Month: May 2016

Oil Prices Are Rising Again: What Will Modi Govt Do Now?

narendra_modi

In a little over a week, the Narendra Modi government will complete two years in office. The finance minister Arun Jaitley, has already started to give interviews in the media, highlighting the success of the Modi government on the economic front. The Vice Chairman of the NITI Aayog, Arvind Panagariya, has written columns around the same, as well.

What both of them haven’t really talked about is the oil price and its dramatic fall, during the time the Modi government has governed India. On May 26, 2014, the day Modi was sworn in as the prime minister, the price of Indian basket of crude oil was $ 108.05 per barrel. Nearly two years later, as on May 16, 2016, the price of the Indian basket of crude oil stood at $46.18 per barrel.

Interestingly, it even touched a low of $26.95 per barrel on February 12, earlier this year. This was a massive fall of 75%. The point being if this hadn’t happened, the finances of the Modi government would have gone for a toss totally. The petroleum subsidy number fell from Rs 92,000 crore in 2013-2014, to a little over Rs 60,000 crore in 2014-2015, to around Rs 30,000 crore in 2015-2016. For 2016-2017, around Rs 27,000 crore has been budgeted for the petroleum subsidy.

The government benefitted on two counts. First, it got a lower petroleum subsidy bill. Second, it captured a large part of this fall in oil price by increasing the excise duty on petrol and diesel. Between November 2014 and now, the excise duty on oil and petrol, has been increased nine times.

The total excise duty collected by the government on petrol and diesel in 2014-2015, had stood at around Rs 1,56,000 crore. This jumped by 59% to a little over Rs 2,48,200 crore in 2015-2016. Hence, lower oil prices were of huge benefit to the government. The state governments also cashed in by increasing the value added tax on petrol and diesel.

By doing this, the fall in the price of oil wasn’t passed on to the end consumers. The trouble is that now oil prices have started to go up again. Between February and mid-May, the price of the Indian basket for crude oil has gone up by more than 71%. As on May 16, 2016, it quoted at $46.18 per barrel.

In a scenario of falling oil prices, the government did not pass on the entire fall in oil prices to the end consumer. Hence, in a scenario of rising oil prices it shouldn’t pass on the entire increase to the end consumer as well by cutting down the excise duty on petrol and diesel. That will be a fair thing to do.

In an ideal world, the Modi government should have freed up the price of petrol and diesel totally, and let the international price of oil, decide the market price of petrol and diesel. If they had done that people would have adjusted to the idea of high oil prices, given that they would have seen low oil prices as well.

But that hasn’t turned out to be the case. The price of oil now is 57.3% lower than it was in May 2014. But the price of petrol and diesel has fallen by 17.4% and 12.9% only, in Mumbai.

Also, it is important to remember here that high oil prices can end up screwing the accounts of the government. This is simply because the government still subsidises the sale of cooking gas as well as kerosene oil.

Further, what does the government plan to do if oil prices continue to go up? If the government continues to raise petrol and diesel prices, I am sure there is going to be a public outcry.

This will happen simply because last time around when oil prices really went up, the end consumer did not have to pay for higher petrol and diesel prices. The oil marketing companies, the oil producing companies and the Manmohan Singh government bore the brunt of high oil prices. The consumer did not. This ended up screwing up the finances of the government.

Also, this time around the Modi government has benefitted tremendously from lower oil prices by raising excise duty on petrol and diesel. It had a tremendous opportunity to move towards a market driven price of petrol and diesel. But if it did that, it would have had to look for alternative sources of revenue.

It would no longer be possible for it to continue financing loss making public sector enterprises. This would mean that some ministers would have become totally jobless. It would have had to sell more shares in profitable public sector enterprises and so on. It would also have to look at ways for cutting down on frivolous expenditure that almost all governments indulge in. It would also have to sell its shares in the cigarette maker ITC, which it strangely continues to hang on to.

Of course, all these would have been difficult decisions and the government chose to latch on to the low hanging fruit of raising excise duty on petrol and diesel. A huge opportunity was missed out on.

