Amit Shah

Gujarat Elections: In 2018 and 2019, with More Socialism, Modi Will Become More Like Manmohan

narendra_modi

As expected the Bhartiya Janata Party (BJP), won the state assembly elections in Gujarat. The margin of victory though left much to be desired.

Before the elections, the party president Amit Shah had talked about the party winning 150 out of the 182 seats in the state assembly. The party finally ended up with 99. So, there was a clear gap between expectation and reality. I say this because Amit Shah is a brilliant electoral strategist and his words should never be taken lightly.

Finally, it is the massive support that the BJP enjoys in the cities of Gujarat that pushed it through. In the four biggest cities of Gujarat, Ahmedabad, Surat, Vadodara and Rajkot, the party won 46 out of the 55 seats (Ahmedabad 16 out of 21 seats, Surat 15 out of 16 seats, Vadodara nine out of 10 seats and Rajkot six out of eight seats).

What this clearly tells us is that the Goods and Services Tax (GST) wasn’t as big an issue in the cities of Gujarat, as was made out to be in the days leading up to the elections, in the media. It clearly impacted a section of the population, but that wasn’t large enough to make an electoral difference. The only other explanation for this lies in the fact that even those impacted negatively by the GST, couldn’t get themselves to vote for the Congress.

The other interesting point here was that more than 5.5 lakh voters chose the NOTA (none of the above) option while voting. This amounted to 1.8 per cent of the total eligible votes. The NOTA votes were more than or close to the winning margins in nearly 24 constituencies. One explanation for this that has been offered is that a small section of the population which is unhappy with the BJP didn’t want to vote for Congress either.

Manmohan-Singh_0

The trouble with this explanation is that there is no way to verify it. It could even be the opposite.

Anyway, getting back to the point I was trying to make—the BJP won 46 out of the 55 seats in the four biggest cities of Gujarat. How did the electoral results look in the remaining 127 seats? The BJP won 53 of these seats. The Congress won 71. Hence, the Congress clearly did much better than the BJP beyond the four biggest cities.

There will be economic and political implications of these electoral results in other states like Rajasthan and Madhya Pradesh, where the elections are scheduled in the months to come. Some points are as follows:

a) The basic problems in India’s rural economy are not going to go away any time soon. The size of the average agricultural holdings in India has fallen as land has been divided across generations, making agriculture as a profession very non-remunerative.
Over and above this, India has too many people in agriculture than is economically feasible. A recent discussion paper by Niti Aayog points out that as of 2011-2012, agriculture employed 64 per cent of the rural workforce but produced only 39 per cent of the total rural economic output. Hence, for agriculture to be economically feasible 8.4 crore agricultural workers need to be shifted out of agriculture. This is around 70 per cent of the non-farm workforce in the rural areas. This isn’t going to happen overnight.

b) Of course, given this huge disguised unemployment in agriculture, people working in agriculture try to work in other areas as well. But the trouble is that there aren’t enough jobs going around for them. Data from the Labour Bureau suggests that only 52.7 per cent of the people looking for jobs all through the year, in rural India, are able to find one. Given this, nearly one in two people in rural India do not have jobs all through the year.

Hence, rural India has a problem at two levels: 1) Agriculture as a profession is no longer as remunerative as it used to be. 2) There are not enough other jobs, given their low skillsets, which people working in agriculture can take on, to add to their income over and above what they make in agriculture.

This explains why land-owning castes have been protesting all across the country. This includes the Patidar Patels of Gujarat.

c) Given this, the BJP in every state that it goes to election after Gujarat, it is likely to promise a farm loan waiver, as it has done in other states over the last one year. This is going to cost state governments all across the country a lot of money. It will also create moral hazard with future borrowers waiting for farm loan waivers than paying off their loans.

The question is why did the BJP not promise a farm loan waiver in Gujarat? The rural areas in Gujarat are not as badly placed as in other states. One reason for this lies in the fact that the livestock economy in the state, has continued to grow robustly. Also, over and above this, the non-farm economy in the rural areas, created job opportunities because of the overall faster growth in the state.

In fact, farm loan waive offs will become even more important given that, the states of Madhya Pradesh and Rajasthan, are not as urbanised as Gujarat is.

