The risk of high food inflation hasn't gone away yet



Vivek Kaul 

Consumer price inflation(CPI) for the month of June 2014 came in at 7.31%. This was the lowest since January 2012. Wholesale price inflation(WPI) for the month of June 2014 had come in at 5.43%, which was a four month low.
A major reason for the fall in overall inflation has been a fall in food inflation, which as measured by the CPI, stood at 7.90% during the month of June 2014. In May 2014, the rate had stood 9.4%. In June 2013, the rate was at 11.84%.
Food inflation has been controlled to some extent due to several steps taken by the Narendra Modi government, which was sworn into power in May 2014. The government has set limits on the export of staples like onions and potatoes. It also decided to sell 5 million tonnes of rice in the open market.
These steps have obviously helped in the near-term. But how do things look over the next few months? The
India Meteorological Department in a press release dated July 11, 2014, pointed out that the“rainfall activity was deficient/scanty over the country as a whole” for the period between July 3 and July 9, 2014. This deficiency of rainfall was at 41% of the long period average.
This delay in rainfall has led to a 51% annual decline in the sowing of
kharif crops. What this means is that there will be an impact on their production in the months to come, which is likely to lead to a price rise.
When it comes to rice and wheat, the government has enough stock to ensure that it can prevent a rise in their price. As on July 1, 2014, the Food Corporation of India,
had a food grain stock of close to 69 million tonnes, which is much more than the strategic reserve that it needs to maintain. A part of this stock can be sold in the open market, in case the lack of adequate rainfall has an impact on the production of food grains, in the months to come.
But the government does not have the same option when it comes to vegetables and fruits. WPI data suggests that vegetable prices fell by 5.89% in June 2014, in comparison to a year earlier. CPI data suggests that vegetable prices went up by 8.73% in June 2014, in comparison to a year earlier.
If we look at the breakup provided by the WPI data potato prices went up by 42.52% in June. A major reason for the same seems to be the fact that the delay in the rains has led to a delay in sowing, harvesting and supply of crops.
Data provided by
the National Horticultural Research and Development Foundation proves this. As on June 2, 2014, the potato prices at the Agra mandi were Rs 12.15 per kg and the arrival of potatoes was at 1350 tonnes. On July 14, 2014, the arrival of potatoes had fallen to 720 tonnes and the price had shot up to Rs 16.20 per kg. This explains to a large extent the dramatic rise in the price of potatoes in the month of June. The current trend suggests that the price of potatoes will continue to rise in July as well.
Also, despite a minimum export price of $450 per tonne being set, a huge amount of potatoes are being exported to Pakistan.
A recent PTI report suggests that “as much as 1,500 to 2,000 tonnes of potatoes are being exported to Pakistan per day through Attari-Wagah land route in the wake of scarcity of the main vegetable crop in the neighbouring nation.”
And what about onions? Onion prices in June 2014 went up by 10.7% in comparison to the same period in 2013. In June 2013, onion prices had risen by 114.76%. The onion prices between May and June 2014 rose by 16.06%.
The arrival of onions at Lasalgaon, the biggest onion
mandi in the country has come down between June and July. In June, the average daily arrival of onions had stood at around 1590 tonnes, at an average price of Rs 13.67 per kg. For the first half of July, the average arrivals have fallen to a little over 1200 tonnes at an average price of Rs 19.67 per kg.
This clearly is not a good sign.
A recent report in the Business Standard pointed out that the National Horticultural Research and Development Foundation put “the onion inventory across the country at 2.4-2.5 million tonnes.” The country consumes around 1.2 million tonnes of onions per month. This means that the current stock of onions will last till end of August 2014. “The problem will aggravate in September, when the existing stocks finish. The government should start importing,” RP Gupta, director of National Horticultural Research and Development Foundation told the Business Standard. Onions can last as long as six months. Hence, unlike vegetables, the government can import and store onions if it wants to.
Other than this, fruit and milk prices continue to rise at a very high rate. Fruit prices in June 2014 rose by 21.4%( as per the CPI) and milk prices rose by 10.82%(as per the CPI). Egg, meat and fish prices also rose by 10.27%(as per the CPI) in comparison to last year. This is an impact of the loose-fiscal policy run by the Congress led United Progressive Alliance government. As a recent report titled
What a Waste! Brought out by Crisil Research points out “Loose fiscal policy, rising demand for high-value food items and substantial increases in wages — especially in rural wages, as a spillover [of] the rural employment guarantee scheme — have translated into higher demand for proteins. This has raised the prices of items such as milk & milk products, egg, fish and meat as supply falls short of demand. The production of milk and eggs has risen by only 3-4% a year, compounded annually, during 2009-10 to 2012-13, while inflation in this category has risen 14-15% a year.”
Due to these reasons the risk of high food inflation will not go away any time soon.
The article appeared with a different headline on on July 15, 2014