Further, what is the government’s view on higher oil prices? As finance minister Arun Jaitley said in an interview to The Economic Times recently: “You see as far as the oil prices are concerned, this is one area where nobody has been able to predict, even reasonably what is going to happen. It is only after the event that people analyse what has happened. When the prices were close to a $120, nobody really thought that they will come down below 30. At 30, they said it would stabilise at 40, now it is 50.”

What Jaitley said was that oil prices cannot be predicted. This is a view that I have often maintained in the past. Nevertheless, after saying this, Jaitley went on to do exactly the opposite i.e. he tried to predict oil prices. As he said: “I think they are still range bound. And being range bound they are within the limits of what India can consider to be affordable and therefore unless there is some very alarming increase, which does not look likely at the moment, I think we are reasonably comfortable.”

So Jaitley feels that there are no chances of any alarming increase in oil prices. He said this after explaining in detail that no one can predict oil prices. This prediction came after oil prices have risen by 71% in a little over three months.

As Philip Tetlock and Dan Gardner write in Superforecasting—The Art and Science of Prediction: “Take the price of oil, long a graveyard topic for forecasting reputations. The number of factors that can drive the price up or down is huge—from frackers in the United States to jihadists in Libya to battery designers in Silicon Valley—and the number of factors that can influence those factors is even bigger.”

While, the government and those who run the government may not be able to predict oil prices, it is important that they think through what they plan to do if oil prices do continue to go up. This becomes especially important given that they did not pass on the fall in oil prices to the end consumer. Also, they are well and truly addicted to all the easy money coming in from raising the excise duty on petrol and diesel.

What is the Plan B of the Modi government? And more specifically, do they have one?

The column originally appeared in the Vivek Kaul Diary on May 18,2016

Kids in the rat race

Dutch_Minibike_race_Lelystad

When I went to school in the 1980s and early 1990s, summer holidays were just holidays. There was no holiday homework. Also, there were no other activities that one had to be a part of because the parents wanted so.

There was no summer camp either, which from what my married friends with kids tell me, is a must these days. Further, there were no extra tuitions to take for every subject taught in school. What the teachers in school taught was deemed to be good enough.

There was always enough time to do things that one wanted to do, which on some days meant nothing. On other days it meant playing cricket with friends in the evening and board games in the afternoon. It also meant listening to some music and watching a little bit of television in the evenings.

Oh and school bags were light. And life was simple.

These days, the kids seem to be as busy as their parents are. I guess, if any kid is brought up, the way I was brought up, it would seem that the parents really don’t care for him or her.

What has changed? The parameters that define a good upbringing have changed. Further, it is worth remembering here that everything in life is relative. My parents left me alone during holidays to do things that I wanted to do. This was primarily because other parents did the same.

If other parents had behaved differently back then, chances are mine would have done the same. It is worth elaborating on this through an example. As Robert H Frank writes in The Darwin Economy—Liberty, Competition and the Common Good: “When you go for a job interview, for example, you want to dress presentably, but the standard for looking good are almost purely relative. An interviewer may have no conscious awareness of how different candidates were dressed. But if you show up in a $500 suit, you’ll be more likely to get a callback if other candidates were wearing $200 suits than if they were dressed in $2,000 suits.”

The situation with kids is similar. If most parents leave their kids alone to do what they want to do during summer holidays, other parents are likely to do the same. This situation is similar to a situation where you turn up for an interview in a $500 suit and other candidates also turn up in a similarly priced suit. In that situation the suit you are wearing doesn’t really matter.

But if others turn up in a $2000 suit, then suddenly your suite isn’t really good enough. So, if most parents are getting their kids involved in activities during holidays, and you are just letting your kid hang around doing what he or she wants to do, you are really not going to look good or feel good as a parent.

As Frank says “the standards for looking good are almost purely relative”. And this applies to parents taking care of their kids as well. Hence, if parents are to feel good about their parenting, the kids also need to be a part of a rat race like their parents. They need to attend extra tuitions, be a part of different activities after school, join a summer club and so on.

