India has enough land for farming but there are other bigger issues to worry about

agricultureVivek Kaul

One of the fears that has been raised in the aftermath of the government promulgating an ordinance to amend the land acquisition act is that land will be taken away for other purposes and given that, the amount of land used for farming will come down dramatically.
This is a very specious argument that is being made.
Data from World Bank shows that around 60.3% of India’s land area is agricultural land. The bank defines agricultural land as “share of land area that is arable, under permanent crops, and under permanent pastures.”
In fact India has the second largest agricultural land in the world. A
s India Brand Equity Foundation, a trust established by the Ministry of Commerce and Industry points out: “At 157.35 million hectares, India holds the second largest agricultural land globally.” Only, the United States has more agricultural land than India.
What this means is that India has enough land dedicated to agriculture and even if some of it is taken away for other purposes there will still be enough land left for agriculture. Nevertheless, there are bigger problems when it comes to Indian agriculture.
Take the case of China. India has more arable land than China. This, despite the fact its total area is only a little over 34% that of China. However, China produces more rice and wheat than India does.
As a report in The Wall Street Journal points out: “India is the second largest producer of rice and wheat after China, with China producing about 40% more rice and wheat than India. India is also the second largest producer of fruits and vegetables in the world after China, but China’s fruit production is three times India’s production.”
What this tells us is that India’s agricultural productivity is low compared to that of China and many other countries in the world.
A report in Mint using 2013 data from the Food and Agricultural Organization points out: “India produces 106.19 million tonnes of rice a year from 44 million hectares of land. That’s a yield rate of 2.4 tonnes per hectare, placing India at 27th place out of 47 countries. China and Brazil have yield rates of 4.7 tonnes per hectare and 3.6 tonnes per hectare, respectively.”
In case of wheat the productivity is better than that of rice. “With 93.51 million tonnes of wheat from 29.65 million hectares, India’s yield rate of 3.15 tonnes per hectare places it 19th out of 41 countries. Here, we do better than Brazil’s yield rate of 2.73 tonnes per hectare, but lag behind South Africa (3.4 t/ha) and China (4.9 t/ha),” the report points out.
There are multiple reasons for this low productivity. The average holding size of land has come down over the decades.
The State of the Indian Agricultural Report for 2012-2013 points out that: “As per Agriculture Census 2010-11, small and marginal holdings of less than 2 hectare account for 85 per cent of the total operational holdings and 44 per cent of the total operated area. The average size of holdings for all operational classes (small & marginal, medium and large) have declined over the years and for all classes put together it has come down to 1.16 hectare in 2010-11 from 2.82 hectare in 1970-71.”
The shrinking size of the average land holding of an Indian farmer has held back agricultural productivity. There is not much that can be done about this. But there are other areas which can be worked upon. As the State of the Indian Agricultural Report points out: “To enhance productivity, easy and reliable access to inputs such as quality seeds, fertilizers, pesticides, access to suitable technology tailored for specific needs, the presence of support infrastructure and innovative marketing systems to aggregate and market the output from large number of small holdings efficiently.”
Ensuring that quality seeds are available is very important. “The efficacy of other agricultural inputs such as fertilizers, pesticides and irrigation is largely determined by the quality of the seed used. It is estimated that quality of seed accounts for 20-25% of productivity. Hence timely availability of quality seeds at affordable prices to farmers is necessary for achieving higher

