In his fourth Independence Day speech on August 15, 2017 as Prime Minister, Narendra Modi said: “Over the past three years, Pradhan Mantri Mudra Yojana has led to millions and millions of youth becoming self-dependent. It’s not just that, one youth is providing employment to one, two or three more people.”
Similar views were expressed by Amit Shah, the president of the Bharatiya Janata Party in May 2017, when he said: “We have tried to give new perspective to employment as it is not possible to provide employment to everyone in a country of 125 crore people. We are promoting self-employment and the government has made eight crore people self-employed.”
These remarks emerge out of the assumption that each loan given under the Pradhan Mantri Mudra Yojana(PMMY, and more popularly referred to as a Mudra Loan), leads to the creation of at least one self-employment opportunity. Is that correct? Let’s take a look at Table 1.
Table 1, tells us that up until early September 2017, close to 9 crore loans have been disbursed under the PMMY. When Shah had made the statement in late May, he had perhaps claimed on the basis of this data that the government had made 8 crore people self-employed.
The assumption was that one Mudra loan makes one individual self-employed. PM Modi in his speech essentially seemed to have assumed one Mudra loan leads to one individual becoming self-employed and he, in turn, employs more people. Take a look at Table 2.
What does Table 2 tell us? It tells us that the average loan being given under the PMMY has jumped from Rs 39,405 in 2015-2016 to around Rs 46,528 in the current financial year. Now let’s take a look at the data at a more granular level in Table 3, focusing on two previous financial years.
As can be seen from Table 3, in the previous two financial years, the total number of loans given to new entrepreneurs stood at 2.25 crore. This amounts to a little over 30 per cent of the total loans. Hence, the claim that 8 crore self-employment opportunities have been created because of PMMY loans doesn’t really add up. A bulk of the loans has been given to people who are already self-employed.
The PMMY loans are categorised into three types. These are Shishu (upto Rs 50,000), Kishore (from Rs 50,000 to 5,00,000) and Tarun (from Rs 5,00,000 to 10,00,000). Let’s look at Table 4, which goes into some detail of these different kinds of PMMY loans.
We can see from Table 4 that the most basic Shishu loans over the last two financial years formed around 92-93 per cent of the total loans. Now look at Table 5, which basically tells us the average amount of loan taken under each of the different kind of loans.
The Shishu loans on an average amounted to Rs 19,400 in 2015-2016 and Rs 23,300 in 2016-2017. This basically means that the average loan given under PMMY is very small. It is highly unlikely that such a small amount of capital can create any employment. Hence, it might act more as an overdraft facility for the self-employed (such as Kisan Credit Cards for farmers) than be able to create employment. Also, whether the new entrepreneurs who have taken PMMY loans continue to survive as entrepreneurs, is an interesting question which researchers need to explore.
It is worth pointing out that many self-employed people in India are not self-employed by choice. Economists Abhijit Banerjee and Esther Duflo call them ‘reluctant entrepreneurs’. They do not have a choice. This can be understood from the fact around 46-47 per cent of the Indian workforce is self-employed. Take a look at Table 6.
The above table clearly indicates that the salaried labour force is way better off than the self-employed. Nearly two-thirds of the self-employed earn up to Rs 7,500 per month. For the salaried, this is at a little over 38 per cent.
To conclude, the CEO of Mudra (Micro Units Development & Refinance Agency Ltd.) in an interview to a private media house, when asked the question on the number of jobs created by the Mudra loans, had said: “We are yet to make an assessment on that… We don’t have a number right now, but I understand that NITI Aayog is making an effort to do that.”
In such a situation, the hypothesis of the government that Mudra loans are making crores of youth self-dependent seems to be flawed. It seems more of a political gimmick, because remaining in power is more important than working to allay the distresses of those who are still seeking employment.
On August 30, 2017, the Reserve Bank of India (RBI), published its much-anticipated Annual Report. Up until last year, only journalists who covered the banking beat, economists and analysts, kept track of the RBI Annual Report.
But this year, many more people were interested. This was primarily because the Annual Report would finally reveal what portion of the demonetised Rs 500 and Rs 1,000 notes, made it back to the banks.
