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])
Ravi Batra is an Indian American economist and a professor at the Southern Methodist University, in Dallas, Texas. Over the years Batra has made many predictions which have turned out right. He correctly predicted the fall of communism in USSR and at the same time said it would continue in China. He also predicted an enormous rise in wealth concentration in the United States that would generate poverty among its masses. These predictions were made way back in 1978 in his book The Downfall of Capitalism and Communism. These along with many of his political and economic predictions have come to be true over the years (for a complete list click here). Batra uses the Law of Social Cycle to make these predictions. On the basis of this law he now predicts the rise of the Team Anna political party. “Through long and painful fasting Anna Hazare has captured the attention of people, and finally decided to form a political party. Indians will indeed vote for him or the candidates he supports,” says Batra. Batra is the author of many bestselling books like The Crash of the Millennium, The Downfall of Capitalism and Communism, Greenspan’s Fraud and most recently The New Golden Age. In this interview he speaks to Vivek Kaul.
What is the law of social cycle?
The law of social cycle was pioneered by my late teacher and mentor, Shri Prabhata Ranjan Sarkar. It can be explained in a variety of ways. Let’s start with a simple observation. A careful examination of every society reveals that there are three possible sources of political power –the army, popular ideas, or money.
Could you explain that through an example?
For instance, if we carefully explore the political landscape of our world, we find that in places like the United States, Western Europe, Canada, India, Australia and Japan, money rules society and super-materialism prevails. In places like Iran, the priesthood is dominant with control over religious ideas, whereas in Russia former intelligence officers such as the ex-KGB chief, Vladimir Putin among others, hold the reigns. In China, the communist party is supreme but the ultimate source of political power is the military, which established the party’s rule in a Marxist revolution in 1949. The Tiananmen Square massacre of 1989 clearly illustrates this point. When the Chinese government faced a serious challenge to its authority, it is the army that restored order in the country and crushed the opposition to the communist rule?
So what does this suggest?
This suggests that there are three main sources of political power—the military, human intellect, and, of course, money or wealth. Religion may also bring power, but priests dominate society by mastering scriptures and rituals. In other words, they also utilise their intellect to control and influence people. Thus, ultimately political power or societal dominance stems from three sources—physical strength or skills, human intellect or intellectual skills, and the hoarding of wealth. As a result, through the pages of history, we find that a society is sometimes dominated by warriors, sometimes by intellectuals (including priests), and sometimes by acquisitors who are experts in making money. However, the law of social cycle goes a lot further than merely describing the three classes of people.
Could you explain that?
It analyses the evolution of civilizations and states that a society evolves in terms of a cycle wherein a nation is first dominated by a group of warriors, then by a group of intellectuals, and finally by a group of wealthy acquisitors. Then towards the end of the age of the wealthy, there is so much corruption and crime that people get fed up and revolt against the elite or the rulers, who are overthrown in a social revolution. Since it takes a lot of courage to revolt against the authorities, the successful revolutionaries are the true warriors, who start another warrior age and bring an end to the corrupt rule of money. This way the social cycle begins anew and moves along in the same succession of warriors to intellectuals to acquisitors and then to the social revolution.
That’s very interesting…
Historically, the warrior era has been represented by the rule of the army, and the intellectual era by the supremacy of the priesthood or prime ministers. By contrast, the eras of acquisitors have occurred when feudal landlords or wealthy bankers and merchants were dominant. Thus warriors come to power with the help of physical might, intellectual with the help of ideas, and acquisitors with the help of money.
Since when has this cycle existed?
The social cycle has existed since the birth of human society and its validity can be proved by written history and the logic of social evolution. For instance, in India, around the times of Mahabharata, warriors dominated society; then came the rule of brahmans or intellectuals, followed by the Buddhist period, when capitalism and acquisitors were predominant; this era ended in the flames of a social revolution, when a great warrior named Chandragupta Maurya, put an end to the reign of a king named Dhananand, and started another age of warriors. What is interesting is that India’s overwhelmingly powerful caste system, wherein the brahman is placed atop the social hierarchy followed by kshyatriyas, vaishyas and shudras, was not able to thwart the law of social cycle. There were times when in practice, though not in theory, the brahman accepted the supremacy of people belonging to other castes. During the Buddhist period, for instance, the vaishyas were treated with great respect. They were called shreshthis, meaning “superiors.” In today’s acquisitive age, of course, we clearly see the priest eagerly and humbly accepting money from the rich regardless of their caste.
What happened after Chandragupta Maurya?
Reverting to the cycle, the Mauryan age of warriors was followed by another age of intellectuals in which the kings themselves claimed to be brahmans. The latter period was followed by feudalism, representing the age of acquisitors. Later, the feudal landlords, sometimes called rajas, were overthrown by an illustrious warrior, named Samudra Gupta, who thus organised another social revolution against the rule of acquisitors. Some historians have called the Gupta king the Napoleon of India, because he destroyed the armies of a large number of landowners and brought the wealthy under control.
