Independence Day Speech

Dear PM, If Things Are Improving for PSUs, Why Not Declare Complete Numbers?

narendra_modi

In the Independence Day speech made on August 15, 2016, the prime minister Narendra Modi talked about the turnaround of three public sector units(PSUs)—Air India, Bharat Sanchar Nigam Ltd(BSNL) and Shipping Corporation of India.

As the prime minister remarked: “The PSUs are formed to fall in a pit, to fail, to get locked or to be sold out. That has been the history. We have tried to bring in a new culture. And today for the first time, I can say with satisfaction that Air India which had a bad image, has succeeded in registering an operational profit last year. At a time when telecom companies all over the world were earning, BSNL was falling in a pit. For the first time, BSNL has succeeded in earning operational profit. Nobody knew whether Shipping Corporation of India would ever be in profit. Today Shipping Corporation of India is making profit.”

Operational profit is the profit that a company makes from its business operations. It is what accountants call earnings before interest and taxes. In case of Air India, as I have written in the past, the airline has made an operational profit primarily because of the fall in oil prices. I will not repeat the argument here. (You can read the column explaining this here). Also, just because the airline has made an operational profit doesn’t mean that the airline is not losing money.

What Mr Modi forgot to tell us is that the airline lost Rs 2,636 crore in 2015-2016. Herein we need to differentiate between the operational profit of the company and the net profit/loss. 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 or net loss, as is the case with Air India. In case of Air India, the airline had a debt of Rs 51,367 crore as on March 31, 2015 and interest needs to be paid on this debt. After paying this interest, the airline ended with a net loss.

Also, the complete profit and loss statement of the airline for 2015-2016, hasn’t been made public yet. From the data that is available in the public domain it can be said that the airline made an operating profit primarily because of a fall in oil prices. If there is anything more to it, then the government needs to make available the complete set of numbers, as soon as possible, in the public domain.

Further, the Modi government, in the process of projecting itself positively, has shown a tendency in the past, to take credit for falling oil prices as well. Take the case of the total savings made through Pahal, the scheme in which the subsidies available on domestic cooking gas are transferred directly into the bank accounts of citizens, after they have bought a cooking gas cylinder at the full price and not the subsidised price as was the case in the past.

In June 2016, the finance secretary Ashok Lavasa said that the government had saved Rs 14,872 crore by paying the subsidy amount directly into the account of people. This turned out to be incorrect.

A CAG Audit Report on Pahal published in August 2016 eventually pointed out that while there were some savings from Pahal, they were nowhere near the claims being made by the government as well as the oil companies which sell cooing gas cylinders.

In a report the CAG said that the reduction of Rs 23,316 crore in cooking fuel subsidy for the first three quarters of 2015-2016, in comparison to 2014-2015, was largely due to a sharp fall in oil prices and not due to the Pahal scheme.

As the report pointed out: “While implementation of PAHAL scheme coupled with the LPG ‘Give it up’ campaign has resulted in the reduction of offtake of domestic subsidised LPG cylinders, the resultant savings was not as significant as that generated through fall of subsidy rates.”

The CAG said that the savings due to implementation of Pahal were only Rs 1,764 crore. The remaining Rs 21,552 crore fall in cooking gas subsidies was largely due to a fall in oil prices. Another interesting point that the CAG made was that while calculating the fall in subsidy, the national average offtake of 6.27 cylinders a year should be used and not the maximum number of 12 cylinders that consumers are allowed subsidy on, during the course of the year.

This isn’t surprising given that politicians and governing political parties all over the world, like numbers which show them in good light. As Philippa Malmgren writes in Signals—How Everyday Signs Can Help Us Navigate the World’s Turbulent Economy: “Why would politics demand that the numbers be skewed in a particular direction? Power. Politicians and policymakers want power. They want votes. They want the mathematics to show whatever will favour them in an election. If they want a different answer they simply change the assumptions or the parameters of the algorithm.”

The thing is that Pahal is actually working and has helped whittle down a good number of bogus domestic cooking gas connections which were being used to divert domestic cooking gas in the black market. Also, Rs 1,784 crore is a very good amount of saving and need not have been misrepresented in the way it eventually was.

