India Budget 2017: Spending to get out of trouble

Fostering Public Leadership - World Economic Forum - India Economic Summit 2010

In January 2017, the ministry of statistics and programme implementation of the Indian government, came up with the economic growth prediction for 2016-2017 (i.e. the period between April 1, 2016 and March 31, 2017).

The numbers showed that incremental government expenditure made up for one-third of the increase in the Indian gross domestic product(GDP) in 2016-2017. What did this mean in simple English? This essentially meant that increased spending by the government would be responsible for one-third of the Indian GDP growth in 2016-2017.

In 2015-2016, the contribution of increased government expenditure to Indian economic growth was just a little over 3 per cent. Hence, what it essentially means is that in the current financial year, the Indian government will primarily drive economic growth.

And from the looks of it, this is likely to continue in 2017-2018 as well. The annual budget presented by the finance minister Arun Jaitley on February 1, 2017, seems to suggest so. Let’s look at this in some detail.

The government has allocated Rs 48,000 crore to the Mahatma Gandhi National Rural Employment Guarantee(MGNREGA) programme. The
of MGNREGA is to provide at least 100 days of guaranteed work during the course of a financial year to adult members of every rural household who are willing to do unskilled manual work.

The Rs 48,000 crore allocation to MGNREGA is the highest allocation ever made to the programme. In 2016-2017, the government had allocated Rs 38,500 crore to MGNREGA, though it will end up spending Rs 47,499 crore on it. The increased spending on MGNREGA is to alleviate the negative impact of demonetisation being felt in the rural and the semi-rural areas of India, where major part of transactions happen in cash. And after demonetisation cash has been in short supply.

It is also expected to alleviate the negative impact of demonetisation on the informal manufacturing sector which operates in cash and tends to employ many semi and unskilled people migrating from rural India. From the midnight of November 8 and 9, 2016, the Narendra Modi government demonetised Rs 500 and Rs 1,000 notes, and made them useless.

Interestingly, in 2013-2014, the Indian government had spent Rs 39,778 crore on MGNREGA. Hence, in inflation-adjusted terms, the Rs 48,000 crore allocation is around the same. Given this, the allocation to this cash for work programme is not as much as is being made out to be.

The government has also increased the allocation to the Prime Minister Housing Scheme-Rural by more than 50 per cent to Rs 23,000 crore. This is expected to create some jobs in rural India where disguised unemployment is extremely high. Close to half of India’s population is engaged in agriculture which contributes only around 18 per cent of the GDP.

On the physical infrastructure front, the government has increased the allocation to build highways by 12 per cent to Rs 64,900 crore. Further, the total capital and development expenditure of Railways has been pegged at Rs 1,31,000 crores. This includes Rs 55,000 crores provided by the government.

The allocation to 29 schemes sponsored by the central government has gone up by 21.6 per cent to Rs 3,35,461 crore, in comparison to the allocation made in 2016-2017. The allocation to the infrastructure sector has gone up by 13.5 per cent to Rs 3,96,135 crore. Also, the total resources being transferred to the States and the Union Territories with Legislatures in 2017-2018 is Rs 4.11 lakh crores, against Rs 3.60 lakh crores in this financial year, the finance minister pointed out. This is a jump of 14.2 per cent.

Over and above this, the government has increased the lending target under the Prime Minister’s Mudra Scheme by 100 per cent to Rs 2.44 lakh crore. Under this scheme, the Micro Units Development and Refinance Agency (or Mudra) provides loans at low interest rates to micro-finance institutions and non-banking finance institutions which in turn lend money to micro/small business entities engaged in manufacturing, trading and services activities.

Further, in the budget speech, the finance minister said: “I have stepped up the allocation for Capital expenditure by 25.4% over the previous year”. Also, capital expenditure will form 14.4 per cent of the total expenditure of the government in 2017-2018. This is the highest since 2008-2009. Capital expenditure leads to the creation of assets and hence, is a good thing.

