Category: Arun Jaitley | Page 2

2 March, 2016

Mr Jaitley, You Just Made Every Honest Tax Payer Feel Like An Idiot

The finance minister Arun Jaitley presented his third budget today. It was expected that Jaitley would take steps towards improving the number of Indians who pay tax. But that doesn’t seem to have happened, instead he has proposed to launch an amnesty scheme for those who have black money within the country.

The point to increase the number of Indians who pay tax was an important part of the Economic Survey which was tabled before the Parliament on Friday i.e. February 26, 2016. As the Economic Survey points out: “Controlling for the level of democracy, India’s ratio of taxpayers to voting age population is significantly less than that of comparable countries. This implies that while at present about 4 per cent of citizens who vote pay taxes, the percentage should be about 23.”

The Survey further points out that around 85% of the country is outside the tax net. One clear impact of this is that the government is not able to raise enough taxes as it could. The other impact of not enough people paying tax to the government, is that a huge amount of black money builds up in the Indian financial system. The prime minister Narendra Modi had talked a lot about getting the black money that has left the Indian shores back to India, in the run up to the Lok Sabha elections of 2014.

After coming to power, the government did try and launch a scheme to get people to declare their overseas black money and pay a tax as well as a fine on it.

On this “declared” black money, the government planned to charge a tax of 30 per cent and a penalty of 30 per cent. During the compliance period offered by the government, 638 declarants declared assets and income amounting to Rs 4,147 crore. The amount collected was very low, given the huge amount of black money within the country. What this told us clearly is that the government’s plan to uncover black money was a complete damp squib.

The point is that it is next to impossible to get back black money that has left the shores of this country. It could have found its way into any of the around seventy tax havens, all across the world. Even the United States has not succeeded on this front.

Despite this, the Modi government continues to be obsessed with the idea of getting back black money from abroad. As Jaitley said during the course of his speech: “Our Government is fully committed to remove black money from the economy. Having given one opportunity for evaded income to be declared once, we would then like to focus all our resources for bringing people with black money to books.”

Further, Jaitley also proposed an amnesty scheme for people who have black money within the country. As he said: “I propose a limited period Compliance Window for domestic taxpayers to declare undisclosed income or income represented in the form of any asset and clear up their past tax transgressions by paying tax at 30%, and surcharge at 7.5% and penalty at 7.5%, which is a total of 45% of the undisclosed income.”

Those who declare black money within this compliance window will not face any scrutiny or enquiry under the Income Tax Act or the Wealth Tax Act. They will also have immunity from any prosecution as well.

There are a few points that need to be raised here. First and foremost, the question is how will Jaitley and company get around the Supreme Court on this. The last time such a scheme was launched was in 1997, when P Chidambaram was the finance minister of India. This led to a declaration of Rs 33,000 crore of undisclosed income on which the government collected Rs 10,000 crore tax.

Nevertheless, this led to a lot of outrage and the government had to commit to the court (essentially Chidambaram and the then revenue secretary NK Singh) that there wouldn’t be any amnesty scheme in the future. The question is how will the government get around this?

Also, any amnesty scheme makes the people who honestly pay their taxes look like fools. It tells them they would have been better off not paying taxes. In fact, in his last budget speech in February 2015, the finance minister Jaitley had said: “The problems of poverty and inequity cannot be eliminated unless generation of black money and its concealment is dealt with effectively and forcefully.”

Doesn’t a black money amnesty scheme lead to greater inequity now, Mr Jaitley?

Further, in June 2015, the union cabinet launched the “Housing for All by 2022” scheme. If the government is serious about this, it needs to some better thinking on how to stop the generation of domestic black money. Jaitley’s budget clearly missed out on that front.

In the past, the Modi government has also opposed the idea of bringing political parties under the ambit of the Right to Information Act. This is not surprising given that it is black money that continues to finance the election costs of the political parties of this country. It needs to be said that any other political party in power would have possibly done the same.

