With Kisan Vikas Patra 2.0 now invest your black money with the government

indian rupeesIf you can’t beat them, join them,” goes the old adage.
The government of India has done just that by relaunching the Kisan Vikas Patra (KVP). An investment in the newly launched KVP will double in 100 months. This means a return of 8.7% per year. It also comes with a lock-in of two and a half years.
There are no tax benefits, neither at the time of investment nor when the investment matures. Initially, the KVPs will be sold through post offices. But over a period of time the government plans to sell KVPs through some designated branches of public sector banks as well.
“The basic aim is to provide an investment opportunity to people who do not know where to invest and put their money into options like Ponzi schemes,”
the finance minister Arun Jaitley said at the relaunch of the scheme.
A ponzi scheme is a fraudulent investment scheme in which money is repaid to old investors by using money being brought in by new investors. The scheme runs as long as the money being redeemed by the old investors is lower than the money being brought in by the new investors. The moment this reverses, the scheme collapses.
In the recent past, the country has seen a whole host of Ponzi schemes like Sahara, Saradha, Rose Valley etc. But how will the KVP stop people from investing in Ponzi schemes?
A major reason why people invested in Ponzi schemes over the last few years lies in the fact that real returns (i.e. nominal return minus the rate of inflation) on fixed income investments (like fixed deposits, post office savings schemes etc.) was negative over the last few years.
Between 2008 and 2013, both consumer price inflation and food inflation were greater than 10%, for large periods of time. In this scenario, the returns on offer on fixed income investments were lower than the rate of inflation.
Given this, individuals had to look at other modes of investment, in order to protect the purchasing power of their accumulated wealth. A lot of this money found its way into real estate and gold, which delivered good returns for most of that period. And some of it also found its way into Ponzi schemes, which promised a slightly higher rate of return than fixed deposits and other fixed income investments.
Inflation has fallen over the last few months, and after many years, the real return on fixed income investments is in the positive territory. This is, as true for KVPs, as it is for fixed deposits offered by public sector banks.
Take the case of a fixed deposit of less than Rs 1 crore with a tenure of one year to less than five years, offered by the State Bank of India. Such a deposit pays an interest of 8.75% per year, which is as good as the return of 8.7% per year offered by KVPs.
Further, the fixed deposit doesn’t come with a lock-in, unlike KVPs which have a lock-in of two and a half years. Also, those who have dealt with post offices on a regular basis will know that dealing with (even) public sector banks is relatively easier than dealing with a post office.
So, there is no basic case for investing in a KVP. Also, for those investing for the long term, instruments like PPF which are not taxed on maturity, remain a considerably better bet. Those comfortable with investing in debt mutual funds are also likely to get higher after tax returns in the long term, once indexation(or inflation in simple terms) is taken into account while calculating capital gains.
And as far as not investing in Ponzi schemes is concerned, the returns offered on KVP are not high enough to stop people from investing in Ponzi schemes.
The government also wants to increase savings by getting people to invest in this scheme. As Jaitley said at the launch “Over the last two three years, when economic growth slowed, our savings rate declined…So it is very necessary to encourage people to increase domestic savings.”