agricultural productivity and production,” the report further points out.
Another issue which adds to the problem is that “substantial chunks of scarce land remain untilled because of landowners’ reluctance to lease out land for fear of losing its ownership.”
What these details tell us clearly is that India has enough land for farming. The problem is that it is not productive enough. The other huge issue is that for nearly 58% of India’s population (as per India Brand Equity Foundation) agriculture is a primary source of livelihood. But agriculture accounts only 14% of nation’s GDP.
Hence, there is a huge requirement to move people away from agriculture into other areas. This can be done if enough industry and jobs are created. For that land is required and farmers have that land.
The worrying point is that in the past when governments have taken away land from farmers, they have not been adequately compensated. Neither have they been re-skilled so that they can take on other professions. And too many times in the past, the government has taken land from farmers at cheap prices and sold it on too industrialists at a higher price. The industrialists have then sold it on further and made a killing. Hence, the trust system that is required for acquiring land for public purposes and building industry has broken down completely. Building this trust will not be easy.
Further, the industry has had a totally lackadaisical attitude towards the entire issue. They seem to be just interested in getting the land and profiting from it. Take the recent comment made by Sunil Kant Munjal, joint MD, Hero MotoCorp,
to the Financial Express. “We can pay but don’t make us responsible for resettlement. That should be left to a government agency,” he said. The question to ask is why can’t the industry be responsible for resettlement?
The issue of land acquisition is a complicated one. If India has to develop, land is required. There should be no doubt on that front. But the entire system of compensating and re-skilling farmers so that they can move away from agriculture needs to be thought through as well.

The article originally appeared on on January 6, 2015
(Vivek Kaul is the author of the Easy Money trilogy. He tweets @kaul_vivek) 