(Vivek Kaul is the author of the Easy Money trilogy. He tweets @kaul_vivek)

The column originally appeared on Huffington Post India on February 29, 2016

9 February, 2016

What the GDP numbers tell us about the fiscal deficit

The Central Statistics Office(CSO) has published the economic growth numbers for the period October to December 2015. It has also put out the economic growth projection for the current financial year i.e. 2015-2016 (April 1, 2015 to March 31, 2016).

The Indian economy grew by 7.3% during the period October to December 2015. It is projected to grow at 7.6% during 2015-2016. Economic growth is measured by the growth in the gross domestic product(GDP). But GDP is a theoretical construct. There are many high frequency economic data indicators which tell us very clearly that there is no way that the country is growing at the rate at which the government wants us to believe it is.

Much has been written about the fact that India’s economic growth numbers can’t be possibly right and given that I wanted to discuss something else, but equally important in this column.

The GDP growth is declared in several forms. When CSO talks about the Indian economy growing by 7.6%, during the course of the year, it is talking about real GDP growth. Real GDP growth is essentially adjusted for inflation. The economic growth which is not adjusted for inflation is known as the nominal GDP growth. The nominal GDP growth for the current financial year is expected to be at 8.6%. Typically, the difference between nominal and real GDP growth is greater than this.

When calculating the fiscal deficit, the government uses the nominal GDP. This is because the revenue as well as the expenditure of the government are not adjusted for the prevailing inflation. Fiscal deficit is the difference between what a government earns and what it spends during the course of the year.

When the finance minister Arun Jaitley presented the budget in last February, he had set a fiscal deficit target of 3.9% of the GDP. The GDP here is the nominal GDP. There are essentially two numbers in the fiscal deficit calculation—the absolute fiscal deficit number and the nominal GDP number.

The absolute fiscal deficit number for this year was set at Rs 5,55,649 crore. The nominal GDP number in the budget was assumed to be at Rs 14,108,945 crore. It was assumed that the nominal GDP would grow by 11.5% in comparison to the nominal GDP in 2014-2015, which was at Rs 12,653,762 crore.

The growth of 11.5% in nominal GDP has not materialised and now close to the end of this financial year, the government thinks that the nominal GDP growth will be at a much lower 8.6%. And this is precisely what has upset the fiscal deficit calculations of the government. A growth of 8.6% means that the nominal GDP for 2015-2016 will come in at Rs 13,741,986 crore.

If the government maintains an absolute fiscal deficit of Rs 5,55,649 crore, then the fiscal deficit as a proportion of the nominal GDP will come in at 4.04% of the GDP. In order to maintain the fiscal deficit at 3.9% of the GDP, the government will have to cut down the fiscal deficit by around Rs 20,000 crore, assuming all other projections remain the same.

A fiscal deficit of 4.04% of the GDP is higher than 3.90% of the GDP, but not significantly higher. But that is not what has got the government worrying. In fact, the finance minister Arun Jaitley had talked about fiscal consolidation in the two budget speeches he has made till date in July 2014 and February 2015. Fiscal consolidation is the reduction of the fiscal deficit.

In July 2014 Jaitley had said: “We need to introduce fiscal prudence that will lead to fiscal consolidation and discipline. Fiscal prudence to me is of paramount importance because of considerations of inter-generational equity. We cannot leave behind a legacy of debt for our future generations. We cannot go on spending today which would be financed by taxation at a future date.”

He had further said: “One fails only when one stops trying. My Road map for fiscal consolidation is a fiscal deficit of 3.6 per cent [of the GDP] for 2015-16 and 3 per cent for 2016-17.”

In the speech he made in February 2015, he postponed this target by a year and said that the government will achieve a fiscal deficit of 3.5% of GDP in 2016-17; and 3% of GDP in 2017-18.

The point being that the government had originally envisaged achieving a fiscal deficit of 3.6% of GDP during this financial year. This target was postponed by a year and the government set itself a much easier target of 3.9% of GDP. And given this, it is very important that the government achieve this much easier target, if it wants people to take it seriously in the future on the fiscal deficit front.

