WEDNESDAY l FEBRUARY 27 l 2013

w w w. f i n a n c i a l e x p re s s . c o m

An explanation for the missing women in Indias labour force

Women who are increasingly being priced out of the agricultural labour market are taking shelter in MGNREGA work schemes
In two of our earlier notes dated July 10, 2012, and June 27, 2011, we had asked the question Where have all the girls gone? Both the NSSO and the Labour Bureau surveys pointed out the low or declining labour force participation of women especially in rural India (see table).Ourearliernotesonlypointedout these trends as there was no clarity on why women were dropping out of the workforce. Some experts thought womenmayhavestartedspendingmore time on education and skill development, or the data collection itself may havebeenfaulty . Our calculations suggested that the declining labour force participation ratio, when juxtaposed with the population, shows that almost no employment opportunities were generated in India in the five years to FY10. Breaking up this data shows that while men found more employment opportunities, women lost outespecially in rural India. The dropping out of women from theworkforcehasmeantthatatanall-Indialevelalmostnonewjobsemerged. Acrossmanyagriculturalactivities, the premium that men used to command over women in terms of per-day wage has shrunk significantly This is . seen most prominently in ploughing but is also true for sowing, weeding, transplanting and winnowing. We note that across many agricultural activities,theaveragewagesweresometimes lower than the minimum wages legally specified then; the situation has dramatically changed where average wages now are above the minimum wagesspecified.Here,itcanbeseenthat economic enforcement has been more powerful than the legal statute, which was patchily implemented. Even as the mechanisation of agriculture has taken place over the last decade,thereisstillsignificantphysical labour involved. Labour productivity has not meaningfully increased in manyof theoccupationsnotedabove.In such a situation, women, whose wages havegoneupmuchmorethanmens,become less profitable to employ for a farm-owner.Wehypothesisethattheimplementation of minimum wage has meant workers with low productivity have been priced out of the market, reflecting in fewer employment opportunitiesforwomenathigherpricepoints. We note that women form a disproportionatelylargegroupinMGNREGA person-days as compared to their proportion in the rural labour force. This leads us to believe that women who are increasingly being priced out of the agricultural labour market are taking shelter in MGNREGA work schemes. Ideally the focus should be on improv, ingtheproductivityof thefemaleworkforce via skill development: This would enable them to move beyond the minimum-wagebandandcommandemploymentopportunitiesbasedonmerits. The author is an analyst with Kotak Securities

Reflect 9

FISCAL DEFICIT AS AGAINST FRBM & 13TH FINANCE COMMISSION RECOMMENDATIONS

In %
8 7 6 5 4 3 2 1 0 2004 2005 2006 2007 2008 2009 2010 2011
(RE)

FRBM

Actual

Finance Commission

2012
(BE)

2013
(T)

2014
(T)

AKHILESH TILOTIA
ver the past seven years, India has strongly economically implemented a minimum-wage regime via MGNREGA: We hypothesisethatthismayhavedrivenruralwomenoutof theworkforceleadingto jobless growth. Basic economics tells usthatanartificialfloororcaponprices leads to the misallocation of resources: minimum-wage regulations drive out workers from the labour market whose productivity is below the wage. Skill development is the key to making the labourforceproductive.

