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])

What happened when Chidu, Amma and Madam met after the budget

Vivek Kaul
Chidu came out of the back door of the Parliament after having presented the budget to avoid the media that was waiting for him at the Main Gate.
And there he ran into his bête noire Amma.
“I knew it,” said Amma. “You will try to pull a fast one after presenting a budget that was a damp squib. And why have you put that tax on iron ore mines?”
Eh, eh, eh!” replied Chidu, trying to avoid Amma’s question. “I was just trying to avoid the media you know.”
“What man,” said Amma. “You think I am a village belle from Chidambaram. I was a Bangalore girl, till filums brought me to Madras. ”
“I know Amma,” said Chidu. “I know.”
“Amma?” screamed Amma. “How can you call me Amma?”
“Oh! Why? What else do I call you Amma?”
“Again Amma? Only those who fall on my feet are allowed to call me Amma.”
“Really?” asked Chiddu.
“Yes. And we all know whose feet all you Congressmen fall on!”
Shh. Shh. Don’t be so loud. She might hear it,” pleaded Chidu.
“How? I don’t see her anywhere,” said Amma.
Arre, she is everywhere.”
So am I.”
“Are you?” came a voice from behind Amma.
“I told you,” screamed Chidu.
“So Chidu, what is that you were saying?” asked Madam, the chief of the Con-Regress party, who had suddenly appeared from nowhere.
“What will he say?” confronted Amma. “I was the one doing all the talking.”
“Oh really?” asked Madam, trying to sound slightly sophisticated.
“Yes,” replied Amma.
“Never mind,” said Madam, leading Chidu away by hand, wanting to talk to him in private.
Once they were at a sufficient distance from Amma they started talking again.
“So what happened to the food thing?” asked Madam.
“Oh, yes. We are on for the Chicken Chettinad on Sunday,” explained Chidu. “I have specially called cooks all the way from Coimbatore to cook for you.”
Ishhhhhh,” screamed Madam. “I didn’t mean the Sunday dinner. What I was referring to was the food bill.”
“Madam. It’s my treat on Sunday. Why will I give you a bill for it?”
“Okay. Now stop cracking your Pjs, Chidu.”
“He he, you know they are my weakness Madam,” said Chidu. “Did you listen to the one Pj that I even used in the budget.”
“Which one?”
“That only 42,800 people in India have taxable income of greater than Rs 1 crore a year.”
“Yes, yes. I heard that.”
“There was another one,” said Chidu, wanting to carry on with his poor jokes.
“Okay. That’s enough. Get to the point Chidu,” Madam screamed again. “Else I will get bada babu back from the Rashtrapatni Bhavan and appoint him in your place.”
“Madam, we don’t have the money for the food bill,” Chidu explained frankly.
“What do you mean you don’t have money?” asked Madam. “Where do all the taxes go?”
“Taxes?” asked Chidu. “Didn’t you hear my speech Madam?”
“Speech,” said Madam. “Actually to tell you the truth I was listening to my iPod.”
“Really?” asked Chidu. “I was wondering why were your earphones so different. These government ones don’t look so good on you.”
“Yeah, every year, listening to these two hour speeches is so difficult. I have been listening to them for ten years now and have got thoroughly bored,” confessed Madam.
“Which song were you listening to Madam?” asked Chidu.
“You know my favourite one,” said Madam.
“Ah that old song,” said Chidu and started crooning the number. “Baaki jo bachcha mehangai maar gayi…”
“Okay, okay. Don’t kill the tune with that nasal tone of yours,” pleaded Madam. “I would rather have Himesh singing it.”
“You know madam I also have a confession to make,” said Chidu.
“What? What?” Madam asked excitedly.
“Well I have the budget speeches of bada babu recorded on CDs.”
“On nights I don’t get sleep I put them on.”
“I fall asleep as soon as bada babu starts speaking in Bongish.”
“He he.”
“Yeah. And you know Madam…”
“Okay. Enough of that. Let me get back to the point. What happened to the Right to Food bill?” asked Madam, suddenly turning serious again. “Why was it missing from your budget speech?”
Madam. As I said in my speech the tax collections have been falling.”
“Are they?”
“Yes madam.”
“So in 2011-12, the tax GDP ratio was 5.5 percent for direct taxes. For indirect taxes it was at 4.4 percent. This is very low when we compare ourselves with other large developing countries.”
“Hmmm,” said Madam.
“And that means that we do not have enough money for the Right to Food bill.”
“Well. I don’t know how you do it. But you have to somehow do it,” said Madam. “Raul ka gum ab mujhse dekha nahi jaata.”
“Yes madam I know,” said Chidu. “Ek Ma ka dard main samajh sakta hoon.”
“So do something then!”
“What madam?” asked Chidu. “There is really no money!”
“Well what is money?”
“As in?”
“It is just a piece of paper,” said Madam.
“So print it.”
“Print it?” asked Chidu. “But that will lead to more inflation madam.”
“I thought you knew my favourite song,” replied Madam. “I heard you singing it sometime back.”
“Yes madam!”
“You do it. Or I will get bada babu back and get him to do it.”
“I’ll do it madam.”
“Good,” said Madam. “Oh and can I have those CDs of bada babu making his budget speeches. I am turning into an insomniac these days getting worried about Raul. He refuses to get married also.”
“Yes Madam time he got married,” said Chidu. “Who will rule us after him otherwise? The show must go on.”
“Oh, I am not worried about that. Priya and Bob’s sons will take care of that.”
“Yes. Yes. They are also there. I will give you the CDs on Saturday.”
“Okay,” said Madam. “See you on Sunday then.” 
“Close call that was,” Chidu told himself, as soon as Madam left.
“Don’t worry. Don’t worry,” said Amma, suddenly appearing from nowhere. “If anything happens you can always join my party.”
“And even mine,” said Didi, also appearing out of nowhere. “What Madam can do I can do better!”
“Oh, I am really having a nightmare,” said Chidu, rushing out of the Parliament in his white Ambassador.
As soon as the car was out of the vicinity of Parliament he asked his driver to put on the FM.
Aur bhaiyyon aur behno,” went the anchor, imitating the voice of the great Ameen Sayani, like they all do. “Sunte hai ye naya gaana!
Tu bhi dramebaaz, main bhi dramebaaz, saale dramebaaz sab yahan!” went the song.

