The Asian Age

The costly ticket to achche din

narendra_modi
A few days back a friend complained on Facebook that since the Narendra Modi government had come to power, power cuts in his city had gone up dramatically, and he had not been able to sleep at all during the night. “So where are the acche din that had been promised?” he asked. To this someone cheekily replied that the promise was of acche din and not acchi raatein.
Narendra Modi and the Bhartiya Janata Party fought the Lok Sabha election on the plank of “acche din aane waale hain”. The slogan offered “hope” to the people of this country, in an environment where economic growth had been falling and inflation had been rising. It was for the first time that a political party was not treating the voter as a “victim”. The slogan struck a real chord with the Indian voter.
The success of the slogan has now led to a scenario where every tough economic decision that the Modi government makes is and will be viewed through the lens of the “acche din aane waale hain” slogan. Take the recent case of the decision to increase the railway passenger fares by 14.2 per cent and freight fares by 6.5 per cent.
The hike in railway passenger fares has been the steepest in 15 years and has been long overdue. Between 1999 and 2014, the passenger fares were increased only thrice, of which one hike was reversed. This has left very little money with the railways for any sort of modernisation and the upkeep of railway tracks. It has also led to a scenario were traveling has become increasingly unsafe, as can be made out from the spate of railway accidents over the last few years.
The trouble is that for too long Indian Railways has been used as a political tool and not a service which is economically viable on its own. One way to correct this is to index fares to the prevailing rate of inflation and increase prices on a regular basis, every year. So, if the inflation is 8 per cent during the course of the year, then fares can go up by 8 per cent at the beginning of the financial year, on April 1. If this practice were to be followed, the chances of railways being economically viable and safer are likely to go up. Also, it would rule out the chances of one-off increases in fares, which upset the monthly budget of people who use the railways to travel regularly.
In the short-term, this increase in fares is expected to add to inflation. There are other decisions that the government will have to make over the next few months which will add to inflation. Take the case of oil. The price of the Indian basket of crude oil stood at $111.94 per barrel on June 19, 2014. It averaged at $106.72 per barrel between May 29 and June 11, 2014.
The price of oil has gone up by close to 5 per cent in such a short period of time primarily because of a threat of war in Iraq. India imports 80 per cent of the oil it consumes. The government will have to pass on this increase in the price of oil to the end consumer. If it does not do that it will have to compensate the oil marketing companies for the “extra” under-recoveries they are likely to face on the sale of diesel, cooking gas and kerosene. This would lead to an increase in government expenditure and, hence, the fiscal deficit. Fiscal deficit is the difference between what a government earns and what it spends.
The government is already very stretched on the fiscal deficit front with the last government leaving unpaid bills of more than Rs 1,00,000 crore. Hence, it will have to pass on the increase in the international price of oil to the end consumers. This will mean higher inflation and another jolt to the promise of acche din.
What makes the situation even more difficult is the fact that the monsoon is expected to be much lower than average this year. In fact, data from the India Meteorological Department shows that rainfall upto June 18 has been 45 per cent lower than normal. This number may improve in the days to come, given that it is still early days for the monsoon. It needs to be pointed out that a bad monsoon does not necessarily lead to a lower production of food. In 2009, even with a 22 per cent deficient rainfall, the agriculture production did not go down. The real problem is once the psychology of drought sets in, the prices of food products start to go up, even though their production may not be impacted.
One thing that the government can do to prevent inflation is to procure a lower amount of rice and wheat from farmers this year. As on June 1, 2014, the Food Corporation of India (FCI) had food grain stocks of 74.8 million tonnes, when it does not require more than 41-47 million tonnes. By buying less from the farmers, the government can ensure that more rice and wheat lands up in the open market, and helps prevent a price rise. The government also needs to ensure that it does not raise the minimum support price of rice and wheat at the rate that the Congress-led UPA government had done in the past. These moves are unlikely to go down well with the farmers, who have also been promised acche din.
It is important that Mr Modi borrows a leaf from Franklin Roosevelt, the President of the United States between 1933 and 1945. This was a difficult time for the US — the Great Depression was on. Between 1933 and 1944, Roosevelt made 30 fireside chats through the radio, explaining to Americans the tough decisions he was taking to get the economy back on track. Mr Modi and his government need to keep talking to the people and explain why they need to take some tough decisions over the next few months.

