India Is Still Facing The Ill-Effects Of The Congress Era Inflation

India's PM Singh speaks during India Economic Summit in New Delhi
The devil, like beauty, always lies in the detail.

Sometime last week the Central Statistics Office(CSO) put out data which clearly shows that India is still facing the ill-effects of the inflationary era unleashed by the Congress led United Progressive Alliance (UPA) government.

Between 2008-2009 and 2013-2014, the average consumer price inflation was higher than 10%. Food inflation was higher than 11%. High inflation essentially forced people to spend more and in the process they had lesser money to save.

Take a look at the following table. The household savings fell from 23.39% of the nominal Gross Domestic Product (GDP) to 19.06%. Nominal GDP does not take inflation into account.

In Rs crore2011-20122012-20132013-20142014-2015
Household Savings2065453223395023609362380488
As a % of total savings68.20%66.40%63.40%57.20%
As a % of nominal GDP23.39%22.36%20.94%19.06%
Net Financial Savings (Gross financial savings minus financial liabilities)642609733616862873961307
As a % of nominal GDP7.28%7.34%7.65%7.70%
Saving in physical assets1389209146368414608441379411
As a % of nominal GDP15.73%14.65%12.96%11.05%

The household savings primarily comprise of financial savings as well as savings in physical assets and savings in the form of gold and silver ornaments. The overall household savings have fallen from 23.39% of the GDP in 2011-2012 to 19.06% in 2014-2015.

The household financial savings (i.e. investments made in fixed deposits, provident funds, shares and debentures and life insurance) rose marginally from 7.28% to 7.70% of the GDP.

What the table does not tell you is that in 2007-2008, before the Congress led UPA government initiated an era of high-inflation, the household financial savings had stood at 11.45% of the GDP. Between 2007-2008 and 2011-2012, household financial savings fell dramatically. They haven’t really recovered since then despite lower inflation numbers.

In 2014-2015, the consumer price inflation was at an average of 5.83% during the course of the year. Food inflation was at 6.26%. The after-effects of the era of high inflation are still being felt. The low growth in household financial savings also explains why despite a massive fall in inflation, interest rates haven’t fallen at the same pace. If savings had risen at a much faster rate, the interest rates would have fallen more.

Savings in physical assets (homes, land, flats etc.) have fallen dramatically between 2011-2012 and 2014-2015 from 15.73% of the GDP to around 11.05%. This is again a reflection of the fact that people are not saving enough despite low inflation. One possible explanation for this is that incomes are not going up at a fast pace.

The other point that needs to be made here is that the real estate prices have gone way beyond what most people can afford. And that explains to some extent why household financial savings have risen between 2011-2012 and 2014-2015, but physical assets have not.

Now take a look at the following table. Companies (non-financial corporations) have been saving more over the years. Their savings have gone up from 9.59% of the GDP in 2011-2012 to 12.27% of the GDP in 2014-2015. What does this tell us?

 

In Rs crore2011-20122012-20132013-20142014-2015
Savings of non-financial corporations84713499032212180201532262
As a % of total savings28.00%29.40%32.70%37.20%
As a % of nominal GDP9.59%9.91%10.80%12.27%
Savings of financial corporations272371300599294180335679
As a % of total savings9.00%8.90%7.90%8.20%
As a % of nominal GDP3.08%3.01%2.61%2.69%
Savings of general government-158234-160048-148089-131729
As a % of total savings-5.20%-4.80%-4.00%3.20%
As a % of nominal GDP-1.79%-1.60%-1.31%-1.05%

 

It tells us that there are not enough investment opportunities going around and hence the profits that these companies are making are not being invested to expand but being saved. This is again a good indicator of the overall slow trend of the economy.

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. Production of goods also creates new jobs.

A pithier version of this law is, “Supply creates its own demand.” And that is why industrial expansion is important for economic growth to happen. But currently that doesn’t seem to be happening.