O
In million

Choosing between hard and easy paths

The finance minister can either choose the easier approach of limiting capital expenditure, or he could bite the bullet on limiting non-plan expenditure
versedandthepathof fiscalderailment. The fiscal deficit, after reaching as high as 6.5% of GDP in 2009-10, came downto4.9%in2010-11.However,itagain shot up to 5.9% in 2011-12 owing to a deceleration in economic activity which , negativelyimpactedtaxcollections.Revenue receiptsasaproportion of GDP fell from an average of 10% in the preceding 5yearsto8.5%in2011-12.Thisisdespitea plethoraof measurestoenhancetaxrevenue, such as increasing the central excise rate from 4% to 5%, making readymade garments subject to excise duty of 10%, etc. Revenue expenditure continued to grow, albeit with a mild moderation. Nonetheless, capital expenditure has witnessed stagnancy in 2011-12. It grew by a meagre 0.1%, reflecting the burden of fiscal adjustment on the economic catalyst sectors. The path of fiscal consolidation remained quite bumpy in the past two years.In2011-12,theeffortstocontainthe deficits were targeted towards increasingrevenuecollectionsbyincreasingthe tax rates and by bringing additional servicesunderthefoldof theservicetaxnet. In 2012-13, the fiscal consolidation measures are based on receipts that are temporary in nature, such as disinvestment proceeds and auction of spectrum. On the expenditure side, there is a deceleration in plan expenditure. As of December 2012, plan expenditure in many critical departments remained low as against budgetary estimates. This was 18%incaseof theministryof power,54% inthecaseof theruraldevelopmentministry ,53%inthedepartmentof schooleducation and literacy and 54% in the de, partmentof healthandfamilywelfare.It is difficult to spend more than 33% of budgetaryestimatesinsomecasesinthe nextthreemonths(lastquarterof FY13). However, the attempt to curtail non-plan expenditureisyettoberealisedfully .Major departments such the ministry of rural development (73%), health and family welfare (94%), and school education and literacy (73%) have spent more than 70% of their budgeted non-plan expenditure in the first three quarters of thefinancialyear. Therefore, the axe of fiscal consolidation has been on plan or developmental expenditurethatleadstoexpansionof real economic activity feeding into longterm revenues for the government. A volatilerevenuesourcewithcurtailment of capitalexpenditureisnotanappropriate route to achieve fiscal consolidation. It remains to be seen if the finance minsterwillcontinueontheeasierpathof fiscal consolidation by limiting capital expenditure as in the past, or a hard path of real fiscal consolidation by pruning nonplanexpenditure. The author is executive director public , sector & governance, PwC India

FISCAL CONSOLIDATION

Labour force participation

Rural+urban
2011
Difference

Women

s ay is catching up with men s in p

Sowing
1.5 1.4 1.3

Proportion of women demanding work in MGNREGA

Analysis of MGNREGA data, March fiscal year-ends, FY2007-12

RANEN BANERJEE

Ploughing
2.2 Difference 2.0 1.8 1.6

Persondays (mn)
3000 2500

of which, women (mn days) 2,836 1,364

2006

Proportion of the avg daily wage of men to women, June year ends, 2008-13

MGNREGA 2,572 1,227

2007-08

2,163 1,036

1500

-21

1.4 1.2

2012-13

1.1 Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun 1.0

500 0 Proportion of women

905 368

25

1.2

2012-13

1000

349
Male

324

136

157

1.0

2007

1,437 611

2008

2009

2010

2011

Female

Source: Labour Bureau, KIE calculations

40.6

42.5

47.9

48.1

47.7

Current account deficit worries

A high CAD signals possible underlying problems such as poorly managed govt spending and taxes, high inflation, and a perception that govt policies are unfavourable for future growth
ally be getting as much of FDI as possible to finance the CAD. What is the possible reasoning behind the Governors statements? It is useful to begin with some basic accounting.Macroeconomicbalancesimply that the CAD is equal to the difference between domestic savings and investment plus the government deficit. Hence, an increasing CAD can reflectahigherfiscaldeficit,anincreasing shortfall of domestic savings, or both. In Indias case, it has been both. Domestic private savings have fallen as a percentage of GDP and the fiscal , deficit has gone up. It is important to realisethattheCADisasymptomof more basic factors that deserve attention. A high CAD is not bad in itself: it just signals possible underlying problems. The problems are poorly managed government spending and taxes, high inflation (and high inflation expectations),andastrongperceptionthatgovernment policies are unfavourable for future growth. The last is based on policy inaction as well as evidence of corruption.Theseproblemsdeservefocus, not the CAD per se. TurningtotheRBIGovernorsstatements, why should the CAD be a risk factor for inflation? If the economy were overheating, and pulling in foreign investment for that reason, this statement might make senseagain, the CAD would be a symptom not a cause. But that does not seem to be the problem, unless Indias potential growth rate has fallen more than policymakers admit. If foreigners were unwillingtofinancetheCAD,andtheIndian rupee had to depreciate, pushing up the domestic price of inelastic imports such as oil, that could fuel inflation in the short run (though not in the long run, unless the RBI made a monetary accommodation). But interestingly af, ter a temporary pause, foreign investment into India has been strong. Subbaraos second point was that foreign investment is of the wrong kind, volatile portfolio flows instead of FDI. A related concern was that the CAD itself is of poor qualityfuelled by imports of gold and oil rather than capitalgoods.Thisleadsbacktopoorinflationmanagement(peoplearebuying goldasaninflationhedge)andpooreconomic management (lack of an effective energy policy and lack of confidenceforprivateindustrialinvestment in India). His main point, though, seemed to be that portfolio flows are volatile and therefore bad. To the extent that portfolio flows bring in foreign capital, they are as goodasFDIdomesticfirmsreceiving foreign portfolio flows may be encouraged or enabled to make real investmentsthemselves.If thislinkisabsent, it points again to poor domestic economic conditions. Foreign portfolio flows could be contributing to an asset bubble, but volatility seems to be a red herring. My ongoing research with Ila Patnaik and Ajay Shah suggests that such flows do not create wild swings in the domestic stock market, or harm domestic investors at the expense of foreigners.Separately ,Ihavenotseenconcrete evidence that domestic stock market movements have much impact on Indias real economy . In fact, any kind of equity investment involves risk sharing, and in that sense it is good for the recipient. At worst, foreigners exit and the currency depreciates: India can still pay its bills. Problems arise much more if the CAD isfinancedbyborrowingontermsfixed in foreign currency especially at short , maturitiesthat can create a crisis. The real issue, therefore, is what is happening to Indias external debt stock, and its maturity composition. This is where RBI should be focusing, in addition to domestic monetary policy Un. necessarilyworryingaboutvolatilityof portfolioflows(orof theexchangerate) is just a distraction. Meanwhile, the biggest problems lie beyond RBIs control: in the governments management of revenue raising, spending, and the conditions for private sector investment. FDI is good, but so is domestic investment. The national government needs to do its job better. If it does, the CAD will take care of itself. The author is professor of economics, University of California, Santa Cruz