If the government had reported the correct number, that in itself would have been a good beginning. By doing what it did, the government gave an opportunity to naysayers to say that “we told you that economic reforms don’t work in India”. And that is not a good message to spread.

The other company that prime minister Modi talked about in his speech was BSNL. Talk about BSNL having made an operating profit in 2015-2016 has been there in the media for some time now. In fact, the former telecom minister Ravi Shankar Prasad in July had said that the company would report an operating profit of around Rs 2,000 crore in 2015-2016.

A news-report in The Economic Times now suggests that the company might have made an operational profit of Rs 3,378 crore in 2015-2016. Again, there is no data available in the public domain on this. The latest numbers I could find where from the department of telecommunications annual report for 2015-2016.

Figure in * Crore

Financial Year2012-132013-142014-152015-16 (Up to September 30, 2015)*
Total Income27,12827,99628,64512,929
Total expenditure35,01235,01637,29216,734
Net profit(-) 7,884(-) 7,020(-) 8,234(-) 3,462

Note: * Data is Provisional & Un-audited

For the first six months of the year, it seems BSNL was on its way to make massive losses that it usually does. What changed over the next six months will become clear only once the complete profit and loss statement of the company is available in the public domain. Right now we only have statements from the government, and a few leaks, and nothing more.

Both Air India and BSNL are unlisted companies. But given that they are eventually owned by the taxpayers, it is only fair that the government puts out their complete set of numbers as soon as possible. While these numbers will eventually be declared but by then it will be too late.

So that leaves us with Shipping Corporation of India, which is listed on the stock exchanges. In 2011-2012, the company made losses of around Rs 428 crore. In 2015-2016, the company made a net profit of around Rs 377 crore. How did this turn around happen?

In fact, the cost of fuel (bunker fuel is the main type of oil used aboard ships) in 2011-2012 was at Rs 1,560.3 crore. By 2015-2016, this had fallen by more than 59.3 per cent to Rs 637.5 crore. In 2011-2012, the cost of fuel amounted to 36.2 per cent of net sales. In 2015-2016, the cost of fuel amounted to 15.5 per cent of the net sales of the company. In fact, the sales of the company have gone down during the period.

The difference in performance of the company lies in the fall in the fuel bill of more than Rs 900 crore. This has pushed the company into a profitable zone. There is nothing more to it.

Also, in 2014-2015, 77 out of the 234 PSUs were loss-making. The number was 70 in 2013-2014. How have things changed on this front, is something that the government needs to tell us.

Currently, the government is busy making out a positive case for itself, on the basis of incomplete data and taking credit for fall in oil prices, as well. It can do better than this.

