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India’s unusual trade pattern with the United States

Richard Rossow (via Milan Vaishnav) shared the latest US-India trade in goods data updated by the US Census Bureau.

India has a running trade deficit in goods: where it imports more goods than its exports. It is wrong to simplistically judge whether a trade deficit is good or bad – however, India does do ‘better’ when it comes to its services.

However, today this blogger learnt that the trade relationship that India has with the United States of America is quite different from that with many other big trading partners. India’s large software and services exports to the US are well-known, but India exports more goods to the US as well. Little wonder that American businesses lobby hard in Washington to be able to trade more and operate more in India.

In 2014, for the first time since 2006, India’s exports to the US are more than double its imports. It is currently unclear as to what to attribute this towards and pass judgement on whether this is a good or a bad thing. The broad trends in the two economies in the last 4 years has been one of revival and renewed growth in the United States, and faltering growth and investment in India.

India-US Trade1The timeline of imports and exports from the 1980s onwards has a few points of interest from recent years. The most prominent of these is the dip in 2009 of both Indian exports and imports, with the former affected far more than the latter. This was preceded by a sharp rise in 2007 in Indian goods imports from the US.

While Indian exports to the US bounced back since 2010, Indian goods imports plateaued in 2011 and have dropped a little in real terms since then.

The USTR website on India-US trade relations says that India’s largest goods exports to the US are precious stones (diamonds), pharmaceuticals, mineral fuel, organic chemicals and others. India’s largest goods imports are again precious stones (diamonds and gold), aircraft, machinery and optical and medical instruments.

A closer examination of export and import trends in types of goods (using the US Census Bureau’s “end use” dataset) provides the following:

1. Since 2009, the largest growth in highly traded Indian goods exports to the US as of 2013 are:
– Petroleum products, other
– Tobacco, waxes, etc
– Fish and shellfish
– Fuel oil

2. Since 2009, the largest growth in highly traded Indian goods imports from the US as of 2013 are:
– Complete military aircraft
– Gem diamonds
– Nonmonetary gold
– Newsprint
– Parts for military-type goods

3. Since 2009, the largest fall in highly traded Indian goods imports from the US as of 2013 are:
– Civilian aircraft, engines, equipment, and parts
– Chemicals-fertilizers
– Steelmaking materials
– Computers
– Drilling and oilfield equipment

I encourage readers to comment on the significance of some of these observed changes.

There’s a lot more information waiting to be unearthed from these datasets, including information on when Indian defence imports of US equipment really increased and to what extents. The defence angle is particularly interesting as the Indian ministry of defence is quite opaque in defence spending and is known to defer capital payments while making large announcements.

Readers are welcome to use the full rich XLS spreadsheet that I have compiled on all the data from the US Census Bureau relevant to the last couple of decades of India-US trade.

Addendum: The US$-Indian Rupee exchange rate has been steadily rising, making imports from the US less competitive. This could perhaps explain a part of the slump in US goods imports by India.

PS. All years used in this post are calendar years and not financial years.

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A Tale of Two Cities

The tale of Bangalore and Chennai’s growth is also the story of Karnataka and Tamil Nadu’s urbanisation.

The Indian growth story has included two actors in the past two decades, Bangalore and Chennai. Along with their parent states of Karnataka and Tamil Nadu, they have been the face of Indian progress, on everything from software to manufacturing to higher education.

Bangalore and Chennai are quite distinct from one another, and this post traces the differences in their urbanisation and their respective roles in their states. Chennai (formerly Madras) was designated as one of four ‘metro’ cities in India from independence, having been the capital of a British presidency before then. Bangalore was a more modest state capital. Till the mid-1980s, Bangalore was almost  two decades behind Chennai in its total population size*. Bangalore has since seen more rapid growth, and in 2011 the city was only a couple of lakh people smaller than Chennai.

