Demand for diesel cars moves north after the petrol price hike

With the difference between petrol and diesel prices going up to more than Rs 25 per litre, the demand for diesel cars has shot up and carmakers are bringing in more models to cater to the cost-sensitive Indian consumers.

The month of April saw a decline in the number of total car sales. High interest rates on loans and the recent hike in petrol prices are expected to hit car sales further. The high cost of petrol due to seven successive price increases has resulted in most middle-class consumers looking at diesel cars as a viable option due to the lower running costs.

General Motors India managing director Karl Slym said, “ The demand for diesel cars is fast catching up. At present the diesel market is around 28 per cent and this is expected to reach 35 to 40 per cent in the next few years.” Most of the new launches are made keeping in mind the demand for the diesel option and in some cases diesel variants are doing better than the petrol version. For example, demand for diesel models like Maruti Swift hatchback, SX4 and Dzire is higher than the petrol variants.

According to officials at Maruti Suzuki India Ltd (MSIL), diesel variants account for nearly 70 per cent of the total sales of Swift, Dzire and SX4. “We have seen an increase in demand for diesel cars and the reason is simple — lower running cost that fits the pocket. We see the trend to be only becoming stronger in the coming months,” Shashank Srivastava, chief GM (sales & marketing) at Maruti Suzuki said.

Recognising the trend, Ford India is going to invest $ 72 million to boost capacity at its local engine plant, with the main thrust being on producing more diesel engines. The sales of Ford India have shown a marked improvement after it introduced its new diesel variants.

Most of the companies like Volkswagen, Hyundai Motor, Tata Motors and General Motors are adding more diesel variants to their portfolios. Japanese premium carmaker Honda, which does not offer any diesel variant, appears to be losing out in sales with even its iconic Honda City being overtaken by some diesel variants in the same price bracket.

Pranab’s ‘UB 12’ budget relies on heavy dose of creative accounting

The Union Budget 2011-12 (UB 12) has been presented to the Parliament against the back drop of higher growth trajectory. The dip that was caused due to global economic crisis has nearly been overcome. The aggregate growth performance of the three sectors of the economy- agriculture, industry and services has been a matter of solace. The budget expects that the economy will move to double-digit growth in near future.

The major SWOT analysis of the economy: Strength: Unaffected growth rate; Weakness: Corruption and weak delivery of public goods and services, low public/ private accountability; Opportunities: Global recovery mainly in the US/ EU; Threats: sticky and stubborn inflation and higher current account deficit mainly due to international oil prices; Thrust areas: Industry (FDI/ FII Investment limits in domestic Mutual Funds / Infrastructure), and Rural development.

Against the above backdrop, the claim of UB12 that fiscal consolidation has been impressive is highly unconvincing. The essential element of the fiscal consolidation is to eliminate revenue deficit, bring down fiscal deficit to 3 percent during the medium term say by 2014- 15. However, the medium term path indicated by the government has not been that encouraging, particular regarding revenue deficit correction.

The budget 2011- 12 has estimated revenue deficit relative to GDP at 3.4 percent at the same level of 2010- 11. Since the government failed in its endeavour to reduce revenue deficit it has created some creative accounting to introduce a new concept of Effective Revenue Deficit ( ERD). The ERD adjusts the grants given to the states for capital assets. Therefore, it is claimed that these grants are of capital expenditure and should not figure in calculation of fiscal deficit.

Accordingly, the ERD is estimated at 1.8 percent of GDP as against the revenue deficit of 3.4 percent. This is erroneous accounting. Grants when received by States translated as non- tax revenues and funds being fungible it is difficult to ascertain the end- use of such funds. More over, even one considers the revenue deficit as normally defined the medium term projection has not been encouraging at 2.7 percent for 2012- 13 and 2.1 percent for 2013- 14.Revenue deficit relative to GDP in 2011- 12 being placed at the same level of 2010- 11 of 3.4 percent, reduction of fiscal deficit from 5.1 per cent of GDP to 4.6 per cent is budgeted to be materialized through higher disinvestment proceeds and lower capital expenditure. These are techniques normally followed to reduce fiscal deficit.

The third deficit indicator that is primary deficit which is key to sustainable fiscal policy and is budgeted at 1.6 percent implying a long distance to be covered by the government to achieve fiscal sustainability. From the above magnitude of deficit indicators, the implications are worth noting. Persistence of revenue deficit would mean negative savings for the government and will have adverse implications for growth. Similarly, persistence of primary deficit will have adverse implications for fiscal sustainability, even though government has claimed that debt- GDP ratio has been budgeted lower.

Fiscal deficit reduction at the cost of capital expenditure will have adverse implication for growth. Thus, in a nutshell, fiscal consolidation framework without strong revenue deficit correction will not be encouraging for sustainable growth and also fiscal sustainability.

