IPL Will Use ZERO Percent of the Water That Sugarcane Does


The Board for Control of Cricket in India (BCCI) is where politicians from across party lines come together. And given this, you don’t expect it to be the most transparent and fair institution going around. Over and above this, the BCCI also has monopolistic tendencies. Hence, in most situations I would not support BCCI on an issue.

Nevertheless, the entire issue of moving the Indian Premier League(IPL) T20 cricket tournament out of the state of Maharashtra, in order to save water, is basically nonsense. The real issue when it comes to a water crisis in Maharashtra is the agricultural production of sugarcane and not IPL. Allow me to explain.

Take a look at the following chart.

Chart-1.2: State-wise Shares in Production of Sugarcane and Sugar

Maharashtra is the second largest producer of sugarcane in the country after Uttar Pradesh. It is also the largest producer of sugar, which is a by-product of sugarcane. Maharashtra produces more sugar than Uttar Pradesh primarily because the sugarcane produced in the state has a higher sucrose content. In fact, among all states, Maharasthra has the highest sugar recovery rate of 11.1% from sugarcane.

Getting back to the issue of water and sugarcane. As TN Ninan writes in The Turn of the Tortoise: “Nationally, the bulk of the water is used for agriculture…Cropping patters have developed such that water-intensive crops are grown in water-scare areas—like [rice] paddy in Haryana and sugar cane in Maharashtra.”

In fact, Maharashtra uses a lot more water to produce sugarcane than other states like Bihar. As the Commission for Agricultural Costs and Prices(CACP) points out in a document titled Price Policy for Sugarcane—2015-16 Sugar Season: “Water productivity analysis shows that Bihar consumes just 822 litres of water to produce a kilogram of sugar compared to over 2100 litres in Maharashtra, and more than 2200 litres each in Andhra Pradesh and Tamil Nadu. Thus, Andhra Pradesh, Maharashtra and Tamil Nadu consume an additional 1300 to 1400 litres of water over and above what it takes Bihar to produce a kilogram of sugar.”

Andhra Pradesh produces only 4% of India’s sugarcane, so it doesn’t really matter much, if it is a water guzzler. Maharashtra and Tamil Nadu between them produce nearly one-third of India’s sugarcane (22% of Maharashtra and 10% for Tamil Nadu). Given that they use a huge amount of water doing so, this shouldn’t be the case.

As CACP further points out in the case of Maharashtra: “In Maharashtra, sugarcane cultivation, which is on less than 4 percent of the total cropped area of the state, takes away almost 70 percent of irrigation water in the state. This leads to massive inequity in the use of water within the state.

As mentioned earlier, it takes 2100 litres of water to produce one kilogram of sugar in Maharashtra. This basically means that it will take around 2100000 litres or 2.1 million litres of water to produce one tonne or 1000 kilograms of sugar.

It is estimated that the twenty IPL cricket matches being played in Maharashtra would end up using six million litres of water. How has this estimate been arrived at? A public interest litigation has been filed in the Bombay High Court stating that IPL cricket matches should be moved out of Maharashtra.

Ankita Verma, the lawyer for the petitioners told Rediff.com: “International maintenance for pitch guidelines state that for each match you need three lakh litres of water for one ground. If you multiply that for the 20 matches that will be played here, you will come to the figure of 60 lakh litres [or 6 million litres] of water.”

The BCCI puts the number at four million litres, reports Mint. Let’s take the higher of the two numbers of six million litres of water. As mentioned earlier, it takes 2.1 million litres of water to grow one tonne of sugarcane. Hence, for IPL the total water being used is what would have been good enough to produce less than three tonnes of sugarcane, actually 2.86 tonnes to be very precise.

Hence, the entire argument of IPL cricket matches leading to a wastage of water is basically nonsense. Sugarcane is the real water guzzler in the state of Maharashtra. In 2013-2014, the state produced 75,384,000 tonnes of sugarcane, which would have needed around 158,306,400 million litres of water (75,384,000 x 2.1).

On the other hand, IPL this year will end up using six million litres of water, which would essentially be good enough to produce three tonnes of sugarcane.