BangalorevsChennai1

It is tempting to view population growth as a competition between two cities, but cities urbanise within the context of their states. While both Karnataka and Tamil Nadu are among India’s more urbanised states, but it is here that Tamil Nadu leaves Karnataka far behind. Tamil Nadu is the most urbanised large state in India, with almost half its population living in cities. For context, the Indian average of urbanisation is just one third. In Karnataka, about 38 per cent of its population lives in cities and towns.

Urbanisation and the successful movement of large numbers of people out of agriculture is key to prosperity for Indians, so it pays to examine what Tamil Nadu got right.

One feature of Tamil Nadu’s success is its lack of dependence on Chennai for all its urban growth. In 1991, Chennai was about 30 per cent of urban Tamil Nadu. The state’s largest spurt of urbanisation came between 1991 and 2001, increasing by over 10 percentage points. Most of this growth came from outside Chennai, with Chennai’s share of the state’s urban population steadily declining since 1991.

BangalorevsChennai2

Much of the urban growth in Tamil Naducame from the reclassification of land and the setting up of town panchayats after the 74th amendment to the constitution was enacted. A lot of it also came from other large cities springing up. Today, Coimbatore, Madurai, Trichy and likely Tiruppur all house million+ people each.

Karnataka’s urbanisation, on the other hand, continues to be led by Bangalore. The primacy of Bangalore in the state is paramount, with Hubli-Dharwad and Mysore having a population of barely a million each. Bangalore was over 35 per cent of urban Karnataka in 2011.

Not just that, but almost half of the urban growth in Karnataka came from Bangalore’s growth between 2001 and 2011. In comparison, only about a fifth of Tamil Nadu’s urban growth came from Chennai in the same decade.

BangalorevsChennai3

This stark difference can perhaps be explained by extensive industrial growth in Tamil Nadu, which is conspicuous in its absence in its neighbouring state. From the city of Hosur giving competition to areas on the far side of the TN-Karnataka border to bustling ports trying to compete with Sri Lanka’s, Tamil Nadu has been more successful in providing an alternative to agriculture for large numbers of its people. Kerala’s urban spurt last decade appears to be similar, with habitations becoming larger and denser, as well as more people leaving agriculture as a profession. When and whether this can happen in Karnataka is an open question.

For now, Karnataka and its politics are still frequently dominated by agrarian concerns. The Western Ghats continue to pose a formidable barrier to the development of the state’s ports, with its largest port Mangalore competing with larger ports at Mumbai, Kochi and Goa. Connectivity – perhaps in the form of all-weather roads and tracks across the Western Ghats and high volume ports – may be just be the most potent driver of urbanisation in the state.

As the Karnataka government is trying to figure out how to split the Bangalore city corporation into more manageable pieces, more people should start reflecting on how to get more centres of urban growth going in the state.

—–

*This is the population of the entire urban agglomeration. Since the Bangalore Municipal Corporation became the Bruhat Bangalore Municipal Corporation in 2006, all urban areas around Bangalore (with the exception of small census towns and Electronic City) have been governed under one municipal authority. Chennai, on the other hand has a metropolitan corporation that is co-terminal with the Chennai district and houses a little over half of the people in the Chennai urban agglomeration. Several other city councils and town councils govern the rest of it.

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Education and bilateral relations

A significant number of Indian students in the United States add great value to both countries, while flying under the radar of bilateral policymaking.

Migration is the foundation stone of India-US relations, if not the bedrock itself. Indian immigration into the United States of America has come a long way since Bhagat Singh Thind fought for citizenship in US courts about 90 years ago.

While the China-US economic relationship leans heavily on trade via the movement of goods, the India-US economic relationship is based more on the movement of people and services. Apart from a sizeable population of Indian origin in the US of about 2-3 million, Indian citizens also form the highest number of H-1B and L-1 visas, both dominated by technology and software professionals.

At Takshashila, we recently had an excellent talk on US immigration policy by Edward Alden, Senior Fellow at the Council for Foreign Relations. This blog post is limited to a few observations on immigrant Indians studying in the US on student visas.

