Tag: economic survey | Page 4

12 May, 2016

It’s Time Govt Admits, It Does Not Know How to Run Air India

In yesterday’s column on Air India I made a rather silly mistake, which I want to correct here. For the year 2015-2016, the government run airline made an operational profit of Rs 8 crore.

Using this data point, I said that for 2015-2016, the government wouldn’t have to pour any more taxpayer money into Air India. This is incorrect primarily because I assumed operational profit to be the same as net profit.

Anyone who has studied Finance 101 knows that operational profit and net profit are two different things all together. Operational profit is the profit that a company makes from its business operations. After this, the company needs to pay interest on its debt, as well as taxes to the government. What remains is the net profit.

While I shouldn’t have made a silly mistake like this, I am glad I did because it allowed me to dig deeper and come across some more data, which makes my point even stronger. This data came from two written replies that the minister of state for civil aviation Mahesh Sharma recently provided to the Lok Sabha.

In 2015-2016, Air India made a net loss of Rs 2,636 crore. This means that between 2010-2011 and 2015-2016, the airline has made a total loss of Rs 34,689.7 crore. And that is not a small amount by any stretch of imagination.

Year	Loss (in Rs crore)
2015-2016	2,636
2014-2015	5,859.1
2013-2014	6,279.6
2012-2013	5,490.1
2011-2012	7,559.7
2010-2011	6,865.2
Total	34,689.7
Source: Public Sector Enterprises Survey and Ministry of Civil Aviation

Given the loss of Rs 2,636 crore, this means that the government would have had to pour money into Air India in 2015-2016. In fact, until March 2016, the government had already poured Rs 22,280 crore into Air India. For 2016-2017, an equity infusion of Rs 1,713 crore has already been approved.

The question to ask is how has the airline managed to bring down its losses to Rs 2,636 crore from Rs 5,859.1 crore in 2014-2015? The minister of civil aviation Ashok Gajapati Raju, told the Lok Sabha that the airline was able to cut operational expenses by almost 11% during the course of the year and that helped it run an operational profit of Rs 8 crore.

That is just a part of the answer and a very minor part to boot. Let’s look at some more numbers

Air India	2012-2013	2013-2014	2014-2015	2015-2016
Year	2012-2013	2013-2014	2014-2015	2015-2016
Total revenue	18,213.79	20,140.59	20,606.27	21,315
Total expenditure	23,703.95	26,420.19	26,466.18	23,951
Net Loss	-5,490.16	-6,279.6	-5,859.91	-2,636
(in Rs crore)

Source: From a written answer provided by Mahesh Sharma, the minister of state for civil aviation, to the Lok Sabha.

As can be seen from the above table the total revenue of Air India has been growing at a very slow pace since 2012. In fact, between 2014-2015 and 2015-2016, the airline managed to increase its sales by just 3.4%.

This isn’t surprising given that it continues to lose market share. In 2013-2014, Air India had a domestic market share of 19%. Since then, it has fallen to 16%(as of February 2016). The airline continues to have a brand image problem and is the airline of preference of a very few people.

That apart, the airline has managed to bring down its expenditure by 9.5% or by Rs 2,515.2 crore, between 2014-2015 and 2015-2016. The question is how has this happened? The simple answer to this lies in the fact that jet fuel prices have fallen during the course of the last financial year and the airline has benefited tremendously because of it.

As I had mentioned in yesterday’s column, in May 2015, the jet fuel price was $1.84 per gallon. By March 2016, this had fallen to $1.07 per gallon. In fact, the price was even lower at $0.93 per gallon in January 2016.

Further, a March 2016 PTI report quotes an Air India official as saying that in 2015-2016, the fuel bill of the company would be around Rs 5,700 crore, which would be lower in comparison to the Rs 8,200 crore bill that the company ran up in 2014-2015.

What does this mean? The company saved Rs 2,500 crore because of lower fuel costs. And how much did the total expenditure of the airline fall by? Rs 2,515.2 crore, as I calculated earlier in the column.