The latest RBI annual report points out that “the household financial saving rate remained low during 2013-14, increasing only marginally to 7.2 per cent of GDP in 2013-14 from 7.1 per cent of GDP in 2012-13 and 7.0 per cent of GDP in 2011-12…the household financial saving rate [has] dipped sharply from 12 per cent in 2009-10.”
Household financial savings is essentially the money invested by individuals in fixed deposits, small savings scheme, mutual funds, shares, insurance etc. It has come down from 12% of the GDP in 2009-10 to 7.2% in 2013-14. A major reason for the fall has been the high inflation that has prevailed since 2008. The return on offer on KVPs is similar to other forms of fixed-income investments available in the market and there is no reason that it should lead to higher financial savings.
So that brings us to the question, why did the government launch KVPs then? Before we understand that, here are a few more features of the scheme. The KVPs as mentioned earlier come with a lock-in of two and a half years. They come in denominations of Rs 1000,Rs 5,000, Rs 10,000 and Rs 50,000 and there is no upper limit to the number of KVP certificates that can be bought. Hence, there is no limit to the amount of money that can be invested in the scheme.
As far as fulfilling know your customer requirements are concerned,
the gazette notifications states that the individual buying the KYC will have to provide proof of name and residence. No PAN card details will have to be provided.
And here comes the clincher—
the KVP will be a bearer instrument, which will not carry the name of the investor. Jaitley stated this at the event to relaunch the KVP. “So people with currency can invest in this,” Jaitley said. “This will be a bearer instrument just like currency and easy to encash,” he added.
So what does this really mean? There are some basic know your customer norms that need to be followed. But the KVP certificate will not carry any name on it, and that essentially makes it an anonymous instrument, once it has been issued.
With this move, the government is hoping that the KVPs will be used to launder black money. In fact, this was precisely the reason the scheme was discontinued in November 2011,
a recent report in the Business Standard points out.
Black money over the years has gone into gold and real estate, where it isn’t productive enough. If it finds its way into the coffers of the government, it can be used more productively, or so the government would like to believe.
It would also lead to higher financial savings and in the process lower interest rates. The government will benefit because it will be able to finance the fiscal deficit at lower interest rates. Fiscal deficit is the difference between what a government earns and what it spends and is financed through borrowing.
The fact that the relaunched KVP is a bearer instrument, without the name of the investor and without any need to provide an identity proof, makes it ideal to invest black money in.
As R Jagannathan writes on Firstpost.com “Since it is a bearer certificate without limit, KVPs are likely to be more popular with the better off than just the poor…Rs 1 crore invested in KVPs of the face value of Rs 50,000 each will involve the creation of only 200 certificates. Not a very big pile and very portable for black money holders.” In fact, given the fact that it is a bearer instrument, KVPs can almost be used as a currency as well.
In the old days when the government wanted to access the black money in the country, it used to launch income tax amnesty schemes, where individuals could pay a one time tax on their accumulated black money and escape punishment. In its current form, the KVP looks more like a quasi-amnesty scheme. In fact, it is even better given that no tax needs to be paid on it.
It would have been a good idea to demand the PAN number from those investors who buy KVPs of Rs 1 lakh or more.
Nevertheless, the question is, should a government which has strong views on “black money” actually be launching a scheme, which makes it convenient for people to invest black money and that too with the government?

