How Manmohan’s omelette came out as scrambled egg


Vivek Kaul
Around half way through Manu Joseph’s new book The Illicit Happiness of Other People, Ousep Chacko, one of the main characters in the book, says “Don’t hate me, son. There are people in this world who set out to make an omelette but end up with scrambled eggs. I am one of them.”
I just couldn’t help comparing this statement to Manmohan Singh, the current Prime Minister of the country. When he started out in 2004 he had all the economic ingredients that could be used to make a good omelette but what he has given us instead is burnt bhurji (the closest Indian representation of scrambled eggs and with due apologies to all the vegetarians out there).
When Manmohan Singh took over as the Prime Minister on May 22, 2004, things were looking good on the economic front. Consumer price index (CPI) inflation was at a rather benign 2.83%(Source: http://www.tradingeconomics.com/india/inflation-cpi) in May 2004. Interest rates were low.
The fiscal deficit projected by the government for 2004-2005(or the period between April 1, 2004 and March 31, 2005) was at 4.4% of the gross domestic product (GDP). Fiscal deficit is the difference between what the government earns and what it spends.
The interest payments that the government had to make on previous debt formed around 94% of the fiscal deficit. Interest payments stood at Rs 1,29,500 crore whereas the fiscal deficit was at Rs 1,37,407 crore.  Thus the primary deficit or the difference between expenditure and income, after leaving out the interest payments, came to just 0.3% of the GDP.
What this meant was that the government was more or less meeting its expenditure from the income that it was earning during the course of the year. Thus the deficit was on account of the past debt. It also meant that the government did not have to borrow much, which in turn kept the interest rates low, encouraging both businesses and consumers to borrow and spend, and thus helping the Indian economy grow at a fast rate.
The subsidy bill for the year stood at Rs 43,516 crore or a little over 9% of the total government expenditure.
Cut to now. The CPI inflation for July 2012 was at 9.86%. The interest rate on most retail loans is greater than 10%. And the fiscal deficit has gone through the roof. The projected fiscal deficit for the year is Rs 5,13,590 crore or around 5.1% of the GDP. The primary deficit is at 1.9% of the GDP.
Even these numbers, as I showed in a recent piece will turn out to be way off the mark. (You can read the piece here). As economist Shankar Acharya wrote in the Business Standard “A few days back the Controller General of Accounts (CGA, not CAG!) informed us that the central government’s fiscal deficit for the first four months of 2012-13 had already exceeded half of the Budget’s target for the full year.”
The way things are going currently, the fiscal deficit might touch 7% of the GDP or its roundabout by the end of this year. This is a situation which hasn’t been experienced since 1990-91, just before India liberalised and opened up the economy.
In his speech as the Finance Minister of India in July 1991 Manmohan Singh had said “The crisis of the fiscal system is a cause for serious concern. The fiscal deficit of the Central Government…is estimated at more than 8 per cent of GDP in 1990-91, as compared with 6 per cent at the beginning of the 1980s and 4 per cent in the mid-1970s.”
So the question that arises is what went wrong between 2004 and 2012? The answer is that the subsidy budget of the government went through the roof. Things started changing in 2007-2008. The projected subsidy bill for the year was Rs 54,330 crore. By the end of the year the government had spent Rs 69,742 crore or 28% more. This was in preparation for the 2009 Lok Sabha elections.
The same thing happened the next year i.e. 2008-2009. The government budgeted Rs 71,431 crore as subsidies and ended up spending Rs 1,29,243 crore, a whopping 81% more. The subsidies were primarily on account of fertiliser, oil and food.
The budgeted subsidies for the current financial year (i.e. the period between April 1, 2012 and March 31, 2013) are at Rs 1,90,015 crore or around 12.7% of the total government expenditure. But as has been the case earlier the government will end up spending much more than this. Even after the Rs 5 increase in diesel price, the oil marketing companies (OMCs) will lose more than Rs 1 lakh crore on selling diesel this year. The total loss on account of selling diesel, kerosene and cooking gas at a loss is estimated to come to Rs 1,67,000 crore.
Just this will push up the subsidy bill close to Rs 3,00,000 crore.  The government is expected to cross the budgeted amount for food and fertiliser subsidy as well. All in all it’s safe to say that subsidies will account for more than 20% of the government expenditure during the course of the year, leading to greater borrowing by the government and thus higher interest rates for everybody else.
The idea behind the subsidies (or inclusive growth as the government likes to call it) is to help the poor and ensure that they are not left out of the growth process. The question is where is the money to fund these subsidies going to come from? As Ila Patnaik writes in The Indian Express “Anyone looking at the rising subsidy bill, at the size of the welfare programmes, and contrasting it with the limited tax base, can only wonder why India will not have a fiscal crisis. A continuation of the present policies cannot but land the country into a huge problem. Either before a crisis or after it, there is little doubt that the current expenditure path has to change.”
The programme at the heart of the so called inclusive growth is the National Rural Employment Guarantee Act (NREGA), under which there is a legal guarantee of 100 days of employment during the course of the financial year to adults of any rural household. The daily wage is set at Rs 120 in 2009 prices, which means it is indexed for inflation. Now only if economic and social development was as easy as getting people to dig holes and fill them up.
Also as is usual with most such schemes in India there are huge leakages in this scheme as well. Estimates suggest that leakages are as high as 70%, which means only around Rs 30 of the Rs 100, reaches those it should, while the rest is being siphoned off. This is done by fudging muster rolls, which are essentially supposed to contain the number of days a labourer has worked and the wages he or she has been paid for it.
Also these subsidy and welfare programmes were initiated when the Indian economy was growing faster than 9%. Now the economic growth has slowed down to 5% levels. As Patnaik puts it “Implicit was also the argument that NREGA will be paid for by the high tax collection that the fast growing sectors of the economy would yield. Growth was to be made inclusive through a redistribution of incomes. This was the scenario when India was growing at 10 per cent and leaving some people behind. It was a scenario that might stand the test of time if India continued to grow at a long-run steady state of 10 per cent growth. This plan did not appear to evaluate the fiscal path of such a programme when growth halved.”
Slow growth also implies a slowdown in tax collections for the government, which might lead to the government needing to borrow more to finance the subsidies and welfare programmes.
A lot of the expenditure on account of subsidies could have been met if the government had been less corrupt and not sold off the assets of the nation at rock bottom prices. The loss on account of the telecom scandal was estimated to be at Rs 1.76 lakh crore. The loss on account of the coal blocks scandal was estimated to be at Rs 1.86lakh crore.
While these scams were happening all around him, Manmohan Singh chose to look the other way. As TN Ninan wrote in the Business Standard “Corruption silenced telecom, it froze orders for defence equipment, it flared up over gas, and now it might black out the mining and power sectors. Manmohan Singh’s fatal flaw — his willingness to tolerate corruption all around him while keeping his own hands clean — has led us into a cul de sac , with the country able to neither tolerate rampant corruption nor root it out.”
Singh has tried to re-establish his reformist credentials recently by announcing a spate of economic reforms over Friday and Saturday. But none of these reforms look to control the expenditure of the government and thus bring down the fiscal deficit. If the government continues down this path the future is doomed. As Ruchir Sharma writes in Breakout Nations “If the government continues down this path, India might meet the same path as Brazil in the late 1970s, when excessive government spending set off hyperinflation, ending the country’s economic boom.”
Higher expenditure also means inflation will continue to remain high. “NREGA pushed rural wage inflation up to 15% in 2011,” writes Sharma. The fear of high inflation continues, despite the reforms announced by the government. “The government undertook long anticipated measures towards fiscal consolidation by reducing fuel subsidies and selling stakes in public enterprises. Further, steps taken to increase foreign direct investment (FDI) should contribute to both greater capital inflows and, over the long run, higher productivity, particularly in the food supply chain. Importantly, however, for the moment, inflationary pressures, both at wholesale and retail levels, are still strong,” the Reserve Bank of India said in a statement today, keeping the repo rate (or the rate at which it lends to banks) constant at 8%. This despite the fact that there was great pressure on the central bank to cut the repo rate. It is unfair to expect the RBI to make up for the mistakes of the government.
The bottomline is that if the government has to get its act right it needs to reign in its expenditure. I started this piece with eggs let me end it with chickens. As economist Bibek Debroy wrote in the Economic Times “Since 2009, UPA-II has behaved like a headless chicken. It is still headless, but the chicken at least wants to cross the road. We still don’t know whether it will be run over or cross the road and lay an egg.”
And even if eggs are laid, we might still not end up with burnt bhurji rather than omelettes.
(The article originally appeared on www.firstpost.com. http://www.firstpost.com/politics/how-manmohans-omelette-came-out-as-scrambled-egg-458242.html)