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

The column originally appeared on Swarajya on February 3, 2016

Time to change your jingle: Rahul Gandhi’s garibi hatao rhetoric is like the Nirma ad

Vivek Kaul 

Guess who’s back, guess who’s back?
Guess who’s back, guess who’s back?
Guess who’s back, guess who’s back?
Guess who’s back? – 
Lines from Without Me by rapper Eminem 

Rahul Gandhi is back. The vice-president of the Congress party is back to India after a 57 day sabbatical. Depending on which political gossip columnist you believe he was holidaying either in South East Asia or in Italy. A news-report also suggests that he was meditating in Burma. But all that doesn’t really matter.
While Rahul was away the Congress politicians put on a brave front. They told the nation that the Gandhi family scion was taking a break and figuring out what to do next. Among many such statements that were made the best one came from Mukul Sangma, the chief minister of Meghalaya. Sangma compared Rahul’s sabbatical (or disappearance, depends on how you look at it) to that of Alfred the Great, who ruled Wessex, an anglo-Saxon kingdom in the South of Great Britain, between 871 and 899 AD.
After a defeat at the hands of the Viking armies, Alfred retreated and came back strongly to win the subsequent war. Sangma compared Rahul’s sabbatical to that of Alfred the Great, 
when he told The Indian Express: “There are certain strategies, some secret plans that leaders always have. If you read stories, read history, Alfred the Great, after he lost the battle, he needed to plan, think and ideate and come up with another formula to defeat the enemy.”
Sangma suggested that Rahul was doing the same. The Congress party 
spokesperson Randeep Surjewala suggested the same when he said: “I don’t know where he is but I know he is not on a holiday. He has taken time off to reflect on how to strengthen the Congress. I see it as an extremely mature step.”
Companies these days regularly go on off-sites, at least once a year, to think and ideate, and to figure out the way forward. While no one quite goes on a two month off-site, but let’s not nitpick here. So Rahul’s sabbatical was along similar lines. Fair enough.
The question is what has he come up with at the end of the sabbatical? From what was visible in his speech to farmers at the 
Ramlila Maidan in New Delhi yesterday, Rahul hasn’t come up with anything new. In fact, he has gone back to the garibi hatao rhetoric of his grandmother Indira Gandhi.
Sample some of the things that Rahul said in his speech yesterday.

Today when farmers go to sleep, they dont know what is going to happen when they wake up the next morning.” 

We increased the MSP of wheat from Rs 540 to Rs 1400.” 

Opposition asked us where will the money come for your loan waiver. Our govt waived Rs 70,000 crore of farmer loans.” 

The MSP[minimum support price] has not changed, no benefit to farmers.”

What is common to all these statements? That India is a poor country. And that the Indian farmer is poor. And that he needs to survive only on doles given by the government. And that the Congress led United Progressive Alliance was excellent in giving out doles. And that the Narendra Modi led Bhartiya Janata Party is not doing the same thing.
This has been the Congress party rhetoric since Indira Gandhi took over the party in the late 1960s. And truth be said it worked beautifully for decades. But isn’t working any more. Why is that? One reason lies in the fact that agriculture contributes 18% of the country’s GDP while it employs almost around 50%(or more depending on which estimate you believe in) of its workforce. What this shows is that agriculture is not remunerative enough given that there are too many people dependant on it. It is also known that only 17% of farmers survive on income totally from agriculture. The rest do other things as well to make money.
Hence, truth be told India has many more farmers than it needs. People need to be moved away from agriculture. And that in turn means we need to create more jobs in other sectors. And that is clearly not happening. This is something that the latest economic survey points out: “Regardless of which data source is used, it seems clear that employment growth is lagging behind growth in the labour force. For example, according to the Census, between 2001 and 2011, labor force growth was 2.23 percent (male and female combined). This is lower than most estimates of employment growth in this decade of closer to 1.4 percent. Creating more rapid employment opportunities is clearly a major policy challenge.”
As per the Census the employment growth between 2001 and 2011 was at 1.8%. It was at 2.5% between 1991 and 2001. The Labour Bureau suggests that the employment growth between 2011-12 and 2013-2014 was at 1%.
The Congress led UPA was in power between May 2004 and May 2014. And it clearly did a lousy job of creating jobs. In fact, data from the last census tells us that nearly 4.7 crore Indians under the age of 25 are looking for jobs, but have not been able to find one. Who is responsible for this?
Once we take all this information into account, what it clearly tells us is that the garibi hatao rhetoric and the policies that have emanated from it, haven’t really worked.
It is time for the Congress(and all other political parties) to do this country a favour and move on from it. It is time to think jobs. But Rahul Gandhi is still stuck up garibi hatao. This even after taking a two month sabbatical.
In that sense, the Congress party is a bit like the Nirma washing powder advertisement, which worked beautifully for a long period of time. In all these years the ad has basically stayed the same. (I have watched it since television first came to Ranchi in 1984). But Nirma is no longer the company it used to be. And the same is true for the Congress.
It is time for both to change their jingle. 