A little over 23,000 Indians availed a US student visa in FY2012, less than 5 percent of the overall student visas issued in the country. This is down from FY2007 as the chart below shows, when Indian students availed more than 10 percent of all student visas issued. In contrast, Chinese students are being issued with visas at a rapidly increasing rate since 2007, and now hover close to 200,000 student visas a year.

US F1 Visas Total

This rapid increase in Chinese students studying in the US has received some policy response from the Americans, with the US government expressing a desire to bridge the gap between the number of Chinese studying in the US and the number of Americans studying in China. While there appears to be state support promoting Chinese students to study in the US, some reports have questioned whether they are getting sufficient returns on a US education. The increase in numbers likely stems from two factors: one, from rising incomes in China and two, from state support for foreign study. These numbers started going up before the global financial crisis and stayed high through out it.

Indian students in the US, while much smaller in number, arguably add greater value to the US economy per person. For one, Indians in the US are more likely to be studying at the masters or PhD level instead of an undergraduate education. This implies a higher threshold for selection, more number of years spent in the country, and a higher productivity and skill of the labour that comes after education.

Two, the number of F-1 student visas to Indians dipped slightly in FY2009, along with the overall number of F-1 visas issued. This was around the time of the financial crisis, a period when scholarships and university funding of masters and doctoral programmes started reducing in number, as well as the availability of jobs in the US started becoming uncertain. This implies a sensitivity of Indian students in the US to the American job market. This is in contrast to the increasing Chinese students who are likely to head back home immediately after education, at their rapid rate of increase.

Three, it is also likely that a higher proportion of Indian students are funded by US universities for their study, with the rupee-dollar exchange rate being unaffordable for most Indians. This could explain much of the drop in student visas between FY2008 and now.

US F1 Visas India China

The last decade in the US has seen a sharp rise in the number of Chinese students, a plateauing of South Korean and Indian students and a fall in the number Japanese students. The reasons for these changes can be multiple. Certain student cohorts are seen as revenue sources for US universities, certain others as high-skilled labour in research, tech and other sectors. The Indian student cohort, though small, punches above its weight. Binning luddite notions of ‘brain drains’, both US and India need to think about how they can enable the student cohort to do even better.

Immigration does not feature high on the agenda for strategic dialogue between India and the US, and student immigration even less so. It’s about time that people in Washington DC and New Delhi paid a little more attention to this as a policy issue much as it remains a social and cultural one.

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In Pragati: Spending for a Modern Armed Force

I write in Pragati–The Indian National Interest Review along with Rohan Joshi on the sorry state of defence modernisation in India:

As Ajai Shukla highlighted in February, only 4 percent of the 2013-14 capital budget is allocated for new acquisitions, down from 38 percent in 2010-11. The interim defence budget announced in February 2014 appears to do little to alleviate this systemic decline. Although a 10 percent increase in the defence budget was announced, there was only a paltry 3 percent increase in capital outlay, with revenue expenses garnering a large part of the increase. What little money will go towards defence modernisation from the overall capital outlay is as of yet unknown.

In the context of the budget, Mr Antony’s admission that there was no money left for the MMRCA deal in FY 2012-13 is surprising. Capital allocation for the IAF was increased in FY 2012-13 by 22 percent, conceivably in order to account for the first installment of Rs. 10,000 crore due to be paid to Dassault after the deal was to be signed in FY 2013.  If we are told that the IAF has spent all but 3 percent of its allocated capital acquisitions budget for FY 2013, where has the rest of the money gone?  The interim budget for FY 2014 has decreased the IAF’s capital allocation budget by about 15 percent (over FY 2013 beginning estimates) to Rs. 31,818 crore.  Worse, if the worrying trend of committed liabilities accounting for 95 percent of the capital acquisition budget lingers, this effectively means that the MMRCA deal cannot be concluded in FY 2014-15 either.
[Full Article: Spending for a modern armed force, March 14, 2014]

India-Defence-modernisation-spending2-e1394799543540

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Old tricks, New Year

The Indian ministry of defence continues to route capital allocations for revenue expenses.

Manu Pubby reports in the Indian Express earlier this week that the Indian ministry of defence may divert about Rs. 6,500 crore from the capital budget of the armed forces towards revenue expenses.