So the total amount of water used by IPL will be around 0.0000038%(6.1 million litres expressed as a percentage of 158,306,400 million litres) of the water used to produce sugarcane in Maharashtra in 2013-2014. The proportion is so small that we can even round it off to 0%. This entire argument to move IPL out of Maharashtra is basically nonsense. The real issue is the production of sugarcane in the state.

Of course, no noise is being made against the excessive consumption of water in the production of sugarcane primarily because some of the bigger politicians of the state of Maharashtra are also sugar barons.

There are other issues also that need to be discussed here. India produces much more sugarcane than it consumes. The CACP estimates that the total demand for sugar in India (domestic demand plus bulk demand) is at 24.3 million tonnes. The domestic demand being 12.3 million tonnes and the bulk demand being 12 million tonnes.

In 2014-2015, India produced around 28 million tonnes of sugar. This is 3.7 million tonnes more than demand. This excess sugar is exported. We need to realise that when we export sugar, we are essentially exporting water. As Ninan points out: “Growing sugar cane, even more water hungry than[rice] paddy, in water-scarce Maharashtra is equally contraindicated—especially since the country happens to be surplus in sugar most of the time, and exporting sugar amounts to exporting water.”

And a country as water-constrained as India is, should not be exporting water. To conclude, as CACP points out: “Future growth of cane in Maharashtra is likely to be severely hampered by scarce water supplies unless much of sugarcane is put on drip irrigation or varieties are evolved that use less water. Given that sugarcane is a water guzzling crop, its long term development must ensure that water pricing policies are formulated in a manner that reflects its scarcity.”

And this is something worth thinking about.

Disclosure: The basic idea for writing this column came after reading Sunil Jain’s column titled IPL vs sugarcane: That’s really the equation in Maharashtra in The Financial Express.

The column originally appeared on Vivek Kaul’s Diary on April 12, 2016



The UnReal State of India’s Real Estate


Over the weekend a friend called and we talked about an interesting conversation he had had with his landlord.

My friend’s landlord is a successful corporate executive and doesn’t live in the same city as my friend does. The landlord had bought the flat that my friend currently lives in, sometime in late 2004.

At that point of time he had paid around Rs 18 lakhs for it. This is what my friend could gather from the conversation with his landlord. The flat is currently worth close to Rs 1.3 crore.

In a period of close to 12 years, the market value of the flat has gone up more than seven times. And this is where things get interesting.

My friend currently pays a rent of around Rs 27,000 per month or Rs 3.24 lakh per year for this flat. The rental yield works out to around 2.5%. Rental yield is obtained by dividing the annual rent by the current market price of the flat.

The question is why would someone want to continue owning an asset which generates a return of 2.5% per year. The interest rate offered on money kept in savings bank account is at least 4%.

So the point is when you can earn a minimum 4% fixed return with none of the headaches that come with owning real estate, why would you choose to earn 2.5%? Also, the actual rental yield is lower than 2.5%, given that a certain amount of maintenance has to be paid to the building society every month.

Then there is the cost of maintaining the flat. Further, property tax also needs to be paid every year. In this scenario it makes perfect sense to sell the flat and invest the money in bank fixed deposits, which currently pay around 7-8% per year.

I put this thought across to my friend and who in turn spoke to his landlord. And the answer he got was very interesting.

The landlord told my friend that his rental yield was 18%. It took me a while to understand how he came around to this number. He was calculating the rental yield on the original price that he had paid for the flat.

A rent of Rs 3.24 lakh on a purchase price of Rs 18 lakh works out to a yield of 18%. While, this is totally wrong, but this is the way my friend’s landlord is currently thinking. He thinks he is earning 18% from his flat and won’t sell.

But he can sell the flat, pay tax on the indexed capital gains and invest the remaining amount in a fixed deposit and earn much more than Rs 3.24 lakh he is currently earning. Over and above this, this investment comes with none of the headaches of owning real estate.

This is not exactly rocket science. It is simple mathematics. So what exactly is preventing my friend’s landlord from selling out? One answer could be tax deduction on the interest payment of the home loan that he had taken in order to buy the house.

But given that the loan is in its twelfth year of repayment, the interest component will be quite small in comparison to the landlord’s current income and really not worth the trouble.