Ordinance Raj should not be the way forward for Modi government

narendra_modiVivek Kaul

The union minister for parliamentary affairs M Venkiah Naidu made an interesting comment in July 2014, when he said that the Congress led United Progressive Alliance (UPA) government had promulgated 61 ordinances when it was in power between 2004 and 2014.
This comment has since then been used as an explanation to defend ordinances promulgated by the Narendra Modi government. If they could have done it, why can’t we? Since coming to power the Modi government has promulgated nine ordinances. The latest set of ordinances to be issued included the ordinance to amend the land acquisition act and the ordinance to allow foreign direct investment in insurance companies to be increased to 49% of equity, from the current 26%. Another ordinance regularizing e-rickshaws in Delhi has also been issued.
The reason for the government issuing these ordinances lies in the fact that the opposition parties did not allow the Rajya Sabha to operate in the recent winter session. The Bhartiya Janata Party (BJP) has only 45 out of the 250 MPs that make up the Rajya Sabha. Hence, with the opposition ganging up together, there is no way that the BJP can get any legislation passed through the upper house of Parliament.
This has led to the BJP government promulgating ordinances. The article 123 of the constitution empowers the president to promulgate an ordinance if the Parliament is not in session, provided he is convinced that the situation demands so. What this also means is that ordinances should not be used to get around the opposition that the government might be facing in Parliament. If the government decides to do that, it is in a way putting to test the basic tenets of democracy.
A report in The Indian Express points out that the president Pranab Mukherjee asked the government “to explain the urgency behind the [land acquisition] ordinance.” Three union ministers “put forth the government’s viewpoint and persuaded the President about the need to move swiftly,” the report points out.
The president has the power to return the ordinance to the government if he feels that the ordinance requires reconsideration. Nevertheless, if the government sends back the ordinance to him, he needs to promulgate it.
After promulgating the ordinance allowing the foreign direct investment in insurance companies to be increased to 49% of equity,
the finance minister Arun Jaitley said: “The ordinance demonstrates the firm commitment and determination of this government to reform. It also announces to the rest of the world, including investors, that this country can no longer wait even if one of the Houses of Parliament waits indefinitely to take up its agenda.”
Jaitley further added that “already there is too much delay, which is why there is urgency.”
What Jaitley is not saying is that the BJP in its role as the principal opposition party until May 25, 2014, has also been responsible for this delay. In December 2013, Yashwant Sinha, a senior BJP leader and a former finance minister had said that the
BJP was willing to support the insurance bill provided the “government shed its obstinate stand of providing 49 per cent FDI in the sector”.
Further, as the principal opposition party in the previous Lok Sabha, BJP regularly stalled proceedings. It is now being paid back in the same coin in the Rajya Sabha. Hence, the party taking a moral high ground on the issue is rather comical. At the same time, the opposition parties not allowing the Rajya Sabha to function is also not democratic. A major function of the Parliament is to legislate and a Parliament that does not legislate is not fulfilling one of its basic purposes.
Another important point that needs to be made here is that justifying the promulgation of ordinances just because the UPA government did the same is a rather weak justification. The UPA government is not really a benchmark for anything when it comes to government or governance. The BJP can and needs to do substantially better than that. They shouldn’t be setting their benchmarks so low.
Further, an ordinance is valid upto six weeks from the date on which the next session of the Parliament starts. After that it lapses. There is no upper limit to the number of times an ordinance can re-promulgated. But that is easier said than done. In this context, the case of DC Wadhwa versus the State of Bihar needs to be discussed here.
The Article 213 of the constitution allows the governor of a state to promulgate an ordinance provided the legislative assembly is not in session. The Bihar government abused this provision to the hilt. Between 1950 and 1966, the Bihar legislature passed 444 Acts. The number of ordinances promulgated during the period stood at 76. The situation then deteriorated and between 1967 and 1981, the number of Acts passed by the legislature were at 180, whereas the number of ordinances passed stood at 2014. As many as
50 ordinances were passed on a single day.
D C Wadhwa, who was the director of the Gokhale Institute of Politics and Economics in Pune, filed a writ petition on this in the Supreme Court.
As Swaminathan Aiyar points out in a recent column in The Times of India: “in the Bihar Ordinance Raj case, the Supreme Court said that repeated ordinances were undesirable but not illegal.” PRS Legislative Research points out that: “The Supreme Court argued that if Ordinance making was made a usual practice, creating an ‘Ordinance raj’ the courts could strike down re-promulgated Ordinances.”
The point is that if the Modi government keeps promulgating and re-promulgating ordinances someone could easily challenge it in court. Hence, none of those constituents who are likely to benefit from an ordinance will act on it unless it is passed by both the houses of the Parliament. This means you won’t see any foreign company increasing its stake in the insurance business that it runs in India to 49% any time soon.
The government does not have the numbers to push these laws through the Rajya Sabha. So what can it do? It can call for a joint session of Parliament and hope to pass these laws. But calling a joint session isn’t exactly easy.
A joint session can be called if a bill is rejected either by the Lok Sabha or the Rajya Sabha. Given that the opposition parties haven’t allowed the Rajya Sabha to function, no bill has been rejected. Secondly, a joint session can be called if the there are disagreements regarding amendments between the two houses. That hasn’t happened either. Finally, more than six months need to have passed since the introduction of the bill in either house. If the bill still hasn’t been passed then a joint session can be called.
While the third condition isn’t fulfilled (for the lack of a better word) currently, this is precisely what the government seems to be aiming at. Nevertheless, it needs to be pointed out that only on three previous occasions a joint session of Parliament has been called (the Dowry Prohibition Bill, 1961, the Banking Service Commission (Repeal) Bill, 1978, and the Prevention of Terrorism Bill, 2002).
A joint session is not a workable solution to this deadlock. First and foremost because it delays legislation. A joint session of Parliament cannot be called overnight. Secondly, for a government which has time and again told the country that it has a huge reform agenda, it cannot be held to ransom by the opposition parties, every time it tries to introduce a new legislation. This is likely to be the case over the next few years, until the BJP state assemblies are able to elect enough MPs to the Rajya Sabha. Thirdly, the opposition parties can get together and try and stall a joint session of Parliament as well.
Given these reasons, it is time that prime minister Narendra Modi and his lieutenants drop the aggressive posture and try to engage the opposition parties. The aggression that suited them when they were in opposition will go against them now that they are in government. This is something that they need to think about.

The article originally appeared on as a part of The Daily Reckoning, on January 6, 2015

Jaitley needs to be realistic while making budget projections for 2015-2016

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

The fiscal deficit of the government of India for the period April to November 2014 stood at Rs 5,25,134 crore or 98.9% of the annual target of Rs 5,31,177 crore (4.1% of the GDP). Fiscal deficit is the difference between what a government earns and what it spends.
As can be seen from the accompanying table this is the second highest fiscal deficit during the first eight months of the financial year since 1997-1998. Also, the level is way higher than the average fiscal deficit of 73.64% between 1997 and 2013. 


