950 Central Government Schemes and Counting


Every year a day before the central government presents its annual budget, it presents the annual Economic Survey. This year was no different. Buried in the Economic Survey is one number which basically tells us all that is wrong with the Indian government.

As the Survey points out: “The Budget for 2016-17 indicates that there are about 950 central sector and centrally sponsored sub-schemes in India… If the states were included, the number of schemes would be orders of magnitude larger.”

What does this tell us? It tells us that it is very easy for the governments (both central as well as states) to launch design and launch a scheme. As Devesh Kapur writes in an essay titled The Political Economy of the State: “Each centrally sponsored scheme has the resources of a particular central ministry to call upon to aid in its design, stipulate conditions for disbursement and so on.”

This explains the fact why there are 950 central government schemes because it is very easy to launch a new scheme. The trouble is in the implementation. As Kapur writes: “The delivery is necessarily by the local administration (the district administration and, now increasingly by the Panchayati Raj Institutions). Few states have the administrative capacity to access grants from [so many] schemes, spend money as per each of its conditions, maintain separate accounts and submit individual reports.”

What does not help is the fact that the poorest districts and states which need the maximum assistance do not get maximum assistance.  As the Economic Survey points out: “In many cases, the poorest districts are the ones grappling with inadequate funds – this is evidence of acute misallocation. Many districts in Uttar Pradesh, Bihar, Chhattisgarh, parts of Jharkhand, eastern Maharashtra, Madhya Pradesh and Karnataka, among others, account for a large share of the poor and receive a less-than-equal share of resources.”

In fact, the Survey offers evidence for some of the largest central government sponsored schemes. Take the case of the Mahatma Gandhi National Rural Employment Guarantee Scheme(MGNREGS). The 40 per cent of the poorest districts in the country receive only 28 per cent of the assistance under MGNREGS. In case of the Mid-Day Meal Scheme, the poorest 40 per cent of the districts get just 20 per cent of the money spent under the scheme. As the Survey points out: “For instance, consider the states of Bihar, Madhya Pradesh, Rajasthan, Orissa and Uttar Pradesh: despite accounting for over half the poor in the country, these states access only a third of the resources spent on the MGNREGS1 in 2015-16.”

The question is why is this happening? As the Survey points out: “One major explanation for misallocation is state capacity – resources allocated to districts are often a function of the district’s ability to spend them; richer districts have better administrative capacities to effectively implement schemes.”

Hence, the poorer areas do not get as much money under these schemes as they should. The richer districts have better administrative capacities to spend the money allocated under these schemes. And given that they get more money to spend. As Kapur writes: “[The] administrative capacity is even more limited in those states where the need is the most. Monitoring is rendered difficult not just because of the limitations in the monitors themselves, but the sheer number and dispersion of the schemes across communities and locations.”

This basically means that if some of these schemes are to be effectively implemented, in which the poorer districts with poor administrative capacity get their fair share, the number of schemes has to come down. In fact, most of the central government schemes have been around for 15 years and more than half of them are over 25 years old. This basically means that no exit option is exercised for schemes, and once a scheme is launched chances are it will keep going on for perpetuity. This makes the overall implementation of schemes significantly difficult.

A part of real economic reform would mean the central government acting on this front and bringing down the total number of schemes.

The column oiginally appeared in the Bangalore Mirror on February 8, 2017

If Trump Unravels the Global Ponzi Scheme, What Will China Do?


On January 31, 2017, I wrote a column on Donald Trump and the Global Ponzi Scheme. Today’s piece is a continuation of that piece. Hence, Dear Reader, it’s best if you read the earlier piece, if you haven’t already, before you start reading this one.

One of the things that the new American President Donald Trump is trying to do is to cut down on the total amount of trade deficit that the United States runs with China. The trade balance is essentially the difference between the imports and the exports of any country. If the trade balance of a country is in negative territory, it is said to run a trade deficit, which the United States does.

Specifically, the United States runs a trade deficit with China i.e., it’s imports from China are significantly greater than its exports to China. Also, over the last three decades the trade deficit that United States has run with China has exploded. This can be clearly seen from Figure 1.

Figure 1: 

As can be seen from Figure 1, the US trade deficit with China has jumped from almost zero in 1985 to around $367.2 billion in 2015. The curve takes a dip in 2016 primarily because only the data between January and November 2016 is currently available. Once the December 2016 trade deficit data comes in, the trade deficit curve will no longer take a dip by as much as it currently does.