Further, it is worth pointing out here that typically if the government were to follow the international norms of declaring the fiscal deficit and not include disinvestment proceeds as a revenue item but a financing item, the fiscal deficit for 2015-2016 would be at 4.4% of the GDP. Also, the 3.9% of GDP fiscal deficit target does not include subsidy payments of more than Rs 1,00,000 crore that need to be made for fertilizer and food subsidies.

The government can achieve a 3.9% of GDP fiscal deficit target, by increasing its revenue and cutting down on its expenditure. The government has been trying to increase its revenue by increasing the excise duty on petrol and diesel. Three such hikes have been made since January 2016. This has led to a situation where oil prices have fallen dramatically but petrol and diesel prices in India have actually risen over the last one year.

The petrol price in Mumbai as of now is Rs 66.05 per litre. The price as of last February was at Rs 63.9 per litre. The price of the Indian basket of crude oil during the same period has fallen by more than 44%.

While the government continues to raise the excise duty on petrol and diesel, it continues to own a 11.2% stake in cigarette maker ITC. This stake as of yesterday’s closing price was worth Rs 28,256 crore. What is so strategic about owning a stake in a cigarette company and at the same time run advertisements trying to tell the country at large that it consumption of tobacco is injurious to health? Why can’t this stake be sold and the money used for better purposes?

This is something that the government needs to explain.

(Vivek Kaul is the author of the Easy Money trilogy. He tweets @kaul_vivek)

The column originally appeared on Firstpost on February 9, 2016.

25 January, 2016

Mr Jaitley, India can’t Shoulder Global Growth as China Slows Down

Being rhetorical is a part and parcel of being a politician. Or you run the risk of being called Maun Mohan Singh. Nobody perhaps understands this any better than the finance minister Arun Jaitley, who is more or less the official spokesperson for the Narendra Modi government.

Jaitley recently said in London that India can shoulder some of the global growth contribution previously made by China. As The Hindu Business Line reports: “India can shoulder some of the global growth contribution previously made by the Chinese economy, Finance Minister Arun Jaitley said in London, ahead of his trip to Davos. The world was now looking for additional “shoulders to rest global growth on,” and India would be part of it he said, acknowledging the “serious challenges” faced by the global economy.”

“India’s growth rate, despite challenges is, among the major economies, the highest in the world,” Jaitley added.

The comment came after the Chinese economic growth fell to a 25-year low of 6.9% in 2015. In fact, the Chinese economic growth for the period October to December 2015 was at 6.8%. In 2014, the economic growth had stood at 7.3%. The Chinese economic growth has collapsed from the peak of 14.2% it had reached in 2007.

This slow Chinese growth led Jaitley to quip that India can shoulder some of the global growth contribution previously made by China. But how much sense does this statement make? Or was it just rhetoric on Jaitley’s part, as is often the case?

Let’s try and use some numbers here to understand.

Data from the World Bank shows that in 2014, the Chinese gross domestic product (GDP at market prices (constant 2005 US$)) was at $ 5.27 trillion. An economic growth of 6.9% in 2015 means that China added around $364 billion to its GDP and the world GDP as well.

India is now the fastest growing major economy in the world. During the period July to September 2015, the economic growth stood at 7.4%. Let’s assume that the country grows at this rate in 2015, given that the economic growth number for 2015 for India hasn’t come out as yet.

In 2014, the Indian GDP (at market prices (constant 2005 US$)) was at $1.6 trillion. The Chinese GDP was at $1.54 trillion in 2001, close to where the Indian GDP is now. The country has grown at a rate of 9.9% per year between 2001 and 2014. This tells us very clearly as to how fast India needs to grow if it has to reach where China is now.

Getting back to India. The Indian GDP in 2014 was $1.6 trillion. If India grew by 7.4% in 2015, it would mean adding $118 billion to its GDP, which is around one-third of what China has added, growing at a slightly slower rate of economic growth.