This need of parents to feel good about their parenting has also led to a situation where kids are sent to coaching classes for engineering and medical exams, even before they clear their tenth standard exams.

Another reason this happens is because parents these days have long-working hours and by keeping their kids busy, they don’t feel guilty about not having enough time for their kids.

But what about just letting a kid be? And letting him to do what he or she wants to do and let the process of self-discovery, works its way through? Nah, that is too 1980s. We are after all in the teens. Nevertheless, it is worth remembering what Lily Tomlin, an American actress, once said: “The trouble with the rat race is that even if you win, you’re still a rat.”

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

The column originally appeared in Bangalore Mirror on May 18, 2016

Why Reservations Are Not a Solution to the Job Crisis

Manohar_Lal_Khattar_2015Last week, the government of Haryana notified the the Haryana Backward Classes (Reservation in Services and Admission in Educational Institutions) Act, 2016.

The Act provides 10 percent reservation to Jats, Jat Sikhs, Rors, Bishnois, Tyagis and Muslim Jats, in Class III and Class IV government jobs. It also provides a 6% reservation in Class I and Class II jobs to the castes mentioned above. Further, the Act provides a 10% reservation to these castes for admission into educational institutes.

In February, earlier this year, Jats had gone on an agitation, resorted to violence and destroyed public property across Haryana, to demand reservation in government jobs. The Parliamentary forces had to be called in order to control the mess that followed.

But the point is will this reservation in government jobs help the Jats? Or to ask a more speciic question, does reservation really help these days?

Take a look at the following table. It shows the number of people employed by the government of Haryana over the years. Honestly, when I started writing this column, I was apprehensive that I would be able to find such data. Nevertheless, I did. The data is two years old. If it was more recent, the analysis would have been a little more definitive.

DateNumber of Employees
March 31, 20143,40,698
March 31, 20133,40,086
March 31, 20123,35,945
March 31, 20113,28,370
March 31, 20103,26,021
March 31, 20093,23,149
March 31, 20083,27,490
March 31, 20073,17,245
March 31, 20063,11,340
March 31, 20053,13,775
March 31, 20043,11,005
March 31, 20033,11,938
March 31, 20023,16,135
March 31, 20013,19,027
Source:Census of Haryana Govt Employees

 

Despite slightly old data, one can make some very good inferences. Between March 2001 and March 2014, the number of employees of the Haryana government went up from 3,19,027 to 3,40,698. This means an increase in jobs at the rate of 0.51% per year, over a 13-year period. This is slower than the rate of population growth.

Interestingly, the total number of people employed by the government of Haryana fell between 2001 and 2004. How do things look if we take March 2004 as the base year? The numbers of jobs grew by around 0.92% per year.

The point being that the Haryana government jobs have been growing at a very miniscule pace. In this scenario, the reservations in governments jobs that Jats have got, is not going to be very beneficial.

In fact, what is valid for Haryana is valid at the country level as well. Take a look at the following table of central public sector enterprises.

Employment Average Annual Emoluments in CPSEs

The number of permanent employees in the public sector was 16.14 lakh in 2006-2007. But by 2014-2015, this had fallen to 12.91 lakh. This essentially means that the public sector enterprises on the whole did not create any jobs between 2006-2007 and 2014-2015. In fact, the number jobs came down by 20%.

Given this, on the whole, reservations did not benefit any caste, when it comes to employment in the public sector enterprises. What is interesting nonetheless is that the average salary of a public sector employee has jumped three-fold in the eight-year period. This essentially means an average increase of around 14.9% per year.

How do things look for the central government employees? On January 1, 2006, the central government had a sanctioned strength of 38.25 lakh. Against this, it had 32.74 employees on its roll. By January 1, 2010, the sanctioned strength had gone up to 38.92 lakh, while the number of employees had fallen to 32.31 lakh.

By January 1, 2014, the sanctioned strength had risen to 40.49 lakh whereas the number of employees had risen marginally to 33.02 lakh. So between 2006 and 2014, the central government basically added around 28,000 jobs.