(Vivek Kaul is a writer. He tweets @kaul_vivek) 


Investing lessons from football penalties

goalkeeperVivek Kaul 

By the time you get around to reading this, the football World Cup would have already started. And hopefully the referees would have awarded a few penalty kicks by then as well.
A penalty kick is by far the easiest way to score a goal in football. As Steven D. Levitt and Stephen J. Dubner write in
Think Like a Freak “75 percent of penalty kicks at the elite level are successful.”
In fact, the goalkeeper cannot wait for the footballer taking the penalty to kick the ball. The ball takes around 0.2 seconds to reach the goal after it is kicked. Hence, this does not give enough time to goalkeeper to figure out the direction in which the ball is kicked. He has to take a guess in which direction the ball will be kicked and jump (either to his right or his left). If he gets the direction wrong, then the chances of a goal being scored “rise to about 90 percent”.
Given this, which direction do goalkeepers jump in? As Levitt and Dubner write “If you are a right-footed kicker, as most players are, going left is your “strong” side. That translates to more power and accuracy—but of course the keeper knows this too. That’s why keepers jump toward the kicker’s left corner 57 percent of time, and to the right only 41 percent.”
What does this mean? It means that they stay in the centre only 2 percent of the time. Hence, the for a footballer taking the penalty it makes immense sense to aim for the centre of the goal. He is more likely to succeed in scoring a goal. But only 17 percent of kicks are aimed for the centre of the goal.
Now why is that the case? Why don’t kickers hit the ball towards the centre of the goal where the chances of scoring the goal are the highest? A simple reason is kickers want to maintain some mystery instead of doing the same thing all the time (i.e. aim towards the centre of the goal). If every kicker started kicking the ball towards the centre of the goal all the time, goalkeepers would soon figure out what is happening and factor that in.
But there is a more important reason than just trying to be unpredictable. As Levitt and Dubner point out “Picture yourself standing over the ball. You have just mentally committed to aiming for the center. But wait a minute—what if the goalkeeper
doesn’t dive? What if for some reason he stays at home and you kick the ball straight into his gut and he saves [the goal]…without even having to budge? How pathetic will you seem!”
So you decide to take the “traditional route” and aim for one corner of the goal. If the goalkeeper saves the goal, then so be it. At least you won’t seem pathetic and be accused of doing a dumb thing.
At a more general level what this means is that people feel more comfortable being a part of a “herd” and doing things that everybody else around them seems to be doing. And this applies to the investment industry as well.
An excellent example of this comes from the dot-com bubble. By the end of 1999, even though the stock market had reached astonishingly high levels, the Wall Street analysts were still recommending that investors should continue to buy stocks. According to data from Zack Investment Research, only about one percent of the recommendations on some 6,000 companies were sell recommendations. The remaining 99 percent was divided between 69.5 percent buy recommendations and 29.9 percent hold recommendations (i.e., don’t buy more shares but don’t sell what you already own). The dot-com bubble started losing steam March 2000 onwards.
Bob Swarup explains this phenomenon in
Money Mania in the context of investment managers.As he writes “Don’t stick your head above the parapet. Run with the pack. There is safety in numbers, especially in bad times. It may not the rational human’s choice but it is the sensible human’s choice.”
Running with the herd is a sensible human’s choice due to two reasons. “First, the notion of inclusivity is powerful and can create perverse economic incentives that encourage crowding. Second, having decided to go with the flow, we are good at convincing ourselves that there are strong rational bases for what is essential a primal urge to belong and conform.”
An excellent recent example of this phenomenon is the current upgrading of the Sensex/Nifty targets by almost all stock brokerages. Targets as high as the Sensex reaching 35,000 points by December 2015, have been bandied around. This is not to say that the Sensex will not reach the target. It may. It may not. That time will tell and I really don’t know.
But the point is that there is not one stock brokerage out there which has a different point of view. How is that possible? Every stock brokerage is telling us that the economic problems of this country are over because a new government which “seems” to be reform oriented will deliver and set everything right. And happy days will be here again.
But as we all know, hope as an investment strategy, can be a pretty dangerous thing. Shouldn’t at least one brokerage be discounting for that? But they are not. As Swarup explains “no financial institution wants to be an outlier.”
Further, it needs to be pointed out here that investment managers are not the only ones who like to move in a herd. Economists do that as well, specially the ones who work on the policy side with the government. Given this, it limits their ability to spot bubbles and financial crises. In order to that they need to move against the herd. And that is a huge risk to take.
As Alan Greenspan writes in
The Map and the Territory —Risk, Human Nature and the Future of Forecasting “In my experience, if policy makers are in a minority and wrong, they are politically pilloried. If they are in a majority, and wrong, they are tolerated and the political consequences are far less dire.”
To conclude, John Maynard Keynes explained this phenomenon brilliantly when he said “Worldly wisdom teaches that it is better for the 
reputation to fail conventionally than to succeed unconventionally.”
The article originally appeared in the Mutual Fund Insight magazine July 2014  