The article originally appeared in The Asian Age/Deccan Chronicle on June 23, 2014
Vivek Kaul is the author  of the Easy Money trilogy. He can be reached at [email protected]

Government of India must stop hoarding food

 rot-in-the-fci-godowns

Vivek Kaul

Food inflation has been an issue of huge concern over the last few years. In a recent report titled What a waste! Crisil Research points out that “food inflation has averaged 8.1% in the last decade, and over 10% in recent times.”
This when agricultural growth has been robust and our granaries continue to overflow. Agricultural growth over the last decade stood at 3.6% per year, in comparison to 2.9% per year, in the decade before that. Hence, the conventional argument that food inflation is a result of not enough supply in comparison to demand, doesn’t totally hold.
The Food Corporation of India (FCI) puts out a number indicating its food grains stock every month. As on June 1, 2014, the food grain stock, which includes rice, wheat, unmilled paddy and coarse grains, stood at 74.8 million tonnes. At the beginning of June 2008, the stock had stood at 36.4 million tonnes.
This indicates that the government through FCI has bought and hoarded more and more of rice and wheat produced in the country. In a May 2013 research report titled Buffer Stocking Policy in Wake of NFSB (National Food Security Bill) written by Ashok Gulati and Surbhi Jain of the Commission for Agricultural Costs and Prices(CACP) it was estimated that anywhere between 41-47 million tonnes, would be a comfortable level of buffer stocks.
This would be enough to take care of the subsidised grain that needs to be distributed to implement the food security scheme. At the same time it would also take care of the strategic reserves that the government needs to maintain, to be ready for a drought or any other exigency.
The current level of food grains with the FCI is significantly more than 41-47 million tonnes. One impact of this is that the government spends money in buying the “extra grain” which it does not require. This adds to the government expenditure and in turn the fiscal deficit. The fiscal deficit is the difference between what a government earns and what it spends. The CACP authors had estimated that an excess stock of 30-40 million tonnes would cost the government anywhere between Rs 70,000 to Rs 92,000 crore.
The main reason for this “extra procurement” is the fact that the Congress led UPA government kept increasing minimum support price(MSP) of food grains over the years, at a fast pace. 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. In comparison, between 1998-1999 and 2005-2006, the MSP of rice had increased at the rate of 3.8% per year.
In case of wheat the MSP has gone up by 14% per year between 2005-2006 and 2013-2014. In comparison, between 1999-2000 and 2005-2006, the price had gone up by 4% per year.
In fact, the decision to increase the MSP was totally random. A report released by the Comptroller and Auditor General in May 2013 pointed out that “No specific norm was followed for fixing of the Minimum Support Price (MSP) over the cost of production. Resultantly, it was observed the margin of MSP fixed over the cost of production varied between 29 per cent and 66 per cent in case of wheat, and 14 per cent and 50 per cent in case of paddy during the period 2006-2007 to 2011-2012.”