(Vivek Kaul is a writer. He can be reached at 
[email protected])
 
 

Of 9% economic growth and Manmohan’s pipedreams


Vivek Kaul

Shashi Tharoor before he decided to become a politician was an excellent writer of fiction. It is rather sad that he hasn’t written any fiction since he became a politician. A few lines that he wrote in his book Riot: A Love Story I particularly like. “There is not a thing as the wrong place, or the wrong time. We are where we are at the only time we have. Perhaps it’s where we’re meant to be,” wrote Tharoor.
India’s slowing economic growth is a good case in point of Tharoor’s logic. It is where it is, despite what the politicians who run this country have to say, because that’s where it is meant to be.
The Prime Minister Manmohan Singh in his independence-day speech laid the blame for the slowing economic growth in India on account of problems with the global economy as well as bad monsoons within the country. As he said “You are aware that these days the global economy is passing through a difficult phase. The pace of economic growth has come down in all countries of the world. Our country has also been affected by these adverse external conditions. Also, there have been domestic developments which are hindering our economic growth. Last year our GDP grew by 6.5 percent. This year we hope to do a little better…While doing this, we must also control inflation. This would pose some difficulty because of a bad monsoon this year.
So basically what Manmohan Singh was saying that I know the economic growth is slowing down, but don’t blame me or my government for it. Singh like most politicians when trying to explain their bad performance has resorted to what psychologists calls the fundamental attribution bias.
As Vivek Dehejia an economics professor at Carleton University in Ottawa, Canada, told me in a recent interview I did for the Daily News and Analysis (DNA) Fundamentally attribution bias says that we are more likely to attribute to the other person a subjective basis for their behaviour and tend to neglect the situational factors. Looking at our own actions we look more at the situational factors and less at the idiosyncratic individual subjective factors.”
In simple English what this means is that when we are analyzing the performance of others we tend to look at the mistakes that they made rather than the situational factors. On the flip side when we are trying to explain our bad performance we tend to blame the situational factors more than the mistakes that we might have made.
So in Singh’s case he has blamed the global economy and the deficient monsoon for the slowing economic growth. He also blamed his coalition partners. “As far as creating an environment within the country for rapid economic growth is concerned, I believe that we are not being able to achieve this because of a lack of political consensus on many issues,” Singh said.
Each of these reasons highlighted by Singh is a genuine reason but these are not the only reasons because of which economic growth of India is slowing down. A major reason for the slowing down of economic growth is the high interest rates and high inflation that prevails. With interest rates being high it doesn’t make sense for businesses to borrow and expand. It also doesn’t make sense for you and me to take loans and buy homes, cars, motorcycles and other consumer durables.
The question that arises here is that why are banks charging high interest rates on their loans? The primary reason is that they are paying high interest rate on their deposits.
And why are they paying a high interest rate on their deposits? The answer lies in the fact that banks have been giving out more loans than raising deposits. Between December 30, 2011 and July 27, 2012, a period of nearly seven months, banks have given loans worth Rs 4,16,050 crore. During the same period the banks were able to raise deposits worth Rs 3,24,080 crore. This means an incremental credit deposit ratio of a whopping 128.4% i.e. for every Rs 100 raised as deposits, the banks have given out loans of Rs 128.4.
Thus banks have not been able to raise as much deposits as they are giving out loans. The loans are thus being financed out of deposits raised in the past. What this also means is that there is a scarcity of money that can be raised as deposits and hence banks have had to offer higher interest rates than normal to raise this money.
So the question that crops up next is that why there is a scarcity of money that can be raised as deposits? This as I have said more than few times in the past is because the expenditure of the government is much more than its earnings.
The fiscal deficit of the government or the difference between what it earns and what it spends has been going up, over the last few years. For the financial year 2007-2008 the fiscal deficit stood at Rs 1,26,912 crore. It went up to Rs 5,21,980 crore for financial year 2011-2012. In a time frame of five years the fiscal deficit has shot up by nearly 312%. During the same period the income earned by the government has gone up by only 36% to Rs 7,96,740 crore.
This difference is made up for by borrowing. When the borrowing needs of the government go through the roof it obviously leaves very little on the table for the banks and other private institutions to borrow, which in turn means that they have to offer higher interest rates to raise deposits. Once they offer higher interest rates on deposits, they have to charge higher interest rate on loans.
A higher interest rate scenario slows down economic growth as companies borrow less to expand their businesses and individuals also cut down on their loan financed purchases. This impacts businesses and thus slows down economic growth.