Long story short—the Modi government is trying to spend its way out of trouble. Though at the same time it needs to be said that it is not going overboard with it. A part of this pump-priming became necessary because of the self-goal of demonetisation, which is expected to pull down economic growth in 2016-2017. The Economic Survey for 2016-2017 released on January 31, 2017, expects GDP growth to be between 6.5-6.75 per cent in 2016-2017. India grew by 7.9 per cent in 2015-2016. The question is what would the economic growth have been if the Modi government hadn’t scored the self-goal of demonetisation?

When pushed to a corner, most governments try to spend their way out of trouble. Nevertheless, the government spending is not always as effective as private spending. In the Indian case, a major reason is massive leakage.  A large portion of the government spending does not reach those it meant for and is siphoned off by the bureaucracy expected to distribute it.

One way of tackling this is for the government to concentrate on running a few important schemes on which it can spend a bulk of its money and focus its time and attention on. The Economic Survey points out that “the Budget for 2016-17 indicates that there are about 950 central sector and centrally sponsored sub-schemes in India.”

One negative impact of running so many schemes is that “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”.

A very important part of economic reform in India is to bring down the number of these schemes. But that as they always say is easier said than done. And as always, this budget missed out on this opportunity as well.


The column was originally published on on February 1, 2017


Can India’s currency ban really curb the black economy?


On November 8, 2016, in a late-night TV broadcast to the nation, Indian prime minister Narendra Modi, demonetised Rs 500 and Rs 1,000 notes. As of the midnight of November 8, 2016, these notes have been rendered useless.

This decision of the Modi government came as a huge surprise to the media as well as the citizens, given that there were no news leaks before the announcement. Newsreports suggest that the Reserve Bank of India, the Indian central bank, was given close six months to prepare for this eventuality. The government had asked the central bank to print more Rs 50 and Rs 100 notes. Despite the long period taken to prepare for this decision, there were no news leaks.

Further, the Rs 500 and Rs 1,000 notes which have been demonetised, can be deposited in banks as well as post offices up until December 30, 2016. The money will be credited in the account of the individual depositing the money. The notes can also be exchanged up to Rs 4,000.

While Indian cities are full of bank branches, those living in rural areas will find exchanging the demonetised notes a little difficult. Only 27 per cent of Indian villages have a bank within 5 kilometres.

The idea behind this move as per the government is to curb “financing of terrorism through the proceeds of Fake Indian Currency Notes (FICN) and use of such funds for subversive activities such as espionage, smuggling of arms, drugs and other contrabands into India.”

It is also to hit those who have a massive amount of black money in the form of cash. Black money is essentially money that has been earned through corruption and legal activities, without any tax being paid on it. There are several estimates of the total amount of black money going around in the Indian economy. A World Bank estimate puts the size of the black economy at a little 23.2 per cent of the economy in 2007.

By making high denomination notes worthless overnight, the government hoped that those who have black money in this form, will not be able to convert this money into physical assets like gold. Newsreports suggest that jewellers across the country worked overtime through the night of November 8 and November 9, 2016, to help convert black money held in the form of Rs 500 and Rs 1,000 notes into gold.

Starting November 10, 2016, the government will introduce new Rs 500 and Rs 2,000 notes. Those who have black money in the form of the old Rs 500 and Rs 1,000 notes will try exchanging them with new notes. They can’t go to a bank and deposit all their black money given that it is likely to lead to questions from the income tax department.

Any other way of exchanging notes will take some doing, given that the old denomination notes form more than 86 per cent of notes in circulation by value. Hence, it will not be easy to exchange these notes without leaving audit trails for the income tax department. To incapacitate those who are holding a lot of black money in the form of cash seems to be the major idea behind the move.

Crisil Research expects income tax collections of the government to improve as money earlier unaccounted for, enters the banking system and eventually gets taxed. Inflation is also expected to come down in the short-term as cash transactions come down.

Another area which is likely to be impacted is real estate. A portion of the payment while buying a house in India is almost always made in the form of cash. With the high denomination notes, having been demonetised it will become very difficult to organise for this payment. Hence, prices are expected to fall. If prices do fall it will be make real estate affordable. At affordable prices, the demand for real estate is likely to go up. This is expected to create low-skilled and unskilled jobs, which the country badly needs, given that one million individuals enter the workforce every month.