Other than the government expenditure shooting up, the rapid increase in MSP has led to more and more food grains landing up with the government. The FCI does not have enough storage capacity for this grain. This is one reason why newspapers frequently carry pictures of food grains rotting, lying in the open. “Between 2005 and 2013, close to 1.94 lakh tonnes of food grain were wasted in India, as per FCI’s own admission in the Parliament,” the Crisil report points out. Rice formed 84% of the total damage.
Further, the excess procurement has also led to high inflation, as a lower amount of rice and wheat have landed up in the open market. The CAG report points out that in 2006-2007, 63.3 million tonnes of rice landed in the open market. By 2011-2012, this had fallen by a huge 23.6% to 48.3 million tonnes. The same is true about about wheat as well, though the drop is not as pronounced as it is in the case of rice. In 2006-2007, the total amount of wheat in the open market stood at 62.1 million tonnes. By 2011-2012, this had dropped to 61.4 million tonnes.
Also, with MSPs going up every year at a rapid rate, “the cropping pattern” the Crisil report points out “has been biased towards food grains like rice and wheat, and have led to excessive production”.
Given this, one way of bringing down food inflation is the government releasing stocks of rice and wheat into the open market. One problem here can be that the procurement is concentrated in a few states. In case of wheat these states are Punjab, Haryana and Madhya Pradesh. And in case of rice, these states are Andhra Pradesh, Chattisgarh and Punjab. Hence, stocks will have to be moved from these parts of the country to other parts. More than that the government needs to stop procuring more than what it needs to run its various programmes. This will be beneficial from the fiscal deficit front as well as help moderate inflation.
This becomes even more important given that the India Meteorological Department expects the monsoon to be below normal at 93 per cent of the long period average. In this scenario, the production of grains is expected to take a hit. If the government continues with excess procurement, less grains will land up in the open market and push prices further up.
Also, when it comes to production of food products like milk, milk products, egg, fish and meat, supply has been lagging demand. The production has risen only at the rate of 3-4% between 2009-2010 and 2012-2013, whereas the price has risen at the rate of 14-15%, the Crisil report points out. This needs to be addressed.
When it comes to fruits and vegetables, the Agricultural Product and Market Committee(APMC) Act was passed to help farmers. Instead, it has made them vulnerable to traders backed by political parties. The huge increase in price of onion last year, despite a small fall in production is an excellent example of the same. The trader cartels need to be broken down.
These steps need to be taken if food inflation has to be controlled in the time to come.