The huge increase in fiscal deficit has primarily happened because of the subsidy on food, fertilizer and petroleum. One of the programmes that benefits from the government subsidy is Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA). The scheme guarantees 100 days of work to adults in any rural household. While this is a great short term fix it really is not a long term solution. If creating economic growth was as simple as giving away money to people and asking them to dig holes, every country in the world would have practiced it by now.
As Raghuram Rajan, who is taking over as the next Chief Economic Advisor of the government of India, told me in an interview I did for DNA a couple of years back “The National Rural Employment Guarantee Scheme (NREGS, another name for MGNREGA), if appropriately done it is a short term insurance fix and reduces some of the pressure on the system, which is not a bad thing. But if it comes in the way of the creation of long term capabilities, and if we think NREGS is the answer to the problem of rural stagnation, we have a problem. It’s a short term necessity in some areas. But the longer term fix has to be to open up the rural areas, connect them, education, capacity building, that is the key.
But the Manmohan Singh led United Progressive Alliance seems to be looking at the employment guarantee scheme as a long term solution rather than a short term fix. This has led to burgeoning wage inflation over the last few years in rural areas.
As Ruchir Sharma writes in Breakout Nations – In Pursuit of the Next Economic MiraclesThe wages guaranteed by MGNREGA pushed rural wage inflation up to 15 percent in 2011”.
Also as more money in the hands of rural India chases the same number of goods it has led to increased price inflation as well. Consumer price inflation currently remains over 10%. The most recent wholesale price index inflation number fell to 6.87% for the month of July 2012, from 7.25% in June. But this experts believe is a short term phenomenon and inflation is expected to go up again in the months to come.
As Ruchir Sharma wrote in a column that appeared yesterday in The Times of IndiaFor decades India’s place in the rankings of nations by inflation rates also held steady, somewhere between 78 and 98 out of 180. But over the past couple of years India’s inflation rate is so out of whack that its ranking has fallen to 151. No nation has ever managed to sustain rapid growth for several decades in the face of high inflation. It is no coincidence that India is increasingly an outlier on the fiscal front as well with the combined central and state government deficits now running four times higher than the emerging market average of 2%.” (You can read the complete column here).
So to get economic growth back on track India has to control inflation. The Reserve Bank of India (RBI) has been trying to control inflation by keeping the repo rate, or the rate at which it lends to banks, at a high level. One school of thought is that once the RBI starts cutting the repo rate, interest rates will fall and economic growth will bounce back.
That is specious argument at best. Interest rates are not high because RBI has been keeping the repo rate high. The repo rate at best acts as an indicator. Even if the RBI were to cut the repo rate the question is will it translate into interest rate on loans being cut by banks? I don’t see that happening unless the government clamps down on its borrowing. And that will only happen if it’s able to control the subsidies.
The fiscal deficit for the current financial year 2012-2013 has been estimated at Rs Rs Rs 5,13,590 crore. I wouldn’t be surprised if the number even touches Rs 600,000 crore. The oil subsidy for the year was set at Rs 43,580 crore. This has already been exhausted. Oil prices are on their way up and brent crude as I write this is around $115 per barrel. The government continues to force the oil marketing companies to sell diesel, LPG and kerosene at a loss. The diesel subsidy is likely to continue given that with the bad monsoon farmers are now likely to use diesel generators to pump water to irrigate their fields. With food inflation remaining high the food subsidy is also likely to go up.
The heart of India’s problem is the huge fiscal deficit of the government and its inability to control it. As Sharma points out in Breakout NationsIt was easy enough for India to increase spending in the midst of a global boom, but the spending has continued to rise in the post-crisis period…If the government continues down this path India, may meet the same fate as Brazil in the late 1970s, when excessive government spending set off hyperinflation and crowded out private investment, ending the country’s economic boom.”
These details Manmohan Singh couldn’t have mentioned in his speech. But he tried to project a positive picture by talking about the planning commission laying down measures to ensure a 9% rate of growth. The one measure that the government needs to start with is to cut down the fiscal deficit. And the probability of that happening is as much as my writing having more readers than that of Chetan Bhagat. Hence India’s economic growth is at a level where it is meant to be irrespective for all the explanations that Manmohan Singh gave us and the hope he tried to project in his independence-day speech.
But then you can’t stop people from dreaming in broad daylight. Even Manmohan Singh! As the great Mirza Ghalib who had a couplet for almost every situation in life once said “hui muddat ke ghalib mar gaya par yaad aata hai wo har ek baat par kehna ke yun hota to kya hota?
(The article originally appeared on www.firstpost.com on August 16,2012. http://www.firstpost.com/economy/of-9-economic-growth-and-manmohans-pipedreams-419371.html)
Vivek Kaul is a writer and can be reached at [email protected]