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

The column originally appeared on Firstpost on Apr 20, 2015 

In defence of Smriti Irani: Why Madhu and Maken are wrong

 smriti-irani

Vivek Kaul

So Smriti Irani cannot make for a good human resources development minister because she is not a graduate.
Or so we have been told by the likes of Madhu Kishwar and Ajay Maken.
In short, people who have degrees make for better politicians is the conclusion being drawn. But is that really the case?
Let’s take the case of a certain Lalu Prasad Yadav, who was the defacto Chief Minister of Bihar for more than 15 years. Lalu has a Bachelor of Laws and a Master in Political Science. How did his degrees make any difference?
During his rule Bihar went from bad to worse. In fact, when Lalu was questioned about the lack of development in the state, he was very open about admitting that development did not lead to votes.
Such was Lalu’s lack of belief in development that even money allocated to the state government by the Central government remained unspent. As Santhosh Mathew and Mick Moore write in a research paper titled
State Incapacity by Design: Understanding the Bihar Story, “Despite the poverty of the state, the governments led by Lalu Prasad signally failed to spend the money actually available to them: ‘…Bihar has the country’s lowest utilisation rate for centrally funded programs, and it is estimated that the state forfeited one-fifth of central plan assistance during 1997–2000.’”
Interestingly, between 1997 and 2005, Rs 9,600 crore was allocated by the Ministry of Rural Development to Bihar. Around Rs 2,200 crore was not drawn. Of the amount that was drawn only 64% was spent.
During Lalu’s rule Bihar went from bad to worse and a whole generation lost out on progress. But yes, Lalu had two degrees.
Let’s take an even better example of former prime minister Dr Manmohan Singh, a PhD from the University of Oxford. Now compare his degree to the mess that we have ended up with under him. Interestingly, most of our politicians who have a degree, tend to have a degree in law. How does that help in anything other than running the law ministry or the ministry of corporate affairs or other similar ministries? And that is assuming that having studied law, the politician understands its intricacies (not every lawyer has the same command on the subject like Arun Jaitley does).
If we take this argument further, what it means is that to become a minister an individual should be an expert in that particular area. So, a finance minister should either be an economist or a finance professional. Arun Jaitley is neither. A defence minister should have experience in the area of defence. So, doesn’t that make General V K Singh an excellent choice for being the defence minister?
Further, in order to get an individual with the right experience or a degree to head a ministry, one would be looking at technocrats all the time. So, then why bother about electing MPs at all?
This would mean moving onto a more American form of government where the President is elected by the people and is allowed to choose his team, a lot of whom are technocrats who have the required experience.
Given this, insisting that a minister have a degree, doesn’t make much sense in the present system of government that we have.
That’s the general part of the argument. Then there is also the specific part regarding Smriti Irani and Congress’ criticism of her lack of a degree. To her credit Irani is a successful professional, who has risen on her own, in a very competitive television industry.
Also, what one needs as a minister is the ability to administer. Whether she has that or not, we will come to know in the time to come.
The Congress party is in no position to criticize her. One of their foremost leaders Rajiv Gandhi, never completed any degree after leaving the Doon School. He was the prime minister of the country. His mother Indira, never completed her degree at Oxford. Their current leader Sonia Gandhi’s educational qualifications are also nothing to write home about. So, they really are not in a position to criticise Irani. It’s like the pot calling the kettle black.
To make a totally different comparison, all the Ivy League MBAs, PhDs in Maths and Physics who worked on the Wall Street, created a major part of the financial crises that the world is currently going through.
To conclude, there is not much of a link between having a degree and having the ability to govern. Look at the mess Kapil Sibal, who held the human resources development ministry between May 2009 and October 2012, made in the education sector. He had got his LLM degree from the Harvard Law School.