 The article originally appeared in The Asian Age/Deccan Chronicle on June 17, 2014

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

Modi's first fiscal challenge

narendra_modi

 

Vivek Kaul

N Chandrababu Naidu, the chief minister of new Andhra Pradesh (what remains of the state after the creation of Telangana), wants to waive off bank loans to farmers and women’s self-help groups amounting to a whopping Rs 54,000 crore. Naidu promised this freebie during the course of the election campaign and now wants to fulfil it.
The trouble of course is that the banks which made these loans will have to be adequately compensated. And for that the newly elected state government will need money, which it does not have. It is estimated that the revenue deficit of Andhra Pradesh will amount to Rs 13,579 crore during the course of this financial year(April 1, 2014 to March 31, 2015). Revenue deficit is the difference between the revenue expenditure and the revenue income of a government.
Hence, the question is where will the government get this money from? Naidu is hoping that the Narendra Modi led government at the centre (BJP fought elections along with Naidu’s Telgu Desam Party both at the state and the national level) will help him fulfil his electoral promises.
But the central government is already stretched on the finance front. In the interim budget presented in February 2014, the fiscal deficit for this financial year was projected to be at Rs 5,28,631 crore or 4.1% of GDP. Even this projection was primarily achieved by cutting down on the asset creating planned expenditure and by not recognising’certain’expenses which in total amounted to more than Rs 1,00,000 crore. Hence, the actual fiscal deficit would have been significantly higher. Fiscal deficit is the difference between what a government spends and what it earns.
If the central government chooses to assist the new Andhra Pradesh government with the entire Rs 54,000 crore that is needed, then it will end up adding to its already high fiscal deficit. In fact, the amount that the new Andhra Pradesh government needs to waive off loans is more or less equal to the assistance that the old Andhra Pradesh received from the central government over the last 10 years(between 2004-2005 and 2013-2014). This assistance amounted to a total of Rs 54,613.4 crore. This comparison clearly tells us the astonishing amount of money that is needed to write off these loans.
One reason that the Modi government might choose to entertain Naidu is the fact that it does not have enough numbers in the Rajya Sabha. But if it entertains Naidu, then it will also have to entertain the likes of Naveen Patnaik and J Jayalalitha, who have been demanding special packages for their states, in return for their support in the Rajya Sabha. And where is all that money going to come from?
Also, it will go against the Modi’s entire electoral pitch of the government creating an enabling environment that allows people to progress, instead of giving out doles to them. It is worth remembering here that the new Andhra Pradesh has around 5% of India’s population. Given that, the question is that whether the central government should be spending such a huge amount of money in a single year on one single state? And the answer is no.
The other option for the new Andhra Pradesh government is to borrow this money by issuing bonds. The trouble is that a state cannot borrow an unlimited amount of money. The borrowing limit for old Andhra Pradesh had been set at Rs 29,000 crore, at the beginning of this financial year. Hence, the borrowing limit for the new Andhra Pradesh will clearly be less than that. Also, as pointed out earlier the state is already expected to run a revenue deficit of Rs 13,579 crore during this financial year.
The moral of the story is that the math for waiving off loans made to farmers and self help groups, does not really work out. News reports suggest that the bankers have requested the ministry of finance to try and convince the new Andhra Pradesh government, not to go ahead with this plan. Other than the math not working out, there are other reasons why the new Andhra Pradesh government shouldn’t be going ahead trying to waive off loans.
First and foremost, it is not fair on the people who have honestly repaid their loans in the past. Also, it will reward those who have defaulted on their loans.
Second, it brings the issue of moral hazard to the core. Economist Alan Blinder in his book After the Music Stopped writes 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.”
What it means in this context is that after the loans are waived off this time around, people of the state of new Andhra Pradesh, will think twice before repaying their loans, in the days to come. If the government can waive off loans once, why can’t it do it all over again, is a question that the people of Andhra Pradesh will be asking themselves?
Third, in the next election the Telgu Desam and the other parties, will compete to promise even bigger freebies.
Fourth, loans being waived off benefits those people who are in a position to take a bank loan, in the first place. Typically, farmers with large landholdings tend to fall in this category. The small farmer is not in a position to fulfil the requirements that need to fulfilled in order to take a bank loan. Hence, the question is do the large farmers really need to be subsidised?
Fifth, the government of Andhra Pradesh needs to build a new capital over the next years. It will need a lot of money in order to do that. Hence, it makes sense for it to be fiscally responsible during its initial years.
All these reasons suggest that Chandrababu Naidu should reconsider his decision of waiving loans to farmers and self help groups of the New Andhra Pradesh.