(Vivek Kaul is the author of the Easy Money trilogy. He can be reached at [email protected]

"Companies are Throwing Money at Social Media"

rohit deshpande

Rohit Deshpandé is Sebastian S. Kresge Professor of Marketing at Harvard Business School, where he currently teaches in the Owner/President Management Program and in other executive education offerings. He has also taught global branding, international marketing. In this interview he talks to Forbes India on various aspects of branding.

I came across an interesting an interesting article that you wrote for the Forbestitled Branding Yoga: Good Business or Blasphemy?” Please tell us something about.
I wrote a case study called Branding Yoga. So my comments relate to that project. The first learning objective of the case is to ask the question can anything be branded?. The majority of the students say yes, anything can be branded. But the follow up question is, should everything be branded? And all of a sudden ethical issues and moral issues come up, in debating that question. It is a much more difficult question to answer.
Can you get into a little more detail?
The discussion broadens into this controversy over branding yoga. The particular controversy that got me interested into doing this case is something that I read about in The New York Times. There was a group of Indian Americans who had protested the commercialization of yoga and they said that it amounted to the commercialization of Hinduism. So they drew a parallel between commercialization of yoga and the commercialization of religion.
And how did that they do that?
In order, to make that argument they said that yoga is essentially Hindu and it would not exist if it were not were for Hinduism. This sparked a tremendous controversy that had to do with the history of Hinduism, the history of yoga, which preceded which one, can you teach Yoga without teaching Hinduism or is yoga all about exercise? That is really what fuels the case discussion. So, that is one set of issues that we deal with.
And what is the other set?
The other set of issues that we deal with is that there are two different branding models. One branding model is from Tara Stiles, who is a very successful Yoga teacher in New York. She is American. She is young. She used to be a model and a dancer and did Yoga herself as a way of keeping fit and started teaching her friends. They said there will be other people who will be interested. She made some free YouTube videos on this and they went viral. And then she started a yoga studio. Somewhere along the line, she became the yoga teacher of Deepak Chopra. He took lessons from her. He is a great fan of her brand of yoga and they have a joint venture . They made an iPad app, which has been very successful and even a DVD.
Which is the other model?
The other branding model is from somebody called Bikram Choudhury of Bikram Yoga. Now look at the contrast. Bikram is an American now but he was born in India. He was traditionally schooled and his brand of yoga focusses on the domain called hot yoga. It is extremely regimented and you have to be physically in a great shape to do that. And he has franchises. He has training programmes. He is much more of a yoga teacher training as a way of expanding the franchise, even though both are marketers. She is a much more of a social media type of thing. And both of them are successful. Both have attracted controversy, Bikram probably much more so, despite the fact that he is Indian and more authentic than she is.
What is the point you are trying to make?
Yoga has been very successfully branded, with different branding approaches and what makes it interesting is that in America the majority of yoga teachers don’t make very much money.
They have small studios. They are making a living. But they are not millionaires. Both Stiles and Choudhury have achieved a lot.
The ones who are not making haven’t branded yoga?
They haven’t thought about the branding aspects of yoga at all. I don’t know how it is in India, but this idea of the business of yoga, a lot of people look at it as an oxymoron.
You just talked social media. These days social media marketing is a huge thing. Does it work?
Of course it works. If done well, it works really well. There are a number of case examples of a number of companies that are doing a very good job. But it doesn’t work for everybody. Companies are spending a lot of money on social media. But a lot of it is experimental i.e. they are throwing money at something, and they are really not sure of what works and what does not work. We are at a nascent experimental stage where we are trying to figure this out.
Can you elaborate on that?
There are lots of examples of social media where the companies themselves are not sure whether the money is worth the spent. I am not sure I can isolate a social media disaster as much as companies not knowing whether they spent their money well. I would say 90% of the companies are in that group of not knowing whether they spent the money well.
Can you explain through an example?
It has to do with the appropriate success metric. How do you judge whether your social media campaign work has worked? One of the most popular metrics is the number of likes that you get. I have some colleagues who have done some research on this and they have found that likes do not translate into sales. When you think about it cognitively it doesn’t take a lot of effort to like but it takes a lot of effort, and not to mention money, to buy. Hence, click-throughs and getting sales, that is much much harder to measure.
So what is being done about this?
The companies are trying to figure out whether by spending more money they can get click-through , that is, translate likes into sales. But there are all kinds of other factors that might explain sales and how do you isolate it and so on.
Can you give us an example of a company which has used social media well?
