Chidambaram

Mr Chidambaram, please don’t fudge data to say that Manmohan was better than Modi

Former finance minister P Chidambaram did a smart thing before the last Lok Sabha elections—he decided not to contest. His son Karti Chidambaram contested instead of him, in the Sivaganga constituency in Tamil Nadu. The junior Chidambaram got around 1.04 lakh votes in a five cornered contest and lost his deposit, having not managed to secure more than one-sixth of the votes polled.

Unlike other Congress leaders, the senior Chidambaram has managed to keep himself partly busy, by writing a Sunday column for The Indian Express. In this column, the former finance minister, tries to tell us every week how the ten year rule of the Congress led United Progressive Alliance (UPA) had been good for the country and how the economy has been in trouble since the Narendra Modi government took over.

The latest column is along similar lines. In this column Chidambaram tries telling us that the Congress led UPA government had left the country in a good shape and the Narendra Modi government has screwed up things, since taking over in May last year.

As Chidambaram writes: “Let us look at the hard data that would be relevant to ‘development’ and ‘jobs’. There are more red lights than green. Yet the GDP(Gross Domestic Product) is estimated to have grown at 7.4 per cent in 2014-15, although the RBI has warned of a downward revision.”

Long story short—Chidambaram seems to believe that the GDP may not have grown by 7.4% between April 1, 2014 and March 31, 2015. And honestly, he may be right about it.

The ministry of statistics and programme implementation released the Gross Domestic Product(GDP) number for 2014-2015 on February 9, 2015. A new method was used to calculate the GDP and as per this method, the GDP growth in the financial year 2014-2015 would come in at 7.4%. This was significantly higher than the 5.5% growth that had been forecast by the Reserve Bank of India, earlier.

The trouble is that the real numbers don’t show this economic growth. Car sales grew by a minuscule 3.9% in 2014-2015. Exports contracted by 1.23%. The total indirect tax collections at Rs 5,46,479 crore were 12.5% lower than the original target of Rs 6,24,902 crore. When it comes lending by banks, it grew by 8.6% between March 21, 2014 and March 20, 2015. In comparison, it had grown by 14% between March 22, 2013 and March 21, 2014.

The Economic Survey released by the ministry of finance today towards the end of February 2015 stated: “The stock of stalled projects at the end of December 2014 stood at Rs 8.8 lakh crore or 7 per cent of GDP.” Further, corporate profitability was dull as well in the latter half of the financial year (October 2014 to March 2015).

It is worth remembering that the numbers highlighted above are real numbers, unlike the GDP which is a theoretical construct. The real numbers make it difficult to believe that the economy grew by 7.4% in 2014-2015. And given that Chidambaram is right in saying what he has in his column. Or so it seems.

The interesting bit comes next, where Chidambaram writes: “I predicted that the economy will revive in 2013-14. It did, and when the UPA passed on the baton to the NDA in May 2014, the GDP had recorded a growth rate of 6.9 per cent in 2013-14.”

So, Chidambaram is basically saying that in 2013-2014, when the Congress led UPA government was in power, all was well. The economy grew by 6.9% and the Congress led UPA passed on a healthy economy to the Narendra Modi government.

Now what is wrong with this argument? Several things. First, you don’t need a PhD in Economics (or an MBA from Harvard, which Chidambaram has), to tell you that 7.4% economic growth (which happened in 2014-2015) is higher than the 6.9% economic growth (which happened in 2013-2014).

Secondly, what Chidambaram does not tell us is that the 6.9% number is also a revised number, which has been calculated as per the new GDP method released by the ministry of statistics and programme implementation. The economic growth as per the old method had been at 5%.

So the point is that Chidambaram does not believe the 7.4% economic growth number as per the new model. But he believes the 6.9% economic growth number which is also as per the new model. And therein lies his double standard.

If he believes in the 6.9% number then he has to believe in the 7.4% number as well because the method involved in calculating them is the same. And that being the case, 7.4% is higher than 6.9%.