Further, the retail as well as the luxury goods businesses where a bulk of transactions are carried out in cash is expected to be impacted negatively, as cash transactions will come down dramatically in the short-term.

In fact, during the period the old notes are withdrawn and new notes make it to the market, the cash transactions are likely to remain down. India is a country where a bulk of transactions are still carried out in cash. A 2012 estimate carried out by the The Fletcher School at the Tufts University estimated that 86.6 per cent of the transactions were carried out in cash. While this figure would have come down since then, it would still be at a very high level.

Another research paper titled The Cost of Cash in India points out that “the ratio of currency to GDP in India (12.2%) is higher than countries such as Russia (11.9%), Brazil (4.1%), and Mexico (5.7%)”. Hence, India is still largely a cash driven economy and given this, Modi government’s move is likely to cause a few problems in the short-term.

Also, if the Modi government is serious about tackling the black money menace, it shouldn’t just leave it at this. As the former RBI governor Raghuram Rajan said in this context: “I think there are ways around demonetization. It is not that easy to flush out the black money. Of course, a fair amount may be in the form of gold, therefore even harder to catch.”

It is important that the government uses information technology to track down those who are earning money but not paying their share of taxes. As Rajan put it: “I would focus more on tracking data and better tax administration to get at where money is not being declared.”

Further, the government needs to quickly introduce electoral financing reform in the country.


The column originally appeared on on November 10, 2016.

Why Raghuram Rajan had to go


Raghuram Rajan, the governor of the Reserve Bank of India(RBI), announced on Saturday evening (June 18, 2016) that he won’t be taking a second term, and would return to his teaching job at the University of Chicago.

In a letter to the RBI employees, which was released to the press, Rajan said: “I want to share with you that I will be returning to academia when my term as Governor ends on September 4, 2016.”

Since the letter has been released a small industry has cropped up, trying to figure out, why has this happened. Other than being the RBI governor, Rajan is also a public intellectual in his own right. Given this, he had things to say on a wide variety of issues and from the looks of it, some of these things haven’t gone down well with the government of the day.

More than one minister has publicly criticised Rajan for having an opinion on a wide range of issues. Take the case of a comment he made in April
this year. “I think we have still to get to a place where we feel satisfied. We have this saying — ‘In the land of the blind, the one-eyed man is king.’ We are a little bit that way,” Rajan told Rajan was referring to India’s fast economic growth, in a slow growing world.

This did not go down well with the government and Nirmala Sitharaman, the commerce minister, told the press: “I may not be happy with his choice of words. I think whatever action is being taken by this government is showing results.”

Rajan perhaps forgot that he was working with a government which is extremely sensitive to criticism. He later clarified what he really meant in another speech, where he said: “My intent was to signal that our outperformance was accentuated because world growth was weak, but we in India were still hungry for more growth. I then explained that we were not yet at our potential, though we were at a cusp of a substantial pick-up in growth given all the reforms that were underway.” But by then the damage had already been done.

There were other similar occasions where his comments did not go down well with the government of the day, and that seems like the major reason for his early exit. It needs to be pointed out here that no RBI Governor since 1992 has had just a three-year term. C Rangarajan at four years and 334 days, has had the shortest term after Rajan. Bimal Jalan, YV Reddy and D Subbarao all got terms close to five years. In fact, Jalan’s term was close to six years.

So letting the RBI governor go in a period of three years, is clearly unprecedented. Something of this sort has not happened in close to 25 years. In the recent past, the maverick Member of Parliament, Subramanian Swamy, has run a rather slanderous campaign for his removal. That seems to have had its impact as well. Further, a section of the government has never liked Rajan, given that he was appointed by the previous Congress led United Progressive Alliance government.

Rajan’s tenure had many good things about it. First and foremost, as soon as taking over, he handled the rupee crisis very well. Inflation has been brought under control from the earlier double digit levels, though that was not only because of the RBI. The bad loans mess in the public sector banks has been brought into the open. And for the first time in India’s history, banks have gone aggressively after crony capitalists, who defaulted and are still defaulting on bank loans.