The article originally appeared on www.equitymaster.com on Nov 20, 2014

Why SBI’s $1 billion loan to Adani doesn’t make sense

SBI-logo.svg

Vivek Kaul

The State Bank of India(SBI) has decided to lend up to $1 billion to Adani Mining, the Australian subsidiary of Adani Enterprises for the Carmichael mine in Queensland, Australia. The mine has massive blocks of untapped coal reserves. The company aims to build the project by end of 2017.
“The MOU with SBI is a significant milestone in the development of our Carmichael mine,” Adani said in a statement released yesterday.
The loan as and when it is extended would be one of the largest given out by an Indian bank for a foreign project. The question is should SBI be giving out a loan of up to $1 billion to a company which already has a huge amount of debt.
Let’s take a look at how the numbers look. As on September 30, 2014, the long term debt of the company stood at Rs 55,364.94 crore. The short term debt stood at Rs 17,267.43 crore. Hence, the total debt of the company stood at Rs 72,632.37 crore.
As on March 31, 2014, the total debt of the company stood at Rs 64,979.04 crore. Hence, the total debt of the company has shot up by Rs 7653.33 crore in a matter of six months.
The question we are trying to answer here is how good is the ability of the company to service all the debt that it has managed to accumulate. For that we use results of the last four quarters and calculate the interest coverage ratio. Interest coverage ratio is essentially the earnings before interest, taxes and exceptional items (or what is often termed as operating profit) of a company divided by its interest expense. It tells us whether the company is making enough money to pay the interest on its outstanding debt.
The total operating profit of the company over the last four quarters comes at Rs 8999.92 crore. The interest that the company has paid on its debt in the last four quarters amounts to Rs 5,733.77 crore. This means an interest coverage ratio of around 1.57.
As www.investopedia.com points out “The lower the ratio, the more the company is burdened by debt expense. When a company’s interest coverage ratio is 1.5 or lower, its ability to meet interest expenses may be questionable.”
While Adani Enterprises’ interest coverage ratio is not lower than 1.5 it is clearly getting there. In fact, things get even more interesting once we start calculating the interest coverage ratio on the basis of quarterly data. The interesting coverage ratio for the period of three months ending March 31, 2014, stood at 2.67. It stood at 1.58, for the period of three months ending June 30, 2014. And for the period of three months ending September 30, 2014, it stood at 1.12.
As we can see, the ability of the company to keep paying the interest that it needs to pay on its debt has come down dramatically during the course of this financial year. As www.investopedia.com points out “An interest coverage ratio below 1 indicates the company is not generating sufficient revenues to satisfy interest expenses.” Adani Enterprises is clearly moving towards this situation. Further, in a May 2014 report, Bank of America Merrill Lynch had estimated that the company would have an interest coverage ratio of 1.2 during the course of this financial year.
What all this clearly tells us is that Adani Enterprises is in an over-leveraged situation and is getting to a situation where it will find it difficult to keep paying the interest on its debt. The thing with debt is that it can work both ways. When a company takes on a higher amount of debt it gives itself an opportunity to generate higher earnings vis a vis a situation where it hadn’t taken on that debt at all.
If this happens, then these increased earnings are spread among the same number of shareholders. But at the same time the company runs the risk of getting into a situation where the projected earnings simply don’t come along and it finds it difficult to keep paying the interest on all the debt that it has taken on.
Adani Enterprises runs the risk of getting precisely into this situation. Further as a Reuters news-report points out “Much bigger coal rivals, like BHP Billiton and Glencore, have also shelved coal developments in Queensland at a time when a third of Australia’s coal output is making losses.” Also, coal prices have fallen over the last few years. As a recent report in The Hindu points out “Globally, coal prices have been on a downtrend in the last three years and are at the lowest levels since 2009. Prices of steam coal, a slightly lower grade that is used in power generation, have halved since 2011 to $62 per tonne now.”
This fall in prices has happened because of the supply not shrinking along with demand. “For instance, demand from China — the largest consumer of coal accounting for half of the total global demand — has been slow. After growing at over 10 per cent annually during 2001-2011, the country’s demand has fallen — imports were down to 150 million tonnes (mt) in 2013, from 182 mt in 2011. And given the pollution-related issues, it is expected that the country may look at cleaner sources more actively, holding down demand. Goldman Sachs estimates that imports will fall to 75 mt by 2018,” The Hindu points out.
Goldman Sachs expects the demand growth to be 15 million tonnes per year during 2013-2018, against 60 million tonnes per year it was at during 2008-2012. The supply of coal isn’t likely to come down. In case of Australia the miners have entered into long term “take or pay” contracts which requires them to pay $20 per tonne of transport costs, irrespective of the fact whether or not they ship coal. Hence, Australian miners are likely to continue to ship coal.
What this tells us is that coal is not the best business to be in right now. Despite these reasons SBI has gone ahead and given a loan of up to $1 billion to Adani Enterprises. This is not a logical decision which takes into account the facts as they prevail. The only possible explanation for this decision is the “so called” closeness of Gautam Adani, chairman of Adani Enterprises to Narendra Modi, the prime minister of India.