President Trump wants to bring down this trade deficit with China and he has been quite vocal about it. The trouble is that this is easier said than done. This was the topic of discussion in my column published on January 31, 2017. For the sake of continuity, I will repeat some stuff from that column.

On a recent visit to Baltimore I had the pleasure of listening to the famous economist Richard Duncan. Duncan’s book The Dollar Crisis has had a tremendous impact on the way I looked at the international financial crisis, in my Easy Money books. As Duncan put it: “President-elect Trump [Duncan was talking before Trump took over as President] believes the US trade deficit has been responsible for the loss of manufacturing jobs in the United States and the downward pressure on US wages that has occurred over the last several decades.”

Now take a look at Figure 2.

Figure 2: 

What does Figure 2 tell us? It tells us that the American import curve and the export curve are very closely matched. It tells us that the dollars earned by the countries which export goods and services to the United States (essentially imports for the United States), are used to buy goods and services being exported by the United States.

As Duncan puts it: “Over the past 35 years, that deficit has become THE driver of global economic growth. In fact, the entire global economy has been constructed around unbalanced trade.”

So, what will happen if Trump makes it difficult for the United States to import stuff from China and other parts of the world, as he has promised to do? If the American imports come down, so will its exports primarily because other countries won’t have the dollars required to import stuff from the United States. Also, with both imports as well as exports shrinking, the American trade deficit may not shrink.

There is a flip side to this as well and it is the Chinese exports and imports. Take a look at Figure 3.

Figure 3: 

Figure 3 like Figure 2 before it makes for an interesting reading. The Chinese export as well as import curves are closely matched (though not as much as the American curves). When China exports less it imports less as well. One reason for that lies in the fact that it has fewer dollars to pay for the imports. One impact of this is that the import of commodities from all over the world, falls. This will have a huge impact on commodity exporting countries like Australia and Brazil, to name a few.

Over and above this, it will have an impact on way things are inside China as well. As Duncan puts it: “If China’s trade surplus were eliminated, the negative impact on China’s economy would be devastating. In all likelihood, China would experience a severe depression, that could threaten the rule of the Communist Party. China might respond militarily – just as Japan did at Pearl Harbor after the US imposed an oil embargo on Japan in 1941. No one should underestimate the damage that could result from an economic crisis in China.”

Hence, the impact of contracting the US trade deficit is going to be far reaching. In fact, things are not going to work out well for the US either. In fact, the dollars that China earned over the years have found their way back to the United States and have been invested in the US government bonds (US treasuries) and other financial securities.

This flood of money coming from outside (and not just from China) has helped keep interest rates in US low. As of November 2016, China owns $1.05 trillion in US government bonds. Just this number should tell us very clearly that Trump shouldn’t fiddle around too much with the US-China trade relationship.

If the US goes back eliminating its trade deficit, by bringing down its imports, other countries may not have access to as many dollars as they had in the past. This would mean that the total dollars that come into the United States and get invested in American government bonds and other financial securities, will come own. This will mean that interest rates in the US will rise.

As Duncan puts it: “Higher interest rates would cause credit to contract and the US economy to go into recession. Higher interest rates would also cause a sharp fall in US asset prices. That, too, would also cause the economy to go into recession. Higher interest rates could cause a wave of credit defaults in the US and around the world, potentially leading to a new systemic financial sector crisis.”

The global trade structure has morphed itself into a Ponzi scheme and that won’t be so easy to unravel. As I write in my the third volume of the Easy Money trilogy: “The United States is the biggest economy in the world. It accounts for nearly one-fourth of the world’s GDP. By virtue of this, it is also the world’s biggest market, where China, Japan, and countries from South-East Asia could sell their goods and earn dollars in the process. It is also the world’s biggest consumer of oil and consumes nearly a fourth of the global oil production. This meant that oil-rich states like Saudi Arabia could sell oil to it and thus earn dollars in the process.

So, the United States imported, and countries like China, Japan, Saudi Arabia, and other countries in Asia earned dollars in the process. These dollars were then invested in treasury bonds… as well as the private sector. With so much money chasing these American financial securities, the issuers of these securities could in turn offer low rates of interest on them.”

If the United States chooses to disturb this relationship, then it will get hurt in the process as well. His hatred for China notwithstanding, Trump should think about all the points highlighted here, before proceeding on this front.

(The column originally appeared on Equitymaster on February 7, 2017)

Why Real Estate Prices Haven’t Crashed After Notebandi


Demonetisation or notebandi was expected to push down real estate prices. Some experts had said that by March 2017 real estate prices would fall by 30 per cent. This was supposed to happen because after demonetisation, the cash needed to carry out the black part of the real estate transactions would not be available.