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

The column originally appeared on Firstpost on May 25, 2015   

Mr Chidambaram, falling inflation is not deflation

P-CHIDAMBARAM
The former finance minister P Chidambaram writes a weekly column for The Indian Express newspaper. The latest column published on April 26, 2015, was headlined Across the Aisle: Inflation is bad, but is deflation good?.
Normally I never read economic columns written by politicians for the simple reason that you can never expect them to take a line which is different from their party line. And given that one knows what the party line is on most occasions, there is no point in reading the column. In most cases the politician tries to come up with reasons in order to defend the party line, irrespective of the fact whether that makes good economics or not.
But on this occasion I did read Chidambaram’s piece because the word ‘deflation’ caught my attention. The headline of the piece suggests that deflation is not good. Deflation is the opposite of inflation. Inflation is a situation in which prices are rising. Deflation is a situation in which prices are falling. Why is deflation not good? Once people figure out that prices are falling, they are likely to keep postponing their consumption in the hope of getting a better deal in the days to come.
If this happens, business revenues will most likely fall and so will economic growth. As business revenues fall, companies may try and maintain profits by firing people, among other things.
Those who get fired will spend money only on the most important things. Further, the firings will also have an impact on others who will fear that they might also get fired and in the process postpone expenditure. And so the deflationary cycle will work.
Hence, deflation is bad.
The only thing is that Chidambaram does not define deflation as a scenario of falling prices. As he writes: “Deflation and its consequences: The decline in the rate of inflation could be attributed to many reasons.”
Chidambaram essentially talks about a fall in the rate of inflation and defines that as deflation. A fall in the rate of inflation means that prices are rising, only that they are rising at a slower rate than they were earlier. This is very different from prices falling. The term Chidambaram should have used is disinflation, which essentially refers to a fall in the rate of inflation.
A former finance minister and a Harvard MBA to boot, should not be making a mistake in the usage of these terms. This is Economics 101.
In his column Chidambaram goes on to defend the economic policies followed by the Congress led UPA government between 2004 and 2014. Chidambaram writes that the current government has added to the woes of the farmer by “a paltry increase in Minimum Support Price (MSP), inefficient procurement, increase in prices of fertilisers, poor compensation for lost crop etc.” He goes on to suggest that the UPA tried to help the farmer in different ways: “introduction of MGNREGA in 2006 to supplement farm income/wages; farm loan waiver in 2008 to give partial relief from past debt; and generous increases in MSP between 2004 and 2014.”
Let’s look at these points one by one starting with the debt waiver which was made in 2008. The total amount of debt waived off to farmers was Rs 71,680 crore. While this one time waiver did not bring down any bank, it built in a huge moral hazard into the system. Economist Alan Blinder writes in After the Music Stopped that the: “central idea behind moral hazard is that people who are well insured against some risk are less likely to take pains (and incur costs) to avoid it.”
The message that was sent to farmers was that in the future there was no need to repay your loans because eventually the government would waive it off. In a country where the banking penetration is low and that remains starved of credit, this was a very short sighted measure aimed at the May 2009 Lok Sabha elections.
Mahatma Gandhi National Rural Employment Guarantee Act(MGNREGA) was launched in 200 of the most backward districts of the country on February 2, 2006. It was extended to all rural districts from April 1, 2008. The scheme 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 was that MGNREGA essentially became another scheme where money was simply given away without any substantial assets being created.
As T H Chowdhary wrote for The Hindu Business Line in December 2011 “Villages cannot sustain so many unskilled labourers and not-so-literate labour. By creating useless “work” we are promoting dependency among the unfortunate rural, illiterate and unskilled population…An example of the village Angaluru in Krishna district will illustrate how good money is being thrown away for bad results. Out of 1,000 families, 800 had registered themselves as BPL, seeking work under NREGA. So far, it was 100 days at Rs. 100 per day. Even at this, 80,000 mandays of useful work in a year is impossible in a village and that too, year after year.” Hence, MGNREGA essentially became an exercise of giving away money without any comparable increase in production and this led to high inflation.
These moves didn’t help the Congress led UPA government win many votes either. As Swaminathan Aiyar wrote in a recent column in The Times of India: “The Congress claimed that its farm loan waiver and MGNREGA (its rural job scheme) won it the 2009 election. Really? Congress won only nine of 72 seats in three very poor states where these schemes should have helped most — Bihar, Chhattisgarh and Odisha.”
Chidambaram also wrote about the generous increase in the minimum support price or wheat and rice between 2004 and 2014. The MSP is the price at which the government buys rice and wheat from the farmers, through the Food Corporation of India(FCI) and other state government agencies.
Between 2005-2006 and 2013-2014, the MSP of wheat was increased at an average rate of 14% per year. In 2005-2006, the MSP for common paddy(rice) was Rs 570 per quintal. By 2013-2014 this had shot up to Rs 1310 per quintal, an increase in price of around 11% per year.
This rapid increase in the MSPs led to very high inflation in general and food inflation in particular, between 2008 and 2014.  As economist Surjit Bhalla put it in a November 2013 column in The Indian Express “For each 10 per cent rise in previous years’ procurement prices, there is a predicted 3.3 per cent increase in the current year CPI…When the government raises the MSP, the prices of factors of production involved in the production of MSP products — land and labour — also go up.” Food inflation hurts the poor the most. Half of the expenditure of an average Indian family is on food. In case of the poor it is 60% (NSSO 2011).
To conclude, if the policies of the Congress led UPA were so pro-farmer, why did the lose the 2014 Lok Sabha election, so badly? Guess, Chidambaram’s next column can try answering that question as well. 