And why was this of interest? After demonetisation had been announced, many people including government ministers and several leading economists, had hoped that a large portion of the demonetised notes won’t come back to the banks. This was because those who had black money in the form of cash wouldn’t want to deposit it into banks, and reveal who they are to the government. In the process, a lot of black money held in the form of cash would be destroyed.
But nothing of that sort happened. The RBI Annual Report revealed that Rs 15.28 lakh crore of the Rs 15.44 lakh crore that was demonetised, made it back into the banks. This meant that nearly 99 per cent of demonetised notes made it back to the banks, and almost no black money was destroyed. Other than not achieving its major goal of destroying black money, demonetisation has also hurt India’s economic growth in general and manufacturing and industrial growth in particular, very badly.
After this, the government as expected has been offering multiple reasons in favour demonetisation. In a press release the ministry of finance offered this reason: “The fact that bulk of specified bank notes (SBNs) have come back to the Banking system shows that the banking system and the RBI were able to effectively respond to the challenge of collecting such a large number of SBNs in a limited time.”
What does this even mean? If paper money is made useless overnight, it is bound to come back to the banks. Where else will it go? Another reason offered to show demonetisation as a success is that Rs 3 lakh crore of the Rs 15.28 lakh crore that has come back is black money. No explanations have been offered on how the Rs 3 lakh crore number was arrived on. But even if we assume that it is black money, the holders of this black money aren’t exactly waiting to hand it over to the government. They have access to chartered accountants as well as lawyers and are ready for a long-drawn battle, if needed.
The weak government spin on demonetisation has continued. The question is why? The answer lies in the fact that a section of the population is still buying this spin on the social media. As Evan Davis writes in Post Truth: “In social media, our disposition to believe things is something a form of bonding. Not only do we tend to reside in echo chambers online, but we actively enjoy becoming closer to our friends by sharing views and agreeing with them. The act of consenting to someone else’s beliefs, and have them consent to ours, is satisfying; and because it is so, it stops us questioning the nonsense that others post.”
This is one explanation for the rather weak defence of demonetisation that is still being put out by the government. Then there is the problem of the narrative, or the prevailing interpretation of a pattern of events. There is a section of population which really wants to believe that demonetisation worked. It’s their narrative.
As Evans writes: “Like-minded groups of individuals share a narrative about many things… These narratives are sometimes true, sometimes not, but they are often like stereotypes… Once embedded in our minds though, they can easily gain excessive traction and trample over truth as willing believers put too much weight on propositions that conform to their narrative without looking for evidence in support of them.”
And that explains why the weak spin on demonetisation is still going strong.
The impact of demonetisation has played out in many ways. Here is one more way: The gold imports between April and July 2017 have been nearly 2.7 times the gold imports during the same period last year.
Let’s take a look at Figure 1 which plots gold imports (in Kgs) over the last few financial years.
Figure 1:
It is clear from Figure 1 that the gold imports have jumped up big time between April to July 2017, in comparison to last year. In fact, they are the second highest in the last five years. Take a look at Figure 2. Figure 2 plots the money spent on importing gold over the last five years.
Figure 2:
Even in value terms significantly more gold has been imported this year than last year. The price of gold during the period April to July 2017, averaged at $1257.9 per ounce (one troy ounce equals 31.1 grams). During the same period last year, the price of gold had averaged at $1291.3 per ounce, which was slightly higher.
How do things look if we look at the calendar year instead of the financial year? Between January and July 2017, the total amount of gold imported stands at 6, 61,836 kgs. Between January and July 2016, this had stood at 3,11,938kgs. There is a clear jump in this case as well. In fact, the interesting thing is that the import of gold has been concentrated during the first five months of the calendar year, immediately after demonetisation.
What does this tell us? When and why do people actually buy gold?
The history of economics tells us that people buy gold when the faith in official paper money (in this case the Indian rupee) is low. Take the case of the period between April to July 2013. A lot of gold was bought during this period. The rate of consumer price inflation was at 9-10 per cent. Given this, a section of the population had lost faith in the Indian rupee and was hedging against inflation and buying gold.
What is happening this time around? This time around Indians are buying gold because in the aftermath of demonetisation which was carried out in November 2016, there is a feeling that the government might do it again. Given this, a portion of the black money which was held in the form of cash earlier, is now simply being converted into gold. This seems like the most logical explanation for this surge. The lower price argument doesn’t really hold because prices this year have been more or less similar to prices last year.