% of the annual target

April to November 2014


April to November 2013


April to November 2012


April to November 2011


April to November 2010


April to November 2009


April to November 2008


April to November 2007


April to November 2006


April to November 2005


April to November 2004


April to November 2003


April to November 2002


April to November 2001


April to November 2000


April to November 1999


April to November 1998


April to November 1997



As far as the total expenditure of the government is concerned it has gone up by only 5% in comparison to the same period in 2013. The major reason for the high fiscal deficit lies in the fact that the total revenues of the government for the period April to November 2014 have grown by 7.8%. The budget presented by finance minister Arun Jaitley in July 2014 had assumed that revenues would grow by 15.6%.
Hence, the revenue growth has been half of the projected level. Things are even worse when it comes to the taxes collected by the government. It was assumed that total tax collected by the government would grow by 16.9% in 2014-2015 in comparison to the same period during the last financial year. The actual growth between April to November 2014 was just 4.3%. The projections made by Jaitley and his team have gone for a toss totally, even after taking into account the fact that the government earns a substantial portion of its tax income during the last quarter of the financial year.
The Mid Year Economic Review which was published in late December 2014 stated that the tax collections will fall short by close to Rs 105,084 crore or around 0.84% of the GDP.
The learning from this is that Jaitley and his team need to be realistic with the projections they make for the next financial year’s budget, which is due next month. There is no point in assuming a very high growth rate in revenues, as was the case this year, and hence, understating the fiscal deficit number for the next financial year.

What these numbers also clearly tell us is that there is no way the government can meet the fiscal deficit target that it set for itself in July, unless it changes course. It doesn’t take rocket science to figure out that there are two things that the government can basically do—cut expenditure and increase revenues.
As far as government expenditure is concerned as I have pointed out in the past the expenditure is categorised into two categories—plan and non-plan. Non-plan expenditure makes up for around 68% of the total expenditure of the government in 2014-2015.
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. Hence, slashing this expenditure to meet the fiscal deficit target is easier said than done.
What is interesting is that while presenting the budget Jaitley had assumed that non-plan expenditure would grow by 9.4% during the course of the financial year. At the same time he had assumed that plan expenditure would grow by 20.9%.
Jaitley had increased the allocation of plan expenditure by close to Rs 1,00,000 crore to Rs 5,75,000 crore. Planned expenditure is essentially money that goes towards creation of productive assets through schemes and programmes sponsored by the central government. In an environment where the highly indebted private sector is going slow on investment, the government should be spending more on asset creation.
Nevertheless, the government will now ago about slashing plan expenditure big time between January and March 2015. From the looks of it, the government has already started going slow on this front. The plan expenditure between April and November 2014 grew by a minuscule 0.9%.
My broad guess is that Jaitley will cut plan expenditure by around Rs 1,00,000 crore to Rs 4,75,000 crore to keep it at the last year’s level. And this can’t be good news in an environment of slow growth. This is what the previous finance minister Chidambaram did in 2012-2013 and 2013-2014. In 2012-2013, he had budgeted Rs 5,21,025 crore towards plan expenditure. The final expenditure came in 20.6% lower at Rs 4,13,625 crore. In 2013-2014, the plan expenditure was budgeted at Rs 5,55,322 crore. The final expenditure came in 14.4% lower at Rs 4,75,532 crore.
There several other areas where Jaitley will have to copy Chidambaram as well.
A recent report in the Business Standard points out that: “Jaitley was likely to ask PSU chiefs to use their cash piles to either boost public investment or partly offset the expected shortfall in tax receipts.”
Chidambaram had done something similar last year by getting public sector companies to pay high dividends. Coal India in particular announced a total dividend of Rs 18,317.46 crore. Of this, a lion’s share of Rs 16,485 crore went to the government. Over and above this, the government also collected Rs 3,100 crore as dividend distribution tax from the company.
Something similar seems to be in the works this year as well.
In another report Business Standard had pointed out that public sector units were sitting on cash of close to Rs 2,00,000 crore. Coal India with Rs 54,780.2 crore was right on top. Getting these companies to pay high dividends is essentially an accounting shenanigan where money will be moved from one arm of the government to another.
Jaitley like Chidambaram will also have to postpone payments to the next financial year. Chidambaram postponed more than Rs 1,00,000 crore of payments in order to meet the fiscal deficit target that he had set for the last government. It is highly likely that the same thing might happen again.
A recent report in The Financial Express points out that: “The Food Corporation of India’s (FCI) procurement operations could come to a halt by February unless it is paid a good part of its outstanding dues of a record Rs 58,000 crore soon.” The corporation which buys rice and wheat directly from farmers is currently running on three short-term bank loans of Rs 20,000 crore , on which it is paying an interest of 11.28%.
The report further points out that “The food ministry has requested the finance ministry for Rs 1.47 lakh crore (including Rs 92,000 crore budgeted for FCI’s MSP functions and overall food subsidy arrears from previous years) in the current fiscal.” This looks highly unlikely and which means some expenditure that has to be paid for will get postponed to the next financial year.
What this means is that Jaitley will have to resort to every trick that Chidambaram had resorted to, in order to ensure that he meets the fiscal deficit target. The finance ministry has been vociferous in the recent past regarding achieving the target. The minister of state for finance
Jayant Sinha recently said: “We are considering all options (cutting expenditure). We are very confident that we will be able to achieve fiscal deficit target of 4.1 per cent in the current fiscal year.”
Let’s see how things pan out on this front.
The Daily Reckoning will keep a close watch.