 The article originally appeared on www.firstpost.com on May 28, 2014

(Vivek Kaul is a writer. He tweets @kaul_vivek) 

The wilful blindness of Manmohan Singh

Manmohan-Singh_0Vivek Kaul

The stock market crash of October 1929 started the Great Depression in the United States, from where it spread to large parts of the world. Some of the best books on the Great Depression, which are still being read, started to appear only 25 years later.
My favourite book the Great Depression is
The Great Crash 1929, written by John Kenneth Galbraith. The book was first published in 1954, twenty five years after the Depression started. Milton Friedman and Anna Schwartz’s A Monetary History of the United States, 1867-1960, which dealt with the Great Depression in considerable detail, came out only in 1963. This book set the agenda for how central banks around the world reacted to recessions.
In fact, books on the Great Depression are still being written. A recent favourite of mine is
Lords of Finance—1929, The Great Depression, and The Bankers Who Broke the World, written by Liaquat Ahamed, which was published in 2009. It won many awards including the Pulitzer Prize for history. What is true about the Great Depression is also true about Mahatma Gandhi. Some of the best biographies on the Mahatma, like Gandhi Before India, have appeared in recent times.
Dear reader, before you start wondering why am I talking about the Great Depression and Gandhi, in a column which is supposedly on Manmohan Singh, allow me to explain. The point I am trying to make here is that the best history is usually written many years after something has happened. The gap is probably necessary to allow historians to iron out the noise. Also, over the years new sources of information appear, which were not available in the first place. For one, documents get declassified. At the same time, letters that the men and women being profiled wrote, appear in the public domain and so on.
Hence, the defining history on Manmohan Singh’s years as the Prime Minister of India will most probably be written a few decades from now. Having said that, it is easy to predict that historians won’t project Singh in a good light.
The story that one usually hears about Singh is that he was an honest man heading a dishonest and a corrupt government. While his ministers may have made money being corrupt, he never did. This is a very simplistic explanation of the entire scenario.
A major reason why Manmohan Singh survived as the Prime Minister of India for a full decade was because he was ‘wilfuly blind’ to a lot of nefarious activities happening around him. Wilful Blindess is a legal concept that was first applied in the British courts in 1861.
As Margaret Heffernan writes in 
Wilful Blindness- Why we ignore the obvious at our peril“A judge in Regina v. Sleep ruled that an accused could not be convicted for possession of government property unless the jury found that he either knew the goods came from government stores or had ‘wilfully shut his eyes to the fact’…Over time, a lot of other phrases came into play – deliberate or wilful ignorance, conscious avoidance and deliberate indifference. What they have all in common is the idea that there is an opportunity for knowledge and a responsibility to be informed, but it is shirked.”
Manmohan Singh’s decade long tenure as the Prime Minister needs to be viewed through the lens of wilful blindness. He was wilfully blind to A Raja running the telecom industry for his own benefit. Singh was also wilfully blind to the coalgate scam where coal mines were given away free to both public sector and private sector companies. In fact, he was the coal minister when a large number of mines were given away free.
In fact, as Heffernan writes “the law does not care why you remain ignorant, only that you do.” Also, on some occasions the wilful blindness comes from that “we focus so intently on the order that we are blind to everything else.” Singh was so focussed on following the orders of Sonia Gandhi, who was the actual head of the government, that he chose to remain ‘wilfully blind’ to all that was happening around him.
Interestingly, when Enron went bust in the early 2000s, Jeffrey Skilling and Kenneth Lay, the CEO and Chairman of Enron, pleaded that they just did not know what was going on in the company and hence, could not be held responsible for it.
Judge Lake who was hearing the case invoked the concept of wilful blindness. As he instructed the jury: “You may find that a defendant had knowledge of a fact if you find that the defendant deliberately closed his eyes to what would otherwise have been obvious to him. Knowledge can be inferred if the defendant deliberately blinded himself to the existence of a fact.”
The phrase to be marked in the above statement is “closed his eyes”. The only way Singh could not have known about what was happening around him was if he had closed his eyes to it.
“Magicians never reveal their secrets,” writes Scottish writer Ian Rankin in his latest crime thriller
Saints of the Shadow Bible. Singh was no magician. If he wants history to treat him a little better than it actually might end up doing, it is best that he spends his years in retirement writing his memoirs of the ten years he spent as India’s Prime Minister, like Winston Churchill did.
Churchill in the years after the Second World War wrote his version of history of the Second World War and even won the Nobel Prize in Literature in 1953. Singh needs to do the same. That way history might also consider his point of view.

