The economists are at it again. Doing what they are good at i.e. building castles in the air.
The Prime Minister’s Economic Advisory Council (EAC) headed by Dr C Rangarajan released their review of the economy in 2012/13, yesterday. One of the things that the Council points out in this report is “If we (i.e. India) grow at 8 to 9 % per annum, we will graduate to the level of a middle income country by 2025.It is once again a faster rate of growth which will enable us to meet many of our important socio-economic objectives.”
While 8-9% economic growth is a noble thought, what is the chance of it happening given the current state of affairs in the country? The answer is that the situation doesn’t look very good.
The EAC expects an economic growth of 6.4% in 2013-2014 (the period between April 1, 2013 and March 31, 2014).
Sustained long term economic growth is very rare. As Ruchir Sharma points out in Breakout Nations – In Pursuit of the Next Economic Miracles “Very few nations achieve long-term rapid growth. My own research shows that over the course of any given decade since 1950, only one-third of emerging markets have been able to grow at an annual rate of 5% or more. Less than one-fourth have kept that pace up for two decades, and one tenth for three decades. Just six countries (Malaysia, Singapore, South Korea, Taiwan, Thailand, and Hong Kong) have maintained the rate of growth for four decades, and two (South Korea and Taiwan) have done so for five decades.”
In fact India and China which have been among the fastest growing countries over the last ten years are totally new to this class. “During the 1950s and the 1960s the biggest emerging markets – China and India – were struggling to grow at all. Nations like Iran, Iraq, and Yemen put together long strings of strong growth, but those strings came to a halt with the outbreak of war…In the 1960s, the Philippines, Sri Lanka, and Burma were billed as the next East Asian tigers, only to see their growth falter badly,” writes Sharma.
The point is that economic growth cannot be taken for granted. There is a lot that can go wrong and it does. In the Indian context that is already coming out to be true. The economic growth rate has fallen from 8-9% to the level of around 5% for the year 2012-2013 (the period between April 1, 2012 and March 31,2013). As the EAC report released yesterday points out “In August 2012, the EAC had projected a likely growth rate for the economy of 6.7 %…At the end of the fiscal year (i.e. as on March 31, 2013)…the actual growth rate at around 5% is much lower than what was projected.”
Different countries have followed different formulas for sustained economic growth at different points of time. But one thing that has almost always killed economic growth is the premature construction of a welfare state, which the Congress led United Progressive Alliance (UPA) government has at the top of its agenda.
As Sharma writes “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. Inspired by the popularity of the employment guarantees, the government now plans to spend the same amount extending food subsidies to the poor. 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.”
Countries that now run big welfare states have done so after many years of high economic growth. As Gurucharan Das points out in India Grows at Night “India’s leaders did not modernise or expand the capability of its institutions. They forgot that western democracies had taken more than hundred years of economic growth and capacity building to achieve the welfare state.”
While extending subsidies to the poor is a noble idea, the thing is it does not work over a period of time. A recent discussion paper put out by the Commission for Agricultural Costs and Prices (CACP), Ministry of Agriculture, seems to suggest the same. The paper finds that real farm wages (i.e. growth in wages adjusted for inflation) grew by 3.7% per year in the 1990s. This growth fell to 2.1% per year in 2000s. “The results (of the analysis) points to the fact that a ‘pull strategy’ is more desirable than a ‘push strategy’, meaning growth-oriented investments are likely to be a better bet for raising rural wages and lowering poverty than the welfare-oriented MGNREGS (Mahatma Gandhi National Rural Employment Guarantee Scheme),” the paper pointed out.
The paper also suggests that growth oriented “investments would have raised the growth rates in these sectors, and ‘pulled’ the real farm wages through a natural process of development, whereby wages increase broadly in line with rising labour productivity.” So it is very clear that the governments much touted rural employment guarantee scheme is not really working. The incomes of farmers would have grown much faster had the government simply stayed away.
The other thing all these subsidies (which include oil subsidies which form the bulk of the total subsidies) have done is that it has pushed up government borrowing. “The total public-debt to GDP ratio is now 70% – among the highest for any major developing country,” writes Sharma. “The development of this habit – deficit spending in good times as well as bad – was a major contributor to the current debt problems in the United States and Western Europe, and India can ill afford it.” This is something that the politicians who run India seem to have totally forgotten about.
Increased government borrowing has also led to high interest rates. This has a huge impact on consumption as well as business expansion and in turn pulled down economic growth. The investment by Indian businesses has fallen from 17% of GDP in 2008 to 13% in 2012.
The media has recently been reporting about the finance minister P Chidambaram travelling to different parts of the world soliciting investors to put money in India. And this is happening at a time when more and more Indian companies are setting up businesses abroad. “At a time when India needs its businessmen to reinvest more aggressively at home in order for the country to hit its growth target of 8 to 9 %, they are looking abroad. Overseas operations of Indian companies now account for more than 10% of overall corporate profitability, compared with 2% just five years ago. Given the potential of the Indian domestic market, Indian companies should not need to chase growth abroad,” writes Sharma.