The article originally appeared in The Asian Age/Deccan Chronicle dated June 11, 2014.
(Vivek Kaul is the author of the Easy Money trilogy. He can be reached at [email protected]) 

Please cut our losses

narendra_modiVivek Kaul  

The investment industry suddenly got into an overdrive in the aftermath of the Narendra Modi-led Bhartiya Janata Party (BJP) winning a majority in the 16th Lok Sabha on its own. Both Indian and foreign stock brokerages immediately upped their Sensex/Nifty targets and categorically stated that the Indian stock market is ready for its next big bull run. Of the many targets bandied around, the most optimistic target was that of Sensex touching 35,000 points by the end of December 2015. It currently quotes at around 24,200 points.
Now, every bull run has a theory behind it. What is the theory behind this bull run? The investing community is of the opinion that the new Modi government will take measures to set the Indian economy back on track. But that is nothing more than hope and hope alone can’t  go a long way.
In the noise of the elections what everybody seems to have forgotten is that the Indian economy is still in a bad shape. The gross domestic product (GDP) numbers that were released on May 30 showed that economic growth, as measured by the growth in GDP for the year ending March 31, 2014, stood at 4.7 per cent. It was the second straight year of less than 5 per cent economic growth. Rather worryingly, the manufacturing sector contracted by 0.7 per cent during the course of the year.
Setting this right will be a major long-term challenge for the Modi government. Economic history clearly shows that countries which have moved from being developing to developed at a fast rate have done so by creating jobs in the manufacturing sector. That hasn’t happened in India as yet.
When it comes to short term challenges, the fiscal deficit remains one of the bigger challenges. Fiscal deficit is the difference between what a government earns and what it spends. The fiscal deficit during the rule of the Congress-led UPA government burgeoned big time. In the interim budget presented in February, the then finance minister, P. Chidambaram, claimed to have brought it down to Rs 5,24,539 crore or 4.6 per cent of the GDP. Numbers later released by the Controller General of Accounts suggest that the fiscal deficit for the year ending March 31, 2014, came in a little lower at Rs 5,08,149 crore.
But this was primarily achieved by cutting down on the asset creating planned expenditure and by not recognising’certain’expenses which in total amounted to more than Rs 1,00,000 crore (their recognition was postponed to this financial year, i.e. the year starting April 1, 2014). This primarily includes oil, food and fertiliser subsidies. This anomaly needs to be set right. More than anything, the Government of India should not be indulging in what is a clear accounting fraud. One of the basic tenets of accounting is to recognise expenditure during the period it is incurred. In the short run, if this leads to the actual expenditure of the government shooting up, then so be it.
The government can, instead, look at encashing some low-hanging fruit. SUUTI (Specified Undertaking of the Unit Trust of India) holds shares of bluechip companies like ITC and L&T which are worth around Rs 42,400 crore currently. SUUTI was formed in the aftermath of the Unit Trust of India going bust in early 2000s. These shares can be sold to help shore up the government revenues.
Over and above this, the BSE PSU Index has gone up by 36 per cent since the beginning of this year. What this means is that the government can use this opportunity to sell shares it owns in a host of public sector units (PSUs). Take the case of Coal India Ltd. There is no reason that the government has to own 89.65 per cent of the company. Even at a significantly lower stake, it can retain the management control of the company.
Along similar lines, the government needs to bring down its stakes in public sector banks (PSBs). Currently, India has 27 PSBs. Why does the government need to run 27 banks? There is clearly no logic to it. A lot of money can be raised by selling shares of PSBs. Money can also be raised by quickly selling telecom spectrum. The last auction which happened in February 2014 fetched the government close to Rs 61,000 crore. There are a whole host of loss making PSUs which are sitting on a lot of land in premier locations. This land needs to be monetised.
It needs to be pointed out that trying to meet regular expenditure by selling assets is not the best idea going around. It is like you and me trying to meet our regular expenditure by selling things that we own. It may be necessary sometimes in the short run. What can also be done is that some of the money coming in through the sale of assets can be used to set up an infrastructure fund. The allocation to this fund can be increased over the years, and this money can be used to boost the physical infrastructure across the country.
Other than trying to raise revenues, the government should also try and limit its losses. Air India, which has constantly been losing money, either needs to be shut down or just sold off (assuming we can find a buyer for it).
Many analysts and experts want the government to cut down on expenditure allocated towards programmes like NREGA and the Food Security Scheme. This may really not be possible given that the BJP had voted to legislate them.
But what the government can easily do is to get the Food Corporation of India (FCI) to go slow on its purchases of rice and wheat. Currently, FCI has double the stocks than what it actually needs. Going slow on purchases can really help control the government expenditure. It will also help to control food inflation, given that more rice and wheat will land up in the open market.
To conclude, the economic scenario remains a huge challenge for the new Modi government, but to get going it can cash in on the low-hanging fruit.
This article originally appeared in The Asian Age/Deccan Chronicle dated June 4, 2014