Is Manmohan following Lalu’s no-growth Bihar strategy?


Vivek Kaul

In a piece titled Farewell to Incredible India, which deals with the current economic problems in India, The Economist writes: “The Congress-led coalition government, with Brezhnev-grade complacency, insists things will bounce back.”
Leonid Brezhnev was the General Secretary of the Central Committee (CC) of the Communist Party of the Soviet Union (CPSU). He ruled the country from 1964 till his death in 1982.
I guess The Economist looked too far. They could have found someone right here in India to describe the complacency of the Manmohan Singh-led United Progressive Alliance(UPA) government. The man I am talking about is none other than Lalu Prasad, the former railway minister and former chief minister of Bihar.
Yes, you read it right. Before I get into explaining why I just said what I did, let us go back a little into history.
The lucky Lalu Yadav
Lalu Yadav re-entered politics in 1973, just by sheer chance. He didn’t have to struggle for it. The opportunity just fell into his lap.
As Sankarshan Thakur writes in Subaltern Sahib: Bihar and the Making of Lalu Yadav, “On the eve of elections of Patna University Students Union (PUSU) in 1973 non-Congress student bodies had again come together, if only for their limited purpose of ousting the Congress. But they needed a credible and energetic backward candidate to head the union. Lalu Yadav was sent for.”
The only trouble was that Lalu Yadav was no longer a student, but was an employee of the Patna Veterinary College. He had quit student politics in 1970, after having lost the election for the presidentship of PUSU to a Congress candidate. Before this, Lalu had been the general secretary of PUSU for three consecutive years.
But Lalu got around the problem. “Assured that the caste arithmetic was loaded against the Congress union, Lalu readily agreed to contest. He quietly buried his job at the Patna Veterinary College and got a backdated admission into the Patna Law College. He stood for elections and won. The non-Congress coalition in fact swept the polls,” writes Thakur.
And from there on Lalu Yadav went from strength to strength. In 1974, the students’ agitation against then prime minister Indira Gandhi spread throughout the country. As Thakur points out, “An agitation committee was formed, the Bihar Chatra Sangharsh Samiti to coordinate the activities of various unions and Lalu Yadav as president of PUSU was chosen its chief.”
These events catapulted Lalu Yadav into the big league. In the 1977 elections, Lalu was elected to the Lok Sabha as a Janata Party candidate at a young age of 29.
Chief Minister of Bihar
VS Naipaul once described Bihar as “the place where civilisation ends”. Lalu Prasad first became the chief minister of Bihar in 1990. Between him and his wife Rabri Devi they largely ruled the state till 2005, and almost brought civilisation to an end.
When India was going from strength to strength with economic growth rates that it had never seen before, the economy of Bihar was shrinking in size. As Ruchir Sharma writes in Breakout Nations – In Pursuit of the Next Economic Miracles , “Bihar was the only Indian state that not only sat out India’s first growth spurt but also saw its economy shrink (by 9 percent) between 1980 and 2003.”
Lalu and his wife Rabri ruled for the major portion of the period between 1980 and 2003. Economic development was nowhere in the agenda of Lalu and on several occasions when questioned about the lack of economic development in the state, he replied that economic development does not get votes. And he was proved right.
In fact 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.’”
Between 1997 and 2005, the Ministry of Rural Development allocated Rs 9,600 crore. Of this, nearly Rs 2,200 crore was not drawn. And of the money received only 64 percent was spent. Similarly, money allocated from other programmes was also not spent.
How did he survive?
Lalu survived by building a potent combination of MY (Muslim + Yadav) voters. The Yadavs are the single largest caste in Bihar. Such was his faith in the MY voters that Lalu did not even promise development, like most politicians tend to do. As Mathew and Moore write: “He finessed this problem…by departing from the normal practices of Indian electoral politics and not vigorously promising ‘development’. For example, if during his many trips to villages he was asked to provide better roads, he would tend to question whether roads were really of much benefit to ordinary villagers, and suggest that the real beneficiaries would be contractors and the wealthy, powerful people who had cars. He typically required a large escort of senior public officials on these visits, and would require them to line up dutifully and humbly on display while he himself was doing his best to behave like a villager. He might gesture at this line-up and ask ‘Do you really want a road so that people like this can speed through your village in their big cars?’”
So what was Lalu Yadav trying to do here? “Lalu Prasad Yadav was not trying to fool most of his voters most of the time. He was offering then tangible benefits: respect (izzat – a Hindi term that he employed frequently) and the end of local socio-political tyrannies