I am developing a case on Dell. And they are considered to be a best practice example of using social media in the business to business space. What works for them is that they have a business model which is direct to consumer rather than going through retail. So they have open channel historically with their customers. They don’t get information on their customers from some sales partners, which means that when something goes wrong, they also find out very very quickly. And they have traditionally done that through their telephone lines. People call on their toll free lines when they have a problem. With the advent of social media, some irritated customers started blogging that they were upset at Dell, there is a problem that happened and so on.
And what did Dell do about it?
Michael Dell, who is the founder, is himself very active in the blog space and when he discovered this he told a team of his people that we should just reach out directly to these customers and fix these issues. When they reached out to fix these issues, the bloggers put blogs saying that here is what the company has done. Effectively, their bloggers were doing their job for them. As you know there is a lot of research that shows that restitution actually gets you a lot more business and than actually the initial sale does. And when the restitution story is being told by a customer it carries even more credibility. That is the story of how Dell got into this space. Now they have a command centre and they keep monitoring what is going on. It has to do with the complaint hotline or the repair hotline or whatever you call it, which is the history of the company. They have now translated this into the social media. They estimate that it has saved them a lot of money and a lot of loss, because of people who would have complained and gone away and scared other people from buying Dell.
Given your experience in the field of marketing and branding, which is the most frequent branding mistake that companies make?
The most frequent branding mistake is to assume that your brand is a logo rather than the personality of your product and company. To assume that its a simply a trademark and therefore it should be managed out of your communications department and maybe your legal department, rather than becoming a part of the overall strategy of the firm. In the research I have done this tends to be particularly true for technology intensive companies where the product is everything and the quality is everything. It is almost like a Dilbert cartoon which stereotypes marketing and says that marketing does not add any value and therefore branding is not very essential and it is all about the quality of the product. Companies in emerging markets are not comfortable with thinking about a brand as anything more than what their marketing people do. It is not seen as a part of the strategy of the firm. A brand is not seen as a relationship with a customer, it is seen as a trademark.
Can you give us an example which doesn’t hold true for whatever you have just said?
I wrote a case on Infosys and they have done an incredible job of making the Infosys brand mean something. Narayana Murthy in some ways represented the brand. The confidence that people had in buying from Infosys came from people who ran the company. The brand stood for more than just IT. The brand stood for the people and since 90% their sales comes from outside India, they actually had to brand India before they could brand Infosys. So there is a whole big story there of how India Inc came to be and what role Infosys played in it.
When brands become successful, the tendency is to extend it. Do line extensions work?
Line extensions do work but they don’t work in all cases. The Kingfisher story is an example of a line extension strategy that did not really work. Yamaha is an example of a line extension strategy that has worked very well. But I think the question is why the line extension? If the reason for the line extension is that you have built a powerful brand and want to milk it, then there is a chance that it won’t work. But if the purpose of the line extension is that it is something that the consumers want, then there is much more likelihood that it will work.
Any other point that should be kept in mind?
Another key part is that what does the brand mean? And does that meaning extend? The question for the Kingfisher management should have been what does the Kingfisher brand mean and how does that meaning translate from beer to airline? There are some brands that transcend the product category, in which case the brand might go across a whole variety of things. There are other brands where their meaning is very rooted in the product category, which is almost like the paradox of success. The brand is successful because people see it as Kingfisher means beer and it can’t mean anything else.
Do celebrity endorsements work?
The research on that is in this area called brand personality. Where the personality of the celebrity is consistent with the personality of the brand, it works. When there is a mismatch, then consumers are cynical and they believe that the only reason this person is speaking is because she or he is being paid for it, and they probably don’t use the brand themselves. I think that is the real issue.
Can you give us an example?
The bad example is the [James] Bond franchise. The BMW introduced a product called z3 through a Bond movie. It was for them a relatively inexpensive convertible car. This made a lot of news because James Bond was a British secret agent who used to drive a British Aston Martin and was now driving a German car. This made for good media. This was a very successful product placement. When that happened, not only BMW but a whole bunch of product companies decided that they would flood the next Bond film with product placements. There was a huge consumer backlash. Consumers were frustrated to the point that it was hurting the Bond movie franchise. People were saying that there is no way that the endorser is personally committed to all these different things but he is using it because he is being paid.
And a good example?
There are several examples of where the brand personality fits. An example of that is the basketball player Michael Jackson advertising Gatorade, which is a sports drink. And it went on for a very very long time.