So what gives? The landlord is totally anchored into the price appreciation that has happened till date. His investment has increased in value from Rs 18 lakh to Rs 1.3 crore in a period of over 11 years.

And this is something that is stuck in the landlord’s mind. Before I go any further, it is important that I explain the term anchoring here. As Garly Belsky and Thomas Gilovich write in Why Smart People Make Big Money Mistakes and How to Correct Them: “Anchoring is really just a metaphoric term to explain the tendency we all have of latching on to an idea or fact and using it as a reference point for future decisions. Anchoring can be particularly powerful because you often have no idea that such a phenomenon is affecting you.”

This applies in case of my friend’s landlord. He has seen the price of the appreciate from Rs 18 lakh to Rs 1.3 crore and has a strong belief that the appreciation will continue. In the process he has held on to this flat. He is anchored into that belief.

Is a similar sort of increase possible? It would mean that the price of the flat would be more than Rs 9 crore (Rs 1.3 crore x seven times) eleven years from now. That is totally unbelievable.

Also, the real estate prices haven’t gone anywhere over the last few years. Most people don’t take that into account. The money illusion is at work. As Belsky and Gilovich write: “This involves a confusion between “nominal” changes in money and “real” changes that reflect inflation.”

Real estate prices have remained flat across large parts of the country over the last few years. The average rate of inflation between 2012 and now has been around 7-8%. Once we factor this into account, the real estate prices have actually come down by a reasonable amount in real terms.

Again, this is something that my friend’s landlord in particular and most other real estate owners in general don’t seem to understand. It will take some time for these people to realise this. Plus, there is always the bit about owning something you can see and feel, which always works with owning real estate. This obviously does not apply to financial investments.

Further, with a huge amount of unsold inventory of real estate companies, as well as homes that have been built and bought as an investment, in the market, real estate is not going to match the returns that it gave between 2002 and 2012. Those days are long gone. Also, it has just become way too expensive.

Of course, people take years to come around to realising that they have been wrong for a long time. Mistakes are not easy to admit and this time will be no different. Until then, the stagnation in the real estate sector will continue.

The column originally appeared on Vivek Kaul’s Diary on April 11, 2016

Here is More Evidence on India’s Love for Black Money


In the budget speech made on February 28, 2013, the then finance minister P Chidambaram had said: “There are 42,800 persons – let me repeat, only 42,800 persons – who admitted to a taxable income exceeding Rs 1 crore per year.”

This statement caused a lot of hungama at that point of time. Recently, the revenue secretary Hasmukh Adhia made a similar sort of statement. “There are only 1.5 lakh individuals whose total income would be above Rs 50 lakh,” Adhia recently remarked.

This statement by Adhia has been largely ignored. It essentially implies two things: a) India is a poor country where very few people actually earn more than Rs 50 lakh. b) Very few Indians actually pay income tax and black money forms a major part of the Indian economy. Black money is money which has been earned, but on which tax has not been paid. While, there is no denying that India is a poor country, in this context the second option makes more sense.

In a country of close to 125 crore people, only 1.5 lakh individuals, or 0.012% of the population has an income of over Rs 50 lakh. This is a tad difficult to believe. The consumption patterns clearly prove otherwise.

One argument that can be made here is that many people earning over Rs 50 lakh are making money in forms that are tax-free, like capital gains and dividends from stocks. Dividend earned from stocks has been tax-free for a while now. In the budget presented in February earlier this year, the finance minister Arun Jaitley introduced a “tax at the rate of 10% of gross amount of dividend…payable by the recipients, that is, individuals, HUFs and firms receiving dividend in excess of Rs 10 lakh per annum.” (HUFs = Hindu Undivided Families).

While Chidambaram had used the phrase “taxable income”, Adhia just used the term “income”. So in Chidambaram’s case it is clear he meant that only 42,800 Indians had a taxable income of more than Rs 1 crore. Hence, there are more than 42,800 Indians making more than Rs 1 crore per year. This would include those who make money through capital gains and dividends from stocks, on which taxes need not be paid.