This is unprecedented. In the past, the show would have just gone on. Crony capitalists would have defaulted only to borrow again a few years later, and the taxpayers would have taken on the tab. This remains Rajan’s biggest achievement. It will be interesting to see if the next RBI Governor continues to be aggressive on this front. For now, India’s crony capitalists will be breathing a sigh of relief and opening champagne bottles for sure.

Over and above this, Rajan has an international stature. He is the only central banker who has openly spoken out against the massive amount of money printing that has been carried out by the Western central banks and the ill effects of the same.

Rajan’s outspokenness on issues, as many in India feel, is not a recent phenomenon. In August 2005, at a Federal Reserve of Kansas’s annual symposium at Jackson Hole, Wyoming, in the United States, Rajan had criticised the policies of Alan Greenspan, the then Chairman of the Federal Reserve of United States.

Greenspan was considered as god in banking circles at that point of time and the Jackson Hole symposium was supposed to be a sort of a send-off for him, before he retired in 2006. Rajan spoilt Greenspan’s party by saying: ““The bottom line is that banks are certainly not any less risky than the past despite their better capitalization, and may well be riskier. Moreover, banks now bear only the tip of the iceberg of financial sector risks…the interbank market could freeze up, and one could well have a full-blown financial crisis.”

Three years later, the financial crisis which the world is currently dealing with, started with Lehman Brothers, the fourth largest investment bank on Wall Street, going bust. The US government had to then come to the rescue of the American financial system. Rajan’s warning came to be true.

Of course, when Rajan spoke out against Greenspan, he was severely criticised by other economists attending the symposium. As he would later admit in his bestselling and brilliant book Fault Lines: “I exaggerate only a bit when I say I felt like an early Christian who had wandered into a convention of half-starved lions. As I walked away from the podium after being roundly criticized by a number of luminaries (with a few notable exceptions), I felt some unease. It was not caused by the criticism itself…Rather it was because the critics seemed to be ignoring what’s going on before their eyes.”

Something similar seems to have been happening in India as well, where the critics of Rajan seemed to have closed their eyes to the issues that the country is currently facing and want to hear good things about the Indian economy all the time.

There justification for Rajan’s removal is that India has enough good economists to fill his shoes. Of course, it does. But there is no one who has the same respect as Rajan has globally.

Further, is that really the point? When was the last time a board fired a well-performing CEO, because he did not agree with their views all the time?

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

The column originally appeared on BBC on June 20, 2016

Why Narendra Modi’s budget looks strangely familiar


The Narendra Modi led government in India presented its third budget today. The budget was presented by finance minister Arun Jaitley, in a nearly 100 minute long speech.

Before the budget was presented the fear was that the Narendra Modi government is gradually going back to the Congress party’s way of doing things, at least on the economic front. The Congress party has governed India in every decade after independence.

So what is the verdict after the budget? Modi seems to have titled the farm way. As the finance minister Jaitley said during the course of his speech: “We need to think beyond ‘food security’ and give back to our farmers a sense of ‘income security’. Government will, therefore, reorient its interventions in the farm and non-farm sectors to double the income of the farmers by 2022.”

This isn’t surprising given that agricultural growth has been very low at the rate of 0.5% per year, over the last two years, due to bad monsoons. Further, the agricultural growth is expected to be at 1.2% this year, much lower than the overall growth of 7.6%.

Initiatives allowing farmers a better access to the market have been planned. Plans have also been made around judicious use of fertilizers, to increase crop yields across land which does not have access to irrigation and so on.

The government has also planned to offer incentives around the production of pulses. In the recent past, price of the tur dal (pigeon pea) has touched Rs 200 per kg and given that India needs to produce more pulses.

But that was the good bit.

Before the Modi led Bhartiya Janata Party (BJP) came to power in the 2014 Lok Sabha elections, the Congress led United Progressive Alliance (UPA) with Manmohan Singh as prime minster, was in power for a decade.