The article originally appeared on www.FirstBiz.com on Nov 18, 2014

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

Jaitley again asks for interest rate cuts, needs lessons in basic economics

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

It is fashionable in Delhi circles these days to ask for an an interest rate cut at a drop of a hat. The finance minister Arun Jaitley like his predecessor P Chidambaram likes to remind the Reserve Bank of India (RBI) now and then that the time is just right for a rate cut.
In an interview to
The Times of India late last week Jaitley said “”Currently, interest rates are a disincentive. Now that inflation seems to be stabilizing somewhat, the time seems to have come to moderate the interest rates.”
Before Jaitley, the senior columnist Prem Shankar Jha became the newest
interest-rate-wallah on the block and in a column in The Times of India held the RBI responsible for India’s slow economic growth over the last few years. As he wrote“[The] Indian economy is not on the road to recovery. The reason is the sustained high interest rate regime of the past four years. Industry has been begging for cuts in the cost of borrowing since March 2011… On August 5, RBI governor Raghuram Rajan surprised the country by announcing that he would not lower interest rates, because at 8% consumer price inflation was still too high.”
I guess Jha must have been among the few people surprised by Rajan’s decision given that among those who follow the workings of the Indian central bank closely, almost no one had expected Rajan to cut interest rates.
The premise on which
interest-rate-wallahs work is that at lower interest rates people will borrow and spend more, which will lead to economic growth. But the entire premise that low interest rates will lead to a pick up in consumption and hence, higher economic growth, doesn’t really hold. (As I have explained here). Jaitley believes that “expansion in real estate will take place significantly only if the interest rates come down a little.”
This is what the real estate companies also like to believe. But the basic point is that people are not buying homes because home prices have risen way above what they can afford. As I have explained in the past,
for an average Mumbaikar it currently takes around 34 years annual income to buy a home to live in. This is true for other cities as well, though the situation maybe a little better than that in Mumbai. So even a major cut in interest rates is not going to lead people buying homes to live in unless real estate prices fall. This is something that Arun Jaitley as the finance minister of this country needs to understand.
Having said that, those looking to move their black money around will always look at investing in real estate and for them the interest rates really don’t matter.
The other big reason offered is that companies can borrow at lower rates of interest. The idea being that lower interest rates might encourage companies to borrow and expand. Again it needs to be realized that companies don’t always decide to expand just because money is available at low interest rates, especially in difficult times as these.
Factors like ease of doing business and consumer demand play an important role.
As I have explained in the past, due to many years of high inflation consumer demand in India continues to remain subdued. And unless it starts to pick up, there is no real reason for companies to expand.
Also, it is worth remembering here that a some of the major business groups in India have already borrowed a lot of money and are having tough time paying interest on the debt they already have. Hence, where is the question of borrowing more?
The bigger question that
interest-rate-wallahs tend to ignore is how much control does the RBI really have over interest rates that banks pay their depositors and in turn charge their borrowers? Over the last few weeks, banks have cut interest rates on their fixed deposits. The list includes State Bank of India, Punjab National Bank and Central Bank of India. (You can read about here, here and here). The Indus Ind Bank also cut the interest it pays on its savings account to 4.5% from the earlier 5.5% for a daily balance of up to Rs 1 lakh, starting September 1, 2014.
All these cuts in interest rates have happened despite the RBI maintaining the repo rate at 8%. Repo rate is the interest rate at which the RBI lends to banks. So what has changed that has allowed these banks to cut the interest rates at which they borrow?
