at 9.2%, that is 30 basis points lower than the projection by the Reserve Bank of India and the International Monetary Fund (IMF) projection of 9.5%. In an earlier analysis (The Hindu, December 18, 2021, The challenge of achieving 9.5% growth rate), we had considered some of the ongoing challenges to the 2021-22 growth forecast, indicating a possible decline. The adverse effect of the third wave of COVID-19, which is mainly affecting the last quarter of 2021-22, may call for a further downward adjustment in the growth rate to about 9%. The main sectors that have held back a more robust recovery are trade, transport, et al. on the output side and private final consumption expenditure (PFCE) on the demand side as their annual estimated 2021-22 magnitudes remain below the corresponding levels in 2019-20.
Growth prospects
•With respect to the prospects of 2022-23 growth, IMF and Organisation for Economic Co-operation and Development (OECD) forecasts have indicated growth rates at 8.5% and 8.1%, respectively. However, these may prove to be optimistic as the base effects characterising 2021-22 may be limited. In fact, as per the NSO’s advance estimates, at the end of 2021-22, the magnitude of GDP in real terms is estimated at INR₹147.5-lakh crore that is only a shade higher than INR₹145.7-lakh crore in 2019-20. Thus, due to the three waves of COVID-19 that India has experienced, two years of real growth in economic activities have been wiped out. The economy has to now start on a clean slate. Growth in 2022-23 would depend on the basic determinants such as the saving and investment rates in the economy. As per the advance estimates, the gross fixed capital formation (GFCF) relative to GDP at current prices stands at 29.6% in 2021-22. Capacity utilisation in India continues to have considerable slack. Available quarterly data indicate a capacity utilisation ratio of only 60% at the end of the first quarter of 2021-22 and an average of 61.7% in the preceding four quarters. As such, a pick-up in private investment may take some time.
•Private final consumption expenditure (PFCE) also shows a low growth of 6.9% in 2021-22. Any pick-up in demand would continue to be constrained by low-income growth in sectors characterised by a high marginal propensity to consume (MPC) such as the trade, transport, et al. sector and the Micro, Small and Medium Enterprise (MSME) sector more broadly. Growth in 2022-23 would also continue to be constrained by supply-side bottlenecks and high prices of global crude and primary products. It may thus be prudent to expect a real GDP growth in the range of 6%-7%. The implicit price deflator (IPD)-based inflation which was as high as 7.7% in 2021-22, may come down to about 5%-6%. Thus, we may expect a nominal GDP growth of about 12%-13% in 2022-23. It is the nominal magnitude which is crucial as far as the Budget is concerned.
•It was due to the high IPD-based inflation that the nominal GDP growth in 2021-22 at 17.6% exceeded real GDP growth by a margin of 8.4% points. This high nominal growth combined with base effects resulted in the Centre’s gross tax revenue (GTR) growth of 50.3% during the first eight months of the current fiscal year. In the first six months of 2021-22, this growth was even higher at 64.2%. In October and November 2021, the average growth in the Centre’s GTR fell to about 17.4% as the base effect was weakening. We assess that the annual growth in the Centre’s GTR may be close to 35%, implying a buoyancy of nearly 2. With these buoyant tax revenues, the Government may be able to limit the 2021-22 fiscal deficit to its budgeted level of 6.8% of GDP although a marginal slippage may not be ruled out. There may be some slippage in disinvestment targets and supplementary expenditure demands have also to be accommodated.
•Going forward, since the base effects in the Centre’s GTR would have weakened, we may expect a lower annual GTR growth of about 15%-16% in 2022-23 which in combination with a nominal GDP growth of 13% implies a buoyancy of about 1.2. This would still compare well with the Centre’s GTR growth performance in the pre-COVID-19 years which averaged only 5.6% during 2017-18 to 2019-20. The major corporate income tax (CIT) reform undertaken in 2019-20 had provided, among other things, a concessional CIT rate of 15% for fresh investment in manufacturing by domestic companies provided their production took off on or before March 31, 2023. As nearly two years have been lost due to COVID-19, the Government may consider extending the time limit for availing this benefit. The GST compensation provision would also come to an end in June 2022. This would cause a major revenue shock at least for some States such as Tamil Nadu, Kerala and Andhra Pradesh. While this matter may be considered by the GST Council, the compensation arrangement should be extended by two years in some modified form. Its impact on the Centre’s Budget should be provided for.
•With respect to non-tax receipts, the scope of the National Monetization Pipeline (NMP) may be extended to cover monetisation of government-owned land assets. Disinvestment initiatives may have to be accelerated.
Expenditure priorities
•Expenditure prioritisation in 2022-23 should focus on reviving both consumption and investment demand. The National Infrastructure Pipeline (NIP) should be reassessed, and its path may be recast in order to make up for existing deficiencies in relation to the original targets — particularly in the health sector. In this regard, the infrastructure investment undertaken by State governments and the public sector should be realistically ascertained and shortfalls with respect to original targets may be identified and remedial measures initiated. Since consumption demand remains weak, some fiscal support in the form of an urban counterpart to Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) may be considered in addition to supporting some of the sectors which are directly impacted by COVID-19. Revival of the economy in 2022-23 would critically depend on containing the adverse economic impact of the third wave of COVID-19 — and subsequent waves — to a minimum.
Return to fiscal consolidation
•It would be appropriate now to consider a graduated return to fiscal consolidation while using fiscal policy to lay the base for faster growth in the years to come. The Fifteenth Finance Commission had suggested a fiscal consolidation path where the Centre’s fiscal deficit was benchmarked at 5.5% of GDP for 2022-23. In their pessimistic scenario, it was kept at 6% of GDP. At this point, while supporting growth is critical, signalling a return to fiscal consolidation is also important. It may be prudent to limit the reduction in fiscal deficit-GDP ratio to about 1% point of GDP in 2022-23. This would imply a fiscal deficit in the range of 5.5%-6% of GDP. From here on, a stepwise reduction of 0.5% points per year would enable a level of about 4% of GDP by 2025-26. By this time, as suggested by the Fifteenth Finance Commission, a high-powered inter-governmental group should be constituted to re-examine the sustainability parameters of debt and fiscal deficit of the central and State governments in the light of new empirical realities, particularly taking into account the likely level of interest rate on government debt.