The article originally appeared in the June 2014 issue of Mutual Fund Insight

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

How UPA turned NDA’s economic growth into shambles

upaVivek Kaul 

In both love and war, it makes sense to hit where it hurts the most.
The war for the next Lok Sabha elections is currently on. And there is no love lost between the two main parties, the Congress and the Bhartiya Janata Party (BJP).
The BJP today hit out at the economic performance of the Congress led United Progressive Alliance government, over the last ten years.
Politically, this makes immense sense given the bad state the economy is in currently. Economic growth as measured by the growth in gross domestic product (GDP) is down to less than 5%. The GDP grew by 4.7% between October and December 2013.
The rate of inflation as measured by the consumer price index had been greater than 10% for a while and has only recently come below 10%. The consumer price inflation for February 2014 came in at 8.1%.
Industrial activity as measured by the index of industrial production (IIP) was flat in January 2014, after falling for a while. The overall index grew by just 0.1% during January 2014. Manufacturing which forms a little over 75% of the index fell by 0.7% during January 2014, in comparison to January 2013. This primarily is on account of the slowdown in consumer demand.
People have been going slow on spending money because of high inflation. This has led to a scenario where they have had to spend more money on meeting daily expenditure. Retail inflation in general and food inflation in particular has been greater than 10% over the last few years, and has only recently started to come down. Given this, people have been postponing all other expenditure and that has had an impact on economic growth. Anyone, with a basic understanding of economics knows that one man’s spending is another man’s income, at the end of the day. When consumers are going slow on purchasing goods, it makes no sense for businesses to manufacture them. When we look at the IIP from the use based point of view it tells us that consumer durables (fridges, ACs, televisions,computers, cars etc) are down by 8.3% in comparison to January 2013. The overall consumer goods sector is down by 0.6%.
This slowdown in consumer demand was also reflected in the gross domestic product(GDP) numbers from the expenditure point of view. Between October and December 2013, the personal final consumption expenditure(PFCE) rose by just 2.6% to Rs 9,81,463 crore in comparison to September to December 2012. In comparison, during the period October to December 2012, the PFCE had grown by 5.1%.
The lack of demand along with a host of other reasons also means that the investment climate for businesses is not really great. This is reflected in the lack of capital goods growth, which was down by 4.2% during January 2014. If one goes beyond this theoretical constructs and looks at real numbers like car sales, they also tell us that the Indian economy is not in a good shape as of now. Smriti Irani,
a television actress turned BJP politician summarized the situation very well, when she said “Today, as the Congress-led UPA leaves office, it leaves behind a legacy of an economy which has been mismanaged.” Yashwant Sinha, former finance minister and senior BJP leader, went a step ahead and said that “an investment crisis” and “a crisis of confidence in the economy”. The Congress party is likely to react to this attack by the BJP by following the conventional line that it has always followed. The party is most likely to say that India has done much better under the UPA than the BJP led National Democratic Alliance (NDA).
Prima facie, there is nothing wrong with the argument. Between 1998-99 and 2003-04, when NDA was in power, the average GDP growth rate was at 6% per year. Between 2004-05 and 2012-2013, when the UPA has been in power the average rate of growth has been at 7.9% per year. If one takes into account, the GDP growth rate for this financial year i.e. 2013-2014, this rate of growth will be lower than 7.9%,
but still higher than the 6% per year achieved during NDA rule.
But it is worth remembering here that the economy is not like a James Bond movie, where the storyline of one movie has very little connection with the storyline of the next. An economy is continuous in that sense.
The rate of economic growth in 2003, a few months before the UPA came to power, was at 7.9%. The rate of inflation was at 3.8%. In fact, the rate of inflation during the entire NDA term averaged at 4.8%, whereas during the first nine years of UPA regime between 2004-2005 and 2012-2013, it has averaged at 6.7%.
If we take the rate of inflation during this financial year into account the number is bound to be higher. The index of industrial product, a measure of the industrial activity in the country,
was growing at 8% in early 2004. Currently it is more or less flat.
The fiscal deficit for the year 2003-2004
came in at 4.5% of the GDP. The fiscal deficit for the year 2012-2013 was at 4.9% of the GDP. The fiscal deficit for the year 2013-2014 has been projected to be at 4.6% of the GDP. Fiscal deficit is the difference between what a government earns and what it spends.
As I have explained in the past, this number has been achieved through accounting shenanigans and does not reflect the real state of government accounts. The expenditure and thus the fiscal deficit of the government
is understated to the extent of Rs 2,00,000 crore. This is not to say that there wouldn’t have been any accounting shenanigans under the NDA rule, but they would have been nowhere near the present level.
The broader point here is that the NDA had left the economy in a reasonable good shape on which the UPA could build. And the first few years of growth under the UPA rule came because of this. In simple English, unlike James Bond movies, growth under the UPA cannot be separated totally from the growth under the NDA. The growth under UPA fed on the earlier growth under the NDA.
That’s one point. The second point that needs to be brought out here is that the massive economic growth during 2009 and 2010,
when India grew by 8.5% and 10.5% respectively, was primarily on account of the government expanding its expenditure rapidly.
The government expenditure during 2007-2008 had stood at Rs 7,12,671 crore. This has since rapidly grown by 123% and stood at Rs 15,90,434 crore for 2013-2014. While this rapid rise in government expenditure ensured that India grew at a very rapid rate when the world at large wasn’t, it has since led to substantial economic problems. During the period Atal Bihari Vajpayee was the Prime Minister of India, the government expenditure grew by 68% and stood at Rs 4,71,368 crore during 2003-2004.
This rapid rise in government expenditure in the last few years has led to loads of problems like high interest rates and inflation, as an increase in government spending has led to an increase in demand without matched by an increase in production.