The interview originally appeared in the Forbes India magazine dated July 10, 2014

No "acche din" for govt finances any time soon

Fostering Public Leadership - World Economic Forum - India Economic Summit 2010Vivek Kaul 

So what do the finance minister Arun Jaitley and the Hindi film industry have in common? They both love the number “Rs 100 crore”. The Hindi film industry cannot stop talking about the films that have done a business of Rs 100 crore or more. Jaitley, in his maiden budget speech, used the Rs 100 crore number 29 times, while making allocations to various government schemes.
This has led a lot of experts to comment that Jaitley has spread himself too thin. Whether that turns out to be the case, only time will tell. Nevertheless, in the budget speech, Jaitley, like finance ministers before him, did not talk about the single biggest expenditure of the government.
The single biggest expenditure of the government of India is debt servicing i.e. the interest that it pays on its debt and the money that it spends in repaying it. Governments all over the world, including the Indian government, spend much more than they earn. This difference is referred to as the fiscal deficit and is financed through borrowing. The money is borrowed for a certain period. During the period a certain amount of interest needs to be paid on it. And at the end of the period, the borrowed money needs to be repaid.
Over the years, the government has been spending more than it has earning. Given this, the fiscal deficit has shot up. In 2007-2008, the fiscal deficit of the Indian government had stood at Rs 1,26,912 crore or 2.6% of the GDP. This had shot up to Rs 5,15,990 crore or 5.7% of the GDP, by 2011-2012. The fiscal deficit projected for 2014-2015 stands at Rs 5,31,177 crore or 4.1% of the GDP.
This increase in fiscal deficit has been financed by a greater amount of borrowing. A greater borrowing has meant that the cost of debt servicing for the government has gone up over the years. In 2009-2010, the total debt servicing cost of the Indian government had stood Rs 2,94,857 crore. The fiscal deficit during the course of that year had stood at Rs 4,18,842 crore. Hence, the ratio of the debt servicing cost to the fiscal deficit worked out to 0.7.
By 2013-2014, the total debt servicing cost had shot up to Rs 5,43,267 crore. As the amount of money borrowed went up, so did the interest that needed to paid on it. And, so did the repayments. The fiscal deficit for the year stood at Rs 5,24,539 crore. Hence, the ratio of debt servicing cost to the fiscal deficit shot up to 1.04.
For the current financial year, the total debt servicing cost has been estimated to be at Rs 6,43,301 crore. Interestingly, in the interim budget presented by P Chidambaram in February earlier this year, the number had stood at Rs 6,74,184 crore. How has the number come down by more than Rs 30,000 crore, that Mr Jaitley did not explain. The fiscal deficit for the year has been projected at Rs 5,31,177 crore. Hence, the ratio of the total debt servicing cost to the fiscal deficit is now at 1.21.
What does this ratio tell us? It tells us that the entire borrowing(and a part of the income) of the government of India is being used to repay past borrowing and to pay interest on it. In simple everyday terms it means that I am using one credit card to pay off what is due on another credit card.
In such a scenario, it becomes very difficult for the government to spend money on other important areas. It also explains to a large extent why Jaitley made so many allocations of just Rs 100 crore. If he had the money, he would have probably preferred a higher amount of allocation. Of course, Mr Jaitley cannot be blamed for this mess which he has inherited from the Congress led United Progressive Alliance (UPA) government.
So what is the way out of this financial hole? The revenue receipts of the government(i.e. the money that it earns through tax and non tax revenue) for the year 2007-2008 had stood at 10.2% of the GDP. For the year, 2014-2015, the revenue receipts are at 9.2% of the GDP.
What this tells us clearly is that the revenue receipts of the government have come down and need to go up. How can that be done? The Modi government has been gung ho about getting the black money of Indians stashed abroad back to India. But what about all the black money that is there in the country? Wouldn’t that be easier to recover?
While the intention to get back all this black money from abroad is certainly noble, how practical is it? Also, if the idea is to recover black money then why discriminate between those who have managed to transfer the money abroad and those who haven’t.
The Modi government can borrow an idea or two from what happened in Greece. In order to recover black money, the Greek government used Google Earth to track those who have swimming pools and then cross indexed their address with the amount of tax they are paying. Ideas along similar lines which use information technology extensively in order to identify people who are not paying the correct amount of income tax, need to be come up with.
In the budget speech made in February 2013, the then finance minister P Chidambaram had estimated that India had only 42,800 people with a taxable income of Rs 1 crore or more. What this clearly tells us is that a lot of people are not paying income tax.
In a country where 27,000 luxury cars are sold every year, the number of individuals with a taxable income of Rs 1 crore has to be more than 42,800. These individuals, who include property dealers, doctors, chartered accountants etc., need to be made to pay their fair share of income tax.
Of course, any such move will not immediately lead to results. The way to do is to execute a few pilot projects in different parts of the country and identify the big defaulters and get them to pay the income tax. This should be extensively publicized as well, so as t ensure that other similar people start paying the right amount of income tax.

The piece originally appeared in The Asian Age/Deccan Chronicle dated July 11, 2014 under a different headline.

(Vivek Kaul is the author of Easy Money: Evolution of the Global Financial System to the Great Bubble Burst. He can be reached at [email protected]