In India, a portion of most real estate transactions is almost always carried out in black. This involves the buyer paying the seller in cash. This essentially ensures that the buyer saves on paying stamp duty, whereas the seller saves on paying a capital gains tax.

With the cash needed to carry out a part of the real estate transaction in black not being available post demonetisation, prices would fall. Or so we were told. (To know my views on the issue, click here).

The question is have real estate prices fallen in the aftermath of demonetisation? The government seems to think so. Take the case of what the
Survey says about this issue: “[Real estate] prices declined, as wealth fell while cash shortages impeded transactions… Prices could fall further as investing undeclared income in real estate becomes more difficult.”

Sometime last week the chief economic adviser Arvind Subramanian said: “The aim of demonetisation, is in fact, to bring down real estate prices.” He also added: “Real estate on the other hand, you do see a dip in prices, in sales, in launches and of course, some of it may be adverse of the economy, but in the long run, some of that is also good, because in equilibrium, the aim of demonetisation, is in fact, to bring down real estate prices.

The question is have real estate prices really fallen? Take a look at the following chart sourced from the latest Economic Survey, which Subramanian perhaps forgot to look at.


The chart essentially shows real estate launches, sales and price, over a period of time. If you look at the right-hand side of the chart, you can clearly see that the red and the blue curves have fallen at a very fast pace. This tells us that demonetisation has led to a huge slowdown in both real estate sales as well as launches.

If we look at the chart carefully, launches of new homes by builders, were down by 60 per cent by December 2016 (the end of the fourth quarter of 2016) in comparison to end 2015. The sales were down by around 40 per cent over a similar period. All of this was not because of demonetisation because both launches and sales were already falling even before demonetisation.

In comparison, the price curve just shows a small dip in the post demonetisation period, this despite the sales crashing. Also, the prices (like sales and new launches) had already been falling even before demonetisation.

So, what does all this tells us? It tells us that the contention of the Economic Survey and Arvind Subramanian of the real estate prices falling should be taken with a pinch of salt. In comparison to the fall in sales and new launches, real estate prices have barely moved.

It also tells us that the government should be carefully reading the documents that it puts out. In this case, the graph says one thing and the analysis accompanying it, says exactly the opposite thing.

So, what explains this phenomenon of falling sales and more or less flat prices? The Indian real estate scenario is always a little tricky to explain. In any other market, if sales had fallen by 40 per cent, the market would have crashed by now. So, what gives? There are no clear cut answers here but only speculative ones.

Most Indian real estate companies are fronts for the ill-gotten wealth of politicians. The builders who operate as fronts have promised a certain rate of return to politicians, and hence, are not able to cut prices. This is one possible explanation. Another explanation that keeps getting offered is the fact that the builders and politicians have made a lot of money over the years, and hence, are in no hurry to cut prices to sell the real estate inventory of homes that has been built up.

A third explanation offered is that banks which have lent money to the builders don’t want them to cut prices. A fourth explanation that was offered to me by a reader was that even though home-sales fell they did not fall by as much as they should have. What does this mean? It basically means that some of the smaller builders post demonetisation, have managed to sell some of their inventory to those who had black money in the form of high denomination notes of Rs 500 and Rs 1,000.

They took this money and used it to pay off their debt to their suppliers. The suppliers then used the money and paid it off to those who they owed money to. Essentially, the demonetised notes were paid down the chain, until they reached the workers who went ahead and deposited the money into their bank accounts. So, the world worked, and black money was converted into white.

I am sure there might be other explanations for this as well. But these are the explanations that I came across and have put them out. With very little data going around, Indian real estate, as always, remains very difficult to analyse.

The column originally appeared in Equitymaster on February 6, 2017

Modi-Jaitley Have Just Missed Their Loha Garam Hai Maar Do Hathoda Moment


To every thing there is a season, and a time to every purpose under the heaven –  Pete Seeger

Or if you are the kind who gets analogies from Hindi cinema more easily, the finance minister Arun Jaitley and prime minister Narendra Modi, have missed their loha garam hai maar do hathoda moment, to clean up the face of electoral funding in India.

The way things stand as of now electoral funding in the country continues to be extremely opaque. As the finance minister Jaitley put it in his budget speech: “Even 70 years after Independence, the country has not been able to evolve a transparent method of funding political parties which is vital to the system of free and fair elections.”

