GDP

Wake up UPA. Central planning didn’t work for Soviet Union, it won’t work for you either

upaVivek Kaul 

In the last ten years that the Congress led United Progressive Alliance(UPA) government has run this country, its solution for almost every socio-economic problem facing this country, has been bigger government. This was a practice followed by the erstwhile Communist countries all over the world, particularly the Soviet Union. And there was a basic reason behind why the system did not work.
Diane Coyle explains this point in her new book GDP – A Brief But Affectionate History. As she writes “The communist countries had centrally planned economies, not market economies. Ministries in Moscow set the figures for the total number of all items to be produced in the economy and cascaded that down to specific production quotas for different industries and individual factories. With the benefit of hindsight we can see that the idea bureaucrats could possibly known enough about a large, complex economy to plan it from the center successfully is ludicrous.”
Coyle further explains why central planning did not work. “Individual factories were set output targets by the planning ministry. These were expressed in terms of volume—number of TV sets or pairs of shoes—or even weight. Targets of this kind are easy to meet. It doesn’t matter what the shoes are like, whether they are durable, comfortable, in the right sizes for the majority of wearers, or stylish. It doesn’t matter whether the TV sets work after six months or if the panel at the back constantly falls off.”
While India is no longer centrally planned to this extent, but our love for central planning has persisted. Take the case of the Right to Education which was introduced in 2009. At the heart of the Act is a noble idea of ensuring that education is a human right that should be free and compulsory for all children between the ages of 6 and 14.
But like is the case with all big bang centrally planned initiatives the Act tries to achieve too many things at once. It ordered schools to have infrastructure like playgrounds and toilets. Again noble ideas which easy to mandate by law, but difficult to implement immediately.
Many “bottom of the pyramid” kind of private schools have been providing education at a rock bottom fee. If they are asked to suddenly create adequate infrastructure which meets the criteria set under Right to Education, their cost of operation goes up. Their only option is to pass on this cost and increase the fee that they charge.
The trouble is that even though most parents want to educate their children, they may not be in a position to pay the higher fees.A recent article on www.bbc.com deals with precisely this issue. It quotes Gitanjali Krishnan, a teacher in a school in Panchsheel Enclave in New Delhi as saying that the school would have to triple student fees to meet the criteria set under the Right to Education. And this is something that parents of the children studying in the school won’t be able to afford. “Our parents are the poorest of the poor, labourers and migrant workers, they won’t be able to afford it,” she said.
This has led to a scenario where schools are simply shutting down. “Baladevan Rangaraju, director of think tank India Institute, who has been monitoring media reports, has counted 2,692 schools shut and 17,871 at risk,” the BBC article said.
State governments are also shutting down schools which don’t meet the criteria set under Right to Education. The thinking among bureaucrats seems to be that in private schools the quality of teaching is not guaranteed. This is a rather stupid argument given that if the teaching in government schools was good, then the government employees and bureaucrats would be sending their sons and daughters to these schools, which is not the case.
Also, shutting down schools is not a solution. Even if the education offered by private schools is not upto the mark, isn’t some education better than no education? As Parth J Shah, founder president of the Centre for Civil Society writes in a blog “Actually many government schools themselves would not be able to meet the rigid input norms((like playground, classroom size and teacher-student ratio) that the Right to Education has mandated.”
Further, what the Right to Education does like all centrally sponsored scheme is to set a target. And the target is to complete the syllabus. Economist Abhijit Banerjee talked about this sometime back. He conducted a small experiment in Bihar and the results were astonishing. “We did one experiment in Bihar which was with government school teachers. This was in summer around two years ago. The teachers were asked that instead of teaching like you usually teach, your job for the next six weeks is to get the children to learn some basic skills. If they can’t read, teach them to read. If they can’t do math, teach them to do math. At the end of six weeks, these teachers were given a small stipend. They had also been given a couple of days of training. At the end of six weeks, the children had closed half the gap between the best performing children and the worst performing children. They had really improved enormously,” said Banerjee.
So what was happening here? The teachers did not have to complete the syllabus in this case. They had to teach students what the students did not know. As Banerjee put it “The reason was they were asked to do a job that actually made sense. They were asked to teach the children what they don’t know. The usual jobs teachers are asked to do is teach the syllabus – which is very different. Under the Right to Education Act, every year you are supposed to cover the syllabus,” said Banerjee.
Central planning essentially tries to implement what should be the best outcome. But that is easier mandated by the law than implemented in reality. As Banerjee put it “One thing that we forget is that the perfect is the enemy of the good. We are trying to have an education system that is perfect and that every child should come out with wisdom at the end of it and as a result they learn nothing.”
Moving beyond the Right to Education, let’s take the case of the food security scheme, which aims at providing subsidised rice and wheat to nearly 82 crore Indians or 67% of the total population. Again, a big Act which tries to achieve the impossible.
Government data over the years has clearly shown that the percentage of hungry people is very low. An article in the Mint points out “A February[2013] report of the National Sample Survey Office (NSSO) shows the proportion of people not getting two square meals a day dropped to about 1% in rural India and 0.4% in urban India in 2009-10. Interestingly, the average cereal consumption of families who reported that they went hungry in some months of the year (in the month preceding the survey) was roughly equal to the average cereal consumption of those who reported receiving adequate meals throughout the year.”
Hence, what people need is not subsidised rice and wheat, but food that is more nutritious. Howarth Bouis, director of HarvestPlus, International Food Policy Research Institute (IFPRI), made a very interesting point in an interview to the Mint in 2013. “If you look at all the other food groups such as fruits, vegetables, lentils, and animal products other than milk, you will find a steady increase in prices over the past 40 years. So it has become more difficult for the poor to afford food that is dense in minerals and vitamins,” he said.
No steps have been taken to tackle this problem. Over and above this other factors also need to be taken into account. As a research paper titled National Food Security Bill: Challenges and Options authored by economists belonging to the belonging to the Commission for Agricultural Costs and Prices (CACP), which is a part of the Ministry of Agriculture points out “Women’s education, access to clean drinking water, availability of hygienic sanitation facilities are the prime prerequisites for improved nutrition. It needs to be recognised that malnutrition is a multi-dimensional problem and needs a multi-pronged strategy.”
This means taking many small steps in the right direction, which necessarily don’t involve big government and more central planning.
To conclude, the Congress led UPA government is spending its last six weeks in power. And if there is one lesson it can draw from its last ten years in power is that Soviet style central planning doesn’t really work any more and perhaps it never did.
The article originally appeared on www.FirstBiz.com on March 27, 2014