Let’s look at some numbers. As on October 3, 2014, over a period of one year, the loans given by banks rose by 9.87%. During the same period the deposits raised by banks rose by 11.54%. How was the situation one year back? As on October 4, 2013, over a period of one year, the loans given by banks had risen by 15.18%. During the same period the deposits had grown by 12.9%.
Hence, the rate of loan growth for banks has fallen much faster than the rate at which their deposit growth has fallen. Given this, it is not surprising that banks are cutting fixed deposit rates, given that their rate of loan growth is falling at a much faster rate.
As Henry Hazlitt writes in
Economics in One Lesson “Just as the supply and demand for any other commodity are equalized by price, so the supply of demand for capital are equalized by interest rates. The interest rate is merely a special name for the price of loaned capital. It is a price like any other.”
As Hazlitt further points out “If money is kept…in…banks…the banks are eager to lend and invest it. They cannot afford to have idle funds.”
Hence, given that the rate of loan growth is much slower than the rate of deposit growth, it is not surprising that banks are cutting interest rates on their fixed deposits. Given this, the impact that RBI’s repo rate has on interest rates is at best limited. It is more of a broad indicator from the RBI on which way it thinks interest rates are headed.
Further, it also needs to be remembered that financial savings in India have fallen dramatically over the last few years. The latest RBI annual report points out that “the household financial saving rate remained low during 2013-14, increasing only marginally to 7.2 per cent of GDP in 2013-14 from 7.1 per cent of GDP in 2012-13 and 7.0 per cent of GDP in 2011-12…the household financial saving rate [has] dipped sharply from 12 per cent in 2009-10.”
Household financial savings is essentially the money invested by individuals in fixed deposits, small savings scheme, mutual funds, shares, insurance etc. It has come down from 12% of the GDP in 2009-10 to 7.2% in 2013-14. A major reason for the fall has been the high inflation that has prevailed since 2008.
The rate of return on offer on fixed income investments(like fixed deposits, post office savings schemes and various government run provident funds) has been lower than the rate of inflation. This led to people moving their money into investments like gold and real estate, where they expected to earn more. Hence, the money coming into fixed deposits slowed down leading to a situation where banks could not cut interest rates., given that their loan growth continued to be strong.
What also did not help was the fact that the borrowing requirements of the government of India kept growing over the years.
The RBI was not responsible for any of this. The only way to bring down interest rates is by ensuring that inflation continues to remain low in the months and the years to come. If this happens, then money flowing into fixed deposits will improve and that, in turn, will help banks to first cut interest rates they offer on their deposits and then on their loans.
The government needs to play an important part in the efforts to bring down inflation. In fact, it has been working on that front. In a recent research report analysts Abhay Laijawala and Abhishek Saraf of Deutsche Bank Market Research write that the “the government is firmly ‘walking the talk’ on fiscal consolidation” through a spate of “recent administrative moves on curbing food inflation (such as fast liquidation of surplus foodstock, modest single-digit hike in MSPs, an effort to eliminate fruits and vegetables from ambit of APMC etc.)”
This is very important given that once inflation remains low for an extended period of time, only then will inflationary expectations (or the expectations that consumers have of what future inflation is likely to be) be reined in. And consumer demand is likely to pick up after this.
The Reserve Bank of India’s Inflation Expectations Survey of Households: September – 2014 which was a survey of 4,933 urban households across 16 cities, and which captures the inflation expectations for the next three-month and the next one-year period. The median inflation expectations over the next three months and one year are at 14.6 percent and 16 percent. In March 2014, the numbers were at 12.9 percent and 15.3 percent. Hence, inflationary expectations have risen since the beginning of this financial year.
To conclude, RBI seems to have become everyone’s favourite punching bag even though its impact on setting interest rates is rather limited. It is time that
interest-rate-wallhas like Jaitley and Jha come to terms with this.