What prevents political parties from having evolved a transparent method of electoral financing? As Sandip Sukhtankar and Milan Vaishnav write in a research paper titled Corruption in India: Bridging Research Evidence and Policy Options: “For instance, corporations and parties are only legally required to publicly disclose political contributions in excess of Rs. 20,000. This rule allows contributors to package unlimited political contributions just below this threshold value completely free of disclosure.”

Hence, political parties are allowed to accept cash donations of up to Rs 20,000 and then not declare who made those donations. In fact, as the Association for Democratic Reforms points out in a recent report titled Analysis of Sources of Funding of National and Regional Parties of India FY 2004-05 to 2014-15 (11 years): “The unknown sources are income declared in the IT returns but without giving source of income for donations below Rs. 20,000. Such unknown sources include ‘sale of coupons’, ‘Aajiwan Sahayog Nidhi’, ‘relief fund’, ‘miscellaneous income’, ‘voluntary contributions’, ‘contribution from meetings/ morchas’ etc. The details of donors of such voluntary contributions are not available in the public domain.”

Not surprisingly, political parties make full use of this provision. The analysis carried out by the Association for Democratic Reforms points out that the total income of national political parties between 2004-2005 and 2014-2015 stood at Rs 9,278.3 crore. The Congress, BJP, BSP, CPI, CPI(M) and NCP, were the six national political parties, considered for this analysis. The All India Trinamool Congress was recognised as a national party only in September 2016.

Around 71 per cent or Rs 6,612.4 crore of the declared income of national parties came from unknown sources. In case of 51 regional political parties which were considered for analysis, the total income over the decade amounted to Rs 2,089 crore. Of this, around 58 per cent or Rs 1,220.6 crore, came from unknown sources.

Hence, overall, around 69 per cent of the income of political parties between 2004-2005 and 2014-2015, came from unknown sources. This during an era when you and I had to offer an identity proof for more and more financial transactions. In fact, recently I found out that even to apply for an ISBN (International Standard Book Number) for a book, requires an Aadhar card. Meanwhile, political parties can continue to accept cash donations of up to Rs 20,000, without revealing the identity of the donor.

In the budget presented yesterday, the finance minister Jaitley and prime minister Modi, have tried to correct this. As Jaitley said in the budget speech: “In accordance with the suggestion made by the Election Commission, the maximum amount of cash donation that a political party can receive will be Rs 2,000/- from one person.”

Hence, the Rs 20,000 limit has been lowered to Rs 2,000. This has been hailed by many as a brave move. As former election commissioner S Y Quraishi told The Indian Express, “It is a positive move and also an acknowledgment that political funding is an issue that needs to be addressed. As the Budget also says, this is the first step and not the final one. I hope this will be taken to the logical conclusion.”

Reducing the cash funding of political parties to one-tenth of what it used to be and the introduction of electoral bonds are two significant steps in curbing corruption,” A.K. Verma, a Kanpur-based political analyst, told Mint.

The Section 29C of the Representation of People Act, 1951, allowed political parties to accept donations of Rs 20,000 from anonymous individuals. This has now been reduced to Rs 2,000. This basically means that all the political party receiving cash donations needs to do is to split one cash donation of Rs 20,000, into ten cash donations of Rs 2,000, and continue with the system as it has evolved.

As Professor Jagdeep Chhokar, founding member of the Association for Democratic Reforms told The Hindustan Times: “Earlier, those who did not want to declare donations used to issue receipts for Rs 19,999. Now they will do the same for Rs 1,999. The business will run as usual.

How does this move in anyway make the entire electoral financing system more transparent, as suggested by Jaitley in the budget speech? This half-baked measure is not going to change things in any way.

If Modi and Jaitley were serious about cleaning up electoral funding they would have simply banned cash donations to political parties and at the same time there would be no donations from unknown sources.

If individuals in this country are expected to go cashless and make use of digital payment mechanisms, the political parties should be expected to do the same as well. It is much easier for them to get the necessary infrastructure in place.

This is basically yet another move by Jaitley and Modi to deviate attention from the real problem of black money financing Indian elections and one set of rules for political parties and another for citizens. Now they have something to say about having done their bit. And that’s that. Instead, they really had an opportunity to clean up the electoral financing system in the country. But they chose not to.

Also, it is worth pointing out here what Chhokar says: “The law was that the political parties were bound to declare donations over Rs 20,000. It did not mean that they could not declare donations below that amount… So those who want to hide the source of their donations, still have a way out.” But that, as they say, this is easier said than done.