Where does Manmohan Singh fit in here?
Some time after Lalu Yadav became the chief minister of Bihar, India had a financial crisis. PV Narasimha Rao was looking for a technocrat for the Finance Minister’s position. He first approached Dr Indraprasad Gordhanbhai Patel, who was the Governor of the Reserve Bank of India(RBI) from 1977 to 1982. Patel refused and suggested the name of his successor at the RBI, Manmohan Singh, who had been the Governor of the RBI from 1982 to 1985. Singh had just taken over as the Chairman of the University Grants Commission (UGC) in March 1991. He was pulled out of there and made the Finance Minister of India. And thus started Singh’s second career. Like Lalu, Singh’s career got a second life.
And he, like Lalu, before him went from strength to strength and finally became the Prime Minister of India. A few days ago, Mamata Banerjee had even proposed his name for President. He would make for an excellent President given that the Indian President doesn’t really do anything, except what the government (in this case Sonia) wants him to.
If Pratibha Patil, who no one had ever heard of, could become the President of India, so can the much more loyal Manmohan. He fits all the parameters Sonia Gandhi is looking for in a President. But the trouble, of course, is she wants the same parameters in her Prime Minister as well. And he can’t be at two places at the same time. So Singh’s name as a presidential candidate has been rejected by the Congress party. It would have been a rather glorious end to an “illustrious” career.
The irony
However what is ironic is that a man, who once spearheaded the economic reform process in India, has now totally withdrawn himself from the same. In fact, at times one wonders whether it is even a priority with him and his government? Now that Pranab Mukherjee is leaving the finance ministry for Rashtrapati Bhawan, we will find out what Manmohan has in store.
There has hardly been any response from the UPA government to the recent low GDP growth rate number of 5.3 percent for the period between January and March 2012. Pranab Mukherjee has blamed the slow growth on the problems in Greece in particular and Europe in general. This is a typical Lalu response where the old adage “if you can’t convince them, confuse them” is at work. The problems of India are not because of problems in Greece or Europe, but because of the economic policies of the Manmohan Singh-led UPA government. (It’s not Greece: Cong policies responsible for rupee crash).
As The Economist puts it, “India’s slowdown is due mainly to problems at home and has been looming for a while. The state is borrowing too much, crowding out private firms and keeping inflation high. It has not passed a big reform for years. Graft, confusion and red tape have infuriated domestic businesses and harmed investment. A high-handed view of foreign investors has made a big current-account deficit harder to finance, and the rupee has plunged.”
In fact, there is a state of total denial within the UPA that there are serious economic problems facing India. The spin-doctors of UPA are even working overtime to sell the country that famous song from 3 Idiots “All is Well“. On a recent TV show, Montek Singh Ahulwalia, the deputy chairman of the Planning Commission, kept insisting that a 7 percent economic growth rate was a given. As it turned out the GDP growth rate fell to 5.3 percent.
Economic development doesn’t matter
The way the UPA government has been working over the last few years, it is very easy to conclude that economic development of this country isn’t really top of the agenda. Like was the case with Lalu Yadav.
The solutions to the problems are simple and largely agreed upon by everyone who has an informed opinion on the issue. As The Economist puts it, “The remedies, agreed on not just by foreign investors and liberal newspapers but also by Manmohan Singh’s government are blindingly obvious. A combined budget deficit of nearly a tenth of GDP must be tamed, particularly by cutting wasteful fuel subsidies. India must reform tax and foreign-investment rules. It must speed up big industrial and infrastructure projects. It must confront corruption. None of these tasks is insurmountable. Most are supposedly government policy.”
But then there is hardly any policy coming out of the government. So what is top of the agenda? To stay in power and enjoy its fruits? And by the time the 2014 elections come around, set the stage ready for Rahul Gandhi to take over? But the question that crops up here is this: like Lalu, does the Manmohan Singh-led UPA have a MY formula? And even if it does have a formula, will it work?
Lalu found out in 2005 that formulas become useless over a period of time. “We could not make it because of overconfidence and division in Muslim-Yadav (votes),” Lalu told India Today magazine after his defeat to Nitish Kumar in the 2005 election.
Overconfidence is the word the Manmohan Singh led UPA needs to watch out for.
(The article originally appeared on www.firstpost.com on June 16,2012. http://www.firstpost.com/politics/is-manmohan-following-lalus-no-growth-bihar-strategy-345933.html)
(Vivek Kaul is a writer and can be reached at [email protected])