This makes one wonder that if Indian companies are not ready to invest in India, why would foreigners want to do the same? It need not be said that doing business in India has become more and more difficult over the years.
Gurucharan Das in India Grows at Night recounts the experience of a businessman friend of his Navin Parikh. “’Not a week goes by,’ Navin said, ‘without an inspector from some department or the other coming for his hafta vasooli, “weekly bribe”. Labour, excise, fire, police, octroi, sales tax, boilers and more – we have to keep them all happy. Otherwise, they make life hell. More than 10% of my costs are in “managing the system”.”
Given this it is not surprising that more and more Indian businesses are happy going abroad rather than investing in India. And if this continues to happen India’s economic growth will continue to flounder.
The Economic Survey points out that agriculture accounts for 58% of the employment in the country. But this 58% produces only 16% of the country’s GDP. So it is basically a no-brainer to suggest that India needs more industries and businesses, so that people can move out of agriculture. And that cannot happen without the government getting its act right. While a spate of economic reforms, from land to labour, are the need of the hour, but there is something which is more important than even that.
The government of India needs to limit its ambitions. As Sunil Khilnani writes in The idea of India “The state was enlarged, its ambitions inflated, and it was transformed from a distant alien object into one that aspired to infiltrate the everyday life of Indians, proclaiming itself responsible for everything they could desire.”
This anomaly needs to be corrected. The idea of mai-baap sarkar needs to go. Unless that happens, continuous 8-9% economic growth will continue to remain an idea in the heads of economists and politicians.
The article originally appeared on www.firstpost.com on April 25, 2013
(Vivek Kaul is a writer. He tweets @kaul_vivek)
Hindi film songs have words of wisdom for almost all facets of life. Even inflation.
As the lines from a song in the 1974 superhit Roti, Kapda aur Makan go “Baaki jo bacha mehangai maar gayi(Of whatever was left inflation killed us).”
Inflation or the rise in prices of goods and services has been killing Indians over the last few years. What has hurt the common man even more is food inflation. Food prices have risen at a much faster pace than overall prices.
A discussion paper titled Taming Food Inflation in India released by the Commission for Agricultural Costs and Prices(CACP), Ministry of Agriculture, on April 1, 2013, points out to the same. “Food inflation in India has been a major challenge to policy makers, more so during recent years when it has averaged 10% during 2008-09 to December 2012. Given that an average household in India still spends almost half of its expenditure on food, and poor around 60 percent (NSSO, 2011), and that poor cannot easily hedge against inflation, high food inflation inflicts a strong ‘hidden tax’ on the poor…In the last five years, post 2008, food inflation contributed to over 41% to the overall inflation in the country,” write the authors Ashok Gulati and Shweta Saini. Gulati is the Chairman of the Commission and Saini is an independent researcher.
During the period 2008-2009 to December 2012, the wholesale price inflation, a measure of the overall rise in prices, averaged at 7.4%. In the same period the food inflation averaged at 10.13% per year.
So who is responsible for food inflation, which is now close to 11%? The short answer is the government. As Gulati and Saini write “The Economist in its February 2013 issue highlights that it was the increased borrowings by the Indian government which fuelled inflation…It categorically puts the responsibility on the government for having launched a pre-election spending spree in 2008, which continued even thereafter.”
Gulati and Saini build an econometric model which helps them conclude that “fiscal Deficit, rising farm wages, and transmission of the global food inflation; together they explain 98 percent of the variations in Indian food inflation over the period 1995-96 to December, 2012…These empirical results clearly indicate that it would not be incorrect to blame the ballooning fiscal deficit of the country today to be the prime reason for the stickiness in food inflation.”
Fiscal deficit is the difference between what a government earns and what it spends. In the Indian context, it has been growing in the last few years as the government has been spending substantially more than what it has been earning.
The fiscal deficit of the Indian government in 2007-2008 (the period between April 1, 2007 and March 31, 2008) stood at Rs 1,26,912 crore. This jumped by 230% to Rs 4,18,482 crore, in 2009-2010 (the period between April 1, 2009 and March 31, 2010). This was primarily because the expenditure of the Congress led UPA government went up at a much faster pace than the income.
The government of India had a total expenditure of Rs 7,12,671 crore, during the course of 2007-2008. This grew by nearly 44% to Rs 10,24,487 crore in 2009-2010. The income of the government went up at a substantially slower pace. Between 2007-2008 and 2009-2010, the revenue receipts (the income that the government hopes to earn every year) of the government grew by a minuscule 5.7% to Rs 5,72,811 crore.
And it is this increased expenditure(reflected in the burgeoning fiscal deficit) of the government that has led to inflation. As Gulati and Saini point out “Indian fiscal package largely comprised of boosting consumption through outright doles (like farm loan waivers) or liberal increases in pay to organised workers under Sixth Pay Commission and expanded MGNREGA(Mahatma Gandhi National Rural Employment Guarantee Act expenditures for rural workers. All this resulted in quickly boosting demand.”