To conclude, as a friend put it to me yesterday, it’s time to run another petition.

The  column originally appeared on Equitymaster on February 2, 2017



Yesterday, while watching my 12th budget speech, at around noon, I fell asleep. The dozen years of watching long and boring budget speeches finally caught up with me.

When I woke up at 1.30 pm, I was extremely hassled at having missed the budget speech, only to realise that I hadn’t missed much.

As far as budgets go, the finance minister Arun Jaitley’s fourth budget was a fairly straightforward one. And dear reader, if you haven’t bothered following it up until now, there is nothing more you need to do, than just read this piece.

So, here are the seven most important things that you need to know about the budget:

a) For incomes between Rs 2.5 lakh and Rs 5 lakh, the rate of income tax has been reduced to 5 per cent. Earlier it was at 10 per cent. This would mean that anyone having a taxable income of Rs 5 lakh or more will pay a lesser tax of Rs 12,500.

b) The finance minister also said that he plans to introduce a simple one page tax return form for individuals having a taxable income of up to Rs 5 lakh other than business income. This promise of simplifying the income tax return form has been made in the past as well. Let’s see how properly it is implemented.

c) Data from past income tax returns shows that during the financial year 2013-2014 only 23.7 lakh individuals declared income from house property i.e. rental income. This basically means that most landlords do not declare their rental income while filing their returns.

Now on, any individual paying a rent of greater than Rs 50,000 per month, will have to deduct a tax of 5 per cent at source. As Sandeep Shanbhag, director of Wonderland Consultants, a tax and investment advisory firm, puts it: “It is also proposed to provide that such tax shall be deducted and deposited only once in a financial year through a challan-cum-statement.”

d) In its war against cash, the government has made it mandatory that no transaction above Rs 3 lakh will be permitted in cash. One thing that it missed out on here is the fact that gold worth lower than Rs 2 lakh can still be bought without showing any identity proof. In fact, this is how jewellers converted demonetised Rs 500 and Rs 1,000 notes into gold, on the night of November 8 and November 9, 2016, when the Modi government suddenly demonetised these notes.

e) Currently, a long-term capital gains tax on immovable property or real estate has to be paid, only if it has been held for three years. The capital gains made on any property sold in less than three years is added to the income for the year and taxed at the marginal rate of tax. The government has decided to reduce this holding period to two years. This is good news for those looking to sell homes bought anywhere between two to three years back.

f) The finance minister also said that “the base year for indexation is proposed to be shifted from 1.4.1981 to 1.4.2001 for all classes of assets including immovable property.” What does this mean? While calculating the capital gains on real estate that has been sold indexation benefits are available. Indexation essentially allows the seller of real estate to take inflation into account while calculating his cost price.
If the property had been bought at any point of time before April 1, 1981, the price as on April 1, 1981, would have be taken into account while calculating the capital gains. This date has now been moved to April 1, 2001. This basically means that anyone who had bought property before April 2001, gets the price of April 2001 as the cost price, while calculating the capital gains. In the process, the capital gains made will come down.
As Jaitley put it: “This move will significantly reduce the capital gain tax liability while encouraging the mobility of assets.” What this means in simple English is that more people will be incentivised to pay income tax rather than carry out a part of their transaction in black.

g) The government has also inserted a section into the Income Tax Act which essentially states that: “set off of loss under the head “Income from house property” against any other head of income shall be restricted to two lakh rupees for any assessment year.” What does this mean? If you have a bought a home by taking on a home loan and are living in it, then you don’t need to worry. Currently, a deduction of Rs 2 lakh can be made against other heads of income for paying interest on a home loan. This continues.

As Shanbhag puts it: “Interest paid on housing loan could be set off against other income (say salary) i.e. the loss from house property could be adjusted against salary income to reduce the final tax liability. On second homes, this was much more significant as the entire interest without any limit (after first adjusting against a real rental income or a notional rental income in case the house was not rented) could then be further adjusted against incomes from other heads (like salaries etc).” Thus, the tax to be paid, could be massively brought down.

As Shanbhag further puts it: “Now, this adjustment against other heads of income has been restricted to Rs 2 lakh per year. Any unabsorbed interest can be carried forward but then will be subject to similar restrictions the following year. In one stroke, the tax arbitrage related to the housing sector has vanished.”

The government has basically plugged a loophole. Hence, now irrespective of the number of home loans that an individual has, the set off cannot be more than Rs 2 lakh.

The column originally appeared in Bangalore Mirror on February 2, 2017