The basic point being that given that the Chinese economy is so much bigger than the Indian economy, even if it grows at a slightly slower rate than India’s, will contribute significantly more to the global economy. Or to put it a little more mathematically, China is growing of a much bigger base.

If India had to contribute as much as China (i.e. $364 billion) to the global economy it would have to grow by 22.7%. If India had to contribute even half as much as China it would have to grow at 11.4%. In times like these that is not possible. And that tells us why India can’t shoulder even a part of the global growth because of China slowing down. Also, as China slows down, India will slow down as well to some extent. We can’t be totally disconnected from a slowing global economy.

Hence, what these numbers clearly tell us is that Jaitley was doing what he does best—being rhetorical. That isn’t surprising given that before becoming a full-time politician he was a full-time lawyer.

The irony is that the Indian economic growth number suddenly started to look up after we moved to a new method to calculate the GDP in early 2015. As I keep mentioning GDP is a theoretical construct. The various ‘real’ economic numbers make it very difficult to believe that the economic growth is possibly greater than 7%.

In fact, as Bank of America-Merrill Lynch has pointed out, the economic growth during the period July to September 2015, as per the old method of calculating the GDP would have been 5.2% and not 7.4% as it has been as per the new method. Even for the period April to June 2015, the economy grew by 5% as per the old method, instead around 7% as per the new method.

This is not to say that the Chinese economic data is sacrosanct. As economist Eswar Prasad told the Wall Street Journal reacting to China’s 6.9% economic growth in 2015: “China’s reported growth rate for 2015 raises many questions rather than providing full reassurance about the economy’s true growth momentum.”

In fact, hedge fund manager Martin Taylor of Nevsky Capital summarised the situation very well when he said: “Currently stated Chinese real GDP growth is 7.1% and India’s is 7.4%. Both are substantially over stated. This obfuscation and distortion of data, whether deliberate or inadvertent, makes it increasingly difficult to forecast macro and hence micro as well, for an ever growing share of our investment universe.” Taylor’s comment was made before the latest

Chinese economic growth number came out and summarises the situation best.