Hence, the expenditure of the airline has fallen primarily because of lower fuel prices. And this has allowed it to make lower losses and at the same time make an operational profit. The numbers make me wonder what operational efficiency was the civil aviation minister talking about.

Further, lower fuel prices are not within the control of the airline. And as soon as prices start to go up, the airline’s losses will start to increase as well. And the meagre operational profit will turn into a loss.

In his reply to the Lok Sabha, minister of state for civil aviation, Mahesh Sharma, has offered a range of reasons as to why Air India makes losses. High fuel prices are one reason. This impacts all airlines and not just Air India. If high fuel prices were an issue, how did Indigo make profits all these years? Further, this cannot be reason for 2015-2016, when jet fuel prices have fallen dramatically.

Sharma also offers other reasons for the non-performance of the airline. One reason offered is high airport usage charges. These charges are not just borne by Air India, other airlines shell it out as well, which in turn is recovered from the end consumer.

Sharma then tells us that competition from low cost carriers is another reason why airline is losing money. But this is true about all other airlines which are operating. The competition is not just specific to Air India.

This also brings out another important point regarding competition and the lack of success of public sector enterprises. As Dwijendra Tripathi writes in The Oxford History of Indian Business: “The profits before interest and taxes as the percentage of capital employed in the public sector remain on an average very low…Few of the profit-making units were operating in a competitive framework; the bulk of the profits came from companies operating in sectors in which the public sector employed a near monopoly position.”

This is a point made in the latest Economic Survey as well. As it points out: “The Indian aviation and telecommunication sectors of today are unrecognizably different from what they were 20 years ago, with enormous benefits for the citizens. Public sector companies now account for a small share of the overall size of these sectors.”

Long story short—when public sector enterprises face any sort of competition from the private sector, their best days soon get over. Air India is a brilliant example of that.

Sharma in his reply also blames the weakening of the Indian rupee for extreme losses. Jet fuel has to be imported and if the rupee weakens against the dollar, the cost of jet fuel also goes up. Nevertheless, this is a risk faced by every airline in the world which does not earn a major portion of its revenues in dollars, and is not just specific to Air India. Also, there are ways an airline can go about hedging these risks.

The point being that Sharma comes up with many reasons except for the fact that the government does not know how to run an airline. Or should a government be running an airline in the first place? Well, if it can make condoms, it can sure run an airline.

And honestly, any other minister, in his place, would have come up with the same set of excuses. The fact of the matter is that a civil aviation minister without Air India coming under him, would essentially be rendered useless.

To conclude, as I said yesterday, the Rs 8 crore operational profit, will be used as an excuse to show the revival of the airline and keep it running. Nevertheless, as soon as fuel prices start to go up, losses will increase. The taxpayer will continue to bailout the airline.

Rest assured!

The column originally appeared in the Vivek Kaul Diary on Equitymaster

14 April, 2016

What is True About Sugarcane in Maharashtra is Also True About Rice in Punjab

A water-scarce state like Maharashtra should not be growing as much sugarcane as it does. Sugarcane is cultivated on less than four percent of the total cropped area in the state but uses 70% of the its irrigation water.

This is something that is happening in the production of rice in Punjab as well. Punjab, is basically a semi-arid area. The state is the third largest producer of rice. It produces 11.3% of the total rice produced in the country, with Uttar Pradesh and West Bengal producing 13.9% and 13.6% respectively.

The production of rice needs a lot of water. Given this, rice is really not something that should be grown in a semi-arid region. As the Commission for Agricultural Costs and Prices (CACP) in a report titled Price Policy for Kharif Crops—The Marketing Season for 2015-16 points out: “West Bengal, just as an example, consumes 2605 litres of water to produce a kilogram of rice compared to 5337 litres being guzzled by Punjab. The efficiency gap with respect to consumption of water in Punjab (the most efficient in terms of land productivity) is over 51 percent. This shows that the most efficient state in terms of land productivity is not the most efficient if other factor of production viz. water is factored into.”

What this clearly tells us is that rice farming in Punjab is a huge water-guzzler. The state government helps the farmers by ensuring that electricity is free, which essentially leads to a lot of over-pumping of ground water in the state.