Let’s look at some more data. Data from the Centre for Monitoring Indian Economy suggests that the number of people working in the public sector in India has come down over the years. This includes people working in the central government, state governments, quasi government bodies and local governments. In 1991-1992, the year the economic reforms were initiated, the public sector employed close to 1.92 crore individuals. By 2011-2012(the latest data that is available) fell to 1.76 crore. So over a period of two decades the number of jobs in the public sector has come down by 16 lakh.

There is nothing that suggests that this scenario has changed between 2011-2012 and now. Given that jobs in the public sector have been coming down, reservation in government jobs, on the whole, can’t be of any benefit.

It only benefits politicians briefly, who try and take credit of having given reservation to a certain caste. But given that the government isn’t creating many new jobs on the whole, reservation as a process of upliftment of certain weaker sections of the society, doesn’t work anymore. Of course, it needs to be said here that Jats do not belong to the weaker section of the society.

Interestingly, the jobs in the organised private sector between 1991-1992 and 2011-2012 went up from 78.5 lakhs to around 1.2 crore. This basically meant an increase of 2.1% per year.

The era when the government created jobs is long gone. Of course, people do not still realise this and given this they demand a reservation in government jobs. The trouble is that the organised private sector is also not creating enough jobs for the 13 million Indians who are entering the workforce every year. As far as the unorganised private sector is concerned, without access to good data, it is difficult to say anything.

Also, it needs to be mentioned here that the Haryana government has created another major problem for the country in the days to come. By giving reservation to the Jats, who resorted to violence while demanding reservation, they have set a precedent. It is more than likely that other well-off communities across the country, might resort to a similar strategy in the days to come.

And this can’t possibly be a good thing.

The column originally appeared on the Vivek Kaul Diary on Equitymaster on May 17, 2016

When It Comes to Taxes, the Fortune is at the Bottom of the Pyramid

rupee

Sometime back the Income Tax department released some detailed data about the income tax returns filed during the assessment year 2012-2013. The income tax returns for the income earned during the financial year 2011-2012 were filed during the assessment year 2012-2013. The department released some other data points as well.

I had hoped I won’t write anymore columns around the data, but then that is not how things have turned out to be.

One of the interesting data points that I wrote extensively about was that in the assessment year 2012-2013, only around 2.88 crore individuals filed income tax returns. Of this number, around 1.62 crore did not pay any income tax. Only the remaining 1.26 crore individuals paid some amount of tax.

Of this number, around 1.11 crore paid a total amount of income tax upto Rs 1.5 lakh. The average income tax paid by these individuals was at around Rs 21,068. Of course, the median amount of income tax paid would be even lower.

The interesting thing is that even though the average income tax paid by these individuals was low, the total income tax paid, added up to a substantial Rs 23,446 crore. This was by far the highest amount paid by any category of taxpayers.

The next highest amount of tax was collected from individuals who paid income tax in the range of Rs 5.5 lakh to Rs 9.5 lakh. Around 1.79 lakh individuals fell in this category and paid a total income tax of Rs 12,580 crore. The average income tax paid worked out to around Rs 7.04 lakh. While at an average level this was substantially higher than the income tax paid by those paying tax of up to Rs 1.5 lakh, on the whole it was lower.

What does this mean? This essentially means that when it comes to income tax there is a fortune waiting for the government at the bottom of the pyramid. The term “fortune at the bottom of the pyramid” was coined by management guru CK Prahalad in a book of the same name.

In this book, Prahalad looked at the distribution of wealth and the capacity to generate incomes in the form of an economic pyramid. As he wrote: “At the top of the pyramid are the wealthy, with numerous opportunities for generating high levels of income. More than 4 billion people live at the bottom of the pyramid on less than $2 per day.”

Prahalad’s book was about these people and he felt that the “dominant assumption is that the poor have no purchasing power and, therefore, do not represent a viable market.” This he believed was incorrect and went on to show through various examples that even those earning less than $2 per day and can add up to substantial market size.