While the ministry has spent over 80 percent of the capital budget of Rs. 86,740 crore allotted this financial year for purchase of new equipment, it is seeing a shortfall in revenue expenditure from the estimated Rs. 1.2 lakh crore.

Sources say that the shortfall is mainly due to unexpected rise in fuel costs that led to rationalisation of equipment usage and exercises this year. As the armed forces are one of the largest consumers of fossil fuel, the hike in global prices coupled with exchange rate variation resulted in a huge hike in government expenditure. Also, the government announced new measures this financial year for increased pensions that put an additional burden on expenditure.

[Full article: Budget hike turned down, MoD to juggle capital funds, Indian Express, January 12, 2014]

On the face of it, this makes a lot of sense – the fall of the rupee a few months ago hurt both the public and private sectors in India significantly and coupled with the global fuel prices it served as a shock that the country is recovering from.

However, this is not the first year that revenue expenses have eaten into the defence modernisation (capital) budget. As I’d written in Pragati last September, this has been routinely happening, especially in the army budget.

DefenceSpending1

Full Infographic: Understanding India’s Defence Spending

The defence ministry should not be having recurring difficulty in accurately estimating its revenue expenses for the year, especially salaries, pensions and fuel. Also, the demand for grants that most ministries submit to the finance ministry are usually 5-10 percent higher than allocations they end up receiving for the budget. The army’s low capital-to-revenue cannot further be weakened every year. And going for perilously expensive ventures like the proposed mountain strike corps which can worsen the situation.

With the defence of the realm at stake, we need better defence planning that is more robust in estimating spending.

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Toilets and access

The National Sample Survey Office released new findings this week from the 69th round of the National Sample Survey conducted in 2012, providing the latest state-level data on sanitation, water supply and electricity access.

The last set of reliable numbers on rural sanitation came from the 2011 census, where we found that about 30.7 percent of rural Indian households had their own toilets in 2010. As covered by The Transition State, this had improved in the previous decade by about 9 percentage points.

Broadly consistent with that rate of increase, the NSS round from 2012 reports that 31.9 percent of rural households had their own toilets in 2012, an increase of ~1.2 percent in two years. What the NSS press release dwells on at greater length is the number of rural households with access to toilets, which is a significantly greater number in most Indian states.

This access is self-reported by surveyed households and can mean that they share or use a neighbour’s toilet, have access to a community/public toilet or perhaps have access at their workplace, especially if they live close to towns and cities. However, the access data is likely an overestimate as there is nothing to prove that every member of the household avails the use of toilets, or uses them all the time.

Nationally, 40.6 percent rural households have access to toilets, as opposed to about 31.9 percent of them owning or having exclusive access to toilets. Since there is a two year lag between the two data points collected (as shown below for all states) this gap can be treated as a minor overestimate.

Toilets vs Access2

As one can see, there is a phenomenal range of differences between households owning toilets and households having access to them. A state like Karnataka has almost no difference, implying that toilets are treated as private, household goods in the southern state. Meghalaya is the other extreme, where the number of households with access to toilets is almost double the number of households who own them. If only access were to be measured, states like Nagaland, Delhi, Sikkim, Mizoram and others could declare themselves to be free of open defecation today.

The chart below illustrates the difference between the ranking of states on rural sanitation between the two measures.

Toilets vs Access

As one can see, most of the change happens in states with higher toilet ownership. Delhi, Nagaland, Meghalaya and Arunachal Pradesh are the biggest gainers when access is considered, with Kerala, Manipur, Punjab and Himachal Pradesh losing the most ground.

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In Pragati: infographic on foreign aid out of India

My second infographic in Pragati this week was on foreign aid going out of India:

4 foreign aid

What makes aid from India different from western aid is that India prefers not to include conditionality clauses such as democracy and good governance, respecting the partner country’s sovereignty. Staying consistent with the Gujral doctrine, the government of India likes to avoid terms like foreign aid or development assistance, both of which are common in the Organisation of Economic Co-operation and Development’s parlance. India prefers to refer to aid as development cooperation or development partnership, and this flows down to the ethos with which grants are given.