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

Even with the diesel price hike, India is staring at a 7% fiscal deficit


Vivek Kaul
The Congress party led United Progressive Alliance(UPA) has been in the habit of shooting messengers who come with bad news. So here is some more bad news.
Almost half way through the financial year 2012-2013 (i.e. the period between April  1, 2012 and March 31, 2013), the fiscal deficit of the government is looking awful to say the least. Fiscal deficit is the difference between what the government earns and what it spends.
When the finance minister presents the annual budget there are a lot of assumptions that go into the projection of the fiscal deficit.
The overall fiscal deficit was projected to be at Rs 5,13,590 crore. The expenditure of the government for the year was expected to be at Rs 14,90,925 crore. In comparison the government expected to earn Rs 9,77,335 crore during the course of the year. The difference between the earnings of the government and its expenditure came to Rs 5,13,590 crore  and this is the projected fiscal deficit. Hence, the government was spending 55% (Rs 5,13,590 crore expressed as a percentage of Rs 9,77,335 crore) more than it earned.
The expenditure part of the calculation includes subsidies on oil, fertiliser and food. The subsidy on oil was assumed to be at Rs 43,580 crore.  This subsidy was to be used by the government to compensate oil marketing companies like Indian Oil, Bharat Petroleum and Hindustan Petroleum for selling diesel, kerosene and cooking gas, at a loss.
The government has more or less run out of the budgeted oil subsidies. It has already paid Rs 38,500 crore to OMCs, for selling diesel, kerosene and LPG at a loss during the last financial year. This amount was reimbursed only in the current financial year and hence has had to be adjusted against the oil subsidies budgeted for this year. This leaves only around Rs 5,080 crore with the government for compensating the OMCs for the losses this year.
And that’s just small change in comparison to the losses that OMCs are expected to face for selling diesel, kerosene and LPG. The oil minister Jaipal Reddy recently said that if the current situation continues the OMCs will end up with losses amounting to Rs 2,00,000 crore during the course of the year.
As economist Shankar Acharya wrote in the Business Standard on September 13“The real fiscal spoilsport is, of course, subsidies, especially those for diesel, LPG and kerosene, though those on fertiliser and foodgrain are also large. Data circulated by the petroleum ministry indicate under-recoveries by oil marketing companies (OMCs) of Rs 17/litre on diesel, Rs 33/litre on kerosene and Rs 347/cylinder on LPG.”
The OMCs need to be compensated for these losses by the government because if they are not compensated then they will go bankrupt. And if they go bankrupt then you, I and everybody else, won’t be able to buy petrol, diesel, kerosene and LPG, which would basically mean going back to the age of tongas and bullock carts. Clearly no one would want that.
So to deal with expected losses of Rs 2,00,000 crore the government has around Rs 5,080 crore of the budgeted amount remaining. This means that the government would have to come up with around Rs 1,95,000 crore from somewhere.
This is a large amount of money. The government has tried to curtail these losses by increasing the price of diesel by Rs 5 per litre and thus bringing down the loss on sale of diesel to Rs 12 per litre. This move is expected to save the government Rs 19,000 crore which means losses will now amount to Rs 1,76,000crore (Rs 1,95,000crore – Rs 19,000 crore)  in total.
Since 2003-2004, the government has had a formula for sharing these losses. The upstream oil companies like ONGC and Oil India Ltd, which produce oil, are forced to share one third of the losses. But there have been instances when the formula has not been followed and the upstream companies have been forced to chip in with more than their fair share. In 2011-2012, the last financial year the government forced the upstream companies to compensate around 40% of the total losses.
If the government follows the same formula this year as well, it would mean that the upstream companies would have to compensate the OMCs to the tune of Rs 70,400crore (40% of Rs 1,76,000 crore). Now that is a huge amount, whether the upstream companies have the capacity to come up with that kind of money remains to be seen. But assuming that they do, it still means that the government would have to come up with Rs 1,05,600 crore (60% of Rs 1,76,000 crore) from somewhere. This would mean that the fiscal deficit would be pushed up to Rs 6,19,190 crore (Rs 5,13,590 crore + Rs 1,05,600 crore). If the upstream companies cannot bear 40% of the total loses the government will have to bear a greater proportion of the total losses, pushing the fiscal deficit up further.
