One lesson from many lessons offered on BJP’s Delhi defeat

narendra_modiA small industry seems to have evolved around trying to explain why the Bhartiya Janata Party(BJP) lost the Delhi elections. A spate of reasons have been offered. One gentleman even went to the extent of saying that it was a weekend, and the BJP voters were not in Delhi.
And then there have been regular reasons like the fringe elements in the Sangh Parivar and the comments they have been making, costing BJP the election. It was also said that the BJP ran a very negative campaign in Delhi, where they targeted Arvind Kejriwal more often than they should have.
Some political pundits have done a complete turnaround and been telling us that they knew all along that the BJP would lose big time in Delhi. The best explanation for this came on one of the Hindi news channels on the day when votes polled for the Delhi election were being counted.
A journalist explained that he had covered the prime minister Narendra Modi’s rallies in Delhi and they did not attract the same kind of crowd that they had when the BJP organized rallies with Modi as the star speaker, at the time of the Lok Sabha elections. He further explained that he saw people leaving the rally even before Modi’s speech had ended. And that was a clear habinger of things to come.
The question is—if this journalist was so sure about all this, why didn’t he say so at the time the rallies were held. Or even other analysts and journalists who have been coming up with different reasons for BJP’s loss in Delhi—if they were so sure, why didn’t they say so earlier?
The “I already told you so,” explanations that have been offered in the aftermath of BJP’s Delhi defeat are an excellent example of what psychologists and behavioural economists call “hindsight bias”.
The Nobel Prize winning economist Daniel Kahneman defines hindsight bias in his book Thinking Fast and Slow, as follows: “When an unpredicted event occurs, we immediately adjust our view of the world to accommodate that surprise…A general limitation of the human mind is its imperfect ability to reconstruct past states of knowledge, or beliefs that have changed. Once you adopt a new view of the world(or of any part of it), you immediately lose much of your ability to recall what you used to believe in before your mind changed.”
Hindsight bias is also referred to as “I knew it all along effect”. As Nassim Nicholas Taleb writes in Fooled by Randomness: “Our minds are not quite desinged to understand how the world works, but, rather, to get out of trouble rapidly and have progeny. If they were made for us to understand things, then we would have machine in it that would run the past history as in a VCR, with a correct chronology, and it would slow us down so much that we would have trouble operating. Psychologists call this overestimation of what one knew at the time of the event due to subsequent information…the “I knew it all along” effect.”
This bias is clearly at work in the explanations that are now being offered for BJP’s shocking defeat in Delhi. One explanation that has been offered is that the freebies/sops offered by the Aam Aadmi Party, essentially led to BJP’s wipe out. But if that were the case then Ashok Gehlot would not have lost in Rajasthan and neither would have M Karunanidhi, the last time they faced the electorate. Oh, and what about Sonia Gandhi? If it were just about offering freebies to voters, would the Congress have been reduced to 44 seats in the current Lok Sabha?
This brings us back to the question, why did the BJP lose so badly in Delhi? One answer lies in the fact that the vote share of the Congress party collapsed and it moved lock, stock and barrel to the Aam Aadmi Party. Why did this vote share not move to the BJP? This is where all the explanations start to come in. But almost all these theories are a matter of conjecture because nobody really knows what’s going on in the minds of a huge number of voters.
The human mind likes explanations for what it does not understand. As Gary Smith writes in Standard Deviations—Flawed Assumptions, Tortured Data and Other Ways to Lie With Statistics: “Our inherited desire to explain what we see fuels two kinds of cognitive errors. First, we are too easily seduced by patterns and by the theories and discount contradicting evidence. We believe stories simply because they are consistent with the patterns we observe and, once we have a story, we are reluctant to let it go.”
In the context of the Delhi elections what this means is that if you are a BJP supporter you would like to believe that the BJP lost because the Aam Aadmi Party offered freebies to voters. If you are an Aam Aadmi Party supporter you would like to believe that the party won because of the positive campaign that it ran. But as Smith points out: “Order is more comforting than chaos…Our vulnerability comes from a deep desire to make sense of the world, and it’s notoriously hard to shake off.”
Further, the more unpredicted an event is, the greater is the hindsight bias. Kahneman explains this through the example of 9/11. As he writes: “In the case of a catastrophe, such as 9/11, we are especially ready to believe that the officials who failed to anticipate were negligent or blind.”
On July 10, 2001, the CIA received information that al-Qaeda was planning an attack on the United States. The CIA director George Tenet told the National Security Adviser Condoleeza Rice and not President George Bush.
When Ben Bradlee the legendary executive editor of The Washington Post came to know of it, he remarked: “It seems to me elementary that if you’ve got the story that’s going to dominate history you might as well go right to the president.” This is classic hindsight bias.
As Kahneman writes: “But on July 10, no one knew—or could have known—that this tidbit of intelligence would turn out to dominate history.”
Long story short—it is always easy to be wise after the event. And that is what is happening with all the lessons/explanations that have been offered for BJP’s defeat in Delhi.