Postscript: In my last column I had suggested that the prime minister Narendra Modi should give an assurance to public sector banks that the government won’t meddle with their work. Newsreports suggest that the prime minster told the same to a bankers retreat in Pune on Saturday. As he said: “There is a difference between political intervention and political interference… there will never be any phone call from the PMO…But as we are working in a democratic system… there will be intervention as and when required.” If followed this will be a great move.

The column originally appeared on as a part of The Daily Reckoning on January 5, 2015

The one assurance that Narendra Modi needs to give bankers…

Vivek Kaul

The ministry of finance has organised a two day retreat for public sector banks in Pune over January 2 and 3, 2015. The retreat is being attended by the RBI governor Raghuram Rajan and the deputy governors as well. It will end today with brief presentations being made to the prime minister Narendra Modi. After the presentations the the prime minister will interact and address the gathering.
A press release issued by the ministry of finance basically outlined four objectives for this retreat, which are as follows:
(i) To create a platform for formal and informal discussions around the issues which are important for banking sector reforms.

(ii) To achieve a broad consensus on what has gone wrong and what should be done both by banks as well as by the government to improve and consolidate the position of PSBs.

(iii) To get some out of box ideas from prominent experts in the field as also from the top level managers attending the retreat.

(iv) The final objective would be to prepare a blue print of reform action plan once adopted which could then be implemented by the banks as well as by the government.