Of course, gold is easy to store and has never gone out of fashion. Hence, it can easily be converted into cash at any point of time.
In 2013-2014, people had lost confidence in paper money because of extremely high inflation. This time around, people have lost faith in paper money because of demonetisation. Hence, they are buying gold.
As Indians bought gold in 2013-2014 and a lot of it (close to 4,20,000 kgs, during the first four months of that financial year, as Figure 1 suggests), the demand for dollars went up. India imports almost all of the gold that it consumes. Hence, it buys gold internationally in dollars. As the demand for dollars went up, importers sold rupees and bought dollars. In the process, the rupee lost value rapidly against the dollar.
In April 2013, one dollar was worth Rs 54.23. By August 2013, it was worth Rs 67.4. The rupee simply crashed during the period. It is worth asking here that why a similar situation does not prevail right now. Why hasn’t the rupee crashed like it did when people bought lots of gold between April and July 2013?
This is because while Indians are buying gold, a lot of dollars continue to come to India through the foreign institutional investors route. These investors continue to invest in the Indian stock market and the debt market. Between April and July 2017, the foreign institutional investors have invested a little over Rs 95,000 crore in the stock and the debt market. The foreign institutional investors sell dollars and buy rupees in order to invest in the stock and the debt market. This demand for the Indian rupee has ensured that the dollar has remained stable against the rupee at around Rs 64. Hence, the demand for rupees among these investors is negating the demand for dollars among gold importers. This has led to a stable value of the rupee against the dollar.
What had happened between April and July 2013? While, the demand for gold was very high, the foreign institutional investors were selling out of India. During the period, they encashed close to Rs 27,000 crore from the stock and the debt market. In fact, the foreign institutional investors sold stocks and debt worth over Rs 60,000 crore between June and July 2013.
In order to repatriate this money abroad, they had to sell these rupees and buy dollars. This along with heavy gold buying, which was accompanied by selling of rupees and buying of dollars, pushed up the demand for the dollar, and drove down the value of the rupee.
This essentially explains why the value of the rupee had crashed in 2013-2014, and has remained stable during this financial year. Nevertheless, people are buying gold because their faith in the Indian rupee has gone down and they clearly want to hedge against the risk of another round of demonetisation.
The Prime Minister, Shri Narendra Modi addressing the Nation on the occasion of 71st Independence Day from the ramparts of Red Fort, in Delhi on August 15, 2017.
Narendra Modi, took over as the prime minister of the country on May 26, 2014. On that day, the global price of the Indian basket of crude oil was $108.05 per barrel. Back then, one litre of petrol cost Rs 80 in Mumbai. Diesel in the city was being sold at Rs 65.21 per litre.
Three years have gone by since then and meanwhile, the global oil scenario has changed completely. On September 14, 2017, the price of Indian basket of crude oil was at $54.56 per barrel, around half of what it was when Modi took over as prime minister.
At Rs 79.5 per litre, the price of petrol in Mumbai as on September 14, 2017, in Mumbai, was more or less same as it was when Modi took over as prime minister. Diesel at Rs 62.46 per litre was slightly lower.
What is happening here? While, the price of crude oil has halved, the price of petrol and diesel, which are by-products of crude oil, continues to remain more or less the same (This argument may not hold all across the country, given that different states levy different taxes and different rates of taxes on petrol and diesel).
The gain because of fall in price of oil, has been captured majorly by the central government and the state governments, by increasing the different taxes that are levied on petrol and diesel. Lately, the commission given to pumps which sell petrol and diesel, has also gone up.
A small-scale industry has emerged lately, trying to defend the high taxes that consumers pay on petrol and diesel. Here are the arguments on offer:
a) India imports 80 per cent of the oil that it consumes. Given this, prices of petrol and diesel need to be high, in order to discourage people from consuming more and more of it. The assumption is that at lower price levels, people will consume more petrol and diesel.
b) We need to respect the environment. Petrol and diesel pollute the environment, and hence, taxes on petrol and diesel need to be high.
c) The high taxes on petrol and diesel have helped the government bring down its fiscal deficit without having to cut on its expenditure. This is something that is required in an economic environment where growth is slowing down and hence, government spending needs to be strong. Fiscal deficit is the difference between what a government earns and what it spends.