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

The column originally appeared on on Feb14, 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. 


% of the annual target

April to November 2014


April to November 2013


April to November 2012


April to November 2011


April to November 2010


April to November 2009


April to November 2008


April to November 2007


April to November 2006


April to November 2005


April to November 2004


April to November 2003


April to November 2002


April to November 2001


April to November 2000


April to November 1999


April to November 1998


April to November 1997



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 as a part of The Daily Reckoning on January 5, 2015

Jaitley may end up doing a Chidambaram to meet fiscal deficit target


In yesterday’s column I had explained how the fiscal deficit of the government of India between April and October 2014 was at its highest level since 1998. Fiscal deficit is the difference between what a government earns and what it spends.
This despite the fact global oil prices have been falling for a while now. This has not helped the government primarily because like his predecessors the current finance minister Arun Jaitley also assumed a low oil subsidy number at the time he presented the budget in July 2014.
When the previous finance minister P Chidambaram presented the budget for the financial year 2013-2014, he assumed that Rs 65,000 crore would be spent towards oil subsidy. The actual number came in at Rs 85,480 crore, which was 31.5% higher.
This has been standard operating procedure for finance ministers over the years, where they start with a low oil subsidy number at the beginning of the year and end up spending much more by the time the year ends. What this does is that it makes the fiscal deficit number look more respectable at the time the budget is presented.
Jaitley did the same thing as his predecessor by assuming that oil subsidy for the year would work out to Rs 63,426.95 crore. This despite the fact that subsidies worth Rs 35,000 crore which were to be paid in 2013-2014, had been postponed to this financial year. So, in effect Jaitley only had a little more than Rs 28,400 crore to play around with on the oil subsidy front.
Oil prices started falling a few months back. This wasn’t known at the time the budget was presented in July earlier this year. In the budget it was assumed that oil prices
would average at $110 per barre during the course of this financial year. As on December 10, 2014, the price of the Indian basket of crude oil stood at $63.16 per barrel.
Given that, Jaitley assumed a lower number to start with, the government is not going to benefit on the fiscal deficit front, due to a fall in oil prices. As Neelkanth Mishra and Ravi Shankar of Credit Suisse write in a recent research note titled
2015 Outlook: Growth at any price?: “The…budgeted amount for fuel subsidies (Rs 63,400 crore, 0.5% of GDP)…may not change much for financial year 2014-2015, as Rs35,000 crore of the oil subsidy is already spent.”
The analysts also wrote that there won’t be much change in the fertiliser subsidy amount of close to Rs 73,000 crore, as well. Mishra and Shankar write that “it will be difficult for the government to reduce food subsidies”.
Given this, Jaitley isn’t really in a position to cut down subsidies. What he will have to do is to start cutting down on plan expenditure, like Chidambaram had done. As I had explained in yesterday’s piece, the government expenditure is categorised into two kinds—planned and non planned. Planned expenditure is essentially money that goes towards creation of productive assets through schemes and programmes sponsored by the central government.
Non-plan expenditure is an outcome of planned expenditure. For example, the government constructs a highway using money categorised as a planned expenditure. But the money that goes towards the maintenance of that highway is non-planned expenditure. 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. These expenses cannot be postponed. Hence, the asset creating plan expenditure gets slashed.
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.
This helped Chidambaram to cut down on the overall government expenditure majorly. Jaitley will have to do something similar, if he wants to achieve the fiscal deficit target of Rs 5,31,177 crore or 4.1% of GDP, that he has set.
As economists Taimur Baig, and Kaushik Das of Deutsche Bank Research write in a recent research note titled
India 2015 Outlook: Turning the cycle and structure around: “The government’s 2014-2015 fiscal deficit target of 4.1% of GDP will likely be achieved, but by cutting capital expenditure for the third straight year in a row. We estimate that the government will have to cut capital expenditure by at least Rs 70,000 crore…to make up for the significant shortfall in tax collection and disinvestment target.”
Supporters of Jaitley say that Chidambarm left him with unpaid bills of more than Rs 1,00,000 crore. Fair point. But Jaitley knew about this at the time he presented the budget. So, what stopped him from taking these unpaid bills into account while presenting the budget earlier this year?
If he had done that he wouldn’t have been able to present a fiscal deficit number of Rs 5,31,177 crore or 4.1% of GDP. The number would have been much higher. Nevertheless, that would have been the real fiscal deficit number, instead of the unrealistic and fictional number that was presented at the time of the budget. It is not surprising that Jaitley will have a tough time in meeting this number.
As I said in yesterday’s piece, the first step towards solving a problem is acknowledging that it exists. Jaitley and the BJP had an excellent opportunity to do this. And they let that go.
Another reason for the government to worry is the disinvestment target of Rs 58,400 crore. With basically three months left for the financial year to get over, the disinvestment of shares that the government owns in government and non-government companies has barely started.
As Baig and Das point out: “We expect the government to rely on disinvestments as a key source of revenue to reduce the fiscal deficit, but as seen from this year’s experience, there is no guarantee that such a strategy would work. Further, trade union activism could come in the way of the government pursuing an aggressive disinvestments/privatization agenda, which then will likely put pressure back on expenditure compression (particularly capital expenditure) to achieve the headline fiscal deficit target.”
Also, what does nothelp is the fact that growth in tax collections is nowhere near what had been assumed initially. The direct taxes (corporation and income tax primarily) were assumed to grow at 15.7%, in comparison to the last financial year. They have grown at only 5.5% between April and October 2014.
The indirect taxes (customs duty, excise duty and service tax) were supposed to grow at 20.3%. They have grown by only 5.9%
The situation clearly does not look good. And given that finance ministers do not like to miss targets they set, it is more than likely that Jaitley will now do a Chidambaram and slash asset creating plan expenditure majorly in the months to come. In fact, the plan expenditure for the first seven months of the financial year fell by 0.4% to Rs 2,66,991 crore.
As the old French saying goes: “
plus ça change, plus c’est la même chose. The more things change, the more they remain the same.