As an August 2015 news-report in The Hindu Business Line points out: “According to the Central Ground Water Board, out of 137 blocks in Punjab, 110 come under the over-exploited category. Besides, the gross underpricing of electricity has encouraged the farmers to pump groundwater with minimal cost and effort.”

The CACP makes a broader point in a report titled document titled Price Policy for Sugarcane—2015-16 Sugar Season where it says: “Instead of focusing on economy in water use in agriculture, most state governments have been content with subsidising electricity for pumping irrigation water.”
Other than free electricity, there is another reason for such a huge amount of rice being produced in Punjab. The government of India announces the minimum support price(MSP) for 23 crops, every year. Nevertheless, as far as procurement is concerned, it primarily buys rice, wheat and cotton, through the Food Corporation of India(FCI) and other state procurement agencies.

The awareness of this procurement among farmers varies throughout the country. In Punjab the awareness is very high. As the Economic Survey for 2015-2016 points out: “In Punjab and Haryana, almost all paddy and wheat farmers are aware of the MSP policy.”

Over and above this, the procurement is also not uniformly carried out throughout the country. In 2013-2014, Punjab produced 11.1 million tonnes of rice. Of this, nearly 11 million tonnes was marketable surplus. The state consumed only 0.1 million tonnes of rice, given that rice is not a staple food in Punjab. The Punjabis are primarily roti eaters and roti is made from wheat.

Of this, 8.1 million tonnes was procured by the government. This is the highest among all the states in the country, both in absolute terms as well as a proportion of total production. Also, nearly one fourth of the total rice procured by the government is procured from Punjab.

Compare this to the state of West Bengal, which produced 15 million tonnes of rice in 2013-2014, with a marketable surplus of 9.5 million tonnes (given that Bengalis are primarily rice-eaters). Of this only 1.7 million tonnes was procured.

As the CACP points out: “For instance, there was almost negligible procurement of rice in Assam during 2013-14, even though it contributed 4.6 percent of the total rice production. The situation in other eastern states such as Bihar, West Bengal is somewhat better than that of Assam but not good enough when these states are compared with Punjab.

This is a point that is made in the Economic Survey as well: “Even for paddy and wheat where active procurement occurs, there is a substantial variation across states – with only half or less paddy and wheat farmers reporting awareness of MSP, especially in states such as, Gujarat, Maharashtra, Rajasthan, Andhra Pradesh and Jharkhand.”

The awareness of MSP for rice essentially ensures that the farmers of Punjab are actually producing more rice than they should, given that they have a ready customer in the government. The free electricity is of course another reason. This has also led to a situation wherein the country is producing more rice than what it needs for consumption and is not producing enough other agricultural products like pulses.

In fact, any export of an agricultural product essentially implies export of water. As CACP points out: “When our country exports about 100 lakh tonnes [10 million tonnes] of rice annually, it implies that over 38 billion cubic meter of virtual water is exported.” In a country as water deficient as India is, this is not a good thing.

Much of this rice is produced by pumping ground water and this has had a huge impact in the state of Punjab. As CACP points out: “Given that this water is extracted by mining groundwater, as is being done in much of the Punjab and Haryana belt (particularly in case of rice), where water table is receding by 33 cm each year, thereby shrinking its per-capita availability, high import duty of 70 to 80 percent is perverse and conveys wrong signals on use of water (and also power).”

Cheap electricity and an ineffective procurement policy have essentially led to a situation where India’s water problem will only get worse in the days to come. As the Economic Survey points out: “India has much lower levels of water per capita than Brazil, one of the world’s leading agricultural countries. This constraint is exacerbated because, while Brazil and China use approximately 60 per cent of their renewable fresh water resources for agriculture, India uses a little over 90 per cent.”

The column originally appeared on Vivek Kaul’s Diary on April 14, 2016

14 March, 2016

Cash Transfer of Subsidies is the Right Way Forward

In his book Naked Economics—Undressing the Dismal Science, the American author Charles Wheelan recounts a very interesting story about his visit to Cuba. Cuba, as you know, dear reader, has been under a communist regime for a very long time.