d) High taxes on petrol and diesel help the government earn enough money in order to fund the physical infrastructure that the country badly needs.
e) High petrol and diesel prices push demand towards more fuel-efficient cars. Also, by taxing petrol more than diesel, the government is ensuring that the private modes of transport (which largely use petrol) are taxed more than the public modes of transport (which use diesel).
f) The oil marketing companies need the flexibility to price their products on a day to day basis. It is this flexibility that reflects in the healthy valuations that their stocks currently enjoy in the stock market.
g) High taxes help the government finance the oil marketing companies which can then sell domestic cooking gas and kerosene at lower prices.
Each of these arguments is largely correct (I mean just because a small scale industry has emerged, doesn’t mean they are wrong) except for the last one. The subsidies on domestic cooking gas and kerosene are now down to around Rs 25,000 crore, which isn’t much in comparison to the petroleum subsidy of the past years. Hence, high taxes on petrol and diesel are clearly not required to fund the subsidy.
But there is one point that these economic commentators and analysts do not talk about. High taxes on the petrol and diesel makes the government lazy and helps it to continue favouring the status quo. Allow me to elaborate. It is worth remembering here that money is fungible. Just as high taxes on petrol and diesel allow the government to fund physical infrastructure, they also allow it to do a lot of other things that a government shouldn’t be doing. Let’s look at the points one by one:
a) Between 2010-2011 and 2015-2016, Air India has lost close to Rs. 35,000 crore, and yet it continues to be run. The losses are not surprising, given that the airline business is a very competitive business and the government clearly doesn’t have the wherewithal to run it. The question is where does the money to keep bankrolling Air India come from? The high taxes on petrol and diesel. Lately, there has been talk of selling the airline. Let’s see, if and when that happens.
b) Or take the case of Hindustan Photo Films Manufacturing Company Ltd. It is the fourth largest loss-making company among the loss making public sector units. It made losses of Rs 2,528 crore in 2015-201 Between 2004-2005 and 2015-2016, the company has made losses of close to Rs 15,000 crore. As mentioned earlier in 2015-2016, the company lost Rs 2,528 crore. It employed 217 individuals. This meant a loss of Rs 11.65 crore per employee. Where does the money to run this company come from?
c) In total, high taxes on petrol and diesel allowed the government to run 78 loss making public sector enterprises in 2015-2016. Between 2011-2012 and 2015-2016, the loss making public sector enterprises have made losses of Rs 1,33,400 crore. Where is the money to finance these losses coming from?
d) Between 2009 and now, the government has spent roughly around Rs 1,50,000 crore, recapitalising public sector banks. The public sector banks have a humungous bad loans portfolio, as they keep writing off the bad loans, their shareholders’ equity keeps coming down and the government as the largest owner, needs to recapitalise them. Bad loans are essentially loans in which the repayment from a borrower has been due for 90 days or more. Take a look at Table 1.
Table 1:
Gross non-performing advances ratio
Indian Overseas Bank
24.99%
IDBI Ltd.
23.45%
Central Bank of India
19.55%
UCO Bank
18.83%
Bank of Maharashtra
18.00%
Dena Bank
17.39%
United Bank of India
16.56%
Oriental Bank of Commerce
14.49%
Bank of India
14.20%
Allahabad Bank
13.72%
Punjab National Bank
13.20%
Andhra Bank
12.91%
Corporation Bank
12.14%
Union Bank of India
11.77%
Bank of Baroda
11.15%
Punjab & Sind Bank
10.80%
Canara Bank
10.00%
Source: Author calculations on Indian Banks’ Association data. As on March 31, 2017.
Table 1 tells us that 17 public sector banks have a bad loans ratio of 10 per cent or high. This basically means that of every Rs 100 of loans that they have given, a tenth or more, is not being repaid. The government currently owns 21 banks, after the merger of the associate banks of State Bank of India and the Bhartiya Mahila Bank, with the State Bank of India.
Some of these banks like the Indian Overseas Bank are in a particularly bad state. This bank has a bad loans ratio of close to 25 per cent i.e. one fourth of its loans have been defaulted on.