The article originally appeared on as a part of The Daily Reckoning, on Dec 12, 2014

GDP growth at 5.3%: A lot needs to be done for the economy to see acche din again

deflationVivek Kaul

India has largely been a centrally planned economy since independence. The central planning increased dramatically in the second term of the previous United Progressive Alliance (UPA) government.
This led to a situation where India’s economy grew at greater than 8% in the aftermath of the financial crisis, when economic growth was collapsing all around the world. But this extra central planning has created many problems for the Indian economy since then.
As Bill Bonner writes in Hormegeddon—How Too Much Of a Good Thing Leads to Disaster, “Central planning can do a good job of imitating real progress at least in the short run.” And that is what precisely what happened in India, in the aftermath of the financial crisis.
The government expenditure exploded. In 2007-2008, the total government expenditure stood at Rs 7,12,671 crore. This doubled to Rs 14,10,372 crore by 2012-2013. This increased spending by the government landed up as income in the hands of the citizens, and they in turn spend the money. And this ensured that the Indian economy kept growing at a fast pace though economic growth was slowing down world over.
A substantial amount of this increased government spending was directly distributed to citizens through schemes like Mahatma Gandhi National Rural Employment Guarantee Scheme. The minimum support price offered on rice and wheat was also increased much more than was the case in the past.
This led to rural income growing at a faster rate than it had in the past. Initially, it did not matter. But as time passed this increased income translated into high inflation, particularly high food inflation.
Further, the trouble was that the government wasn’t earning all this money that it was spending. Between 2007-2008 and 2012-2013, the total income of the government did not go up at the same pace as its expenditure (it went up by around 57%), and the government borrowed more to make up for the difference.
The fiscal deficit in 2007-2008 was Rs 1,26,912 crore. This shot up by 286% to Rs 4,90,190 crore by 2012-2013. Fiscal deficit is the difference between what a government earns and what it spends. And the government makes up for the difference through increased borrowing.
This increased borrowing by the government crowded out other borrowers, that is, there wasn’t enough left on the table for other borrowers to borrow. This meant banks had to offer higher rates of interest to attract deposits. This pushed up interest rates at which they loaned out money as well.
Also, to control the high inflation, the Reserve Bank had to push up the repo rate, or the rate at which it lends to banks. Further, during the good years, the corporates loaded up on debt, borrowing much more than they could ever repay. A major portion these loans were taken by crony capitalists from public sector banks.
All these reasons led to what analysts call the “India growth story” coming to an end. High inflation forced people to cut down on spending as incomes did not keep pace with expenditure. Economic growth fell to around 5% from double digit levels and that is where it has stayed for a while now.
It was widely expected that with Narendra Modi taking over as the prime minister, the Indian economy will start seeing
acche din soon. But that hasn’t happened. For the three month period July to September 2014, the economic growth, as measured by the growth in the gross domestic product (GDP), was at 5.3%. During the period April to June 2014 the economy had grown at 5.7%.
The financing, insurance, real estate and business services sector which formed a little over 22% of the GDP during the period, grew by an impressive 9.5%. But other sectors did not do so well.