Singh’s term as prime minster, especially the second term, was marked by an increasing amount of doles as well as corruption. Loans to farmers were written off. The Mahatma Gandhi National Rural Employee Guarantee Act (MGNREGA) was passed and so was the Food Security Act. In July 2014, Modi had slammed the UPA government’s food security scheme by saying: “The government in Delhi thinks that just by bringing in the Food Security Bill there will be food on your plate.”

Modi has also mocked the other big Congress scheme, the MGNREGA in the past. In February 2015, Modi had said: “I will ensure MGNREGA is never discontinued. It is proof of your failings. After so many years of being in power, all you were able to deliver is for a poor man to dig ditches a few days a month.”

The Modi government has done a u-turn on this front and allocated Rs 38,500 crore to the scheme for 2016-2017. This is the highest ever allocation to the scheme, the finance minister Jaitley proudly claimed during the course of his speech. Modi is now looking more and more similar to Manmohan Singh. He is a better marketer though than Singh and his regime isn’t corrupt. Not until now, at least.

MGNREGA aims at providing at least 100 days of guaranteed employment in a financial year to every household whose adults are willing to do unskilled manual work. The trouble is that MGNREGA essentially became another scheme where money is simply given away without any substantial assets being created.

Modi in the run up to the 2014 Lok Sabha elections had promised minimum government and maximum governance. But with the allocations to MGNREGA being at its highest ever level, looks like that promise has gone out of the window, at least for now.

The economist Surjeet Bhalla has called MGNREGA as the fourth most corrupt institution in the world after FIFA, the BCCI (the board that governs cricket in India) and the public distribution system used by the Indian government to distribute food grains as well as kerosene to the poor.

The food security scheme provides rice and wheat at Rs 3 and Rs 2 per kg to the poor. The Economic Survey of the government presented on February 26, points out that nearly 54% of the wheat, 48% of the sugar and 15% of rice, meant to be distributed through PDS is lost as a leakage.

The price at which the government sells the food grains and the price at which it buys is essentially the food subsidy that it provides. The allocation to food subsidy is at Rs 1,34,835 crore for 2016-2017. This has come down a little from the Rs 1,39,419 crore that was allocated last year.

Nevertheless, no effort has been made to tackle this leakage which costs the country a lot of money. The Report of the High Level Committee on Reinventing the Role and Restructuring of Food Corporation of India presented a report in January 2015 to tackle this issue. It has since been gathering dust.

Further, what India needs is the creation of huge number of jobs. The organised sector in this country continues to remain very small. In 1991-1992, the total number of people working in the organised sector had stood at around 27 million. Since then the number has jumped to around 29.6 million (as of 2011-12, the latest data available).

At the same time nearly 58% of India’s population continues to be dependent on agriculture which generates around 16-18% of India’s gross domestic product. What this tells us is that there is huge overemployment in the sector and jobs need to be created in other sector so that people can move away from agriculture. And that is clearly not happening.

Modi’s win in 2014 tapped into the aspiring class of India and promised to create jobs. In fact, in November 2013, Modi had said: “If BJP comes to power, it will provide one crore jobs which the UPA Government could not do despite announcing it before the last Lok Sabha polls.”

The government is betting on the creation of road and railway infrastructure for the creation semi-skilled and unskilled jobs required for moving people away from agriculture. The finance minister has allocated Rs 97,000 crore towards the road sector. Together with the capital expenditure of the Railways, this amounts to a good Rs 2,18,000 crore during the course of the year.

The question is will this be enough to move people away from agriculture by creating a substantial number of jobs? There are no easy answers for that.

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

A slightly different version of the column appeared on on February 29, 2016

Why are more than 10 million homes vacant in India?