Also, in the run up to 2019 Lok Sabha elections, I see the minimum support price of agricultural crops going up. As per the Shanta Kumar Committee, the minimum support price system benefits under 6 per cent of the farming households in the country. While, increasing MSPs may not benefit many farmers, it does have a strong signalling effect.

d) The Modi government will also look to consolidate its position in the urban and semi-urban areas. And for that, chances are it will waive off Mudra loans of Rs 50,000 or lower. In total, over 7 crore of Mudra loans of less than Rs 50,000 have been given out.

e) As far as the Congress is concerned, it needs to start rebuilding itself, particularly in the rural areas because that is where its support is. This is a rather obvious insight.
To, conclude, the Modi government will give out doles and waive off loans, in order to improve its position. This strategy will not be much different from what the Congress led UPA government led by Manmohan Singh, did in the 2009 elections. This again goes with the broader point that I keep making—India has only one model of governance and that is the Congress model.

In the end, socialism will win. We will have a bigger government in areas that we really shouldn’t.

The column was originally published in Equitymaster on December 19, 2017.

Mudra Loans Haven’t Created 8 crore Self-Employment Opportunities

mudra-580x372

Arjun Kumar and Vivek Kaul

In his fourth Independence Day speech on August 15, 2017 as Prime Minister, Narendra Modi said: “Over the past three years, Pradhan Mantri Mudra Yojana has led to millions and millions of youth becoming self-dependent. It’s not just that, one youth is providing employment to one, two or three more people.”

Similar views were expressed by Amit Shah, the president of the Bharatiya Janata Party in May 2017, when he said: “We have tried to give new perspective to employment as it is not possible to provide employment to everyone in a country of 125 crore people. We are promoting self-employment and the government has made eight crore people self-employed.”

These remarks emerge out of the assumption that each loan given under the Pradhan Mantri Mudra Yojana(PMMY, and more popularly referred to as a Mudra Loan), leads to the creation of at least one self-employment opportunity. Is that correct? Let’s take a look at Table 1.

Table 1, tells us that up until early September 2017, close to 9 crore loans have been disbursed under the PMMY. When Shah had made the statement in late May, he had perhaps claimed on the basis of this data that the government had made 8 crore people self-employed.

The assumption was that one Mudra loan makes one individual self-employed. PM Modi in his speech essentially seemed to have assumed one Mudra loan leads to one individual becoming self-employed and he, in turn, employs more people. Take a look at Table 2.

What does Table 2 tell us? It tells us that the average loan being given under the PMMY has jumped from Rs 39,405 in 2015-2016 to around Rs 46,528 in the current financial year. Now let’s take a look at the data at a more granular level in Table 3, focusing on two previous financial years.

As can be seen from Table 3, in the previous two financial years, the total number of loans given to new entrepreneurs stood at 2.25 crore. This amounts to a little over 30 per cent of the total loans. Hence, the claim that 8 crore self-employment opportunities have been created because of PMMY loans doesn’t really add up. A bulk of the loans has been given to people who are already self-employed.

The PMMY loans are categorised into three types. These are Shishu (upto Rs 50,000), Kishore (from Rs 50,000 to 5,00,000) and Tarun (from Rs 5,00,000 to 10,00,000). Let’s look at Table 4, which goes into some detail of these different kinds of PMMY loans.

We can see from Table 4 that the most basic Shishu loans over the last two financial years formed around 92-93 per cent of the total loans. Now look at Table 5, which basically tells us the average amount of loan taken under each of the different kind of loans.

The Shishu loans on an average amounted to Rs 19,400 in 2015-2016 and Rs 23,300 in 2016-2017. This basically means that the average loan given under PMMY is very small. It is highly unlikely that such a small amount of capital can create any employment. Hence, it might act more as an overdraft facility for the self-employed (such as Kisan Credit Cards for farmers) than be able to create employment. Also, whether the new entrepreneurs who have taken PMMY loans continue to survive as entrepreneurs, is an interesting question which researchers need to explore.

It is worth pointing out that many self-employed people in India are not self-employed by choice. Economists Abhijit Banerjee and Esther Duflo call them ‘reluctant entrepreneurs’. They do not have a choice. This can be understood from the fact around 46-47 per cent of the Indian workforce is self-employed. Take a look at Table 6.

The above table clearly indicates that the salaried labour force is way better off than the self-employed. Nearly two-thirds of the self-employed earn up to Rs 7,500 per month. For the salaried, this is at a little over 38 per cent.

To conclude, the CEO of Mudra (Micro Units Development & Refinance Agency Ltd.) in an interview to a private media house, when asked the question on the number of jobs created by the Mudra loans, had said: “We are yet to make an assessment on that… We don’t have a number right now, but I understand that NITI Aayog is making an effort to do that.”

In such a situation, the hypothesis of the government that Mudra loans are making crores of youth self-dependent seems to be flawed. It seems more of a political gimmick, because remaining in power is more important than working to allay the distresses of those who are still seeking employment.

This originally appeared in Newslaundry on September 21, 2017.