The column originally appeared on The Daily Reckoning on Apr 28, 2015

Jaitley needs to be realistic while making budget projections for 2015-2016

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

The fiscal deficit of the government of India for the period April to November 2014 stood at Rs 5,25,134 crore or 98.9% of the annual target of Rs 5,31,177 crore (4.1% of the GDP). Fiscal deficit is the difference between what a government earns and what it spends.
As can be seen from the accompanying table this is the second highest fiscal deficit during the first eight months of the financial year since 1997-1998. Also, the level is way higher than the average fiscal deficit of 73.64% between 1997 and 2013. 

Period  

% of the annual target

April to November 2014

98.90%

April to November 2013

93.90%

April to November 2012

80.40%

April to November 2011

85.60%

April to November 2010

48.90%

April to November 2009

76.40%

April to November 2008

132.40%

April to November 2007

63.80%

April to November 2006

72.80%

April to November 2005

74.70%

April to November 2004

51.50%

April to November 2003

61.00%

April to November 2002

61.50%

April to November 2001

68.00%

April to November 2000

57.80%

April to November 1999

80.60%

April to November 1998

75.80%

April to November 1997

66.70%

Source: www.cga.nic.in


As far as the total expenditure of the government is concerned it has gone up by only 5% in comparison to the same period in 2013. The major reason for the high fiscal deficit lies in the fact that the total revenues of the government for the period April to November 2014 have grown by 7.8%. The budget presented by finance minister Arun Jaitley in July 2014 had assumed that revenues would grow by 15.6%.
Hence, the revenue growth has been half of the projected level. Things are even worse when it comes to the taxes collected by the government. It was assumed that total tax collected by the government would grow by 16.9% in 2014-2015 in comparison to the same period during the last financial year. The actual growth between April to November 2014 was just 4.3%. The projections made by Jaitley and his team have gone for a toss totally, even after taking into account the fact that the government earns a substantial portion of its tax income during the last quarter of the financial year.
The Mid Year Economic Review which was published in late December 2014 stated that the tax collections will fall short by close to Rs 105,084 crore or around 0.84% of the GDP.
The learning from this is that Jaitley and his team need to be realistic with the projections they make for the next financial year’s budget, which is due next month. There is no point in assuming a very high growth rate in revenues, as was the case this year, and hence, understating the fiscal deficit number for the next financial year.