It is announced that in the course of the year the Central Government would introduce an amendment to the FRBM Act, laying down the fiscal road map for the next five years. In this context it is suggested that revised road map should refrain from the concept of effective revenue deficit. Instead, it would be appropriate to introduce a road map for primary deficit along with revenue deficit, fiscal deficit and debt. The announcement of Public Debt Management Agency of India Bill in the next financial year is a welcome measure but needs to be drafted with utmost care as the fiscal consolidation has not been fully achieved A separate organization to manage the public debt than the Reserve Bank of India needs careful evaluation in terms skill management.

The budget states that the extant classification of public expenditure between plan, non- plan, revenue and capital spending needs to be revisited. In this context, it may be noted that accounting classification changes is not true expenditure management. Government needs to have a roadmap to reduce interest payments, rationalize subsidies and provision for capital expenditure.

As regards the tax revenue, the budgeted growth of 18.5 percent in gross tax revenue on the top of an increase of 26 percent in 2010- 11 looks difficult to be achieved similarly, Rs. 40,000 crore, disinvestment proceeds is on the higher side. Government is pessimistic on the non- tax revenue. Some initiatives should have been taken to enhance non- tax revenue to sustain fiscal consolidation.

The size of the cake (expenditure of BE 2011- 12 over RE 2010- 11 is slightly over 3 percent and when one accounts for an inflation of about 8 percent, the net size of the proposed budget is smaller as compared to the F 2010- 11. This has been based on an expected disinvestment proceeds of nearly (non- debt capital receipts of Rs. 40000 crore). The realization of this amount needs to be watched, as it is nearly double that of the disinvestment proceeds of the present fiscal. Healthcare sector and basic education have not been accorded the deserving outlays, as they play a very crucial role in the sustenance of our economic growth.

A lot of expectations were there on improving the agriculture sector, but surpassingly mere concessions to compliant farmers who repay their loans were announced. But as far input subsidies and marketing- related issues are concerned, the budget has remained silent except improving the cold storage from which the average Indian farmer gets no relief.

Defence spending up by 11.6 per cent

India's defence budget will go up by a modest 11.6 per cent in the next fiscal from Rs 1.51 lakh crores in the current financial year to Rs 1.64 crores, Finance Minister Pranab Mukherjee announced while presenting the Union budget.

A major chunk of Rs 69,198 will go to capital expenditure for the acquisition of arms and modernisation, he said while vowing that any further requirement for the country's defence would be met. The defence expenditure accounts for one- seventh of the total Union budget.

The Rs 8366 crores hike in capital expenditure, which is 12 per cent more than this year's Rs 60,833 crores, comes at a time when the government is looking to finalise big ticket deals. Of the total budgetary allocation for 2010- 11, the Army has been granted Rs 64,251 crores, Navy Rs 10,589 crores, Air Force Rs 15,928 crores and DRDO Rs 5,624 crores.

From the Rs 69,199 crores capital outlay, the Army got Rs 18,986 crores, Navy Rs 5,688 crores, Naval Fleet Rs 7,320 crores and Air Force Rs 30,699 crores. Commenting on the allocation, Minister of State for Defence M. M. Pallam Raju told reporters that its was a " substantial" increase for his ministry in view of the Rs 69,918 crores capital outlay.

Defence experts, however, believe that since around 60 per cent of the capital acquisition budget would go for committed liabilities (on account of contracts that have already been signed), only Rs. 18,000 to 21,000 will be available for new schemes. L. K. Behera at the Institute of Defence Studies and Analysis (IDSA) says this amount was not enough in view of the some big- ticket items likely to be purchased in the coming year.

These include the 126 Medium Multi-Role Combat Aircraft MMRCA (estimated to cost $ 11 billion), the C- 17 Globemaster (estimated cost of $ 5.8 billion), 197 light helicopter and the 145 Ultralight Howitzers for the Army.

FOREIGN MINISTR: The total budget of the External Affairs Ministry has been slashed to Rs 7106 crores for 2011- 12 from Rs 7120 allocated for the current year. The axe has fallen on the special diplomatic expenditure (discretionary funds), which have been slashed from Rs 1300 crores to Rs 1200 crores. Keeping in the view India's rising global power, an amount of Rs 574.38 crores has been set aside for international commitments and contributions to international bodies.

Financial Inclusion or Tokenism ?

Our Eleventh Five ear Plan (2007- 2012) aims at bringing about inclusive growth in the real sector. In the context of the policy paradigm of inclusive growth in the real sector, financial inclusion has become a policy priority. The basic idea is simple: access to affordable finance may enable the poor, especially the rural poor, to undertake economic activities like self- employment, or micro businesses.