Few are asking questions of the effectiveness of Indian aid – both in achieving development goals in partner countries and in generating benefits for India. It remains largely unknown, beyond anecdotal evidence. As the Indian taxpayer starts paying more, the DPA like USAID in the United States and DfID in the United Kingdom will be expected to provide greater accountability. The creation of DPA also provides an opportunity for the MEA to work with India’s private for-profit and not-for-profit sectors that have amassed expertise in a range of developmental issues.

The Indian government’s increased commitment to foreign aid over the past two years is a welcome change, but one that may be hostage to fiscal crises and change of leadership. How well foreign aid can be used to extend Indian interests abroad will depend entirely on how well we choose to administer and deploy it out of India. [Full article: Infographic: Foreign aid going out of India, December 20, 2013.]

The data story is a part of my ongoing research on aid flows out of India, some of which should be out in January 2014.

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Infographic – Growth and Poverty in India

A lot of heat was generated in the Sen vs. Bhagwati debate that took place a few months ago, along with some rays of light. The same followed after the release of the latest poverty numbers. Here’s a look at how Indian states have fared in both economic growth and poverty reduction between 2004-05 and 2011-12.

Poverty and Growth in India - A Story in Five Charts

Gross Domestic Products are the most common estimates of economic growth. GDPs of Indian states (called “GSDP”) matter, but bigger states obviously have larger GDPs. To compare states, one needs to look at GDP per person (“per capita” for those who like to use Latin). It should be noted that GDP per person is different from the average or median income.

In the 2000s, states raced against each other on per capita GDP. While almost all states grew well, not all of them could keep pace with others close to them. The chart below shows you how state rankings have changed between 2004-05 and 2011-12.

GSDP Slopes

Between 2004-05 and 2009-10, the biggest relative gains were made by Sikkim and Uttarakhand, with Punjab, Arunachal Pradesh, Jammu & Kashmir and Karnataka losing significant ground.

If the same chart is made for how states have fared on poverty reduction, a different picture emerges. States have been ordered below based on the percentage of population in the state that lives below the poverty line.

Poverty ratio Slopes

There appears to be a lot more dynamism in poverty reduction, perhaps because there are several states that are much closer to each other. Between 2004-05 and 2009-10, the biggest relative gains in poverty reduction relative to each other were made by the states of Andhra Pradesh, Rajasthan, Maharashtra, Himachal Pradesh and Orissa. While no state’s poverty headcount increased in this time period, the relative underperformers were Assam, Delhi, Jammu & Kashmir, Jharkhand and Karnataka.

Note that the states of Arunachal Pradesh, Goa, Manipur, Mizoram, Nagaland, Sikkim, Puducherry and Tripura were removed from this list as their 2004-05 poverty numbers were based on poverty lines of other states (like Assam and Maharashtra) and hence the numbers are not comparable to the 2011-12 numbers. Some news stories and opinion pieces had erroneously talked about how several northeastern states had worsened in poverty. Such observations are sadly mistaken.

The two charts from earlier tell us only about relative performance of states – using their closest competitors as benchmarks. However, absolute performance on growth and poverty reduction matter just as much, if not more. The next few graphs examine just that: examining the growth in GSDP per person, and reduction on poverty in percentage points between the years 2004-05 and 2011-12.

Poverty and Growth - States

The above graph shows a clear correlation between economic growth and poverty reduction.Higher the growth, higher is the poverty reduction observed. The only major outlier to this is the National Capital Territory of Delhi – which is so because Delhi started with a low poverty rate of 13.1 percent in 2004-05. The graph also clearly shows that the high poverty reduction, high growth state of Uttarakhand is far removed from all the other states.

On Uttarakhand, many are quick to jump to the conclusion that this high “reckless” growth caused the disaster earlier this year. What we can conclude from data is that Uttarakhand grew exceptionally well in the past decade and reduced poverty equally rapidly, but failed to reduce any vulnerability it had to natural disasters. Had an event like the Kedarnath disaster happened a decade ago, there would be a lot fewer residents, tourists and property to be affected as greatly.