NIRVIKAR SINGH
n recent weeks, the Governor of the Reserve Bank of India, Duvvuri Subbarao,hastwicehighlightedthe nations current account deficit (CAD) as a cause for concern. The CAD is basically the difference between what is earned on selling goods and services to foreigners and what India pays for foreign goods and services, and it has recently hit record levelsover 5% of GDP The CAD is typically offset by for. eign capital coming into India. Why shouldahighCADbeacauseforworry? The RBI Governor highlighted several concerns. At the G20 Finance Ministers meeting, he said, There are a number of risk factors for inflation. The most important is the current account deficit. A few days earlier, he had stated, We would not worry if the widening CAD is on account of the import of capital goods, but here it is high on account of the import of oil and gold. The other concern is the way we are financing it. We are financing our CAD through increasingly volatile flows. Instead, we should ide-

Taxing issues with regard to CSR

In Budget 2013, govt would do well to lend clarity to the tax deductibility of CSR expenditure as well as provide incentives by way of weighted deductions
NABIN BALLODIA
social responsibility (CSR). In the past, a significant portion of Indian CSR activities have been voluntary . The proposed Companies Bill makes it mandatory for companies meeting the specified criteria to earmark 2% of the net profits in the preceding three years towards CSR activities. There is increased accountability on companies to defineaclearframeworktoensurestrict compliance. The Bill is to be placed before the Rajya Sabha during the budget session. The proposed CSR framework, once ratified, would make India one of the first few countries to mandate CSR throughastatutoryprovision. The draft Bill requires companies with a net worth of more than R500 crore oraturnoverof R1,000croreoranetprofitof R5croretoconstituteaCSRcommittee as well as formulate a clear policy for spending the earmarked funds towards CSR activities. The composition of the committee, the CSR policy as well as activitiesundertakenbythecompanyneed to be disclosed in the boards report as wellasonthecompanyswebsite.Incase companies are unable to spend the earmarked funds on the identified CSR activities, adequate disclosure on reasons forfailurealsoneedtobemade. Thefocusismoreonensuringgreater and sustainable engagement of corporates with the community rather than a cheque book-based philanthropy The . emphasis is towards transparency and accountability of CSR spends rather than penalising companies on failure to spendtheearmarkedfunds. At present, as part of voluntary CSR projects, large corporatesspecifically in the manufacturing and infrastructuresectorshavebeenundertakingexpenditure on providing better basic amenities such as healthcare, drinking water, sanitation and education. The focus of these CSR projects is the socioeconomic betterment of weaker sections of our community Generally such . , activities are undertaken by corporates in and around the areas of their operationandactasamechanismforbuilding trust and goodwill amongst the local communityestablishing a business nexus for CSR expenditure. Inthepast,therehavebeendifferences of opinion about deductibility of such CSR project-related expenses while computing the taxable profit of corporates. The bone of contention is whether CSR expensesareincurredbythecompanyin connection with its business operations orshouldbeconsideredoutsidetheambit of business operations. As long as the expenditure qualifies for business purposes, the same should be considered deductible while computing taxable income. The issue becomes much more intenseasexistingmandatoryguidelines on CSR for Central Public Sector Enterprisesrequirepublicsectorundertakings tocontribute0.5-5%of theirnetprofitsfor CSRactivities.Inviewof thestatutoryrequirement, there is a divergent position creatinganundesiredhazearoundthetax treatment of expenses incurred on CSR. Given the magnitude of spending contemplated under the Companies Bill and the intention of the government to involve the corporate community to partnerwiththegovernmentintheoverallsocio-economic growth of the economy , thereisaneedtobringoutsomeclarityon taxdeductibilityof CSRexpenses. In fact, it may be worthwhile for the government to consider allowing a higher weighted tax deduction to corporates with respect to the CSR expenditure incurred by them. This would not only encourage them to come forward and support the community as responsible citizens of the country but also incentivise them by reducing the effective tax rates of the companies. Such a mechanismwoulddefinitelyencouragethecorporates to undertake CSR activities rather than finding loopholes in the law toavoidsuchspends. Overtheyears,severalbusinesshouseshaveembracedCSR,albeitonavoluntarybasis.Theperceptionof corporates towards CSR has also been changing viewednotjustasacostbutasanenabler for brand building. With the advent of the Companies Bill, the government should consider not only clarifying the position on tax deductibility of the CSR expenditure in the Budget 2013 but also provideincentivesintheformof weighted deductions to encourage corporates tocontinuetomeaningfullyengagewith the community . Theauthorispartner ,Global InternationalCorporateTax, KPMGinIndia.Viewsarepersonal