As Wheelan writes: “Because the visit was licensed by the U.S. government, each member of the delegation was allowed to bring back $100 worth of Cuban merchandise, including cigars. Having been raised in the era of discount stores, we all set out looking for the best price on Cohibas [a premium Cigar brand] so that we could get the most bang for our $100 allowance. After several fruitless hours, we discovered the whole point of communism: The price of cigar was the same everywhere. There is no competition between stores because there is no profit as we know it. Every store sells cigars—and everything else for that matter—at whatever price Fidel Castro (or his brother Raul) tells them to.”

Wheelan had basically experienced in Cuba what we in India call the public distribution system. Further, he had managed to find cigars everywhere he went though at the same price. What this tells us is that the public distribution system in Cuba did work, at least when it came to cigars. In India, it does not.

The government runs the public distribution system through around five lakh fair priced shops also known as ration shops. Unlike Cuba, these shops are very leaky. And food grains and kerosene that are sold through these shops do not reach the intended beneficiaries and find its way into the open market. The fair price shop owners benefit in this process.

As per the Economic Survey which was released last month, 54% of the wheat and 15% of the rice that is distributed through the public distribution system does not reach the intended beneficiaries. Along similar lines, 48% of sugar is siphoned off as well (as per last financial year’s Economic Survey). When it comes to kerosene, nearly 46% is siphoned off. 24% of domestic cooking gas and 40% of fertilizer is also siphoned off.

This means that the government of India loses a lot of money every year. As the economist Kaushik Das writes in An Economist in the Real World: “The problem arises from the fact that in India the food subsidy is handed to poor households via the ration shops. The government delivers subsidised grain to the store owner and the owner is then instructed to hand this over at the prescribed price to Below Poverty Line (BPL) households and to some other categories of vulnerable households.”

The assumption is that the shop owners will honestly pass on the grains and kerosene to those it’s meant for. As Basu writes: “If store owners were perfectly honest, this would work fine. But if they are not, then it is easy to see that many of them will give in to the temptation of making some easy money by selling off some of this subsidised grain in the open market where the price is higher, and turning away some of the deserving poor households or adulterating the grain that is to be sold to those households…A large share of the wheat meant to reach the poor never does because it is pilfered or sold on the open market en route.”

So what is the way out of this? One way is better policing. Nevertheless, as Basu writes: “It is easy to respond to this by asking for better policing. But we have to be realistic. Trying to police such a large system by creating another layer of police and bureaucracy will come with its own problems of corruption and bureaucracy.”

A better solution for this mess is to handover the subsidy directly to the poor households instead of going through the fair price shop owner. How can this be done? This can be carried out through the Aadhaar card linked to a savings bank account.

The penetration of Aadhaar cards has gone up at a very rapid pace all across India. As the Economic Survey points out: “The current government has built on the previous government’s support for the Aadhaar program: 210 million Aadhaar cards were created in 2015, at an astonishing rate of over 4 million cards per week. 975 million individuals now hold an Aadhaar card – over 75 percent of the population and nearly 95 per cent of the adult population…Aadhaar penetration is high across states. Nearly one-third of all states have coverage rates greater than 90 percent; and only in 4 states—Nagaland (48.9), Mizoram (38.0), Meghalaya (2.9) and Assam (2.4)—is penetration less than 50 per cent.”

These cards now need to be linked to savings bank accounts. This will ensure that instead of handing over subsidised grains to the intended beneficiary through the fair price shop route, the government can simply transfer money into his Aadhaar linked bank account. This money can then be used to buy the food grains from any shop instead of just the shops which come under the public distribution system.

This will create competition among shops and ensure that the poor get access to the food grains that they are entitled to. It will also ensure that the leakage of food grains will come down dramatically.

As the Economic Survey points out: “After identifying beneficiaries, the government must transfer money to them. Every beneficiary needs a bank account and the government needs their account numbers. This constraint has been significantly eased by the Pradhan Mantri Jan Dhan Yojana, under whose auspices nearly 120 million accounts were created in the last year alone—at a blistering, record-setting pace of over 3 lakh accounts per day.”