On paper this sounds like a good idea. It shows that the government is serious about figuring out what is wrong with the banking sector in India and working on it, instead of just letting things drift. Nevertheless, the retreat shouldn’t boil down into an excercise of exerting pressure on the public sector banks (PSBs) to lend more. With officials of ministry of finance attending the retreat as well, there are chances of that happening.
The total amount of loans being given by banks have slowed down in the recent past. Data released by the RBI shows that in November 2014 loans to industry increaed by 7.3% in comparison to November 2013. The loans had increased by 13.7% in November 2013 in comparison to November 2012. “Deceleration in credit growth to industry was observed in all major sub-sectors, barring construction, beverages & tobacco and mining & quarrying,” a RBI press release pointed out. Loans to the services sector grew at 9.9 per cent in November 2014 as compared with an increase of 18.1 per cent in November 2013.
The finance minister Arun Jaitley has time and again blamed high interest rates for this slowdown in bank lending as well as economic growth.
In a speech he made on December 29, 2014, Jaitley said: “The cost of capital…I think in recent months or years…is one singular factor which has contributed to slowdown of manufacturing growth itself.”
This and other statements that Jaitley has made over the last few months tend to look at credit (or banks loans) as a flow. But is that really the case? As James Galbraith writes in
The End of Normal: “Credit is not a flow. It is not something that can be forced downstream by clearing a pie. Credit is a contract. It requires a borrower as well as a lender, a customer as well as a bank. And the borrower must meet two conditions. One is creditworthiness…The other requirement is a willingness to borrow, motivated by the “animal spirits” of business enthusiasm. In a slump, such optimism is scarce. Even if people have collateral they want security of cash.”
Further, as Jeff Madrick points out in
Seven Bad Ideas—How Mainstream Economists Have Damaged America and the World: “Business investment is not just affected by the supply of national savings but by the state of optimism. If consumer demand for goods is not strong, a business will have little incentive to invest, no matter how great profits are or how low interest rates are on bank loans.” These are very important points that the mandarins who run the ministry of finance in this country need to understand.
So how good is the creditworthiness(or the ability to repay a loan) of Indian companies? The answer for this is provided in the recent Mid Year Economic Analysis released by the ministry of finance. As the report points out: “M
ore than one-third firms have an interest coverage ratio of less than one (borrowing is used to cover interest payments). Over-indebtedness in the corporate sector with median debt-equity ratios at 70 percent is amongst the highest in the world.”
Interest coverage ratio is the earnings before income and taxes of a company divided by the interest it needs to pay on its debt. If the ratio is less than one what it means is that the company is not earning enough to repay even the interest on it debt. The interest then needs to be repaid by taking on more debt. This works just like a Ponzi scheme, which keeps running as long as money being brought in by new investors is greater than the money that needs to be paid to the old investors.
In this situation it is not surprising that the bad loans of banks, particularly public sector banks have gone up dramatically. As the
latest financial stability report released by the RBI points out: “The gross non-performing advances (GNPAs) of scheduled commercial banks(SCBs) as a percentage of the total gross advances increased to 4.5 per cent in September 2014 from 4.1 per cent in March 2014.”
The stressed loans of banks also went up. “Stressed advances increased to 10.7 per cent of the total advances from 10.0 per cent between March and September 2014. PSBs continued to record the highest level of stressed advances at 12.9 per cent of their total advances in September 2014 followed by private sector banks at 4.4 per cent.”
The stressed asset ratio is the sum of gross non performing assets plus restructured loans divided by the total assets held by the Indian banking system. The borrower has either stopped to repay this loan or the loan has been restructured, where the borrower has been allowed easier terms to repay the loan (which also entails some loss for the bank) by increasing the tenure of the loan or lowering the interest rate.
What this means in simple English is that for every Rs 100 given by Indian banks as a loan(a loan is an asset for a bank) nearly Rs 10.7 is in shaky territory. For public sector banks this number is even higher at Rs 12.9.
The question that crops up here is why is the stressed asset ratio of public sector banks three times that of private sector banks? The financial stability report has the answer for this as well. As the report points out: “Five sub-sectors: infrastructure, iron and steel, textiles, mining (including coal) and aviation, had significantly higher levels of stressed assets and thus these sub-sectors were identified as ‘stressed’ sectors in previous financial stability reports. These five sub-sectors had 52 per cent of total stressed advances of all SCBs as of June 2014, whereas in the case of PSBs it was at 54 per cent.”
As is well known that these sectors are full of crony capitalists who were close to the previous political dispensation. This forced the public sector banks to lend money to these companies and now these companies are either not in a position to repay or have simply fleeced the bank and not repaid.
The report further points out that the public sector banks have the highest exposure to the infrastructure sector: “Among bank groups, exposure of PSBs to infrastructure stood at 17.5 per cent of their gross advances as of September 2014. This was significantly higher than that of private sector banks (at 9.6 per cent) and foreign banks (at 12.1 per cent).”
Public sector banks haven’t been able to recover these loans from businessmen who have defaulted on them. Given this, if there is one assurance that Narendra Modi needs to give to public sector banks, it has to be this—he needs to assure them that there will be absolutely no pressure on them from his government to lend money to crony capitalists who are close to the current political dispensation.
This single measure, if followed, will go a long way in improving the situation of public sector banks in this country. It will be one solid move towards the promised
acche din.

The article originally appeared on as a part of The Daily Reckoning on Jan 3, 2015