Dear Reader,

If you ever go to New Delhi, try taking a drive through the sub-city of Dwarka and you will see miles and miles of built homes with nobody living in them. You can see a similar sight in large parts of the National Capital Region (NCR) around New Delhi.
In fact, Anshuman Magazine, chairman and managing director of CBRE South Asia Pvt. Ltd., in a recent article pointed out that “around 12 million completed houses” are “lying vacant across urban India”.
A similar point is made by Akhilesh Tilotia in his book
The Making of India—Gamechanging Transitions, where he states that India has more homes than households. As he writes: “India’s households increased by 60 million to 247 million from 187 million between 2001-2011. Reflecting India’s higher ‘physical’ savings, the number of houses went up by 81 million to 331 million from 250 million. The urban increases is telling: 38 million new houses for 24 million new households.”
And despite this, there is a huge shortage of housing in urban India. As the latest Economic Survey, a document which is released every year a day before the annual budget of the government of India, points out: “At present urban housing shortage is 18.8 million units [i.e. homes].”
So what is happening here? Many of these homes have been bought as investments by people who have “extra” money to invest. A substantial portion (no one knows how much) of this is black money on which taxes haven’t been paid. Hence, homes have been bought but nobody is living in them.
Further, the dynamics of real estate sector in India have so evolved that builders like catering only to the richer segment of the population. Also, the price levels have now gone even beyond this section of the population.
But the shortage in housing is at the lower income levels. “95.6 per cent [of housing shortage] is in economically weaker sections (EWS) / low income group (LIG) segments,” the Economic Survey points out. Tilotia points out that: “70% of the urban housing shortage arises from the bottom four deciles of households whose ability to pay is severely constrained.” He estimates that unmet needs in India are at price points of Rs 0.5-Rs 1 million. The real estate companies due to various reasons are not interested in satisfying this unmet demand.
A recent research report by real estate rating and research firm Liases Foras points out that the average price of a home in the Mumbai Metropolitan Region, as of March 31, 2015, was Rs 1.3 crore. The numbers for Bangalore and Delhi are Rs 86 lakh and Rs 74 lakh respectively. Given these high prices, it is not surprising that the housing demands of a large segment of population are going largely unmet.
Hence, it is not surprising that as per the 2011 Census, 13.7 million households in cities live in slums. The number of people living in these slums is around 65 million and forms around 17.4% of the urban population. As per the Census, Visakhapatnam with 44.1% of its population living in slums comes right at the top. Mumbai, with 41.3% of the population living in slums comes in third. Kolkata with 31.9% of its population living in slums is eight on the list.
Further, the number of people living in urban slums may be understated. This is primarily because the 2011 Census was carried out only in what are known as statutory towns. These are towns which have some sort of an elected local body.
A Times of India newsreport points out that India has a total of 7935 towns. Of this 4041 are statutory towns. The remaining do not have an elected local body. Nevertheless, they fulfil the criteria of being urban, and the Census classifies them as census towns. The census towns were not considered for counting slums. These towns have a total population of more than 5 crore and substantial part of that population is living in slums.
Further, other estimates put the slum population living in Indian cities at a much higher level. A
2012 newsreport quotes S. Parasuraman, director of the Tata Institute of Social Sciences in Mumbai as saying: “Nearly 60 percent of Mumbai’s slum population lives in 8 percent of land.” The Census number as mentioned earlier is at 41.3%. These differences apart, what this clearly tells us is that with so many people living in slums, India has a huge urban housing shortage.
So what is the way out of this? The government needs to start doing something about it sooner rather than later. Maybe it can learn a thing or two from the South Korean government, which in the late 1980s built around 2 million homes of which around 0.9 million were built around the capital city of Seoul, as Tilotia points out.
In order to do this, the government will have to first and foremost sort out the mess that currently surrounds the process of land acquisition. Further, these homes will have to be built on the periphery of cities, backed up by a good transportation system, so that people can travel to work. The outdated floor space index laws controlled by real estate lobbies (which are often fronts for politicians) will need a thorough re-look. These laws essentially deal with how much area can be built-up, given the size of the plot on which a building is being built. So, if the FSI allowed is 2, then on a plot of 1000 square metres, the building being built can’t have a built-up area of more than 2000 square metres.
If all this is not done there will be more trouble ahead, as more and more of Indian population moves to Indian cities, in the years to come. As the Economic Survey points out: “Nearly 30 per cent of the country’s population lives in cities and urban areas and this figure is projected to reach 50 per cent in 2030.”
What this means is that if affordable housing doesn’t become the order of the day, the slumification of India will continue. And that is not a happy thought.

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

The column was originally published on on May 21, 2015