Where is the money to keep these banks going, coming from? In a world where money wasn’t free flowing because of high taxes on petrol and diesel, banks like the Indian Overseas Bank, UCO Bank, United Bank of India, Dena Bank, etc., would have already been shutdown or perhaps been sold off. These banks are too small on the lending front to make any substantial difference to the total lending carried out by banks in India. But their losses do hurt the government a lot. Every extra rupee that goes towards funding these banks is taken away from something more important areas like education, health and agriculture.
e) Also, given the different taxes implemented by different states, the price of petrol and diesel tend to vary across the country. Take the case of the government of Maharashtra charging a drought cess of Rs 9 every time one litre of petrol is bought in the state. Why is this cess even there during a time when there is really no drought in the state? It is just an easy way for the government to raise money. Most people don’t even know that they are paying for something like this, every time they buy petrol.
Hence, to introduce a sense of equality among citizens living in different states, petrol and diesel need to be taxed under the GST (They are already a part of it, with zero percent tax rates).
The high taxes from petrol and diesel also helps the government to continue running many inefficient firms as well as banks. Any plan of closing down these firms and banks is likely to met with a lot resistance and also, lead to a lot of hungama (for the lack of a better word). Given this, it makes sense for the government to take the easy way out, maintain the status quo and continue running these firms and banks.
As Donald J Boudreaux writes in The Essential Hayek: “People’s intense focus on their interests as producers, and their relative inattention to their interests as consumers, leads to press for government policies that promote and protect the interests of producers.”
Any idea of shutting down or selling an inefficient public sector enterprise or banks, is likely to be met with a lot of protests from the employees as well as the trade unions representing them. The political parties are likely to join in. Hence, it is easy for the government to maintain the status quo and not make any difficult decisions.
But the money that goes towards keeping these individuals happy, is taken away from other areas like education, agriculture, health etc. People who lose out because of this, do not have the kind of representation that people working for government run firms have.
Of course, all this does not mean that there should be no taxes on petrol and diesel. With the right to govern comes the right to tax people. But these taxes should be at a reasonable level. Also, with lower taxes, people will spend more money on personal consumption and that will help economic growth. And the impact of people spending money, on economic growth, is always greater than that of the government.
To conclude, it is worth remembering that every coin has two sides, and it doesn’t always land up heads.
Over the years I have written under many female pseudonyms. I can remember at least four names right now. Maybe there were more.
So, this happened during the time when I was working for one newspaper and righting majorly for another, of course under a female pseudonym.
Given that I have always wanted to know what the readers are thinking, an email id of the female pseudonym, used to be published along with every article. Soon, a stock analyst started emailing regularly. One fine day, I woke up to see a wedding proposal from his end. It seems, his sister had read all the columns that I was writing under the female pseudonym, thought that the woman writing these columns was very smart, and told her brother to pursue the female writer. (It’s like Manohar Singh tells Shabana Azmi in Main Azad Hoon, ye aadmi jaana nahi chahiye...in this case, it was, ye aurat jaani nahi chahiye).
Of course, the brother did not understand the difference between pursue and propose and propose he did.
The emails became very regular and after a point it was a bit like stalking. So, one day I decided to have some fun with this guy and started a slightly flirty conversation, of course, pretending to be the woman he was madly in love with. (Wicked me! But then journalism does give you a lot of time to kill).
This put him off completely. He thought that the woman he was in love with was different (a sati savitri), but she turned out to be just like most of his female colleagues were.
After that, he rarely mailed. And so ended, this budding love story! A few years later, when I saw Gangs of Wassepur, I was reminded of him. When Ramadheer Singh tells his son, tumse na ho paega.
PS: Of course, this is the second most hilarious thing that happened to me while writing under a pseudonym. The most hilarious thing was when a personal finance editor of a leading pink newspaper read something I had written under a pseudonym and wanted me to write for her paper.
I told her that I couldn’t write under my original name (which was the pseudonym) but could do so under a pseudonym. Sadly, she refused. Else I would have written under a pseudonym of a pseudonym. And that would have been some high.This story I have already told before.
As can be seen from Table 3, in the previous two financial years, the total number of loans given to new entrepreneurs stood at 2.25 crore. This amounts to a little over 30 per cent of the total loans. Hence, the claim that 8 crore self-employment opportunities have been created because of PMMY loans doesn’t really add up. A bulk of the loans has been given to people who are already self-employed.