The column originally appeared in Vivek Kaul’s diary on January 25, 2016

22 May, 2015

There is no plan in sight for public sector banks

One of the points that I forgot to talk about in the recent Master Series chat (“Looking Behind The Modi Smokescreen with Vivek Kaul”) that I and Rahul had, was the bad state of public sector banks in India.
As S S Mundra, one of the Deputy Governors of the Reserve Bank of India pointed out in a recent speech: “asset quality [of banks] has seen sustained pressure due to continued economic slowdown.” The primary reason for this is the fact that banks have lent too much money to companies. And many companies right now are not in a position to repay the loans they had taken on.
The gross non-performing assets(or bad loans) of banks have been on their way up. As on March 31, 2014, they had stood at 3.9% of their total advances. By March 31, 2015, the number had shot up to 4.3% of the total advances. Crisil Research expects this number to touch 4.5% of the total advances of banks, during the course of this financial year.
What is worrying is that 40% of the loans restructured during 2011-2014 have become bad loans. A restructured loan is where the borrower has been allowed easier terms to repay the loan (which also entails some loss for the bank) by increasing the tenure of the loan or lowering the interest rate. If 40% of restructured loans have gone bad, it is safe to say that the banks have been essentially restructuring loans in order to postpone recognizing them as bad loans.
Interestingly, bad loans are expected to go up during this course of the year primarily because more and more restructured loans will turn into bad loans. As Crisil Research points out in a recent research note titled Modified Expectations: “Reported gross non performing assets[bad loans] will still remain at elevated levels as some of the assets restructured in the previous 2-3 years, especially in the infrastructure, construction, and textiles sectors, degenerate into non-performing assets again.”
And this is clearly worrying. In fact, Mundra during the course of his speech went on to refer to the recent Global Financial Stability Report of the International Monetary Fund(IMF) and said: “Referring to the high levels of corporate leverage, the [IMF] report highlights that 36.9 per cent of India’s total debt is at risk, which is among the highest in the emerging economies while India’s banks have only 7.9 per cent loss absorbing buffer, which is among the lowest. While these numbers might need an independent validation, regardless of that, it underscores the relative riskiness of the asset portfolio of the Indian banks.” This statement coming from one of the top officials of the RBI needs to be taken seriously.
Mundra also pointed out that because of this inability of corporates to repay loans that they had taken on, the public sector banks are in a much bigger mess than other banks. He pointed out that the stressed assets ratio of banks in India as a whole stood at 10.9%.
The stressed asset ratio is the sum of gross non performing assets(or bad loans) plus restructured loans divided by the total assets held by the Indian banking system. The borrower has either stopped to repay this loan or the loan has been restructured, where the borrower has been allowed easier terms to repay the loan by increasing the tenure of the loan or lowering the interest rate. Hence, a stressed assets ratio of 10.9% essentially means that for every Rs 100 given out as a loan, Rs 10.9 has either been defaulted on or has been restructured.
As Mundra pointed out: “The level of distress is not uniform across the bank groups and is more pronounced in respect of public sector banks…The stressed assets ratio[of public sector banks] stood at 13.2%, which is nearly 230 bps[one basis point is one hundredth of a percentage] more than that for the system.” The stressed assets ratio of public sector banks as on March 31, 2014, was at 11.7%. The overall stressed assets ratio of banks was at 9.8%.
This is indeed very worrying. Between March 31, 2014 and March 31, 2015, the stressed assets ratio of public sector banks has gone up a whopping 150 basis points. This has hit the capital that public sector banks carry on their balance sheets. As Mundra pointed out: “Our concerns are larger in respect of the public sector banks where the CRAR [Capital to Risk (Weighted) Assets Ratio also known as capital adequacy ratio] has declined further to 11.24% from 11.40% over the last year.”
The government seems to have made it more or less clear that it is unlikely to pump in any more money into the weaker public sector banks. Also, given the poor perception and stock price of these banks, they are unlikely to be able to raise capital from the stock market. In such a situation it is imperative they be very careful in handling the capital they have. “The need of the hour for all banks, and more specifically, in respect of the PSBs, is that capital must be conserved and utilized as efficiently as possible,” writes Mundra.
What Mundra means in simple English is that banks need to take almost no risk while lending. And this unwillingness of banks to lend has hit the infrastructure sector the most. As Crisil Research points out: “In the past, many private developers have bid aggressively for projects, especially in roads and power. However, most projects have seen execution delays due to issues such as fuel availability, land acquisition and environmental clearances; resulting in significant cost overruns….As a result, poor operational cash flows coupled with rising debt burden have led to a sharp deterioration in the debt-servicing ability of many companies. Banks, too, are wary of lending to the sector.”
The PJ Nayak committee report released in May 2014, estimated that between January 2014 and March 2018 “public sector banks would need Rs. 5.87 lakh crores of tier-I capital.” The report further points out that “assuming that the Government puts in 60 per cent (though it will be challenging to raise the remaining 40 per cent from the capital markets), the Government would need to invest over Rs. 3.50 lakh crores.” The budget for the year 2015-2016 provided Rs 11,200 crore towards this, which is not even peanuts given the kind of money that is required.
It is clear that the government does not have the kind of money that is needed to recapitalize the public sector banks. But the money is needed. What is surprising that even though one year has more or less elapsed since the Modi government came to power, no comprehensive plan has been put forward to solve the mess in the public sector banking space.

The column appeared on The Daily Reckoning on May 22, 2015

23 December, 2014

Has the Chief Economic Adviser ever read George Orwell?