What these numbers also clearly tell us is that there is no way the government can meet the fiscal deficit target that it set for itself in July, unless it changes course. It doesn’t take rocket science to figure out that there are two things that the government can basically do—cut expenditure and increase revenues.
As far as government expenditure is concerned as I have pointed out in the past the expenditure is categorised into two categories—plan and non-plan. Non-plan expenditure makes up for around 68% of the total expenditure of the government in 2014-2015.
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 to meet the fiscal deficit target is easier said than done.
What is interesting is that while presenting the budget Jaitley had assumed that non-plan expenditure would grow by 9.4% during the course of the financial year. At the same time he had assumed that plan expenditure would grow by 20.9%.
Jaitley had increased the allocation of plan expenditure by close to Rs 1,00,000 crore to Rs 5,75,000 crore. Planned expenditure is essentially money that goes towards creation of productive assets through schemes and programmes sponsored by the central government. In an environment where the highly indebted private sector is going slow on investment, the government should be spending more on asset creation.
Nevertheless, the government will now ago about slashing plan expenditure big time between January and March 2015. From the looks of it, the government has already started going slow on this front. The plan expenditure between April and November 2014 grew by a minuscule 0.9%.
My broad guess is that Jaitley will cut plan expenditure by around Rs 1,00,000 crore to Rs 4,75,000 crore to keep it at the last year’s level. And this can’t be good news in an environment of slow growth. This is what the previous finance minister Chidambaram did in 2012-2013 and 2013-2014. In 2012-2013, he had budgeted Rs 5,21,025 crore towards plan expenditure. The final expenditure came in 20.6% lower at Rs 4,13,625 crore. In 2013-2014, the plan expenditure was budgeted at Rs 5,55,322 crore. The final expenditure came in 14.4% lower at Rs 4,75,532 crore.
There several other areas where Jaitley will have to copy Chidambaram as well. A recent report in the Business Standard points out that: “Jaitley was likely to ask PSU chiefs to use their cash piles to either boost public investment or partly offset the expected shortfall in tax receipts.”
Chidambaram had done something similar last year by getting public sector companies to pay high dividends. Coal India in particular announced a total dividend of Rs 18,317.46 crore. Of this, a lion’s share of Rs 16,485 crore went to the government. Over and above this, the government also collected Rs 3,100 crore as dividend distribution tax from the company.
Something similar seems to be in the works this year as well. In another report Business Standard had pointed out that public sector units were sitting on cash of close to Rs 2,00,000 crore. Coal India with Rs 54,780.2 crore was right on top. Getting these companies to pay high dividends is essentially an accounting shenanigan where money will be moved from one arm of the government to another.
Jaitley like Chidambaram will also have to postpone payments to the next financial year. Chidambaram postponed more than Rs 1,00,000 crore of payments in order to meet the fiscal deficit target that he had set for the last government. It is highly likely that the same thing might happen again.
A recent report in The Financial Express points out that: “The Food Corporation of India’s (FCI) procurement operations could come to a halt by February unless it is paid a good part of its outstanding dues of a record Rs 58,000 crore soon.” The corporation which buys rice and wheat directly from farmers is currently running on three short-term bank loans of Rs 20,000 crore , on which it is paying an interest of 11.28%.
The report further points out that “The food ministry has requested the finance ministry for Rs 1.47 lakh crore (including Rs 92,000 crore budgeted for FCI’s MSP functions and overall food subsidy arrears from previous years) in the current fiscal.” This looks highly unlikely and which means some expenditure that has to be paid for will get postponed to the next financial year.
What this means is that Jaitley will have to resort to every trick that Chidambaram had resorted to, in order to ensure that he meets the fiscal deficit target. The finance ministry has been vociferous in the recent past regarding achieving the target. The minister of state for finance Jayant Sinha recently said: “We are considering all options (cutting expenditure). We are very confident that we will be able to achieve fiscal deficit target of 4.1 per cent in the current fiscal year.”
Let’s see how things pan out on this front. The Daily Reckoning will keep a close watch.

Postscript: In my last column I had suggested that the prime minister Narendra Modi should give an assurance to public sector banks that the government won’t meddle with their work. Newsreports suggest that the prime minster told the same to a bankers retreat in Pune on Saturday. As he said: “There is a difference between political intervention and political interference… there will never be any phone call from the PMO…But as we are working in a democratic system… there will be intervention as and when required.” If followed this will be a great move.

The column originally appeared on www.equitymaster.com as a part of The Daily Reckoning on January 5, 2015

A day ahead, who is Chidambaram fooling?