Agriculture which formed around 10.8% of the total GDP during the quarter grew by 3.2%. It had grown by 5% during the same period last year. Manufacturing which formed around 14.6% of the total GDP during the quarter was more or less flat at 0.1%. In fact, the size of manufacturing sector has fallen by 1.4% in comparison to the period between April and June 2014.
What this tells us clearly is that sustainable economic growth cannot be created by the government giving away money to citizens and then hoping that they spend it and create economic growth. For sustainable economic growth to happen a country needs to produce things. As the Say’s Law states “
A product is no sooner created, than it, from that instant, affords a market for other products to the full extent of its own value.” The law essentially states that the production of goods ensures that the workers and suppliers of these goods are paid enough for them to be able to buy all the other goods that are being produced. A pithier version of this law is, “Supply creates its own demand.”
In an Indian context this is even more important given
that nearly 60% of the population remains dependent on directly or indirectly dependent on agriculture, even though agriculture now forms a minor part of the overall economy. What this tells us is that the sector has many more people than it should. Hence, people need to be moved from agriculture to other sectors like manufacturing. And for that to happen jobs need to be created in these sectors.
The government recently launched the
Make in India programme to create jobs in the manufacturing sector. But just launching the programme is not good enough. For companies to make products in India a lot of other things need to be provided. They need access to electricity all the time and for that to happen we need to sort out the mess our coal sector is in. The physical infrastructure of roads, railways and ports needs to improve. The ease of doing business needs to go up considerably and so on.
As Daron Acemoglu and James A. Robinson write in
Why Nations Fail—The Origins of Power, Prosperity and Poverty regarding the industrial revolution that happened in Great Britain in the 19th century: “The English state aggressively…worked to promote domestic industry…by removing barriers to the expansion of industrial activity.” Similar barriers need to be removed in India as well. Also, entrepreneurs need to be confident that their contracts and property rights will be respected.
These things are easier said than done. What makes the scenario even more difficult in the Indian case is that Indian businessmen who operate in the infrastructure sector are not the most honest people going around. Raghuram Rajan, the governor of the Reserve Bank of India, more or less hinted at it in a recent speech.
As he said “The amount recovered from cases decided in 2013-14 under DRTs (debt recovery tribunals) was Rs. 30,590 crore while the outstanding value of debt sought to be recovered was a huge Rs. 2,36,600 crore. Thus recovery was only 13% of the amount at stake. Worse, even though the law indicates that cases before the DRT should be disposed off in 6 months, only about a fourth of the cases pending at the beginning of the year are disposed off during the year – suggesting a four year wait even if the tribunals focus only on old cases.”
If incumbent businessmen do not repay their loans and then banks cannot recover those loans, banks will not lend or charge a higher rate of interest when they lend. And this does not help the businessmen currently looking to expand their businesses by borrowing.
To conclude, there is a lot that the government needs to do to get economic growth up and running again. The only action that one has seen from the government until now is demanding that the RBI cuts the repo rate. Now only if creating economic growth was simply about cutting interest rates.