This an updated version of a column that appeared on Oct 22, 2014. You can read the original column here

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

Cleaning up the mess: Why the unions of Coal India are becoming increasingly irrelevant

coal

Vivek Kaul

It’s always about timing. If it’s too soon, no one understands. If it’s too late, everyone’s forgotten – Anna Wintour

For their threats to be credible it is important that the trade unions get their timing right. Gurudas Dasgupta, the general secretary of the All India Trade Union Congress, has clearly got the timing all wrong, in trying to derail the government’s initiatives for sorting up the mess in the coal sector.
The government has promulgated an ordinance which will give it the power to e-auction coal blocks. The Supreme Court in a decision given in September 2014 had cancelled the allocation of 204 out of the 218 blocks that various governments since 1993 had allocated to companies for captive consumption.
These blocks will now be auctioned. And this hasn’t gone down well with Dasgupta and other trade union leaders who have threatened to protest and possibly even go on a strike. Dasgupta said that the government decision on coal blocks is “a backdoor entry for taking over the entire coal sector by the private corporates”.
Jibon Roy, the general secretary of the All India Coal Workers Federation (AICWF) said that “to protest against the enabling provision and proposed e-auction, the workers would stage nationwide dharna on November 5 to 7.”
The decision to allot coal blocks to private players for captive consumption was made in 1993. The idea, as the Economic Survey of 1994-1995 pointed out, was to “encourage private sector investment in the coal sector, the Coal Mines (Nationalisation) Act, 1973, was amended with effect from June 9, 1993, for operation of captive coal mines by companies engaged in the production of iron and steel, power generation and washing of coal in the private sector.”
This allowed private companies engaged in the production of iron and steel, power and cement to own coal blocks for their captive use. Hence, if a coal block had been allocated to a power plant, the coal produced needed to be passed on to the power plant.
In 1993, the government allocated only one coal block. Until 2002, the government had allocated only 19 coal blocks in total. The allocation of coal blocks picked up since 2003. During that year 20 coal blocks were allocated. A considerable number of these blocks were allocated to private companies for captive consumption.
The question is why are the trade unions protesting now? The allocation of coal blocks to private companies had been on for a while. The government has decided to go in for an e-auction of the coal blocks after the Supreme Court cancelled most of the allocations that had been made. Hence, only the method of allocation has changed and not its purpose. So why are the trade unions protesting now?
Further, the process of auctioning is transparent, unlike the earlier “screening committee” method of allotment which was fairly opaque as well as arbitrary, leading to crony capitalists gaining in the process. Also, the government has decided to hand over the money raised from the auction to the state government where the coal block is based. Why have the unions got a problem with all this?
The government has also said that sometime in the future it will allow private companies to commercially mine coal. Currently only the government owned Coal India is allowed to do that. The trade unions are bound to have a problem with this. As Dasgupta put it “We strongly protest and call upon the government to reverse the decision as there is an enabling clause in the Ordinance which gives rise to concerns and apprehensions of sweeping privatisation of coal sector.”
This, Dasgupta said could lead to “serious industrial disturbances,” and added that allowing private companies to commercially mine coal would jeopardise “national interest” and weaken Coal India.
Let’s look at this statement of Dasgupta in detail. Coal India had an average manpower of 4,76,577 individuals in 2004-2005. Since then the number of employees has constantly come down. In 2013-2014, the average manpower stood at 3,52,282. The number has fallen further, and as on August 31, 2014, it stood at 3,39,769 individuals.
Hence, between 2004-2005 and 2013-2014, the total manpower of Coal India came down by 26% and the unions haven’t been able to do anything about that. During the same period, the total production of coal went up by 43% from 323.58 million tonnes to 462.42 million tonnes.
So, the coal production went up despite the number of employees coming down.