Vivek Kaul

The writer George Orwell in his dystopian novel 1984 came up with the concept of “doublethink”. He defined this as a situation where people hold “simultaneously two opinions which cancelled out, knowing them to be contradictory and believing in both of them”. Arvind Subramanian, the chief economic adviser to the ministry of finance, seems to be in a similar situation these days. While speaking to the press after the Mid Year Economic Analysis was presented to the Parliament, Subramanian said that the government should consider increasing public sector spending in the medium term to revive economic growth . At the same time Subramanian said that the government was committed to meeting the fiscal deficit target of 4.1% of GDP during the current financial year. Fiscal deficit is the difference between what a government earns and what it spends. How is it possible to stand for two absolutely opposite ideas at the same time? How can there be a commitment to increased government spending and maintaining the fiscal deficit at the same time? If the government spends more without earning more, its fiscal deficit is bound to go up. Nevertheless, before getting into this issue in detail let’s try and understand why Subramanian makes a case for increased public investment. In the Mid Year Economic Analysis Subramanian suggests that the public private partnership (PPP) model for infrastructure development hasn’t really worked. “There are stalled projects to the tune of Rs 18 lakh crore (about 13 percent of GDP) of which an estimated 60 percent are in infrastructure. In turn, this reflects low and declining corporate profitability as more than one-third firms have an interest coverage ratio of less than one (borrowing is used to cover interest payments). Over-indebtedness in the corporate sector with median debt-equity ratios at 70 percent is amongst the highest in the world. The ripples from the corporate sector have extended to the banking sector where restructured assets are estimated at about 11-12 percent of total assets. Displaying risk aversion, the banking sector is increasingly unable and unwilling to lend to the real sector,” the Mid Year Economic Analysis points out. What this means is that over the last few years corporates have borrowed more than what they can hope to repay. This has led to them defaulting and banks ending up in a mess. Currently the corporates are not willing to invest and banks are not ready to lend. In the process projects worth Rs 18 lakh crore (which is slightly more than the annual budget of the government of India) have been stalled. So what is the way out of this mess? “First, the backlog of stalled projects needs to be cleared more expeditiously, a process that has already begun. Where bottlenecks are due to coal and gas supplies, the planned reforms of the coal sector and the auctioning of coal blocks de-allocated by the Supreme Court as well as the increase in the price of gas which should boost gas supply, will help. Speedier environmental clearances, reforming land and labour laws will also be critical,” the analysis points out. But even this will not be enough, given that the PPP model hasn’t really delivered. In this scenario Subramanian suggests that “it seems imperative to consider the case for reviving public investment as one of the key engines of growth going forward, not to replace private investment but to revive and complement it.” The question that crops up here is on what should the government be spending money on? Subramanian suggests “there may well be projects for example roads, public irrigation, and basic connectivity–that the private sector might be hesitant to embrace.” He further suggests that one of the main lessons from PPP not working is that “India’s weak institutions there are serious costs to requiring the private sector taking on project implementation risks.” Hence, risks like “delays in land acquisition and environmental clearances, and variability of input supplies (all of which have led to stalled projects) are more effectively handled by the public sector.” And above all weak infrastructure (lack of power supply and poor connectivity) remains a major reason as to why the manufacturing sector hasn’t taken off in India. Increased spending by the government could address all these issues. The reasons presented by Subramanian for increased government spending make sense. One cannot argue against them. Nevertheless, he doesn’t address the most important question, which is, where is the money for all this going to come from? All he says in Mid Year Economic Analysis is that: “consideration should be given to address the neglect of public investment in the recent past and also review medium term fiscal policy to find the fiscal space for it(Italics in the original).” What he means here is that the government will have to somehow figure out how to finance the increased spending in the budgets to come. A document which runs into 148 pages could have done slightly better than that. So, let’s look at the options that the government has? It is not in a position to raise the tax rates, given the economic scenario that we are in. The other possible option is to cut down on non-plan expenditure which makes up for around 68% of the total expenditure of the government and use the money saved to increase public spending. Interest payments on debt, pensions, salaries, subsidies and