So the increased expenditure of the government was on giving out doles rather than building infrastructure.
This meant that the money that landed up in the pockets of citizens was ready to be spent and was spent, sooner rather than later. “But with several supply bottlenecks in place, particularly power, water, roads and railways, etc, very soon, ‘too much money was chasing too few goods’. And no wonder, higher inflation in general and food inflation in particular, was a natural outcome,” write the authors.
So increased expenditure of the government led to increasing demand for goods and services. This increase in demand was primarily responsible for the economy growing by 8.6% in 2009-2010 and 9.3% in 2010-2011(the period between April 1, 2010 and March 31, 2011). But the increase in demand wasn’t met by an increase in supply, simply because India did not have the infrastructure required for increasing the supply of goods and services. And this led to too much money chasing too few goods.
No wonder this sent food prices spiralling. Food prices have continued to rise as the government expenditure has continued to go up. Also food prices have risen at a much faster pace than overall prices. This is primarily because agricultural prices respond much more to an increase in money supply vis a vis manufactured goods where prices tend to be stickier due to some prevalence of long term contracts. As Gulati and Saini put it “In fact, our analysis for the studied period shows that one percent increase in fiscal deficit increases money supply by more than 0.9 percent.”
The other major reason for a rising food prices is the rising cost of food production due to rising farm wages. This pushes inflation at two levels. First is the fact that an increase in farm wages drives up farm costs and that in turn pushes up prices of agricultural products. As the authors point out “During 2007-08 to 2011-12, nominal wages increased at much faster rate, by close to 17.5% per annum…The immediate impact of these increased farm wages is to drive-up the farm costs and thus push-up the farm prices, be it through the channel of MSP(minimum support price) or market forces.”
Rising farm wages also lead to a section of population eating better and which in turn pushes up price of protein food. As Gulati and Saini point out “This study finds that the pressure on prices is more on protein foods (pulses, milk and milk products, eggs, fish and meat) as well as fruits and vegetables, than on cereals and edible oils, especially during 2004-05 to December 2012. This normally happens with rising incomes, when people switch from cereal based diets to more protein based diets.”
In the recent past price of cereals like rice and wheat has also gone up substantially. This is primarily because the government is hoarding onto much more rice and wheat than it requires to distribute under its various social programmes.
If food inflation has to come down, the government has to control expenditure. The authors Gulati and Saini suggest several ways of doing it. The government can hope to earn Rs 80,000-100,000 crore if it can get around to selling the excessive grain stocks that it has. Other than help control its fiscal deficit, the government can also hope to control the price of cereals like rice and wheat which have been going up at a very fast rate by increasing their supply in the open market.
As the authors write “By liquidating(i.e selling) excessive grain stocks in the domestic market or through exports, massive savings of non-productive expenditures can be realized. For example, as against a buffer stock norm of 32 million tonnes of grains, India had 80 million tonnes of grains on July 1, 2012, and this may cross 90 million tonnes in July 2013. Even if one wants to keep 40 million tonnes of reserves in July, liquidating the remaining 50 million tonnes can bring approximately Rs 80,000-100,000 crore back to the exchequer. And with this much grain in the market food inflation will certainly come down. Else, the very cost of carrying this “extra” grain stocks alone will be more than Rs 10,000 crore each year, counting only their interest and storage costs.”
Of course this has its own challenges. More than half of this inventory of grain in India is concentrated in the states of Punjab and Haryana. Moving this inventory from Punjab and Haryana to other parts of the country will not be easy, assuming that the government opts to work on this suggestion. At the same time the government will have to do it in a way so as to ensure that the market prices of rice and wheat don’t collapse. And that is easier said than done.
The authors also recommend that the government can cut down on food and fertiliser subsidy by directly distributing it. “By going through cash transfers route (using Aadhar), one can plug in leakages in PDS(public distribution system) which, as per CACP calculations are around 40%, and save on high costs of storage and movement too, saving in all about Rs 40,000 crore on food subsidy bill,” write Gulati and Saini.
Something similar can be done on the fertiliser front as well. “Fertiliser subsidy, if given directly to farmers on per hectare basis (Rs 4000/ha to all small and marginal farmers which account for about 85 percent of farmers; and somewhat less (Rs 3500 and Rs 3000/ha) as one goes to medium and large farmers, and deregulating the fertiliser sector can bring in large savings of about Rs 20,000 crore along with greater efficiency in production and consumption of fertilisers.”
Whether the government takes these recommendations of the Commission for Agricultural Costs and Prices seriously, remains to be seen. Meanwhile here is another brilliant Hindi film song from the 2010 hit Peepli Live: “Sakhi saiyan khoobai kaamat hain, mehangai dayan khaye jaat hai(O friend, my beloved earns a lot, but the inflation demon keeps eating us up).”
The article originally appeared on www.firstpost.com on April 2, 2013
(Vivek Kaul is a writer. He tweets @kaul_vivek)