In Adhia’s case, he has just used the term “income”. Hence, the 1.5 lakh individuals who make more than Rs 50 lakh per year, would also include those who make money in forms, on which income tax does not have to be paid. It also includes those who make more than Rs 50 lakh per year, but whose taxable income is less than Rs 50 lakh, given that they make use of various deductions that are available.

Adhia’s statement was made in a certain context. In a notification put out on April 1, 2016, the ministry of finance had said: “With Assessment Year 2016-17, individuals and HUFs filing their returns of income in ITR-1, ITR-2, ITR-2A and ITR-4S, having income exceeding Rs.50 lakh will now be required to furnish information regarding assets and liabilities in Schedule-AL of the relevant ITR form.”

Basically those earning more than Rs 50 lakh would now have to declare their assets (cars, investments, property etc.) as well as liabilities (like loans being re-paid) while filing their income tax returns.

There were some protests against this move, which led Adhia to state that: “There are only 1.5 lakh individuals whose total income would be above Rs 50 lakh. This schedule in ITR only applies to ultra rich and will not affect the common man… 99.5 per cent taxpayers are not affected by this requirement. Only the ultra rich will have to give this information in their I-T Returns.”

On the face of it, this seems like another move on the part of the Narendra Modi government to crackdown on black money. While this might look like another move to tackle black money, to me it seems more like a classic bureaucratic exercise to harass those who are already paying income tax and following the law of the land.

The number 1.5 lakh is anyway so small that this lot of people is probably not in a position to hide its income given that most of it is tax deducted at source(TDS). Chances are that these individuals are either salaried and/or honest.

Hence, what is the point in making their income tax filings more complicated than it currently is? Is the chartered accountant(CA) lobby at work? Is it trying to ensure that filing income tax returns gets more complicated by the year, leading to more CAs being able to charge more?

I really don’t have answers for that. But in a country where conspiracy theories thrive, this one makes immense sense.

Also, from April 1, 2016, onwards, many high value transactions are to be reported to the income tax department.

These include: a) buying or selling of immovable property worth more than Rs 30 lakh. b) purchase of shares worth more than Rs 1 lakh or mutual funds worth more than Rs 2 lakh. c) payment of credit card bills more than Rs 2 lakh. d) investment of more than Rs 1 lakh in gold ETFs. e) investment of Rs 5 lakh or more in debentures or bonds of a company. f) cash deposit of more than Rs 10 lakh made into a savings bank account.

Hence, the government will have access to most of the information that it now wants from those earning more than Rs 50 lakh to declare in their income tax returns. Why is it still asking for this information? One possible explanation is that given the slow pace at which our bureaucracy works, the expectation is that this information will not be shared with the income tax department at a fast pace or on a regular basis. Hence, the department now wants the information coming to it directly. Again, I don’t have any evidence for this, but it makes for a good conspiracy theory.

Also, the moot question is what is the government doing to expand the tax base? Is it looking at the right places for people and institutions which are avoiding to pay income tax? Take the recent data on money supply released by the Reserve Bank of India.

Between March 2015 and March 2016, the currency with the public went up by 15% or Rs 2.08 lakh crore. Between March 2014 and March 2015, the jump had been 10.6% or Rs 1.33 lakh crore. So why this sudden jump?

The RBI governor Raghuram Rajan explained this in an interaction with the media after presenting the first monetary policy statement for this financial year on April 5. He explained that assembly elections are currently on in several states. Around this time, the cash in hands of the public increases.

As Rajan said: “you can guess as to reasons why…we also guess.” This increase is not only in the states that go to elections but also in neighbouring states. Having said that, this explains only a part of the increase.

This money that has gone out of the banking system to finance elections, is very easy to track. The income tax department can easily check if tax has been paid on this income. Typically, black money finances elections. But given that this money is financing assembly elections, and politicians are involved, the chances of anything like this happening are remote.

The column originally appeared on Vivek Kaul’s  Diary on April 7, 2016

Of salary increments and percentage tricks



It is that time of the year when the annual salary increments are due. While one looked forward to the increments between 2002 and 2008, since the start of the financial crisis in September 2008, the annual salary increment has been slow and steady. And this of course has led to a lot of heartburn. Nevertheless, companies cannot increase salaries at a rate which is faster than the rate of increase in their profit. In fact, I have even worked for an organisation where the salary was cut during the course of the year.