This has happened due to two reasons. Coal India was overstaffed and has not been filling up the posts of retiring employees. Further, over the years Coal India has been extracting more and more coal by outsourcing work to private contractors. Between 2010-2011 and 2013-2014, the contractual expenses of Coal India jumped by 47.9% to Rs 7,812.71 crore. These expenses came in third after salaries and and provident fund expenses of employees.
A major part of coal is now extracted through outsourcing to private contractors. The private contractors don’t have to pay their employees as much as Coal India does to its workers, and hence coal is extracted at cheaper rates than it would be if employees were to do the job.
Over and above this, what is interesting is that some of the subsidiaries of Coal India, which have the least number of employees, produce most of its coal. Take the case of Mahanadi Coalfields Ltd. As on August 31, 2014, it employed
22,206 individuals or 6.5% of the total number of people working for Coal India. During the course of 2013-2014 it produced 114.34 million tonnes of coal or nearly one fourth of the coal that was mined by Coal India.
Or take the case of Northern Coalfields Ltd. The company employed 16,515 individuals as on August 31, 2014 or around 4.86% of the total number of people working for Coal India. In 2013-2014, it produced 72.11 million tonnes of coal or around 15.6% of the total coal produced by Coal India.
This is primarily because these companies have taken to outsourcing. Also, the coal mines of Northern Coalfields are highly mechanised. Now let’s compare this to Eastern Coalfields Ltd, which employs 70,191 individuals or around 20.7% of the Coal India total. In 2013-2014, it produced just 36.25 million tonnes or 7.8% of the coal produced by Coal India. The same was the case with Bharat Coking Coal, which employed 17% of total Coal India employees but produced only 7.4% of coal that was produced.
One reason for this is that a lot of mines run by Eastern Coalfields and Bharat Coking Coal are underground mines, where the technology used to mine coal is still very labour intensive.
Also, the trade unions are stronger in this part of the country (Eastern Coalfields is head-quartered at Sanctoria in West Bengal and Bharat Coking Coal at Dhanbad in Jharkhand, but right on the Bengal border) and that is another reason why these companies employ so many people to produce a minuscule amount of coal in comparison to other subsidiaries of Coal India.
Dasgupta feared that recent moves of the government were “a backdoor entry for taking over the entire coal sector by the private corporates”. But as far as coal mining is concerned that has already happened. Dasgupta and others of his ilk should have started protesting many years back. This protest has come too little too late. It is interesting nonetheless to observe that the contractual expenses of Eastern Coalfields have risen by 117% since 2009-2010.
Coal India has privatized a major part of coal mining and is reaping in tremendous benefits because of the same. As on March 31, 2014, it had cash and bank balances amounting to Rs 52,389.93 crore.
The number would have been greater than Rs 70,000 crore had the company not been forced to give a dividend of close to Rs 20,000 crore to the government to help control the fiscal deficit. The fiscal deficit is the difference between what a government earns and what it spends.
It needs to be pointed out that the country needs more coal right now than what is being produced. Despite having the fifth largest coal reserves in the world of 301.6 billion tonnes, India was the third largest importer of coal in 2013-2014 at 104.7 million tonnes. What this tells us is that Coal India, which produces most of the coal produced in the country, hasn’t been able to keep pace.
In fact as of last week 64 out of 103 power plants had a coal inventory of less than a week. Between 2010-2011 and 2013-2014, the rate of coal production of Coal India increased at a minuscule rate of 1.76% per year.
To conclude, it is important that India produces more coal. For this, the monopoly of Coal India needs to be broken and private players (including foreign players) need to be allowed to commercially mine coal.
As Dasgupta said allowing private players would “weaken” Coal India. That is precisely what needs to happen, for the country as a whole to produce more coal. The comparable example for this is what happened after private telecom players were allowed to offer services. Despite the scams and the controversies that have happened over the years, the tele-density increased big time. Why shouldn’t that happen in the coal sector as well? Maybe Dasgupta has an answer for that.