The next two graphs look at comparable groups of states: large, higher income states and lower income states of India.

Poverty and Growth - Higher Income States

When both growth and poverty reduction are looked at in concert, Maharashtra and Andhra Pradesh come off as the best perfomers, well above the national average on both parameters. It is also noteworthy that while Gujarat grew faster than Maharashtra in terms of its GSDP during the 7 year period under consideration, Maharashtra did slightly better on a per person basis.

Following on the previous charts, Punjab and Karnataka’s poor performance comes as no surprise. Karnataka grew quickly in the early 2000s with the IT boom, and hasn’t quite been the same since. Punjab’s agrarian prosperity also seems to have peaked, with insufficient dynamism in services or manufacturing sectors to sustain high growth.

Poverty and Growth in India - Lower Income States

Odisha had the highest rate of poverty reduction in India of all states, and is among the top performers alongside Bihar, Rajasthan and MP among the lower income states. Chattisgarh grew well, but failed to reduce poverty as much as the other lower income states, and Jharkhand did poorly on both fronts.

Economic growth is clearly necessary but not sufficient for poverty reduction. Our conversations on economic growth have to evolve from “Growth or Something else” to “Growth AND Something More“. What can be observed over each of the last three charts is the absence of states on the “Low Growth, High Poverty Reduction” quadrant. Evidently, there are many states who grew well, but failed to provide sufficient public goods for significant poverty reduction. However there are no states that managed to reduce poverty to a great extent without strong economic growth during the mid 2000s. What has been well known in economist circles is confirmed again for Indian states.

Between 2004-05 and 2011-12, the Indian economy grew at an average rate of about 8.5 percent (CAGR, Compound Annual Growth Rate), and thus at 6.7 percent per person. Indian states were spread around this number. In 2013 the growth rates have fallen to about 5 percent nationally – and there are no signs of going back to an 8 percent growth rate in the near future. It is not difficult to imagine how abysmal poverty reduction will be over the next few years. We may end up failing another generation of India’s poor.

Postscript. There are some caveats to keep in mind, while interpreting the performance of individual states. First, while poverty reduction and growth are compared across the same time period, there can be a lag between the two. New wealth generated can take time to percolate through the economy. Second, GSDP numbers are generated by state economics and statistics departments based on central guidelines. The competence and independence of different states’ economics departments can vary a lot, and it is possible that GSDP numbers from some states could be overestimated.

Third, there are many discrepancies between poverty ratio numbers calculated from NSS surveys from  2009-10 and 2011-12. States such as Bihar show little poverty reduction between 2004-05 and 2009-10, but phenomenal decrease in the next two years. While 2009-10 was a drought year and might have underestimated the overall reduction in poverty, the planning commission needs analyse and provide clarifications on the latest state-level poverty numbers presented. However, these caveats do not affect the overall observation that there are no Indian states that grew poorly but reduced poverty greatly.

Many thanks to Dr. Mukul Asher for discussions that helped shape this piece.

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Census Towns and Toilets

The Transition State returns to examining sanitation data today and we take a look at toilets in the odd entities called ‘Census Towns’. (For previous analyses see this and this.)

Census towns are formed by villages that show an increasingly urban character in terms of density, size and economy. They are considered towns only by the Census and not by state governments and are hence called ‘Census towns’ as opposed to ‘statutory towns’. Census towns are governed locally by village panchayats.

Why are census towns relevant from a sanitation perspective? Rural sanitation in India is still stuck at a level where a majority of people continue to defecate in the open, and less than 1 in 3 households have a toilet. Understanding what drives people to build and use toilets is necessary to change this. Urban India fares much better in toilet ownership – but fails quite spectacularly in other aspects of sanitation like waste collection and disposal.

Census towns are of interest here because they are places which have *just* urbanised, and are still at the margin. Census towns get called so when they have crossed all three of the following thresholds: a population density of 500 people per square kilometre, village size of 5,000 residents and 75 percent of the working age male population employed in non-agricultural sectors.