When It Comes to Creation of Jobs, We Agree and Disagree with Amit Shah

amit shah

The BJP president Amit Shah late last week said: “We have tried to give new perspective to employment as it is not possible to provide employment to everyone in a country of 125 crore people. We are promoting self-employment and the government has made eight crore people self-employed.”

Well it’s obvious that no government can create the huge number of jobs that India needs. But then politicians are not known to say the most obvious things. Hence, Shah deserves credit for saying what he did.

The number of jobs in central public sector enterprises has fallen over the years. Let’s take a look at Table 1.

Table 1: Employment and Average Annual Emoluments in CPSEs 

As can be seen from Table 1, the number of people employed by the central public sector enterprises has fallen over the last decade.

Now how do things look for the central government employees? On January 1, 2006, the central government had a sanctioned strength of 38.3 lakh. Against this, it had 32.7 lakh employees on its rolls. By January 1, 2010, the sanctioned strength had gone up to 38.9 lakh, while the number of employees had fallen to 32.3 lakh.

By January 1, 2014, the sanctioned strength had risen to 40.5 lakh, whereas the number of employees had risen marginally to 33 lakh. So, between 2006 and 2014, the central government basically added around 28,000 jobs.

Over and above this, the various state governments employ around 72 lakh individuals. Hence, the ability of the government to create jobs is limited. This does not help given that around one million Indians are entering the workforce every month. Hence, the economy needs to be creating 1.2 crore jobs every year, and that is clearly not happening.

In fact, the sad state of the Indian jobseeker can be made out from something I write in my new book India’s Big Government-The Intrusive State and How It is Hurting Us: “Only 60.6 per cent of the individuals who were available for work all through the year were able to get work for the entire year. In rural areas, this figure was at 52.7 per cent. This basically means that close to half of rural India cannot find work for all 12 months of the year.” These numbers were true for 2015-2016.

Further, the situation on this front is more or less the same since the last survey was carried out, in 2013-2014. As per the last survey, 60.5 per cent of individuals who were available for work all through the year had been able to find work for that entire year. In rural areas, this figure was at 53.2 per cent. The figures are more or less similar to those of the latest survey.

Last week Shah talked about self-employment and the government having made 8 crore people self-employed. In the next breath he also said: “There is no system to find out the exact availability of jobs in the country.” So that makes us wonder, where did the 8 crore number come from?

Also, Shah in his statement tried to pass-off self-employment as something unique to the current government. Self-employment is what almost every Indian who does not find a job, ends up with.

As Abhijit Banerjee and Esther Duflo write in Poor Economics: “The sheer number of business owners among the poor is impressive. After all, everything seems to militate against the poor being entrepreneurs. They have less capital of their own (almost by definition) and… little access to formal insurance, banks and other sources of inexpensive finance…. Another characteristic of the businesses of the poor and the near-poor is that, on average, they are not making much money.”

The point here is that a large part of the workforce is not self-employed by choice but are self-employed because they have no other option. Banerjee and Duflo call them ‘reluctant entrepreneurs’. This can be made out from the fact around 46-47 per cent of the Indian workforce is self- employed.

The fact that Indians are reluctant entrepreneurs also becomes clear from some data highlighted in the National Manufacturing Policy of 2011. It estimated that the number of Small and Medium Enterprises (SMEs) in India stood at over 26 million (2.6 crore) units. They employed around 59 million (5.9 crore) people.

This means that any SME, on an average, employed 2.27 individuals. The Boston Consulting Group estimated that 36 million (3.6 crore) SMEs (or what it calls micro-SMEs) employ over 80 million (8 crore) employees. This means that any SME, on an average, employs 2.22 individuals. These firms are responsible for 45 per cent of the manufacturing output of the country.

What this clearly tells us is that the size of the average Indian manufacturing firm is very small. This is a good proof of the fact that most Indians getting into entrepreneurship do so because they don’t get jobs. They start small and continue to remain small. One reason lies in the fact that their business does not generate enough capital to expand.

The second reason lies in the lack of ease of doing of business. Any firm looking to grow soon runs into a maze of rules and regulations and corrupt bureaucrats appointed by both state and central government. Jobs are created when small firms start to grow big and recruit more people.

As an OECD (Organisation for Economic Co-operation and Development) research paper points out: “SMEs (small- and medium-sized enterprises) account for 60 to 70 per cent of jobs in most OECD countries, with a particularly large share in Italy and Japan, and a relatively smaller share in the United States. Throughout, they also account for a disproportionately large share of new jobs, especially in those countries which have displayed a strong employment record, including the United States and the Netherlands. Some evidence points also to the importance of age, rather than size, in job creation: young firms generate more than their share of employment.”