sglobalexperienceshasdemonstratedinsomeof thedeveloped economies, the involvement of the private sector can go a long way in contributing to the social development of a country In the Indian context, this . is more pronounced due to the sheer size of the country and the large populationbase.Thisrequirementisfurther spurred by increasing globalisation and the need for corporates to be socially responsible and contribute to the inclusive development of the communities in which they operate. Recognising the pivotal role that can be played by the corporate sector in contributing to the socio-economic development of the country, the Companies Bill as passed by Lok Sabha in December 2012 formally introduced the concept of corporate

2,114 1,019

2007-08

2000

2012

48.2

he most significant reform initiativetakenbythegovernmentof India in public financial management is the Fiscal Responsibility Budget Management (FRBM) Act. The Act mandated that the government achieve 3% fiscaldeficitandrevenuebalanceby200809.Asshowninthegraphabove,fiscalindicatorsdidimproveduring2004-08,with the fiscal deficit averaging 3.6%. The globaleconomicmeltdownhadimpacted the Indian economy and there was a sharp increase in the fiscal deficit from 2.5% during 2007-08 to 6% in 2008-09. The revenue deficit has moved from 1.05% in 2007-08 to 5.25% in 2009-10 and the primary balance turned deficit in 2008-09 after runninginsurplusinthepreviousyears. The fiscal slippage has primarily been drivenbytheloweconomicactivitystarting with 2008-09, which had derailed the fiscal consolidation process that started posttheenactmentof theFRBMAct. Weak economic activity led to a taxGDP ratio lower than pre-crisis levels. Non-taxrevenuesfacedasteepdeclinein 2008-09. To restrict the spiralling effect of demandcontraction,thegovernmentintroduced a plethora of fiscal incentives, which further added pressure on the exchequer. The government introduced three successive fiscal stimulus packages by cutting the excise duties and service tax, direct assistance to export industries, refund of excise duties/central sales tax. Other interventions such as increasedspendingontheMahatmaGandhi National Rural Employment Guarantee Scheme, higher liabilities on account of the implementation of the Sixth Pay Commission recommendations on government employees salaries and pensionsof retiredemployees,fertiliserand oil subsidies, Agriculture Debt Waiver and Debt Relief Scheme for farmers furtheraggravatedthefiscalwoes. The issue was that the fiscal stimulus was directed towards revenue expenditure rather than adding major capital assets. Capital expenditure's share in total expenditure, after reaching as high as 15% in 2007-08, had fallen to 9-10% in the crisis period (also the period of fiscal stimulus). In 2008-09, revenue expendituresawagrowthof 34%whilecapitalexpenditure declined by 27%. The developmental revenue expenditure increased by47%anddevelopmentalcapitalexpenditure declined by 53% the same year. This highlights the turbulence through which the central government has tra-