Pranab Mukherjee does a Paulo Coelho


Vivek Kaul

The rating agency Standard and Poor’s(S&P) has warned that India could lose its investment grade credit rating. In a report titled Will India Be the First BRIC Fallen Angel?, the rating agency said “Slowing GDP growth and political roadblocks to economic policymaking could put India at risk of losing its investment-grade rating.”
The agency revised its outlook on India’s ‘BBB-‘ long-term sovereign credit rating to negative from stable. What this means is that India runs the risk of losing its investment grade credit rating and being rated as speculative or junk.
Let us try and understand what this really means for India.
What is investment grade?
In 1970, the Penn Railroad, the largest railroad in the United States, went bankrupt. This was something that the rating agencies did not foresee. One of the repercussions of this bankruptcy was that the Securities and Exchange Commission (SEC, the American equivalent of the Indian Sebi) decided to penalize brokers who held bonds of companies that were less than investment grade. But who would decide what was investment grade?
As Roger Lowenstein writes in an article titled Triple-A Failure “This prompted a question: investment grade according to whom? The SEC opted to create a new category of officially designated rating agencies, and grandfathered the big three – S&P, Moody’s and Fitch…Bank regulators issued similar rules for banks. Pension funds, mutual funds, insurance regulators followed…Many classes of investors were now forbidden to buy non investment-grade bonds at all”.
Every rating agency follows different ratings. The rating agency Moody’s has 21 different type of ratings of which the top 10 are deemed to be investment grade. The remaining 11 are deemed to be speculative by the rating agency and “junk” by the market.
S&P has 12 different level of ratings of which the top 5 are deemed to be investment grade. India’s rating is BBB-, which is the last rating in the ratings which are deemed to be investment grade. If India’s rating is downgraded, then the next rating is BB+. S&P defines it as a rating which is “considered highest speculative grade by market participants”. Hence BB+ is the first rating at the junk level. The ratings are essentially meant to be an estimate of probabilities. Hence, the bonds of a country which has a BB+ rating are expected to default more than the bonds of a country which has a BBB-rating, thus making them more risky.
What will be the impact if India gets downgraded?
One clear impact will be foreign investors who are not allowed to invest in non-investment grade securities staying away from India. This would mean that pension funds and other long term funds will stay away from India. It could also mean that for foreign investors who have investments in India exiting their positions and the stock market might go down in the days to come. This after the brief rally it has seen recently in expectation of an interest rate cut by the Reserve Bank of India.
The way foreign investors think about India is very important in deciding how well the Indian stock market performs. Since the beginning of the year foreign institutional investors have been net buyers (the difference between what they have bought and what they have sold) of stocks to the extent of Rs 34,551.33 crore. During the same period the domestic institutional investors have been net sellers of stocks to the extent of Rs 18,666.06 crore.
This buying by the foreign investors is the major reason behind the BSE Sensex, India’s premier stock market index, giving a return of 7.85% since the beginning of the year. The threat of downgrade to junk status obviously does not put India in a good light in the eyes of the foreign investors. Given this, the stock market is likely to go down, and bring down the overall economic confidence in the country as well. It would also mean that Indian corporates looking to raise money from abroad would have to pay a higher rate of interest.
The bond market in India will largely remain unaffected because it doesn’t have much foreign presence.
The Azhar Syndrome
But the threat of a downgrade by S&P according to me is a smaller worry than the Azhar syndrome. So what is the Azhar syndrome? The term was first used in a report of the name brought out by First Global more than three years back in March 2009. As the report pointed out: “The Azhar Syndrome is all about Azhar… the kid from the slums in Slumdog Millionaire. He flew to LA for the Oscars, slept on clean sheets in an air-conditioned hotel room, for the first time (and possibly the last time)…came to his Bombay slum home…and moaned to the press “It is so hot here, and the mosquitoes…I can’t sleep”. He is finished. A few nights in a clean hotel room, and the guy can’t adjust back to the reality of his slum existence.”
Like Azhar assumed that the “five-day” party that he had in Los Angeles would continue forever, so has the Congress Party led United Progressive Alliance (UPA assumed that all is well and the economic growth that India saw for the last few years will continue forever on its own. India enjoyed a GDP growth averaging 8.7% during 2004-2008 and 7.8% during 2009-2011.
Pranab Mukherjee, the finance minister, rejected the threat of the S&P downgrade. In a press release said that the Government is fully seized of the current situation and he is confident that there will be a turnaround in our growth prospects in the coming months. Mukherjee expects the Indian economy to grow by 7% in this financial year. “A reversal of interest rate cycle, weak crude prices and a normal monsoon were likely to improve the economic conditions and the slowdown would not be as sharp as widely feared, and that the economy would grow closer to 7 percent this fiscal,” Mukherjee told a conference of chief commissioners and directors general of Income Tax on June 11,2012.
The things that Mukjerhee expects will help India grow at 7% are things he has no control over. This is the Azhar syndrome, which has plagued the Congress party led UPA for a while now, at work. The confidence that come what may, economic growth will happen continue on its own. Mukherjee and the UPA seem to be big believers in what Paulo Cohelo wrote in the bestselling The Alchemist – A Fable About Following Your Dream “Here is one great truth on this planet: whoever you are, or whatever it is that you do, when you really want something, it’s because that desire originated in the soul of the universe. It’s your mission on earth… And, when you want something, all the universe conspires in helping you to achieve it.”
The world might conspire to give India its economic growth. Interest rates might fall. Oil prices might fall. And the country might have a normal monsoon. But this is no way of running a country.
And the assumption that economic growth will happen because Mukherjee and his ilk say that it will happen, is clearly worrying. As Ruchir Sharma writes in his recent boo k Breakout Nations – In Pursuit of the Next Economic Miracles: “India is already showing some of the warning signs of failed growth stories, including early-onset of confidence.”
To conclude
Hardly any constructive steps have been taken to revive economic growth which is falling. Just talking about growth does not create economic growth. The solutions to the economic problems currently facing India are simple and largely agreed upon by everyone who has an informed opinion on the issue. As the Economist put it in a recent article titled Farewell to Incredible India “The remedies, agreed on not just by foreign investors and liberal newspapers but also by Manmohan Singh’s government, are blindingly obvious. A combined budget deficit of nearly a tenth of GDP must be tamed, particularly by cutting wasteful fuel subsidies. India must reform tax and foreign-investment rules. It must speed up big industrial and infrastructure projects. It must confront corruption. None of these tasks is insurmountable. Most are supposedly government policy.”
But there isn’t much hope going around. As the S&P report explains: “The crux of the current political problem for economic liberalization is, in our view, the nature of leadership within the central government, not obstreperous allies or an unhelpful opposition. The Congress party is divided on economic policies. There is substantial opposition within the party to any serious liberalization of the economy. Moreover, paramount political power rests with the leader of the Congress party, Sonia Gandhi, who holds no Cabinet position, while the government is led by an unelected prime minister, Manmohan Singh, who lacks a political base of his own.”
(The article originally appeared at www.firstpost.com on June 6,2012. http://www.firstpost.com/economy/sp-downgrade-and-indias-return-to-slumdog-status-340605.html)
(Vivek Kaul is a writer and can be reached at [email protected])