Between 2008 and 2013, when the rate of inflation was higher than 10%, the annual increments were lower than that in many cases. Hence, in the strictest sense of the term, the ‘real’ salary was actually going down.

Let’s try and understand this point through an example. Let’s say the rate of inflation is at 10%. Hence, the increment in salary also needs to be 10% in order to ensure that the actually purchasing power of the salary continues to remain the same. Any increment of lower than 10%, actually means that the purchasing power of the salary is actually going down.

If the increment in salary is 8% and the rate of inflation is 10%, then the real salary has actually gone down. This despite the fact that you may have got the best increment within the group that you work in. This is something that most people don’t understand.

When it comes to annual salary increments, an interesting trick that some companies (or divisions of some companies at least) employ these days, is of giving out a sort of an equal increment to everyone. Honestly, I don’t have any research based evidence for this, and at best all my evidence is anecdotal, wherein I have heard about these things from friends as well as family.

While an equal increment to everyone might sound like a very equitable way of going about things, especially when times are tough, it is not. At a very basic level it shows the laziness of the bosses who are meant to decide on such things. How can increments be equal? And at the same time it shows that the bosses are rewarding themselves at the cost of their underlings.

How is that? As Charles Wheelan writes in Naked Statistics—Stripping the Dread from the Data: “Your kindhearted boss might point out that as a matter of fairness, every employee will be getting the same raise this year, 10 percent. What a magnanimous gesture—except that if your boss makes $1 million and you make $50,000, his raise will be $100,000 and yours will be $5,000.”

So what sounds very similar when we use percentages turns out to be very unequitable when we use absolutes. As Wheelan writes: “The statement “everyone will get the same 10 percent raise this year” just sounds so much better than “my raise will be twenty times bigger than yours.””

This is essentially a trick that higher-ups in the organisation employ to ensure that their actual increments in salary are much more, even though on the face of it, it doesn’t seem like that.

There is another point that needs to be made here. As an employee goes up the hierarchy, the absolute increment starts to matter more than the percentage increment. This is another point that people don’t seem to understand. A 10% increment at Rs 30 lakh will mean an absolute increase in salary of Rs 3 lakh. The same increment at Rs 10 lakh, would mean an absolute increase in salary of Rs 1 lakh.

I have met more than a few insecure souls who have been unhappy about someone earning a lower salary getting a higher percentage increment. This does not make any sense, but that is what comparison does to people.

To conclude, these are a few basic points that people need to keep in mind when they get around to analysing their increments in the months to come. And here is hoping that you get a good one.

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

The column originally appeared in the Bangalore Mirror on April 6, 2016

Money Printing: Rajan Launches QE Lite to Bring Down Interest Rates


In the first monetary policy statement for this financial year, Raghuram Rajan, the governor of the Reserve Bank of India(RBI) cut the repo rate by 25 basis points to 6.5%.

One basis point is one hundredth of a percentage. Repo rate is the rate at which RBI lends to banks and acts as a sort of a benchmark for the short and medium term interest rates in the economy.

In the column dated March 30, 2016, I had said that it is best if the RBI cuts the repo rate 25 basis points at a time and not more.

My logic for writing this was fairly straightforward. From January 2015 onwards, the RBI had cut the repo rate by 125 basis points. In comparison, the banks had cut their lending rates by only around 60 basis points. Meanwhile, they have cut the interest rates on their fixed deposits by more than 100 basis points.

This means that the banks have cut their lending rates at a very slow pace. Hence, there was no point in the RBI cutting the repo rate by more than 25 basis points, given that the banks have not passed on that cut to their prospective and current borrowers, in the form of lower lending rates.

In this scenario the best strategy for the RBI is to cut the repo rate 25 basis points at a time and then take a check if the cut has been passed on to the borrowers by banks.

And this is precisely what Rajan did yesterday by cutting the repo rate by 25 basis points. Honestly, the cut in the repo rate was not the most important part of yesterday’s monetary policy statement.