The article originally appeared on www.FirstBiz.com on Oct 22, 2014

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

Yes, inflation is lower, but Arun Jaitley should not be happy about it just yet

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

The wholesale price index (WPI) inflation for September 2014 came in at a five year low of 2.38%. In a statement released yesterday, after the WPI inflation number was published, the finance minister Arun Jaitley said “It is heartening to note that we have been able to bring food inflation under control. Growth in vegetable and protein prices that have been contributing to the recent increase in inflation rates have shrunk thanks to the steps taken by the government. We are committed to continuing reforms in food markets that will improve supply responses and keep inflation low and stable.”
Food inflation, which forms around 14.34% of the wholesale sale price index, stood at 3.52% during September 2014. In comparison it had stood at 18.68% during September 2013. The price of the politically sensitive onion crashed by 58% in September 2014, in comparison to a year earlier. Vegetable prices have fallen by 14.98%. But potato prices rose by 90.23% during the same period. Fruit prices were up by 20.95% and milk by 11.55%. Nevertheless, the overall rise in food prices has slowed considerably in comparison to the last few years.
The government deserves some credit for this, but there are clearly other factors at work as well. The global food prices have also fallen in the recent past.
The Food and Agricultural Organization of the United Nations said in a recent statement that the “the decline” in food prices “in September marks the longest period of continuous falls in the value of the index since the late 1990s.” Food prices in September 2014 fell by 2.5% in comparison to August 2014 and 6% in comparison to September 2013. Hence, global food prices have also had an impact.
While Jaitley is quick in taking trading for controlling inflation, he offers no explanation for the low manufacturing products inflation. Manufacturing products make up 64.97% of the wholesale price index. Inflation in this group was at a low 2.84% during September 2014. This was not significantly different from the 2.36% inflation that prevailed during the same period last year.
A low manufacturing products inflation is a reflection of the low consumer demand that has been prevailing in India for a while now. For more than five years, food inflation in India was at very high. High inflation ate into the incomes of people and led to a scenario where their expenditure went up faster than their income. This led to a cut down on expenditure which is not immediately necessary.
As I have often pointed out in the past, half of the expenditure of an average household in India is on food. In case of the poor it is 60% (NSSO 2011)
When people cut down on expenditure, the demand for manufactured products falls as well. This lack of demand is also visible in the index of industrial production(IIP) number, which rose by a minuscule 0.4% in August 2014 in comparison to August 2013. The IIP is a measure of industrial activity in the country.
Nevertheless high inflation can no longer be an explanation for lack of consumer demand. Inflation has constantly been falling over the last few months. So why isn’t the Indian consumer in the mood to get his shopping bags out again? One possible explanation is that despite falling inflation, inflationary expectations still remain high (or the expectations that consumers have of what future inflation is likely to be). Or as economists like to put it the inflationary expectations have become firmly anchored.
A good data point to look at is the
Reserve Bank of India’s Inflation Expectations Survey of Households: September – 2014 which was a survey of 4,933 urban households across 16 cities, and which captures the inflation expectations for the next three-month and the next one-year period. The median inflation expectations over the next three months and one year are at 14.6% and 16%. In March 2014, the numbers were at 12.9% and 15.3%. Hence, inflationary expectations have risen since the beginning of this financial year.
The RBI points out that these inflationary expectations “are based on their individual consumption baskets and hence these rates should not be considered as benchmark of official measure of inflation.” Nevertheless, “the households’ inflation expectations provide useful directional information on near-term inflationary pressures.”
What these numbers clearly tell us is that the Indian consumer is still not convinced about the fact that low inflation is here to stay. As the RBI Survey points out “The survey shows that housewives and retired persons have marginally higher level of inflation expectations based on median inflation rates…About 72.8 per cent (72.0 per cent in the last round) and 78.7 per cent (74.0 per cent in the last round) of respondents expect double digit inflation rates for three-month ahead and one-year ahead period, respectively.”
These expectations have ensured that the low consumer demand scenario has continued despite a fall in inflation. This also explains why many analysts are downgrading the economic growth expectations for this financial year.
JP Morgan recently predicted an economic growth of only 5.1%, instead of the earlier 5.3%.
The only way the Indian consumer will get his shopping bags out again is if inflation continues to stay low for a while. Whether that happens remains to be seen. Some economists are still not convinced that the spiral of food inflation has been broken. They feel only after November 2014, the real picture on the food inflation front will start to emerge, once the impact of the below normal monsoons on summer crops becomes more visible.

The article originally appeared on www.FirstBiz.com on Oct 16, 2014

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