Sonia’s UPA is taking us to new ‘Hindu’ rate of growth


Vivek Kaul

Raj Krishna, a professor at the Delhi School of Economics, came up with the term “Hindu rate of growth” to refer to Indian economy’s sluggish gross domestic product (GDP) growth of 3.5% per year between the 1950s and the 1980s. The phrase has been much used and abused since then.
A misinterpretation that is often made is that Krishna used the term to infer that India grew slowly because it was a nation dominated by Hindus. In fact he never meant anything like that. Krishna was a believer in free markets and wasn’t a big fan of the socialistic model of development put forward by Jawahar Lal Nehru and the Congress party.
In fact he realised over the years looking at the slow economic growth of India that the Nehruvian model of socialism wasn’t really working. This was visible in the India’s secular or long term economic growth rate which averaged around 3.5% during those days.
The word to mark here is “secular”. The word in its common every day usage refers to something that is not specifically related to a particular religion. Like our country India. One of the fundamental rights Indians have is the right to freedom of religion which allows us to practice and propagate any religion.
But the world “secular” has another meaning. It also means a long term trend. Hence when economists like Krishna talk about the secular rate of growth they are talking about the rate at which a country like India has grown year on year, over an extended period of time. And this secular rate of growth in India’s case was 3.5%. This could hardly be called a rate of growth for a country like India which was growing from a very low base and needed to grow at a much faster pace to pull its millions out of poverty.
So Krishna came up with the word “Hindu” which was the direct opposite of the word “secular” to take a dig at Jawahar Lal Nehru and his model of development. Nehru was a big believer in secularism. Hence by using the word “Hindu” Krishna was essentially taking a dig on Nehru and his brand of economic development, and not Hindus.
The policies of socialism and the license quota raj followed by Nehru, his daughter Indira Gandhi and grandson Rajiv ensured that India grew at a very slow rate of growth. While India was growing at a sub 4% rate of growth, South Korea grew at 9%, Taiwan at 8% and Indonesia at 6%. These were countries which were more or less at a similar point where India was in the late 1940s.
The Indian economic revolution stared in late July 1991, when a certain Manmohan Singh, with the blessings of PV Narsimha Rao, initiated the economic reform process. The country since then has largely grown at the rates of 7-8% per year, even crossing 9% over the last few years.
Over the years this economic growth has largely been taken for granted by the Congress led UPA politicians, bureaucrats and others in decision making positions. Come what may, we will grow by at least 9%. When the growth slipped below 9%, the attitude was that whatever happens we will grow by 8%. When it slipped further, we can’t go below 7% was what those in decision making positions constantly said. On a recent TV show Montek Singh Ahulwalia, the Deputy Chairman of the Planning Commission, kept insisting that a 7% economic growth rate was a given. Turns out it’s not.
The latest GDP growth rate, which is a measure of economic growth, for the period of January to March 2012 has fallen to 5.3%. I wonder, what is the new number, Mr Ahulwalia and his ilk will come up with now. “Come what may we will grow at least by 4%!” is something not worth saying on a public forum.
But chances are that’s where we are headed. As Ruchir Sharma writes in his recent book Breakout Nations – In Pursuit of the Next Economic Miracles “India is already showing some of the warning signs of failed growth stories, including early-onset of confidence.”
The history of economic growth
Sharma’s basic point is that economic growth should never be taken for granted. History has proven otherwise. Only six countries which are classified as emerging markets by the western world have grown at the rate of 5% or more over the last forty years. These countries are Malaysia, Singapore, South Korea, Taiwan, Thailand and Hong Kong. Of these two, Hong Kong and Taiwan are city states with a very small area and population. Hence only four emerging market countries have grown at a rate of 5% or more over the last forty years. Only two of these countries i.e. Taiwan and South Korea have managed to grow at 5% or more for the last fifty years.
“In many ways “mortality rate” of countries is as high as that of stocks. Only four companies – Procter & gamble, General Electric, AT&T, and DuPont- have survived on the Dow Jones index of the top-thirty U.S. industrial stocks since the 1960s. Few front-runners stay in the lead for a decade, much less many decades,” writes Sharma.
The history of economic growth is filled with examples of countries which have flattered to deceive. In the 1950s and 1960s, India and China, the two biggest emerging markets now, were struggling to grow. The bet then was on Iraq, Iran and Yemen. In the 1960s, the bet was Philippines, Burma and Sri Lanka to become the next East Asian tigers. But that as we all know that never really happened.
India is going the Brazil way
Brazil was to the world what China is to it now in the 1960s and the 1970s. It was one of the fastest growing economies in the world. But in the seventies it invested in what Sharma calls a “premature construction of a welfare state”, rather than build road and other infrastructure important to create a viable and modern industrial economy. What followed was excessive government spending and regular bouts of hyperinflation, destroying economic growth.