The article appeared originally on on Nov 29, 2014

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

What Narendra Modi can learn from Narsimha Rao

narendra_modiVivek Kaul

Before PV Narsimha Rao took over as the prime minister of the country, the finances were in a bad shape. Under the previous regime, the foreign exchange reserves had fallen to a level which was enough to pay only for three weeks worth of essential imports. In this scenario India had to take an emergency loan of $2.2 billion from the IMF. This was done by offering 67 tonnes of gold as a collateral.
Given this, Rao realized that he needed a ‘technocrat’ as his finance minister. IG Patel, a former governor of the Reserve Bank of India(RBI) was approached first. Patel, had been the fourteenth governor of the RBI between 1977 and 1982. After retiring from the RBI he was the director of IIM Ahmedabad. Between 1984 and 1990 he was the director of the London School of Economics.
Patel refused Rao’s offer and instead recommended Manmohan Singh. Singh had taken over from Patel as the governor of the RBI. He had a three year tenure at the RBI. After that he took over as the deputy chairman of the planning commission. In March 1991, Singh was appointed as the Chairman of the University Grants Commission(UGC). And this is when Narsimha Rao came calling and on June 21, 1991, the day Rao took over as the prime minister of the country, Singh was appointed as the finance minister.
Singh with the firm backing of Rao unleashed a spate of economic reforms which unshackled the moribund Indian economy and placed it on a much better footing. What is interesting nonetheless is that the entire period of Rao’s rule was not reform oriented. The economic reforms happened in the first three years and after that election considerations for the next Lok Sabha took over. Hence, the last two budgets of Manmohan Singh were of the ‘populist’ nature.
There is a lesson in this for the current prime minister Narendra Modi. Modi is likely to have elections on his mind more than Rao for the simple reason that his party and his allies are outnumbered in the Rajya Sabha. And if he has to establish a majority in the upper house, he first needs governments of the Bhartiya Janata Party in states. The BJP currently has 43 MPs in the Rajya Sabha and the NDA 63 MPs. This makes it difficult for the government to enact any legislation unless it calls for a joint sitting of both the houses.
Hence, elections for state governments are very important for the Modi government.
In this scenario it might is quite possible that economic reforms and even simple administrative decisions for that matter, may take a back seat. A very good example of this is that Modi had to wait for elections in Maharasthra and Haryana to get over before the government could announce the decontrolling of the price of diesel.
The good news is that an election free window of almost 11 months is coming up. As analysts Abhay Laijawala and Abhishek Saraf of Deutsche Bank Market Research point out in a recent report titled
Policy action to intensify “Following three state elections in December – Jharkhand, Jammu and Kashmir – there will be a near eleven month election free window, before Bihar state goes to the polls around November 2015.”
As can be seen from the accompanying table, after elections in the states of Jharkhand and Jammu and Kashmir are over, there is an election free window of close to 11 months. This table does not account for elections in Delhi, which also may happen soon.
The next big election is scheduled only in November 2015 in Bihar. The state has around 7.3% of the country’s Lok Sabha seats. It also elects 16 members to the Rajya Sabha. The Rajya Sabha has 241 seats in total. Hence, the Bihar election will be of significant importance. And it may not be possible to push economic reforms around the time elections happen in the state.
Hence, the time to push reforms is early next year, when the election free window starts. A good place to start with would be take the deregulation of diesel prices further, and start gradually increasing the price of cooking gas. Currently,
the oil marketing companies make an under-recovery of Rs 393.50, every time they sell a cooking gas cylinder.
As was done in the case of diesel, prices can be increased gradually at the rate of Rs 10-20 per month. Currently, the oil marketing companies face an under-recovery of Rs 188 crore per day on the sale of cooking gas and kerosene. A part of this amount is reimbursed by the government. This leads to an increase in the expenditure of the government and hence, its fiscal deficit. Fiscal deficit is the difference between what a government earns and what it spends. An increase in price will also ensure that over a period of time the black marketing of domestic cooking gas to hotels will become unviable.
Also, over a period of time as the government is able to increase its numbers in the Rajya Sabha it needs to introduce land and labour reforms as well. As Laijawala and Saraf point out “Most of the reforms in India, since 1991, have been broadly focused towards product and capital markets. Reforms in factor markets, other than capital, principally land and labor, have been broadly left out by all political administrations since 1991. We believe that a long era of coalition governments may be the reason for this anomaly.”
Narendra Modi’s government is not held back by the coalition dharma, as almost all governments since 1996 have been. Hence, it is in a position to push through some real economic reforms on this front. These reforms are of great importance if Modi’s call of
Make in India is to be take seriously.
Other than this, the Goods and Services Tax (GST) bill which has been in the works for a while, needs to be passed as well. The benefits of GST over the long term will be tremendous. “It has a very ambitious objective to wean away inefficiencies in India’s indirect tax value chain and ensure smoother movement of goods and services by converting India into a one common market, versus the current status where different states levy different types and rates of taxes, which introduces several inefficiencies,” write Laijawala and Saraf.
To conclude, Narendra Modi and his government need to make the best of the election free window that starts from January 2015 and try and make the best of it.

The article originally appeared on on Nov 14, 2014

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