And the age of Samudragupta was followed by?
The Gupta warrior era gave way to another intellectual era in the 9th century, when a renowned ascetic named Shankracharya revived brahmanism and uprooted Buddhism from the land of its birth. Priests and prime ministers dominated again, but their influence waned in a few hundred years and gave way to another round of feudalism, which was followed by yet another age of warriors, this time under the rule of Muslim invaders. Thus began the Muslim warrior era during the 14th century and continued as the Mughal empire in the 15th. Akbar the Great was the most illustrious emperor of this age, which lasted for a while and then gave way to another intellectual era, this time under the dominance of Muslim priests or Ulemas, who held sway over the Mughal king Aurangzeb. Around these times the great warrior Shivaji founded the Maratha Empire, which, after his death, came under the influence of brahmans known as Peshwas. At the same time, the northern Mughal Empire came under the sway of its wazirs or prime ministers. Thus this Mughal-Maratha period was the latest era of intellectuals, which was followed by yet another era of acquisitors, when the British took over around 1800. India has been in this age ever since. Indians will indeed vote for him or the candidates he supports
So what is the point that you are trying to make?
The main point is that no class remains in power forever, and that the acquisitive age always ends in a revolution. Such was the case in all civilizations. In fact new revolutions are already taking place in the world. Muslim society, where Saudi oil wealth is the main source of power, is also in the age of acquisitors, as is much of the planet. Rebellions have already occurred in the Islamic nations of Tunisia, Egypt, Libya and Yemen, and now Syria is facing the same fate. The Syrians have shown admirable resolve, and even though unarmed or heavily outgunned they are revolting against their ruler, President Assad.
What about the current state of affairs in India?
Courage is contagious and gradually inspires the masses to fight tyranny. The wave of courage that has dethroned many Muslim rulers is now budding in India under the guidance of Shri Anna Hazare and Baba Ram Dev. The movements they have started are still in the early stage but such movements are likely to grow and ultimately succeed in their mission to rid the nation of political corruption, because the age of acquisitors is about to end around the globe. Who could have imagined just a few years ago that Egypt’s Hosni Mubarak and Libya’s Colonel Kaddafi would be overthrown by their people?
Yes you are right…
A revolution doesn’t occur overnight, but when it starts it engulfs the nation in a mighty wave that crushes the ruler. It is initiated by small groups that have been opposing corruption for a long time, and for a while it faces public apathy and even opposition, but when the right moment comes it ignites the people to decimate the elite. The current decade is likely to be the decade of revolutions that will consume the ruling classes around the planet. The revolutionary wave began in the Muslim world and it is bound to spread in all areas where the acquisitors are dominant, because remember that courage is contagious. India gained independence in 1947 and so did many other countries within a few years. The point is that when a revolutionary wave begins in one area, it unleashes a flood that engulfs the neighbours. The moment has arrived to dethrone the corrupt acquisitors, and someone has to seize the moment to feed this flame. Anna Hazare and Ram Dev are doing it and they deserve the support of moralists around the world.
But how do you see the current rule of wealth being overthrown in India?
The rule of wealth in India will end through the electoral process, because people will vote for those who vow to end corruption. Through long and painful fasting Anna Hazare has captured the attention of people, and finally decided to form a political party. Indians will indeed vote for him or the candidates he supports. Although, some of his followers will be unhappy with his decision to enter the political fray, this is the right thing to do. As Mahatma Gandhi demonstrated, fasting alone is not enough to achieve a desired goal. You also have to offer a concrete and credible alternative. The social revolution against the acquisitors has started in Muslim society and is slowly gathering steam in India and the United States. By the end of this decade, if not sooner, the age of acquisitors will be a thing of the past, and those with courage to oppose the elite will start a new age of warriors, because courage is the chief hallmark of a person of warrior mentality. Today, an acquisitor’s democracy prevails in most nations; in the near future it will give way to a warrior’s democracy, where money will not be needed to win an election.
So how do you see this new age that you are predicting?
During the Buddhist period preceding Chandragupta’s ascension kings were elected in some areas of north India. That was an example of warrior’s democracy wherein a person’s martial skills, not wealth, brought him the high office. Similarly, in the future a candidate’s military background could be important in his rise to power. Whoever brings about the new warrior age will also give birth to a new golden age.
(The interview originally appeared on www.firstpost.com on August 7,2012. http://www.firstpost.com/economy/raghuram-rajans-advice-isnt-what-upa-may-want-to-hear-410694.html)
(Vivek Kaul is a writer and can be reached at [email protected])