Budget 2014: When it comes to the fiscal deficit, Jaitley has done a Chidambaram

 Fostering Public Leadership - World Economic Forum - India Economic Summit 2010

Vivek Kaul

Alfred Hitchcock, the British director, who taught Hollywood how to make thrillers, once famously said: “The length of a film should be directly related to the endurance of the human bladder.” On a lighter note, this rule should apply to the speeches that politicians make, as well.
Arun Jaitley in his maiden budget speech as the finance minister of India, junked Hitchcock’s bladder test and went on and on and on. Early on in his budget speech Jaitley said : “My predecessor has set up a very difficult task of reducing fiscal deficit to 4.1 per cent of the GDP in the current year. Considering that we had two years of low GDP growth, an almost static industrial growth, a moderate increase in indirect taxes, a large subsidy burden and not so encouraging tax buoyancy, the target of 4.1 per cent fiscal deficit is indeed daunting. Difficult, as it may appear, I have decided to accept this target as a challenge. One fails only when one stops trying.” Fiscal deficit is the difference between what a government earns and what it spends.
So, the question is how does Jaitley plan to meet the fiscal deficit target of Rs 5,31,177 crore or 4.1% of the GDP? Jaitley has assumed that tax receipts will go up by 16.9% to Rs 9,77,258 crore during the course of this financial year (April 2014 to March 2015). In the economic survey released yesterday, the economic growth for the current financial year has been projected to be at 5.4-5.9%. Governments projections typically tend out to be more optimistic than they actually turn out to be.
In this scenario how feasible is an assumption of 16.9% growth in tax receipts? Jaitley’s predecessor P Chidambaram had assumed a growth of 19.2% in tax receipts for the last financial year. The actual growth turned out to be much lower at 12.7%. In a scenario of low growth and high inflation an assumption of 16.9% growth in tax receipts is highly optimistic and is unlikely to be achieved.
Chidambaram had gone about achieving a fiscal deficit of 4.6% of the GDP for the last financial year(April 2013 to March 2014) by largely doing two things. Subsidies on petroleum, food and fertilizer which should have been paid up by the government during the course of the last financial year, were postponed to this financial year. Estimates suggest that this amount was greater than Rs 1,00,000 crore.
Jaitley doesn’t seem to have taken this into account while working out the numbers. The total cost of subsidies for this financial year has been budgeted to be at Rs 2,55,707.62 crore. This is more or less similar to the last year’s number. Hence, unless subsidies are brought down majorly, which remains a politically unpopular move and inflationary in the short-term, this amount is unlikely to be sufficient to meet the subsidy commitments of the government. And if subsidises are not brought down, Jaitley will either have to let the fiscal deficit go up or like Chidambaram push their accounting to the next financial year.