Oil subsidies are not the only subsidies going around. The government is expected to overshoot its food subsidy target of Rs75,000 crore as well. The Economic Times had quoted a food ministry official on June 15, 2012, confirming that the food subsidy target will be overshot, after the government had approved the minimum support price (MSP) of rice to be increased by 16 per cent to Rs 1,250 per quintal to. “The under-provisioning of food subsidy in the current year is at Rs 31,750 crore. Now with increased MSP on paddy(i.e. rice), the total food subsidy deficit at the end of the current year will be about Rs 40,000 crore putting immense pressure on the food subsidy burden of the government,” said a food ministry official,” the Economic Times had reported.
If we add this Rs 40,000 crore to Rs 6,19,190 crore the deficit shoots up to Rs 6,59,190 crore. This is something that Acharya confirms in his column. “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,” he writes.
What does this mean is that for the first four months of the year, the government’s fiscal deficit was greater than half of the fiscal deficit for the year. The targeted fiscal deficit for the year was Rs 5,13,590crore. Half of it would equal to Rs 2,56,795 crore. The government has already crossed this in the first four months. At the same rate it would end up with a fiscal deficit of Rs 7,70,385 crore (Rs 2,56,795 crore x 3) by the end of the year. This would work out to 50% more than the projected fiscal deficit of Rs 5,13,590 crore.
It would be preposterous on my part to project a fiscal deficit which is 50% more than the projected deficit. But as I had shown a little earlier a deficit of around Rs 6,60,000 crore is pretty much on the cards.
What does not help is the fact that things aren’t looking too good on the revenue side for the government. As Acharya puts it “More recently, there are ominous, if unsurprising, indications of a significant deceleration in direct tax collections up through August, especially from companies, with gross corporate tax revenues stagnant compared to April-August of the previous financial year. Despite finance ministry reassurances, tax collections for the year could fall significantly below Budget targets because of sluggish economic activity.”
So the government is not going to earn as much as it had expected to through taxes. The government also has set a disinvestment target of Rs30,000 crore. It hopes to earn this money by selling shares of public sector companies. But six months into the financial year there has been no activity on this front.
Taking these factors into account a fiscal deficit of Rs 7,00,000 crore can be expected. Fiscal deficit as we all know is expressed as a proportion of the gross domestic product (GDP). The projected fiscal deficit of Rs 5,13,590 crore works out to 5.1% of the GDP. The GDP in this case is assumed to be at Rs 101,59,884 crore.
With a fiscal deficit of Rs 7,00,000 crore, fiscal deficit as a proportion of GDP works out to 6.9% (Rs 7,00,000 crore expressed as a % of Rs 101,59,884 crore).
The GDP number of Rs 101,59,884 crore is also a projection. The assumption is that the GDP will grow by a nominal rate of 14% over the last financial year’s advance estimate of GDP at Rs 89,121,79 crore.  The trouble is that the economy is slowing down and it is highly unlikely to grow at a nominal rate of 14%. The current whole sale price inflation is around 7%. The real rate of growth for the first six months of the calendar year (i.e. the period between January 1, 2012 and June 30, 2012) has been around 5.4%. If we add that to the inflation we are talking of a nominal growth of around 12.5%. At that rate the expected GDP for the year is likely to be around Rs 100,26,201crore (1.125 x Rs 89,121,79 crore).
Hence the fiscal deficit as a percentage of GDP will be around 7% (Rs 700,000 crore expressed as a percentage of Rs 100,26,201crore). A 7% fiscal deficit would give the Prime Minister Manmohan Singh a sense of déjà vu. In his speech as the Finance Minister of India in 1991 he 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.”
One way out of this mess is to cut the losses due to the sales diesel, kerosene and on LPG. But that would mean a price increase of Rs 12/litre on diesel, Rs 33/litre on kerosene and Rs 347/cylinder on LPG. That of course is not going to happen. Also with the government having to borrow more to meet the increased fiscal deficit, the interest rates will continue to remain high.
India is staring at a huge economic problem. The question is whether the government is ready to recognise it. As Pratap Bhanu Mehta writes in The Indian Express “The central driver of good economics is recognising the problem.” The trouble is that the Congress led UPA government doesn’t want to recognise the problem, let alone tackle it.
(The article originally appeared on www.firstpost.com on September 14,2012. http://www.firstpost.com/economy/why-the-diesel-hike-will-not-even-dent-the-fiscal-deficit-455249.html)
(Vivek Kaul is a writer. He can be reached at [email protected])

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


Vivek Kaul

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