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

Why the foreigners are not impressed with Budget 2013

P-CHIDAMBARAMThe foreigners aren’t impressed with the budget presented by Finance Minister P Chidambaram yesterday. These include the rating agencies as well as investors who pour money into the Indian stock market.
As Ruchir Sharma, head of the Emerging Markets Equity team at Morgan Stanley Investment Management and the author of Breakout Nations told NDTV in a discussion yesterday: “On the fiscal side..a lot of the assumptions are being torn apart when people are analysing this budget.”
Government income is essentially categorised into two parts. Revenue receipts and capital receipts. Revenue receipts include regular forms of income which the government earns every year like income tax, corporate tax, excise duty, customs duty, service tax and so on.
Capital receipts include money earned through sale of shares in government-owned companies, telecom spectrum, etc. Capital receipts are essentially earned by selling things that the government owns.  Once something is sold it can’t be sold again and that is an important point to remember. Borrowing by the government, which is not an income, is also comes under capital receipts.
Revenue receipts for the year 2013-2014 are expected to be at Rs 10,56,331 crore. For the year 2012-2013 revenue receipts were budgeted to be at Rs 9,35,685 crore when the last budget was presented. This number has now been revised to Rs 8,71,828 crore. Hence, the government expects the revenue receipts to grow by 21.2 percent in 2013-2014. This projection has been made in an environment where the government is unlikely to meet its original revenue receipts target for the year. Also the revenue receipts this year will grow by 16 percent in comparison to last year.
So a 21 percent growth in revenue receipts is a fairly optimistic assumption to make. So if revenues collected are lower during the course of the year and the expenditure continues at the same rate, the fiscal deficit will be higher than it has been projected to be. Or expenditure will have to be cut, like it has been done this year. And that is not always a good sign.
Another point that this writer made yesterday was on the side of subsidies. For the year 2012-2013 subsidies were expected to be at Rs 1,90,015 crore. This has been revised to Rs 2,57,654 crore, which is almost 36 percent higher. This makes it very difficult to believe next year’s subsidy target of Rs 2,31,084 crore, especially when more subsidies/sops are likely to be announced during the course of the next financial year in view of the 2014 Lok Sabha elections.
As I said in the piece, the understating of subsidies has not been a one-off thing and has happened every year during the second term of the Congress-led United Progressive Alliance (UPA) government. So higher subsidies than budgeted might again mean a higher fiscal deficit or a cut in expenditure.
Amay Hattangadi and Swanand Kelkar of Morgan Stanley Investment Management, in a report titled The Art of Balancing, make an interesting point. They feel that the finance minister by projecting a fiscal deficit of 5.2 percent of GDP for this financial year and 4.8% of GDP might be giving an impression of fiscal prudence, but a closer look at the math reveals a different story.
As they write: “As trained accountants, we have learnt that sale of assets from the balance-sheet are one-off or non-recurring items. It is interesting that if we add back the estimates from sale of (telecom) spectrum and divestment of government companies (both non-recurring in our view), the ‘real’ fiscal deficit/GDP ratio for financial year 2014 shows no improvement over financial year 2013.”
The table below sourced from the Morgan Stanley report gives the complete story.