As Ruchir Sharma put it in a December 2013 piece in the Financial Times
“With consumer prices rising at an average annual pace of 10 per cent during the past five years, India has never had inflation so high for so long nor at such an unlikely time…Historically, its inflation was lower than the emerging-market average, but it is now double the average. For decades India’s ranking among emerging markets by inflation rate had hovered in the mid-60s, but lately it has plunged to 142nd out of 153.”
In fact, if one looks at the incremental capital output ratio, it throws up a scary picture.
Swanand Kelkar and Amay Hattangadi in a December 2013 article in the Mint wrote “the Incremental Capital Output Ratio (ICOR)…measures the incremental amount of capital required to generate output or GDP. From FY2004 till FY2011, India’s ICOR hovered around the 4 mark, i.e. it required four units of investment to generate one unit of output. Over the last two years, this number has increased with the latest reading at 6.6 for FY2013.” Currently, the number stands at 7.
This, in turn, has led to a massive fall in investment. As Chetan Ahya and Upasna Chachra or Morgan Stanley write in a recent research report titled
Five Key Reforms to Fix India’s Growth Problem and dated March 24, 2014, “Public and private investment fell from the peak of 26.2% of GDP in F2008 to 17.3% in F2013. Indeed, private investment CAGR[compounded annual growth rate] was just 1.4% between F2008 to F2013 vs. 43% in the preceding five years.”
What all this clearly tells us is that the economic growth during the UPA rule fed on the economic growth during the NDA rule. The UPA has left the economy in shambles, and the government that takes over, will have a tough time turning it around.
The article appeared originally on www.firstpost.com on March 30, 2014
(Vivek Kaul is a writer. He tweets @kaul_vivek)