P-CHIDAMBARAMVivek Kaul 

An important part of finance minister P Chidambaram’s job for a while has been to keep telling us that “all is well” on the economic front.
He continued with this on the last day of the financial year when he said “the Indian economy is now stable and the fundamentals have strengthened.” The statement was in response to 18 questions on the economy posed by former finance minister and BJP leader Yashwant Sinha.
So how strong is the Indian economy? “We have contained inflation. Our biggest success is containing fiscal deficit,” said Chidambaram.
But how do the numbers stack out? In February 2014, inflation as measured by the consumer price index was at 8.1%. It has come down from levels of greater than 10%. The primary reason for the same has been a rapid fall in food prices. Food products make up for around half of the consumer price index. The question is how much credit for the fall in food prices goes to the government? Not much. Also, it is worth reminding here that unseasonal rains and hailstorms in parts of the country have damaged crops, and this is likely to push up prices again.
If we look at non fuel-non food inflation, or what economists refer to as core inflation, it stood at 7.9% in February 2014. This number has barely budged for a while now. Non fuel-non food inflation takes into account housing, medical care, education, transportation, recreation etc.
What about the fiscal deficit? “We will end FY14[period between April 2013 and March 2014] with a fiscal deficit of 4.6%, as planned,” Chidambaram said. Fiscal deficit is the difference between what a government earns and what it spends.
But how has this target been met? A lot of expenditure has simply not been recognised. Oil subsidies of Rs 35,000 crore have not been accounted for. Estimates suggest that close to Rs 1,23,000 crore of subsidies (oil, fertilizer and food) have been postponed to next year. A March 4 report in this newspaper pointed out that the central government owes the states Rs 50,000 crore on account of compensation for the central sales tax.
On the income side, public sector banks have been forced to give huge dividends to the government despite not being in the best of shape. Coal India Ltd has paid the government a dividend and a dividend distribution tax of close to Rs 19,600 crore. India has the third largest coal reserves in the world but still needs to import coal. Shouldn’t this money be going to set up new coal mines? Neelkanth Mishra and Ravi Shankar of Credit Suisse point out in a recent report titled Elections: Much Ado about Nothing dated March 19, 2014 that “True utilisation in thermal power generation is below 60%, near 20-year lows (reported plant load factor is 65%).” This is because we don’t produce enough coal that can feed into the power plants.
Getting back to Chidambaram, he further said “The CAD has contracted. We have added to reserves. FY14 CAD is likely to be about $35 billion.” The current account deficit is the difference between total value of imports and the sum of the total value of its exports and net foreign remittances.
This has largely happened because of two things. The government has clamped down on legal gold imports. But anecdotal evidence suggests that gold smuggling is back with a huge bang. This has a huge social cost. Also, over the last few months non gold non oil imports have fallen due to sheer lack of consumer demand. And that surely can’t be a good thing.
Chidambaram also expects “spirited growth going forward”. The finance minister has been spinning this yarn for a while now. In early February he had said that the economy will grow by 5.5% in this financial year.
Growth during the first three quarters of the financial year has been less than 5% (4.4% in the first quarter, 4.8% in the second quarter and 4.7% during the third quarter). A simple back of the envelope calculation shows that the economy will have to grow by 8.1% in January to March 2014, for the Indian economy to grow by 5.5% during 2013-2014. You don’t need to be an economist to realise that this is not going to happen.
Interestingly, in July 2013 Chidambaram had said that “People should remember India continues to be the second fastest growing economy after China.” By January 2014 this statement had changed to ““India remains one of the fast growing large economies of the world.” What happened in between? A whole host of countries in our neighbourhood have been growing faster than us. This includes countries like Cambodia, Philippines, Indonesia, Sri Lanka and even Bangladesh.
Given these reasons, it is fair to say that Chidambaram was cracking an April Fools’ joke, a day early.