Table from Morgan Stanley
Table from Morgan Stanley

Once we take away capital receipts like divestment of shares and sale of telecom spectrum, which are essentially one-off sources of income from the equation, the real fiscal deficit  to GDP ratio comes in at a more realistic 5.6 percent of the GDP and not 4.8 percent or 5.2 percent that it has been projected to be. The point is that people aren’t buying the numbers put out in Chidambaram’s budget.
There is also very little acknowledgement of the mistakes that have made by the government over the past few years.
Ruchir Sharma, in his discussion on NDTV, put up a very interesting slide. The slide shows that India has consistently held rank 24-26 among 150 emerging market countries when it comes to economic growth over the last three decades. We thought we were growing at a very fast rate over the last few years, but so was everyone else. As Sharma put it: “The last decade we thought we had moved to a higher normal and it was all about us. Every single emerging market in the world boomed and the rising tide lifted all boats, including us.”

India's growth has remained consistent in the last three years
India’s growth has remained consistent in the last three decades

But now that we are not growing as fast as we were in the past, it is because of the slowing down of the global economy. As Chidambaram put it in his budget speech “We are not unaffected by what happens in the rest of the world and our economy too has slowed after 2010-11.”
Sharma pointed out the self-serving nature of this argument thus: “When the downturn happens it is about the global economy. When we do well it’s about us.” This is a disconnect that still persists, as is evident from Chidambaram’s statement.

India in the last four years was fed with artifuical fiscal stiumal, which led to high inflation
India in the last four years was fed with artificial fiscal stimulas, which led to high inflation

Another slide put up by Sharma makes for a very interesting reading. “Between 2008 and 2010 we implemented a massive stimulus, both fiscal and monetary, and that artificially inflated our growth rate to 13th in emerging market (as is evident from the slide). We were thrilled about it. It led to a massive increase in inflation and now this is payback time. Between 2010-2012, we fell to the 40th position,” said Sharma. So as more money was pumped into the economy, it chased the same number of goods and services, which led to higher prices or inflation.
So the massive spending by the government came back to haunt us. Inflation went through the roof. India’s rank among emerging markets when it came to inflation used to be around 60th. In the last few years it has fallen to the 118-119th position.

Chart:Morgan Stanley
As Sharma puts it: “This is the problem that India has today. India does not have an explicit inflation target. Most emerging markets and central banks work with explicit inflation targets. We have gotten away with it. I think the time is coming now for a more rules-based system. If we had an inflation target I doubt if we would have allowed inflation to increase at such a rapid pace”

Nations which have grown in the past at rapid rates have never had consistently high inflation. “And whenever inflation persisted over a period of time it always meant that the economy was headed for a major slowdown,” said Sharma. High inflation continues to be a major reason for worry in India.
Inflation in India has been a manifestation of a rapid increase in government spending. The total expenditure of the government in 2006-2007 was at Rs 5,81,637 crore. For the year 2013-2014, the total expenditure is expected to be at Rs 16,65,297 crore. The expenditure thus has nearly tripled (actually it’s gone up 2.9 times). During the same period the revenue receipts of the government have gone up only 2.5 times. The difference, as we all know, has been made up by borrowing leading to a burgeoning fiscal deficit. The next slide tells you how hopeless the situation really is.

Chart:Morgan Stanley
So India is really at the bottom when it comes to the fiscal deficit.