In the most important paragraph of the monetary policy, the RBI said that it will “continue to provide liquidity as required but progressively lower the average ex ante liquidity deficit in the system from one per cent of NDTL [net demand and time liabilities] to a position closer to neutrality.”

What does this mean in simple English? There is a certain demand for money that the banking system has. But there is only a certain supply of it going around which is not enough to fulfil demand. The difference is referred to as liquidity deficit.

Hence, banks cannot borrow as much as they want to from the banking system. In this scenario they have to pay a higher rate of interest to borrow.

The monetary policy statement of the RBI puts the liquidity deficit at 1% of demand and time liabilities. This means that the liquidity deficit in the banking system is at 1% of the total current account deposits, savings account deposits and fixed deposits, of banks.

As on March 18, 2016, the total demand and time deposits of banks stood at Rs 93,786,60 crore. The liquidity deficit is 1% of this and hence works out to around Rs 93,786 crore. This is where theoretically the deficit in the banking system should have been.

But the actual deficit is more than this. Rajan in his interaction with the media after presenting the monetary policy conceded that the actual liquidity deficit was around Rs 50,000-60,000 crore more than the RBI had estimated. This means that the actual daily liquidity deficit is around Rs 1,50,000 crore.

There are multiple reason for the same. Assembly elections are currently on in several states. Around this time, the cash in hands of the public increases. As Rajan said: “you can guess as to reasons why…we also guess.” This increase is not only in the states that go to elections but also in neighbouring states.

Then there was the issuance of tax-free bonds. Further, before the interest rates on small saving schemes were cut there was an inflow of money into these schemes. All these factors have essentially ensured that the liquidity deficit in the banking system is around Rs 1,50,000 crore.

The RBI now plans to bring down this deficit to a position closer to neutrality. The RBI plans to steadily reduce this deficit. The question is how will the RBI do this? The central bank will have to buy assets from banks.

One way of going about it is to carry out open market operations and buy bonds from banks. In fact, the RBI announced an open market operation of Rs 15,000 crore, yesterday.

The question is where will the RBI get this money from? The RBI, like any other central bank, has the ability to create money out of thin air by printing it, or rather by creating it digitally these days.

And this is precisely what the RBI will do—it will print money to buy bonds. When it buys bonds, it will pay for it through this freshly created money. When this freshly created money enters the banking system, the supply of money will go up and the liquidity deficit will come down. This will push down interest rates and in the process banks will pass on lower interest rates to the end consumers.

Of course this is not going to happen overnight and will happen over the course of this financial year and perhaps even the next.

In fact, what the RBI is trying to do is similar to what happened in the aftermath of the financial crisis that started in September 2008. The Federal Reserve of the United States decided to print money and buy bonds, in order to drive down interest rates, so that people would borrow and spend more. This is referred to as quantitative easing or QE.

The RBI is also doing a smaller version of QE. We can perhaps call it QE lite.

There were other moves also to help banks lower lending interest rates. Up until the RBI had maintained a difference of 100 basis points between the reverse repo rate and the repo rate.

While repo rate is the rate at which the RBI lends to banks, the reverse repo rate is the rate at which the RBI borrows from banks. Before today, the repo rate was at 6.75% and the reverse repo rate was at 5.75%. The difference, as mentioned earlier, was 100 basis points.

The RBI cut the repo rate by 25 basis points to 6.5%. At the same time, it increased the reverse repo by 25 basis points to 6%, thus narrowing the difference to 50 basis points. Hence, banks will now pay a lower interest when they borrow from the RBI and get a higher interest when they have excess funds, which they can park at the RBI. This basically will help banks to earn more and make it more likely for them to cut their lending rates.

Further, banks need to maintain 4% of their demand and time deposits with the RBI as a cash reserve ratio(CRR). Currently, the banks need to maintain 95% of the required CRR with banks on a daily basis. This has been lowered to 90%. This will help ease the pressure on banks and they will have more free cash. This should again help them cut their lending rates.

Up until now, the RBI repo rate cuts led to interest rate on deposits being cut more rapidly than lending rates. This time around, the lending rates are also likely to be cut.

Watch this space!

The column was originally published on Vivek Kaul’s Diary on April 6, 2016