maintenance expenditure are all non-plan expenditure. As is obvious a lot of non-plan expenditure is largely regular expenditure that cannot be done away with. The government needs to keep paying salaries, pensions and interest on debt, on time. Hence, slashing this expenditure is easier said than done. Another option for the government is to sell its assets, put that money into some sort of an infrastructure fund and use that money to finance higher public spending. But as we have seen over the last few years the disinvestment process has been a non starter. Now that leaves the government with only one option i.e. to finance the higher expenditure by borrowing more. This will lead to several other issues. As T N Ninan writes in the Business Standard: “The government could borrow more and invest, but the history of public sector investment is that, outside of sectors like oil marketing, the return on capital employed is lower than the government’s cost of borrowing.” While return on capital employed is not the best way to judge increased public spending, there are other issues that need to thought through as well. The government of India had managed to push its fiscal deficit down to 2.7% of GDP in 2007-2008. In 2008-2009, it decided to start increasing its expenditure to finance social schemes like NREGA and to give out subsidies as well. This pushed up the fiscal deficit to 6.4% of the GDP in 2009-10. This increased spending by the government helped the country grow at greater than 8% during a time when growth was collapsing all around the world in the aftermath of the financial crisis which started in September 2008. But it also led to a scenario of high interest rates and inflation, and a huge fall in household financial savings. The household financial savings have fallen dramatically over the last few years. The household financial savings rate was at 7.2% of the gross domestic product in 2013-2014, against 7.1% of GDP in 2012-2013 and 7% in 2011-2012. It had stood at 12% in 2009-2010. Household financial savings is essentially the money invested by individuals in fixed deposits, small savings scheme, mutual funds, shares, insurance etc. A fall in these savings led to high interest rates. The government was not creating any physical infrastructure through this increased spending. It was basically doling out money to asection of the population. As this money chased the same amount of goods and services it led to high inflation. Subramanian’s plan on the other hand is to use the increased government spending to create some physical infrastructure. Hence, increased government spending will not directly translate into inflation, as was previously the case. Nevertheless, all government spending in India has leakages and these leakages are likely to lead to some inflation. Further, there has been sharp fall in productivity over the last couple of years. As Swaminathan Aiyar puts it in his today’s column in The Economic Times: “After 2012, the investment needed to produce one unit of output has gone up from four to seven units.” Long story short—these issues need to be thought through. Further, an increase in spending can push up fiscal deficit again to a level, which the international rating agencies as well as foreign investors may not like. If the rating agencies downgrade India or even threaten to downgrade India that will lead to a huge amount of foreign money leaving the debt and the equity market. If the foreign investors see the Indian fiscal deficit going out of control they can also choose to exit India. This will lead to the rupee falling to levels which are not health for the Indian economy. And since we import more than we export any fall in the value of the rupee tends to hurt us more. This is something that the country went through only last year, and it should not be so forgotten so quickly. Even if a part of the money invested in the debt market starts to leave the country, the rupee will crash against the dollar. This is precisely what happened between June and November 2013, when foreign institutional investors sold debt worth Rs 78,382.2 crore. The rupee crashed to almost 69 to a dollar. Over the last five years economists and columnists have been complaining about a high fiscal deficit, high interest rates and high inflation. A major part of this came out because of the huge jump in government spending starting in mid 2008. Ironically, the same guys are now recommending that the government needs to increase its spending to create economic growth. In fact, this noise is only going to get louder in the new year. What this tells us is that economists and columnists (who also fancy themselves as economists) basically have two ides: cut interest rates (an idea which came from Milton Friedman) and increase government spending (an idea which came from John Maynard Keynes). These two ideas keep repeating themselves in cycles. And now that Raghuram Rajan hasn’t obliged with an interest rate cut, the economists have jumped on to the increasing public spending idea. A version of the second idea is when the government decides to increase spending through printing money. The conspiracy theory going around is that is exactly what the government may be planning. Meanwhile, I am waiting for the day when an economist comes up with a third idea. The column appeared on www.equitymaster.com as a part of The Daily Reckoning, on December 23, 2014