Market supports pro-Bharat splurge

Last Updated: Fri, Mar 09, 2012 06:34 hrs

The government has come under fire for its runaway fiscal deficit and profligate policies. No wonder, a segment of the economy is demanding an end to such administrative measures that the government can ill afford. Interestingly enough, such socialist programmes have an unlikely votary in analysts. What's profligate for some is inclusive growth for them. Market analysts are now providing a counter-view to this entire debate on "entitlement".

The first point some of these analysts are making is an excessive focus on rural handouts alone. In reality, the government also doles out as much - if not more - to the corporate sector and urban populace. Second, there is a clear correlation between rising rural incomes and corporate profitability. The central government's transfers, through its various schemes, now constitute nearly 12 per cent of rural incomes. Expectedly, some part of income is going into consumption. Lest we forget, it's the rural economy that came forward to rescue corporate India in the post-Lehman world. Interestingly, analysts are now writing extensively on inclusive growth and how it's not such a bad thing.

Since numbers speak louder than words at times, here's how the government's social spends have moved over the years. In the last five years, central grants to rural social schemes/rural social spend has increased from Rs 154,000 crore in FY08 to an estimated Rs 344,170 crore in FY12. This figure includes transfers through various welfare schemes like Mahatma Gandhi National Rural Employment Guarantee (MGNREGA), Bharat Nirman, National Rural Health Mission and Sarva Siksha Abhiyan, accounting for nearly 44 per cent of the government's social spending.

Akhilesh Tilotia of Kotak Institutional Equities says rural India has driven the growth of many consumer companies in the last few years. "We believe this was made possible by the large-scale government intervention in favour of rural India," he notes in his Game Changer series report, 'Rural India'. "This story hinges significantly on fund infusion by the government."

Government spending on rural schemes                                    (Rs crore)
Scheme FY08 FY09 FY10 FY11 FY12E
Rural Infra Development Fund 12,000 14,000 14,000 16,000 18,000
Rashtriya Krishi Vikas Yojana 3,000 3,400 4,000 6,800 7,900
Sarva Siksha Abhiyan 10,700 13,100 13,100 200 21,000
National Rural Health Mission 7,500 10,300 11,300 13,300 13,200
Mid-Day Meal Scheme 7,300 8,000 8,000 9,400 10,400
Integrated Child Devt Prog 4,800 6,300 6,700 8,700 10,300
Swarnjayanti Gram Swarozgar Yojna 1,600 2,100 2,100 2,700 2,900
Rural Sanitation 1,000 1,200 1,200 1,600 1,700
Integrated Watershed Management Prog 1,100 1,400 1,600 2,200 2,500
Central Road Fund 12,500 14,100 13,900 16,600 18,500
Rural Credit 240,000 287,000 325,000 375,000 475,000
Interest Subvention 0% 0% 1% 2% 3%
Amount benefited through 0 0 3,300 7,500 14,300
Total 61,400 74,000 79,100 84,900 120,600
Source Research, Budget documents 

What this essentially means is that a cut in social spending will definitely have an impact on the corporate sector as well. While the government's critics may call for such measures, broad-basing growth is not a bad idea in the long term, according to market analysts. Reason: large sections of the population have not been able to enjoy the benefits of the trickle-down effect of India's growth story. To make matters worse, the corruption scandals have made it even more difficult for the government to reverse its social policies.

If analysts are to be believed, the MGNREGA has allowed farm workers to ask for minimum wages, given that there was an assurance from another place of alternate employment. As a consequence, it made a lot more sense for farmers to buy tractors than to depend on fickle and unreliable farm labour. Having said that, analysts are unanimous that while social spending is good for broad-basing growth, the manner in which the government has gone about it has resulted in market distortions.

This argument has been taken a step further by analysts at ICICIDirect Research. In its report, aptly titled Bharat vs India, head of research Pankaj Pandey compared the benefits given to urban India in comparison to rural India. While social spending on rural India gets much coverage, benefits received by the corporate sector and urban India are not ever brought into the debate. Pandey's report has attempted to arrive at such a figure. He says the government also passes on benefits to the urban section of the country. This, on the face of it, is not visible but flows through in the form of revenues foregone by giving indirect benefits through MAT credit, excise duty exemptions, corporate and personal tax benefits.

Despite the urban population merely constituting 32 per cent of the total population, government grants/benefits through various exemptions remain very high for the urban population, explains Pandey. The benefit per urban population is Rs 13,567, which is six times the social spend per rural population at Rs 2,365. According to ICICIDirect's assessment, the government's revenue forgone through various corporate exemption schemes added up to Rs 511,600 crore in FY11.

The report also talks of the share of urban India's share of fuel subsidies. "Fuel subsidy, much talked about in terms of burden for the exchequer, seem to favour urban India more than rural India," it says. "Even after assuming that all of PDS kerosene pertains to rural India, the rural segment accounts for merely 36 per cent of oil burden vs. their urban cousins who contribute 64 per cent to the burden." In contrast, rural India accounts for a very small share when it comes to roads (34 per cent of total road network), total credit (12-13 per cent) and power (24 per cent of total power sold by SEBs).

Pandey concludes in his report that "while we continue our 'love to hate you' attitude towards government policies, we are probably missing the bigger picture of inclusive growth, which will be achieved only when the present gap between rural and urban India is bridged".

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