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

The Aadhar joke is on us

adhar

 Vivek Kaul  
In a speech that Rahul Gandhi, the Vice President of the Congress party, made on January 17, 2014, he requested the Prime Minister Manmohan Singh to provide 12 cooking gas cylinders a year at the subsided rate, instead of nine.
Since the request came from the Gandhi family scion, the normally slow Congress led United Progressive Alliance (UPA) government acted quickly for a change, and before the end of January 2014, the cap had been raised. From April 1, 2014, consumers will get one subsidised gas cylinder a month. This increase in cap is expected to increase the subsidy burden of the government by Rs 5,000 crore.
Along with increasing the cap, the government has also suspended the Aadhar card-linked Direct Benefit Transfer for LPG (DBTL) scheme. This scheme had been implemented in 289 districts in 18 states. In January 2014, it had been extended to a further 105 districts including Delhi and Mumbai. Under this scheme, the consumers bought the cooking gas cylinder at its actual market price. The subsidy amount was then transferred directly into their Aadhar card linked bank accounts.
So, a resident of Delhi, where the scheme was recently launched, while buying a gas cylinder would have had to pay Rs 1,258 for a 14.2 kg cylinder. The cost of the subsidised cylinder is Rs 414 in Delhi. Hence, the difference of Rs 844 would be paid directly into the Aadhar linked bank account of the consumer.
The trouble is that many people still do not have Aadhar accounts. And those who have it have not been able to link it to their bank accounts. Hence, the government has set up to review the DBTL scheme. In an election year, the worst thing that can happen to a government is that its subsidies do not reaching the citizens. By forming a committee to review the DBTL that discrepancy has been set right.
Anyone who has implemented even a very basic project would tell you that it is very important to do a SWOT(strengths, weaknesses opportunities, threats) analysis of the project. A basic SWOT analysis would have shown that the first problem in the DBTL scheme would be people not having Aadhar cards and those who had it, would not have had it linked to their bank accounts.
But the government and Nandan Nilekani, the chief of Unique Identification Authority of India (UIDAI), have been in a hurry to showcase Aadhar. UIADAI is in charge of implementing Aadhar. In fact, a recent report on the website of the Moneylife magazine pointed out that Nilekani is a member of almost every committee that has been making Aadhar mandatory “for citizens to access several services and benefits” from the government. Guess, he is not bothered about the conflict of interest his being on these committees creates, even after having held one of the top jobs at Infosys, one of India’s most ethical companies. In the recent past, the political ambitions of Nilekani have come to the fore. Does that explain his hurry to get Aadhar up and running and everywhere?
What is interesting is that the oil marketing companies (OMCs) (i.e. IOC, BP and HP) continued to insist on Aadhar linked bank accounts for subsidy payments in case of cooking gas, even after the Supreme Court ruled that Aadhar should not be made mandatory for availing any services. The September 2013 order had unequivocally said that “no person should suffer for not getting the Aadhaar card in spite of the fact that some authority had issued a circular making it mandatory.”
Even before the Supreme Court had ruled, Rajiv Shukla, minister of state for parliamentary affairs and planning, had said on May 8, 2013, that the “Aadhaar card is not mandatory to avail subsidized facilities being offered by the Government like LPG cylinders.”
The irony is that the form Aadhar enrolment form clearly states that “Aadhar enrolment is free and voluntary”.
If enrolment into Aadhar is free and voluntary, how could the OMCs have insisted on Aadhar linked bank accounts for payment of cooking gas subsidies? And why did the Supreme Court have to rule that Aadar should not be made mandatory for availing any services? The situation should not have reached that stage. In the world of Nandan Nilekani and the government of India, free and voluntary, clearly means something that you and I do not understand.
Interestingly, Montek Singh Ahluwalia, the Deputy Chairman of the Planning Commission, did some straight talking on Aadhar (UIDAI was created by a notification of the Planning Commission in January 2009), at Davos in January 2011. “We will simply make it compulsory for those benefiting from government programmes to register for the UID number,” Ahluwalia remarked. And that is what seems to be happening. In Maharashtra, the government employees have been ordered to get Aadhar cards so that their salaries can be paid into Aadhar linked bank accounts. In Delhi, Aadhar is compulsory for marriage registrations.
Nilekani has tried to explain this by saying “Yes, [Aadhaar] is voluntary. But the service providers might make it mandatory. In the long run I wouldn’t call it compulsory. I’d rather say it will become ubiquitous.” As stated earlier Nilekani is a member of almost every committee that has been making Aadhar mandatory. In fact, as he put it in November 2012 “If you do not have the Aadhaar card, you will not get the right to rights.” When it comes to Aadhar, Nilekani and his masters have offered the nation a Hobson’s choice.
For more than four years now, the Nilekani led UIADAI has been collecting biometric information (photographs of the face, iris scans and fingerprints of all the 10 fingers) of the citizens of this country, without any statutory backing. The Aadhar card has been fostered upon the nation without any statutory backing. The Union Cabinet has approved the National Identification Authority of India Bill that will give statutory status to the UIDAI. But this bill hasn’t been introduced in the Parliament.
The joke, as always, is on us.

The article originally appeared in The Asian Age dated February 4, 2014.
(Vivek Kaul is the author of Easy Money. He can be reached at [email protected])