Hence, jobs are created when small firms grow. And that clearly isn’t happening in India. The labour laws continue to remain as screwed up as ever. And so does the ease of doing business. On that front Shah’s government has barely managed to move.

When it comes to creating jobs, the government can at best act as a facilitator and help the private sector and individuals create jobs. But that facilitation is easier said than done.

Postscript: I recently did a podcast with the writer Amit Varma who is currently the editor of the Pragati magazine, on The Coming Jobs Crisis. Most of what I spoke was based on my new book India’s Big Government-The Intrusive State and How It is Hurting Us. You can listen to the podcast here.

The column originally appeared in Equitymaster on May 29, 2017.

When It Comes to Creation of Jobs, We Agree and Disagree with Amit Shah

amit shah

The BJP president Amit Shah late last week said: “We have tried to give new perspective to employment as it is not possible to provide employment to everyone in a country of 125 crore people. We are promoting self-employment and the government has made eight crore people self-employed.”

Well it’s obvious that no government can create the huge number of jobs that India needs. But then politicians are not known to say the most obvious things. Hence, Shah deserves credit for saying what he did.

The number of jobs in central public sector enterprises has fallen over the years. Let’s take a look at Table 1.

Table 1: Employment and Average Annual Emoluments in CPSEs 

As can be seen from Table 1, the number of people employed by the central public sector enterprises has fallen over the last decade.

Now how do things look for the central government employees? On January 1, 2006, the central government had a sanctioned strength of 38.3 lakh. Against this, it had 32.7 lakh employees on its rolls. By January 1, 2010, the sanctioned strength had gone up to 38.9 lakh, while the number of employees had fallen to 32.3 lakh.

By January 1, 2014, the sanctioned strength had risen to 40.5 lakh, whereas the number of employees had risen marginally to 33 lakh. So, between 2006 and 2014, the central government basically added around 28,000 jobs.

Over and above this, the various state governments employ around 72 lakh individuals. Hence, the ability of the government to create jobs is limited. This does not help given that around one million Indians are entering the workforce every month. Hence, the economy needs to be creating 1.2 crore jobs every year, and that is clearly not happening.

In fact, the sad state of the Indian jobseeker can be made out from something I write in my new book India’s Big Government-The Intrusive State and How It is Hurting Us: “Only 60.6 per cent of the individuals who were available for work all through the year were able to get work for the entire year. In rural areas, this figure was at 52.7 per cent. This basically means that close to half of rural India cannot find work for all 12 months of the year.” These numbers were true for 2015-2016.

Further, the situation on this front is more or less the same since the last survey was carried out, in 2013-2014. As per the last survey, 60.5 per cent of individuals who were available for work all through the year had been able to find work for that entire year. In rural areas, this figure was at 53.2 per cent. The figures are more or less similar to those of the latest survey.

Last week Shah talked about self-employment and the government having made 8 crore people self-employed. In the next breath he also said: “There is no system to find out the exact availability of jobs in the country.” So that makes us wonder, where did the 8 crore number come from?

Also, Shah in his statement tried to pass-off self-employment as something unique to the current government. Self-employment is what almost every Indian who does not find a job, ends up with.

As Abhijit Banerjee and Esther Duflo write in Poor Economics: “The sheer number of business owners among the poor is impressive. After all, everything seems to militate against the poor being entrepreneurs. They have less capital of their own (almost by definition) and… little access to formal insurance, banks and other sources of inexpensive finance…. Another characteristic of the businesses of the poor and the near-poor is that, on average, they are not making much money.”

The point here is that a large part of the workforce is not self-employed by choice but are self-employed because they have no other option. Banerjee and Duflo call them ‘reluctant entrepreneurs’. This can be made out from the fact around 46-47 per cent of the Indian workforce is self- employed.

The fact that Indians are reluctant entrepreneurs also becomes clear from some data highlighted in the National Manufacturing Policy of 2011. It estimated that the number of Small and Medium Enterprises (SMEs) in India stood at over 26 million (2.6 crore) units. They employed around 59 million (5.9 crore) people.

This means that any SME, on an average, employed 2.27 individuals. The Boston Consulting Group estimated that 36 million (3.6 crore) SMEs (or what it calls micro-SMEs) employ over 80 million (8 crore) employees. This means that any SME, on an average, employs 2.22 individuals. These firms are responsible for 45 per cent of the manufacturing output of the country.

What this clearly tells us is that the size of the average Indian manufacturing firm is very small. This is a good proof of the fact that most Indians getting into entrepreneurship do so because they don’t get jobs. They start small and continue to remain small. One reason lies in the fact that their business does not generate enough capital to expand.