Along similar lines, those paying an income tax of less than Rs 1.5 lakh can also end up paying a substantial amount of income tax in total, though individually the income tax that they pay is low.

Hence, there is a lot of money that the government can collect at the lower end as income tax. This is a point that was made even in the most recent Economic Survey, released in February earlier this year. Take a look at the following chart.

05132016-Vivek-DRChart

What does this tell us? It shows very clearly that the basic tax exemption limit, only above which an income tax has to be paid, has risen at a much faster rate than the per capita income in India. As the Survey points out: “We can calculate in some sense the “missing taxpayers” in India—not those who are evading taxes altogether or under-reporting taxes but those who have legitimately gone under the tax radar due to “generous” government policy.”

What does this calculation tell us? Or to put it simply who are these missing taxpayers? These are those taxpayers who got left out because the basic exemption limit beyond which an income tax has to be paid has been raised from the level of Rs 1.5 lakh in 2008-2009. It currently stands at Rs 2.5 lakh.

If this threshold had not been raised as rapidly as it was, the government’s income tax collections would have gone up tremendously.

As the Economic Survey points out: “We ask how many taxpayers there would have been in 2012-13 if the threshold had been maintained at Rs. 1,50,000 (the threshold limit in 2008-09). We find that there would have been an additional 1.65 crore units incorporated within the taxation system (an addition of about 39.5 percent) and tax revenues would have been about R31,500 crores greater. India’s tax-GDP would have increased by 0.32 per cent just by not having raised the threshold so generously.”

In fact, the Survey also points out that there is a lot that India can learn from China on this front. As it points out: “[The] Chinese success in bringing more citizens into the individual income tax net owes to setting a reasonable threshold for paying taxes and not changing it unduly. In contrast, in India, exemption thresholds for income taxes have been consistently raised. In fact, as Figure 7 [the chart shared above] shows, thresholds have been raised much more rapidly than underlying income growth so that today, the wedge between average income and the threshold has widened.”

The finance ministers who increased the tax exemption limit knew what they were doing. They were basically playing to the gallery. But the loss of taxes on this front was more than made up for through first through a higher service tax rate and now through various cesses like Swacch Bharat Cess and Krishi Kalyan Cess.

Of course, indirect taxes are in the end paid by everybody, even those who are not a part of the formal sector. In that sense, it was only fair on those paying income tax.

It is worth remembering that in economics there are no free lunches. If the government gives from one hand it takes away from another.

Disclosure: The basic idea for this column came after reading R Jagannathan’s column Why Nicking The Non-Poor May Yield More Tax Than Just Mugging The Rich on SwarajyaMag.com

The column originally appeared on the Vivek Kaul Diary on May 13, 2016

Why Cricket Commentary Needs More Outsiders

harsha bhogle

I recently read the English translation of the Kannada novel Ghachar Ghochar written by Vivek Shanbhag and thoroughly enjoyed it. The narrator of this novel goes to a coffee shop daily, where he interacts with a waiter called Vincent.

Vincent has a habit of saying things which are full of wisdom. These are things which you would normally associate with gurus, but given that Vincent is a waiter, he is not taken seriously. As Shanbhag writes: “Had Vincent taken on a grand name and grown a long shimmering beard, he’d have had lakhs of people falling at his feet. How different are the words of those exalted beings from his? Words after all are nothing by themselves. They burst into meaning only in the minds they’ve entered. If you think about it, even those held to be gods incarnate seldom speak of profound things. It’s their day-to-day utterances that are imbued with sublime meanings.”

The point being that while what is being said is important, it is more important who is saying it. And depending on who is saying, something gets taken seriously or not. An excellent example of this is the commentary that accompanies cricket matches these days.

Most of it is very mediocre and full of hindsight bias. Allow me to explain. A fast bowler bowls a brilliant out-swinger. The batsman edges the ball. But there is no fielder fielding at the slip position. Don’t be surprised if the commentator immediately says, I would have had a slip there, given that the ball is swinging so much. This is hindsight bias, where you adjust your analysis or comment taking into account what has already happened.