The broader perspective of financial inclusion is provided by the Rangarajan Commission: “ financial inclusion is considered a prerequisite for empowerment, employment, economic growth, poverty reduction, and social cohesion.” A rather tall order indeed! Financial inclusion is thus the process of ensuring access to credit, or financial services generally, needed by vulnerable groups such as weaker sections and low income groups at affordable cost, from the mainstream institutions, like commercial banks, Regional Rural Banks, and Cooperatives, Reserve Bank of India (RBI) has taken a number of measures to accelerate this process of financial inclusion by setting specific targets of coverage of population by public sector banks (PSBs).

A major change introduced by RBI is that such coverage could take place not necessarily through a brick and mortar branch but also through any of the various forms of Information and Communication Technology (ICT) based models like Business Correspondents ( BCs). Under this BC Model banks have been permitted to use the services of various entities like the individual Kirana medical/ fair price shop owners, agents of small saving schemes, functionaries of well- run SHGs linked to banks.

Two funds were set up with NABARD: first, Financial Inclusion Fund for meeting the cost of developmental and promotional interventions for facilitating financial inclusion, secondly, Financial Inclusion Technology Fund to meet the cost of technology adoption. The overall Corpus of these funds was Rs. 500 crore each: these were enhanced by Rs. 100 crore each in 2010- 2011.

In November 2009, the RBI advised banks to draw up a roadmap to provide, by March 2011, banking services in every village with a population of over 2000. The target date has now been postponed to March 2012. About 73,000 villages have been allocated to various banks for provision of banking services.

While, in principle, the concept of financial inclusion is indeed in- controvertible, it is necessary to introspect on whether the way we are going about to achieve the results is the right way. Does the Target based approach, targets in terms of villages to be covered, or number of accounts to be opened, dilute the substance of inclusion? In this zeal for hundred per cent coverage, is the movement being reduced to tokenism? This article seeks to address these issues.

In retrospect, it can be seen that much before financial inclusion became internationally fashionable, the authors of nationalisations of banks in 1969, emerge as pioneers of financial inclusion. The expansion of branches of public sector banks was phenomenal in the post- nationalisation period, unprecedented in the history of world banking.

Banking growth in this era was in a manner of speaking organic. Banks were allocated areas for expansion like Lead Districts.

Further expansion was left to banks concerned: each bank would decide on whom to lend; how much to lend and so on. In other words, normal banking practices governed the expansion of banking.

In contract, the emphasis now seems to be on quantities. How many accounts has a bank opened? Since the inception of the scheme in November 2005, 50.6 million no-frills accounts”, which banks are required to open with very low or even nil” balances have been opened by banks, upto March 2010, with an outstanding balance of Rs. 5386 crore. Further more, in 2009- 10, banks were advised to provide small over drafts in such accounts, by March 2010 banks had provided 0.18 million over drafts with a total amount of Rs. 28 crore. General purpose credit cards (GCC) offered by banks at their rural and semi- urban branches are in the nature of revolving credit, entitling the holder to withdraw upto the limit sanctioned (Rs. 25,000). By March 2010, banks had provided credit aggregating Rs. 635 crore for 3.5 million GCC accounts.


This is a result of “command performance”, a case of directed credit. This massive target of number of accounts to be opened is putting a strain of banks’ resources, both human and financial. The Ministry of Finance is planning to compensate public sector banks for this additional burden imposed on them in terms rural penetration. Our submission is that RBI’s approach to financial inclusion in the sense of universal or near Universal coverage of households is flawed, or basically misconceived. Banking sector resources are, and would continue to be, limited.

Optimum utilisation of banking sector resources would demand a selective approach to credit extension. Ideally credit should chase productive activities and if this is

ensured, we could promote optimal use of banking sector resources. Spreading banking sector resources too thinly, which universal coverage necessarily implies, would not lead to optimise growth.

However, today financial inclusion has been reduced a game of numbers, a mere tokenism. Take, for instance, No frills Accounts’, we have discussed above. As Dr. Tarapore, former Deputy Governor, has printed out, only a tenth of these accounts are operational. What purpose on earth 90 per cent of such “ near dead” accounts serve?

Only RBI could provide an answer to this question. Because these accounts have stemmed from `targets’ and not grown organically, they are in a sorry state.

The point is let us not pursue the shadow of universal coverage but seize the substance of banking. Let RBI allocate areas to different banks for penetration but, leave the selection of borrowers to banks. Let there by no insistence on numbers. Then there will be the normal banking practices which govern the selection of borrowers, the quantum of credit to be given and so on. This approach would bring about healthy banking growth, facilitating growth in the real sector.