The second reason lies in the lack of ease of doing of business. Any firm looking to grow soon runs into a maze of rules and regulations and corrupt bureaucrats appointed by both state and central government. Jobs are created when small firms start to grow big and recruit more people.

As an OECD (Organisation for Economic Co-operation and Development) research paper points out: “SMEs (small- and medium-sized enterprises) account for 60 to 70 per cent of jobs in most OECD countries, with a particularly large share in Italy and Japan, and a relatively smaller share in the United States. Throughout, they also account for a disproportionately large share of new jobs, especially in those countries which have displayed a strong employment record, including the United States and the Netherlands. Some evidence points also to the importance of age, rather than size, in job creation: young firms generate more than their share of employment.”

Hence, jobs are created when small firms grow. And that clearly isn’t happening in India. The labour laws continue to remain as screwed up as ever. And so does the ease of doing business. On that front Shah’s government has barely managed to move.

When it comes to creating jobs, the government can at best act as a facilitator and help the private sector and individuals create jobs. But that facilitation is easier said than done.

Postscript: I recently did a podcast with the writer Amit Varma who is currently the editor of the Pragati magazine, on The Coming Jobs Crisis. Most of what I spoke was based on my new book India’s Big Government-The Intrusive State and How It is Hurting Us. You can listen to the podcast here.

The column originally appeared in Equitymaster on May 29, 2017.

The Halo Effect of Amit Shah

 

amit shah
When the Bhartiya Janata Party (BJP) won the Lok Sabha elections in May 2014, a lot of credit for its success went to Amit Shah. He was deemed to be a master strategist and a hard worker. A lot was written on how Shah worked round the clock to ensure a BJP victory. Explanations were offered on how Shah picked up winning candidates, engineered local alliances and so on.

The rise of Amit Shah in public consciousness is an excellent example of the halo effect. Author and strategist Michael Mauboussin defines the halo effect as “our proclivity to attach attributes to what has succeeded, solely because of the success.” The media went around looking for reasons behind the success of Amit Shah and found them. As Phil Rosenzweig writes in The Halo Effect…and the Eight Other Business Delusions that Deceive Managers “We want explanations. We want the world around us to make sense…We prefer explanations that are definitive and offer clear implications.”

This tendency to build a halo around those who are successful is not just limited to politics. It’s a very important part of success in business as well. As Jason Zweig writes in The Devil’s Financial Dictionary: “If the price of a company’s stock has gone up strongly, the people who run the company will seem almost superhuman. In early 2000, for instance, with Cisco Systems’ stock up more than 100,000 percent over the previous decade, Fortune magazine called its chief executive, John Chambers, “the world’s greatest CEO.””

If you are the kind who reads business newspapers and magazines regularly, you are unlikely to miss out on profiles of business leaders. These profiles typically look into the background of what makes these leaders so successful, at the time they are successful. These days the profiles of those who run ecommerce firms are very popular in the media. They get the kind of readership that nothing else does (at least in the business media). What none of these profiles seem to talk about is that these businesses are loss-making and are likely to continue to be loss making.

The point being that the media writes good things only up until the going is good. Getting back to Amit Shah, after the success of May 2014, the BJP lost elections first in Delhi, and then more importantly in Bihar. Both these defeats were hugely embarrassing for the party.

And not surprisingly, knives are now out for Shah. Some analysis suggest that he is a Gujarati and doesn’t have a feel of the entire country. This has been offered as one of the explanations for why the BJP lost Bihar. Then there were also some news reports that suggested that Shah will be replaced as the BJP president soon.

The same media that built a halo around Shah is now busy pulling him down. In fact, what is happening to Shah now, also happened to Chambers at Cisco.

After a 100,000 percent increase in price, the stock price of Cisco fell by 80% in a year. As Zweig writes: “A year later with the  stock price down almost 80%, Fortune described Chambers as having dangerously blind to the signs of the coming collapse. The same company run by the same man seemed utterly transformed as soon as its stock price fell.”

Why does this happen?  As Mauboussin told me in an interview a few years back: “The idea is that when things are going well, we attribute that success to skill—there’s a halo effect. Conversely, when things are going poorly we attribute it to poor skill…So the answer is that great success, the kind that lands you on the covers of business magazines [or other magazines], almost always includes a very large dose of luck. And we’re not very good at parsing the sources of success.”

Nevertheless, the media couldn’t have just written that luck played a large role in Shah and BJP’s success in 2014. That would have been boring.

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

The column was first published in the Bangalore Mirror on December 9, 2015