If the commentator had this insight, he should have shared it before the ball was bowled and not after it. Nevertheless, most of the analysis and commentary that accompanies cricket these days is along the lines of, if they had bowled better, if they had batted better and if they had fielded better. Of course, winning in cricket at the end of the day is about batting better, bowling better and fielding better.

Many cricketers simply end up verbalising the visuals being broadcast. That is another example of how mediocre they are. But these commentators are still followed with a lot of interest and seriousness and get paid a lot of money. A recent report in The Times of India quoted a source as saying: “Sunny[Gavaskar] gets Rs 10 lakh per match day while Sanjay[Manjerekar] gets around Rs 3 to 4 lakh. Do your math.”

That is clearly a lot of money for stating the obvious. The question is why do these commentators get paid a bomb for merely stating the obvious at most points of time. As I said earlier, they get taken seriously not because of what they say, but because who they are—retired cricketers.

They have played the game at the highest level and done a reasonably good job of it. And that allows them to get away with very shoddy commentary. Try listening to some of the Hindi commentary these days, given by the likes of VVS Laxman, Shoaib Akhtar and Kapil Dev. It is atrocious to say the least. The language is all wrong and there is very little analysis on offer.

The same can be said about many other cricketers from all parts of the world who appear as experts and analysts on myriad television news channels. The mediocrity of their analysis stands out loud and clear.

But these commentators and experts still manage to peddle their craft because at some point of time they had skin in the game i.e. they played cricket at the highest competitive level. Nassim Nicholas Taleb talks about skin in the game in his book Anti Fragile. As he writes: “For the Romans, engineers needed to spend some time under the bridge they built…The English went further and had the families of the engineers spend time with them under the bridge, after it was built.”

Along similar lines the ex-cricketers who are now commentators and analysts, have had a skin in the game. When Gavaskar talks about facing fast bowling, he has himself faced the fastest bowlers in the world and scored many runs of them. He scored 13 centuries against the West Indies, which in the seventies and the eighties, had the best pace bowling attack in the world. When Kapil Dev, talks about outswing bowling, he knows what he is talking about, given that he had one of the best outswingers in the game. When Wasim Akram, talks about bowling yorkers, he needs to be taken seriously, given that he (along with Waqar Younis) had the meanest yorker, in the game. He was also the king of reverse swing.

Nevertheless, most of the things that these experts say are full of hindsight bias and unoriginal. They also tend to verbalise visuals quite a lot. A simple explanation for this lies in the fact that it is one thing having played the game and it is totally another thing commenting on it. They are entirely different skillsets and it is possible that the same individual may not have both.

Honestly, someone who has watched cricket regularly for a few years, can say the same things. Of course, he or she will not be taken seriously, at least initially, given that he has had no skin in the game. He has not played cricket for his country.

Any cricket match generates a lot of numbers. But you will never hear these cricketers getting into numbers. But this isn’t surprising given that you don’t expect cricketers to be good at mathematics. A good example of this is cricketers dissing about the Duckworth-Lewis system used to decide on things in cricket matches interrupted by rain. Maths is clearly not their strong point.

Use of numbers can clearly uplift the quality of analysis. In fact, this shouldn’t be very difficult, given that TV channels broadcasting cricket can hire maths geeks, get them to do the maths and simply feed it to the commentators. While some of this is happening, more needs to happen in the days to come, to lift the quality of analysis.

Also, if you look at the cricket commentators, at least in the Indian context, it looks like a closed club. You can make it to the big league, only if you have had played cricket for India. The only non-cricketer who has managed to break-in over the years is Harsha Bhogle. And honestly, even after being as over-exposed as he is, he is still one of the better commentators. The commentary accompanying the function that happened after Sachin Tendulkar’s last test match at the Wankhede Stadium, was simply fabulous.

If the boredom that has crept into cricket commentary has to be broken, more outsiders need to be allowed to break in. Some variety will do it no harm. After all, it is not rocket science.

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

The column originally appeared on Value Research Online on May 14, 2016