So how do census towns fare in toilet ownership compared to their rural surroundings? I compare census towns with the rural taluk (sub-district) in terms of toilet ownership for the state of Karnataka. The taluks are ordered in an ascending order of toilet ownership.

Toilets-Census-Towns-Karnataka

Census towns in Karnataka appear to have much higher toilet ownership than their rural surroundings. And when the rural base goes higher than 20 percent, most of the census towns cross the 80 percent mark in toilet ownership.

Several things change between census towns and other villages. The services sector would have taken off in census towns, likely also resulting in higher incomes. But the most important change is that of population density. This increase in density results in a reduction in open spaces where people can defecate conveniently. If people have to go more than say 200 yards every time they need to relieve themselves, then the case for a toilet becomes a lot stronger. The ‘call of nature’ becomes more difficult as nature is beating a retreat out of the census town.

Urbanisation seems solve the toilet ownership problem. But toilets are far from sufficient in a city to achieve the public good that is sanitation. Waste collection and treatment become vital – be it through a sewerage network, local treatment plants, septage management or some other means.

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In Pragati: Understanding India’s Defence Spending

I restarted the infographics column in Pragati last week by creating one on defence spending:

India Defence Spending preview

[Pragati, September 2013]

You can read the full text of the infographic below:

India has the 3rd largest armed forces in the world in terms of active personnel, and is the 8th largest spender on defence. India has been spending more on defence in the last 20 years, but so has the rest of the world.

In the last 10 years, China, Russia and Saudi Arabia have all increased their defence spending faster than India. In the mean time, India’s defence expenditure is steadily falling: as a percentage of both GDP and total government expenditure (union + states). But then, why is so much written about India’s high defence expenses? The answer lies in India’s arms imports. India’s defence imports have been steadily rising and it was big news when in 2011 India became the largest arms importer in the world. This is reflective of India’s weak defence manufacturing ability at home rather than any aggressive military expansion by the India. Both private and public sector defence manufacturing houses in India lack capacity and technological ability. While India needs to become more self-reliant in defence equipment, this can be achieved by greater foreign direct investment entering India’s defence sector, rather than closing it off to foreign competition.

What does India spend its defence budget on?

About half of India’s defence expenses go to the army, a quarter to the air force and the remaining for the navy, R&D, ordinance factories and more.

Broadly, one can classify expenses into capital and revenue: Capital expenditures are investments, for future benefits and improvement. In defence, they can be on new aircraft, battleships, tanks, rifles and more. Revenue expenses are those that are recurring and for salaries, pensions and consumables.

Generally, higher the Capital-to-Revenue ratio is, the more competitive and modern the armed forces are. Before 2004-05, India’s armed forces had a C:R ratio of 27:73 but since then it has increased by about 12 percentage points to 39:61.

The Capital-to-Revenue ratio is very different in the three armed forces. While the Indian Navy and the Air Force spend more than half their budgets on capital assets, the Indian Army spends less than 20% on average on capital. Worse still, in 2011-12, the Capital-to-Revenue ratio in army expenses reduced from a 17:83 in the budget estimate to 11:89 in the actual expenditure, implying that higher than expected revenue expenses were eating away at the already sparse capital funding.

The Indian Army’s revenue expenses are increasing rapidly over the past few years. Since the sixth pay commission came into force around 2008-09, both salaries and pensions for army soldiers have become ballooning numbers for the exchequer. As a result, while budget estimates for capital expenses have flattened out, the actual expenditure on capital is actually declining rapidly in the army. What is particularly alarming is that the army’s capital expenditure is decreasing even in nominal terms – and is far worse once inflation is factored in.

Even in the navy and the air force, there is an increasing divergence between budget estimates and final expenditures by the end of the financial year.While the fiscal deficit is often used as a reason for this in parliament standing committee reviews, the real reasons could be more alarming.

What is evident here is the decreasing ability to plan and follow through with defence procurement and manage the finances of India’s armed forces.

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