The article appeared  in the Daily News and Analysis dated April 1, 2014
(Vivek Kaul is the author of Easy Money. He can be reached at [email protected]) 

UPA destroyed economy. Where will Modi get the money to sort out this financial mess?

narendra_modiVivek Kaul 
The Congress led United Progressive Alliance (UPA) seems to have more or less realized that the 2014 Lok Sabha elections is a lost cause. Hence, the idea seems to be make things difficult for the next government, especially on the finance front.
I had written on this issue on February 17, 2014, the day the finance minister P Chidambaram presented the interim budget. Since then, more details have come out, and these details clearly suggest that things are much worse on the finance front than they first seemed.
A recent news report in the Daily News and Analysis points out that the central government owes the states Rs 50,000 crore on account of compensation for the central sales tax. The newspaper quotes a finance ministry official to point out that a 2% cut in the central sales tax was introduced as a part of the process to phase it out and move towards goods and services tax. The state governments were to be compensated for the losses they had incurred because of this. This payment hasn’t been made for the last three years and the amount has now gone up to close to Rs 50,000 crore.
This is something that the next government will have to deal with. On February 28, 2014, the government raised the dearness allowance of five million central government employees to 100% of their basic salary. This was earlier at 90%. This move is expected to cost around Rs 6,390 crore in 2014-2015. Interestingly, the government had hiked the dearness allowance from 80% to 90% of basic only in September 2013, with effect from July 2013.
The government also approved among the terms of reference for the seventh pay commission, the addition of 50% dearness allowance with the basic pay. This is expected to push salaries of public sector employees up by 30%, that is, if the recommendations of the seventh pay commission are implemented in the time to come. Also, once the dearness allowance of the central government employees is increased, it puts an immense amount of pressure on state governments to increase the salaries of their employees as well.
There are some points from the interim budget that need to be highlighted as well. An amount of Rs 1,15,000 crore has been budgeted against food subsidies for 2014-2015(the period between April 1, 2014 and March 31, 2015). Out of this around Rs 88,500 crore has been allocated under the Food Security Act.
The problem with this number is that the food security scheme is expected to cost much more than the amount that has been allocated. (you can read a detailed explanation here). Also, with Rs 88,500 crore allocated towards food security scheme, it doesn’t leave enough, for the public distribution system that is already in place. As the DNA article cited earlier points out “The next government will have to find a lot of resources for the public distribution subsidy as well. Out of the total Rs 115,000 crore for the food subsidy, the government has allocated Rs 88,500 crore to the Food Security Act.”
And if all this wasn’t enough there are expenditures from the current year that haven’t been accounted for and will spill over to the next year. Estimates suggest that this year close to Rs 1,23,000 crore of subsidies have been postponed to the next year. The next finance minister would have to meet this expenditure.
In fact, in a last ditch effort the government tried to push in nine ordinances before the election commission announced the elections dates. But the President Pranab Mukherjee did not agree to it. As economist Arvind Panagariya points out in a recent column in The Times of India “Perhaps the worst poison pill is UPA’s attempt to push as many as nine ordinances and clear vast numbers of projects on literally the last possible day before Election Commission’s Model Code of Conduct was expected to kick in. Only sage advice from the president held back the government’s hand from pushing the vast majority of these ordinances.”
The Congress led UPA government has left the country in a huge financial mess and the next government will have a tough time dealing with it, from day one. And if they mess it up even slightly, India will end up in an even bigger mess than it currently is.
The opinion polls suggest that Narendra Modi is likely to be the next Prime Minister of India. The great Indian middle class has high hopes from Modi and his ability to get the Indian economy back on track. But the question is where will Modi get the money from, for whatever he wants to do, to set the economy back on track? Close to Rs 2,00,000 crore of government expenditure next year, hasn’t been accounted for.
One way out is to cut down on the subsidies. But will Modi be able to do that, given that he is likely to lead a coalition government. Also, during all the years that the BJP has been in opposition it has supported the populist entitlement programmes, which have led to the government expenditure going up big time. So it is really not in a position to reverse that expenditure even if it is voted to power.
As Robert Prior-Wandesforde, an economist at Credit Suisse in Singapore, recently told Mint “The power of the finance minister in the new government will be key… as will be the administration’s ability to either cut spending on social welfare or match that expenditure through revenue.”
Now that, as the common phrase goes, is easier said than done.
The article originally appeared on www.FirstBiz.com on March 13, 2014
 (Vivek Kaul is a writer. He tweets @kaul_vivek)