The point is very basic. We don’t earn all the money that we want to spend. As Chidambaram admitted to in the budget speech: “In 2011-12, the tax GDP ratio was 5.5 percent for direct taxes and 4.4 percent for indirect taxes.  These ratios are one of the lowest for any large developing country and will not garner adequate resources for inclusive and sustainable development.  I may recall that in 2007-08, the tax GDP ratio touched a peak of 11.9 percent.”
And this budget highlighted very little on how the government plans to increase its revenue receipts. In fact, Chidambaram even admitted that only 42,800 individuals admitted to having taxable incomes of greater than Rs 1 crore in India. This is a situation that needs to be set right. More Indians need to be made to pay income tax.
To conclude, let me say that the foreigners are worried and so should we.
The aritcle originally appeared on on March 1, 2013.
Vivek Kaul is a writer. He tweets @kaul_vivek

Chidu expects you to spend Rs 25,000 to save Rs 2,500

A seemingly popular measure announced in today’s budget is the increase in the tax deduction allowed on home loan interest by Rs 1 lakh. Currently a deduction of Rs 1.5 lakh is allowed to someone buying his first home.
The extra deduction of Rs 1 lakh comes with caveats. The first caveat is that the house should be bought during the period between April 1, 2013 and March 31, 2014. The home loan taken should not be more than Rs 25 lakh. And the value of the house being bought should not exceed Rs 40 lakh (something that the finance minister P Chidambaram did not talk about in his budget speech). Chidambaram felt that this move will “promote home ownership and give a fillip to a number of industries like steel, cement, brick, wood, glass etc. besides jobs to thousands of construction workers.”
Let us try and understand why nothing of that sort is going to happen anywhere other than the imagination of Chidambaram. Let us say an individual who falls in the top tax bracket of 30%, takes a home loan of Rs 25 lakh at an interest of 10.5% to be repaid over a period of twenty years. The equated monthly instalment (EMI) to repay this loan would work out to around Rs 24,960. Lets assume this to be Rs 25,000 for the ease of calculation.
What is the extra saving that the individual makes? He gets a tax break of extra Rs 1 lakh. Given that he is in the 30% tax bracket, this means an yearly saving of Rs 30,000 (again lets ignore the 3% education cess for the ease of calculation). This essentially means an added saving of Rs 2,500 per month (Rs 30,000/12).
So what Chidambaram wants us to believe is that people of this country would start paying EMIs of Rs 25,000, in order to make an extra saving of Rs 2,500? No wonder he went to Harvard.
There are other problems with this deduction as well. The deduction is available only for the financial year 2013-2014 (or the assessment year 2014-2015). If the complete deduction is not used in 2013-2014, the remaining part can be used in 2014-2015(or the assessment year 2015-2016). 
The point is that the deduction is largely available only once. To imagine that people would buy homes to make use of what is essentially a one time deduction is stretching it rather too much. Of course the market understands this. The BSE Realty Index is down around 2.7% from yesterday’s close as I write this.
People don’t buy homes to get a tax deduction. The average middle class Indian buys a home to stay in it. And for that to happen a couple of things need to happen. The real estate prices need to fall from their current atrocious levels. And interest rates also need to fall for EMIs to become affordable.
In fact this is where another comment made by Chidambaram during the course of the speech that makes immense sense. As he said “There are 42,800 persons – let me repeat, only 42,800 persons – who admitted to a taxable income exceeding Rs 1 crore per year.”
This is nothing but a joke. There must be more people earning more than Rs 1 crore in South Delhi, let alone all of India. What this tells us very clearly is that there is a tremendous amount of black money in this country. And all these ill gotten gains are stashed away by buying real estate. This ensures that there are more investors/speculators in the real estate market, than genuine buyers.
Unless this nexus is broken down there is no way anyone who actually needs a house to live in, to be able to actually buy one.
As far as EMIs are concerned they will only come down once interest rates start falling. And for that to happen the government needs to control its borrowing. The borrowing will fall only once the fiscal deficit is under control. Fiscal deficit is the difference between what a government earns and what it spends.
And I don’t see any of these two things happening in the near future. Neither will black money in the system come down nor will the fiscal deficit fall leading to a fall in interest rates.
Chidambaram ended his speech by quoting his favourite poet Saint Tiruvalluvar. Let me end this piece by quoting one my favourite poets, Bashir Badr. 

Musaafir ke raste badalte rahe,
muqaddar mein chalna thaa chalte rahe
Mohabbat adaavat vafaa berukhi,
kiraaye ke ghar the badalate rahe

So the moral of the story is that we will continue to live in rented houses, changing them every 11 months, when the contract runs out.
The article originally appeared on on February 28, 2013

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