The trouble is that despite this blistering pace, the savings account penetration continues to remain low across large parts of the country. As the Economic Survey points out: “Despite Jan Dhan’s record-breaking feats, basic savings account penetration in most states is still relatively low – 46 per cent on average and above 75 per cent in only 2 states (Madhya Pradesh and Chattisgarh).”

The sooner this is corrected, the faster the government can move to putting cash directly in the accounts of people instead of trying to distribute food grains through a leaky public distribution system.

To conclude, on March 11, 2016, the government moved one step closer to cash transfer of subsidies. The Lok Sabha passed the Aadhaar Bill. Given that the Bill was introduced as a money bill, the government doesn’t have to get the Bill passed through Rajya Sabha.

The column originally appeared on Vivek Kaul’s Diary on March 14, 2016

9 March, 2016

Middle class exit is quietly on

It is very well known that only a small portion of India’s population pays income tax whereas everyone over eighteen is allowed to vote.

As per the annual report of the ministry of finance for 2014, the total number of assesses in 2013-2014 had stood at 4.7 crore. These includes individuals, families, trusts as well corporates. What this clearly tells us is that not many Indians pay income tax in an individual capacity. The number could be as low as 3% of the population.

One explanation for this is that India is a poor country, and in a poor country it is but logical that many people won’t pay income tax. Having said that 3% is too low a number. This is something that the latest Economic Survey which released on February 26, 2016.

As the Survey points out: “For the level of democracy, India’s ratio of taxpayers to voting age population is significantly less than that of comparable countries. This implies that while at present about 4 per cent of citizens who vote pay taxes, the percentage should be about 23.”

So around one-sixth of those who should be paying income tax are actually paying it. There are multiple implications of the same. The government doesn’t earn as much as it could. This means that the government has to borrow more to pay for its expenditure. And every extra rupee that the government borrows, means that there is one rupee less available for the private sector to borrow. This pushes up the costs of borrowing for the private sector, which in effect impacts their expansion plans.

It also means that a lot of black money is being generated. This black money finds its way into real estate and gold, where it is the easiest to hide. Black money going into real estate has driven up prices too extremely high levels all around the country, making it difficult for people who want to buy a home to live in, to be able to buy one.

But there is another problem—a small section of the population gets squeezed for income tax. The logic here is that the government takes from those who have money through taxation and hands it over to those who don’t, in various ways. A good example of this in the non-tax context was a policy that was followed in the state of West Bengal.

As economist Kaushik Basu writes in An Economist in the Real World: “To ensure that rural people get good education, West Bengal made it compulsory for teachers, including the best, to serve a term in rural areas.”

What did this do? As Basu points out: “It changed the catchment of “best” teachers, since many talented people preferred not to become teachers or, if they were already teachers, they preferred to move out to other places, where they would not be rotated.”

A similar sort of thing happens when a small section of population is squeezed for taxes. As the Economic Survey points out: “If the state’s role is predominantly redistribution, the middle class will seek – in Professor Albert Hirschman’s famous terminology – to exit from the state. They will avoid or minimise paying taxes; they will cocoon themselves in gated communities; they will use diesel generators to obtain power; they will go to private hospitals and send their children to private education institutions.”

This phenomenon is clearly visible in Bengaluru and other metropolitan cities all across the country. As the Economic Survey points out: “All these pathologies are evident in India. By reducing the pressure on the state, middle class exit will shrink it, eroding its legitimacy further, leading to more exit and so on. A state that prioritises or over-emphasises redistribution without providing basic public goods [roads, electricity, water and so on], risks unleashing this vicious spiral.”

Like was the case with the teachers of West Bengal, the Indian middle class exit is quietly on.

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

The column originally appeared in the Bangalore Mirror on March 9, 2016

2 March, 2016

Budget 2016: Mr Jaitley, pro-rural steps are all fine but when will we tax rich farmers?