India is in a similar situation now. Over the last five years the Congress party led United Progressive Alliance is trying to gain ground which it has lost to a score of regional parties. And for that it has been very aggressively giving out “freebies” to the population. The development of infrastructure like roads, bridges, ports, airports, education etc, has all taken a backseat.
But the distribution of “freebies” has led to a burgeoning fiscal deficit. Fiscal deficit is the difference between what a government earns and what it spends.
For the financial year 2007-2008 the fiscal deficit stood at Rs 1,26,912 crore against Rs 5,21,980 crore for the current financial year. In a time frame of five years the fiscal deficit has shot up by nearly 312%. During the same period the income earned by the government has gone up by only 36% to Rs 7,96,740 crore. The huge increase in fiscal deficit has primarily happened because of the subsidy on food, fertilizer and petroleum.
This has meant that the government has had to borrow more and this in turn has pushed up interest rates leading to higher EMIs. It has also led to businesses postponing expansion because higher interest rates mean that projects may not be financially viable. It has also led to people borrowing lesser to buy homes, cars and other things, leading to a further slowdown in a lot of sectors. And with the government borrowing so much there is no way the interest rate can come down.
As Sharma points out: “It was easy enough for India to increase spending in the midst of a global boom, but the spending has continued to rise in the post-crisis period…If the government continues down this path India, may meet the same fate as Brazil in the late 1970s, when excessive government spending set off hyperinflation and crowded out private investment, ending the country’s economic boom.”
Where are the big ticket reforms?
India reaped a lot of benefits because of the reforms of 1991. But it’s been 21 years since then. A new set of reforms is needed. Countries which have constantly grown over the years have shown to be very reform oriented. “In countries like South Korea, China and Taiwan, they consistently had a plan which was about how do you keep reforming. How do you keep opening up the economy? How do you keep liberalizing the economy in terms of how you grow and how you make use of every crisis as an opportunity?” says Sharma.
India has hardly seen any economic reform in the recent past. The Direct Taxes Code was initiated a few years back has still not seen the light of day, but even if it does see the light of day, it’s not going to be of much use. In its original form it was a treat to read with almost anyone with a basic understanding of English being able to read and understand it. The most recent version has gone back to being the “Greek” that the current Income Tax Act is.
It has been proven the world over that simpler tax systems lead to greater tax revenues. Then the question is why have such complicated income tax rules? The only people who benefit are CAs and the Indian Revenue Service officers.
Opening up the retail sector for foreign direct investment has not gone anywhere for a long time. This is a sector which is extremely labour intensive and can create a lot of employment.
What about opening up the aviation sector to foreigners instead of pumping more and more money into Air India? As Warren Buffett wrote in a letter to shareholders of Berkshire Hathaway, the company whose chairman he is, a few years back “The worst sort of business is one that grows rapidly, requires significant capital to engender the growth, and then earns little or no money. Think airlines. Here a durable competitive advantage has proven elusive ever since the days of the Wright Brothers. Indeed, if a farsighted capitalist had been present at Kitty Hawk, he would have done his successors a huge favor by shooting Orville down…The airline industry’s demand for capital ever since that first flight has been insatiable. Investors have poured money into a bottomless pit, attracted by growth when they should have been repelled by it.”
If foreigners want to burn their money running airlines in India why should we have a problem with it?
The insurance sector is bleeding and needs more foreign money, but there is a cap of 26% on foreign investment in an insurance company. Again this limit needs to go up. The sector very labour intensive and has potential to create employment. The same is true about the print media in India.
The list of pending economic reforms is endless. But in short India needs much more economic reform in the days to come if we hope to grow at the rates of growth we were growing.
To conclude
Raj Krishna was a far sighted economist. He knew that the Nehruvian brand of socialism was not working. It never has. It never did. And it never will. But somehow the Congress party’s fascination for it continues. And in continuance of that, the party is now distributing money to the citizens of India through the various so called “social-sector” schemes. If economic growth could be created by just distributing money to everyone, then India would have been a developed nation by now. But that’s not how economic growth is created. The distribution of money creates is higher inflation which leads to higher interest rates and in turn lower economic growth. Also India is hardly in a position to become a welfare state. The government just doesn’t earn enough to support the kind of money it’s been spending and plans to spend.
Its time the mandarins who run the Congress party and effectively the country realize that. Or rate of growth of India’s economy (measured by the growth in GDP) will continue to fall. And soon it will be time to welcome the new “Hindu” rate of economic growth. And how much shall that be? Let’s say around 3.5%.
(The article originally appeared at www.firstpost.com on June 1,2012. http://www.firstpost.com/politics/sonias-upa-is-taking-us-to-new-hindu-rate-of-growth-328428.html)
(Vivek Kaul is a writer and can be reached at [email protected])