The second thing Chidambaram did in order to achieve a fiscal deficit of 4.6% of GDP was to cut down on plan expenditure. The government expenditure is categorised into two kinds—planned and non planned. Planned expenditure is essentially money that goes towards creation of productive assets through schemes and programmes sponsored by the central government. Non-plan expenditure is an outcome of planned expenditure. For example, the government constructs a highway using money categorised as a planned expenditure. But the money that goes towards the maintenance of that highway is non-planned expenditure. Interest payments on debt, pensions, salaries, subsidies and maintenance expenditure are all non-plan expenditure.
As is obvious a lot of non-plan expenditure is largely regular expenditure that cannot be done away with. The government needs to keep paying salaries, pensions and interest on debt, on time. These expenses cannot be postponed. The only thing it can do is to postpone making the subsidy payments. Hence, when expenditure needs to be cut, it is the asset creating planned expenditure which typically faces the axe and that is not good for the overall economy. If one looks at the numbers Jaitley has assumed that is the direction we seem to be headed.
The planned expenditure target of the government during the last financial year was at Rs 5,55,322 crore. The actual planned expenditure came in at Rs 4,75,532 crore, which was close to Rs 80,000 crore or 14.4% lower. This is how the fiscal deficit of 4.6% of GDP was achieved.
Jaitley has set the total planned expenditure for the year at Rs 5,75,000 crore. It is highly likely that during the last few months of this financial year (i.e. the period between January and March 2015) Jaitley might like Chidambaram have to put a freeze on this expenditure, if he hopes to achieve the fiscal deficit target that he has set. And this can’t possibly be good for the Indian economy.
Another area where Jaitley could have been aggressive is the money that can be raised through the disinvestment of public sector companies. During the course of this financial year the government hopes to earn Rs 58,425 crore through disinvestment. Chidambaram had set a target for Rs 54,000 crore but managed to earn only around Rs 19,000 crore. The advantage that Jaitley has is that the stock market has been rallying for a while. Given this, the government could have been aggressive and set a disinvestment target of close to Rs 1,00,000 crore.
What makes the fiscal deficit target of 4.1% of GDP further unrealistic is the legacy that the Congress led United Progressive Alliance has left for the Narendra Modi led National Democratic Alliance. The fiscal deficit number for the first two months of this financial year(April-May 2014) does not look good at all. Numbers released by the Controller General of Accounts suggest that for April-May 2014, the fiscal deficit of the government has already touched Rs 2.41 lakh crore.
This works out at around 45% of the fiscal deficit target of Rs 5,31,177 crore that Jaitley has set. Hence, he has only around Rs 2,90,000 crore to play around with between June 2014 to March 2015. This, of course is not Jaitley’s fault.
To conclude, this was Jaitley’s chance of presenting the true financial situation of the Indian government. He seems to have lost that chance by projecting a higher revenue than the government is likely to earn and a lower expenditure than the government is likely to spend.
The article also appeared on on July 10, 2014

(Vivek Kaul is a writer. He tweets @kaul_vivek)