In his budget speech, the finance minister Arun Jaitley came up with a slew of announcements for the farmers of this country. This wasn’t surprising given the fact that the country has seen two bad monsoons, leading to the agricultural growth collapsing to 0.5% over the last two years.

In 2015-2016, agriculture is expected to grow by 1.1%. This is an improvement over 2014-2015, when agriculture contracted by 0.2%. Nevertheless, it is much slower than the overall growth of 7.6% expected in 2015-2016.

As Jaitley said during the course of this speech: “We have a desire to provide socio-economic security to every Indian, especially the farmers, the poor and the vulnerable; we have a dream to see a more prosperous India; and a vision to ‘Transform India’.”

Nevertheless, Jaitley, like finance ministers and governments of the past, continues to molly coddle, the rich farmers. Agricultural income in India continues to be untaxed.

One of the core points of the Survey is about not enough Indians paying income tax.

As the Economic Survey released on February 26, points out: “In India today, roughly 5.5 percent of earning individuals are in the tax net. This statistic gives an idea of the gap that India needs to cover to become a full tax-paying democracy. Based on recent tax data…we estimate that about 15.5 percent of net national income excluding taxes (which is the national income accounts counterpart of the personal income accruing to households) was reported to the tax authorities as gross taxable income.”

This means that nearly 85% of the country is outside the tax net. One clear impact of this is that the government is not able to raise enough taxes as it could. “To give a sense of the magnitudes, controlling for both the level of economic development and democracy, India’s overall tax to GDP is about 5.4 percentage points less than that of comparable countries,” the Survey points out.

While, the government doesn’t collect enough taxes, the rich farmer has the best of all the worlds. He has access to free/subsidised water and electricity. He has access to free fertilizer and benefits the most from minimum support price that the government offers on the purchase of rice and wheat. In fact, the Economic Survey points out that the implicit subsidy on electricity is Rs 37,170 crore.

The rich farmers benefit the most from cheap or free electricity. As Swaminathan Aiyar wrote in a recent column in The Times of India: “During a Punjab visit, I was told of one Jat farmer with 150 tubewells, paying zero electricity charges.”

In fact, as the Economic Survey points out: “India uses 2 to 4 times more water to produce a unit of major food crop than does China and Brazil.” This is primarily because of free or cheap electricity leading to over-pumping of water.

As the Economic Survey points out: “It has long been recognized that a key factor undermining the efficient use of water is subsidies on power for agriculture that, apart from its benefits towards farmers, incentivises wasteful use of water and hasten the decline of water tables. According to an analysis by National Aeronautics and Space Administration (NASA)5 , India’s water tables are declining at a rate of 0.3 meters per year. Between 2002 and 2008, the country consumed more than 109 cubic kilometers of groundwater, double the capacity of India’s largest surface water reservoir, the Upper Wainganga.”

This is clearly not a good thing.

And on top of this rich farmers do not pay any income tax. A lot of this money makes it into real estate, especially on the edges of cities and towns, making it unaffordable for others.

Further, if the government hopes to up its tax collections significantly in the years to come, the rich farmer needs to be brought under the tax net. As the Economic Survey pointed out: “The tax exemptions which often amount to redistribution towards the richer private sector will also need to be reviewed and phased out. And, reasonable taxation of the better-off, regardless of where they get their income from—industry, services, real estate, or agriculture–will also help build legitimacy of India.”

Jaitley like his predecessors chose to do nothing about this. This is not surprising given that taxing the rich farmer remains a political hot-potato. The governments over the last 25 years could not have done it, given that they lacked the majority to do so.

The Modi government has the majority in the Lok Sabha, but given the fractious relationship it shares with the opposition, any significant decision is likely to attract a lot of protest. Plus there are elections in Punjab coming up, where Modi’s Bhartiya Janata Party (BJP) is in alliance with the Akali Dal, which is essentially a party supported by rich farmers.

Finance ministers are not known to listen to the advice provided in the Economic Survey. Nevertheless, if Jaitley had taken on this advice, the whole country would have been better-off in the process.

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

The column originally appeared on Firstpost on February 29, 2016