The column originally appeared in Vivek Kaul’s Diary on August 19,2016

Of 9% economic growth and Manmohan’s pipedreams


Vivek Kaul

Shashi Tharoor before he decided to become a politician was an excellent writer of fiction. It is rather sad that he hasn’t written any fiction since he became a politician. A few lines that he wrote in his book Riot: A Love Story I particularly like. “There is not a thing as the wrong place, or the wrong time. We are where we are at the only time we have. Perhaps it’s where we’re meant to be,” wrote Tharoor.
India’s slowing economic growth is a good case in point of Tharoor’s logic. It is where it is, despite what the politicians who run this country have to say, because that’s where it is meant to be.
The Prime Minister Manmohan Singh in his independence-day speech laid the blame for the slowing economic growth in India on account of problems with the global economy as well as bad monsoons within the country. As he said “You are aware that these days the global economy is passing through a difficult phase. The pace of economic growth has come down in all countries of the world. Our country has also been affected by these adverse external conditions. Also, there have been domestic developments which are hindering our economic growth. Last year our GDP grew by 6.5 percent. This year we hope to do a little better…While doing this, we must also control inflation. This would pose some difficulty because of a bad monsoon this year.”
So basically what Manmohan Singh was saying that I know the economic growth is slowing down, but don’t blame me or my government for it. Singh like most politicians when trying to explain their bad performance has resorted to what psychologists calls the fundamental attribution bias.
As Vivek Dehejia an economics professor at Carleton University in Ottawa, Canada, told me in a recent interview I did for the Daily News and Analysis (DNA) “Fundamentally attribution bias says that we are more likely to attribute to the other person a subjective basis for their behaviour and tend to neglect the situational factors. Looking at our own actions we look more at the situational factors and less at the idiosyncratic individual subjective factors.”
In simple English what this means is that when we are analyzing the performance of others we tend to look at the mistakes that they made rather than the situational factors. On the flip side when we are trying to explain our bad performance we tend to blame the situational factors more than the mistakes that we might have made.
So in Singh’s case he has blamed the global economy and the deficient monsoon for the slowing economic growth. He also blamed his coalition partners. “As far as creating an environment within the country for rapid economic growth is concerned, I believe that we are not being able to achieve this because of a lack of political consensus on many issues,” Singh said.
Each of these reasons highlighted by Singh is a genuine reason but these are not the only reasons because of which economic growth of India is slowing down. A major reason for the slowing down of economic growth is the high interest rates and high inflation that prevails. With interest rates being high it doesn’t make sense for businesses to borrow and expand. It also doesn’t make sense for you and me to take loans and buy homes, cars, motorcycles and other consumer durables.
The question that arises here is that why are banks charging high interest rates on their loans? The primary reason is that they are paying high interest rate on their deposits.
And why are they paying a high interest rate on their deposits? The answer lies in the fact that banks have been giving out more loans than raising deposits. Between December 30, 2011 and July 27, 2012, a period of nearly seven months, banks have given loans worth Rs 4,16,050 crore. During the same period the banks were able to raise deposits worth Rs 3,24,080 crore. This means an incremental credit deposit ratio of a whopping 128.4% i.e. for every Rs 100 raised as deposits, the banks have given out loans of Rs 128.4.
Thus banks have not been able to raise as much deposits as they are giving out loans. The loans are thus being financed out of deposits raised in the past. What this also means is that there is a scarcity of money that can be raised as deposits and hence banks have had to offer higher interest rates than normal to raise this money.
So the question that crops up next is that why there is a scarcity of money that can be raised as deposits? This as I have said more than few times in the past is because the expenditure of the government is much more than its earnings.
The fiscal deficit of the government or the difference between what it earns and what it spends has been going up, over the last few years. For the financial year 2007-2008 the fiscal deficit stood at Rs 1,26,912 crore. It went up to Rs 5,21,980 crore for financial year 2011-2012. 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.
This difference is made up for by borrowing. When the borrowing needs of the government go through the roof it obviously leaves very little on the table for the banks and other private institutions to borrow, which in turn means that they have to offer higher interest rates to raise deposits. Once they offer higher interest rates on deposits, they have to charge higher interest rate on loans.
A higher interest rate scenario slows down economic growth as companies borrow less to expand their businesses and individuals also cut down on their loan financed purchases. This impacts businesses and thus slows down economic growth.
The huge increase in fiscal deficit has primarily happened because of the subsidy on food, fertilizer and petroleum. One of the programmes that benefits from the government subsidy is Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA). The scheme guarantees 100 days of work to adults in any rural household. While this is a great short term fix it really is not a long term solution. If creating economic growth was as simple as giving away money to people and asking them to dig holes, every country in the world would have practiced it by now.
As Raghuram Rajan, who is taking over as the next Chief Economic Advisor of the government of India, told me in an interview I did for DNA a couple of years back “The National Rural Employment Guarantee Scheme (NREGS, another name for MGNREGA), if appropriately done it is a short term insurance fix and reduces some of the pressure on the system, which is not a bad thing. But if it comes in the way of the creation of long term capabilities, and if we think NREGS is the answer to the problem of rural stagnation, we have a problem. It’s a short term necessity in some areas. But the longer term fix has to be to open up the rural areas, connect them, education, capacity building, that is the key.”
But the Manmohan Singh led United Progressive Alliance seems to be looking at the employment guarantee scheme as a long term solution rather than a short term fix. This has led to burgeoning wage inflation over the last few years in rural areas.
As Ruchir Sharma writes in Breakout Nations – In Pursuit of the Next Economic Miracles “The wages guaranteed by MGNREGA pushed rural wage inflation up to 15 percent in 2011”.
Also as more money in the hands of rural India chases the same number of goods it has led to increased price inflation as well. Consumer price inflation currently remains over 10%. The most recent wholesale price index inflation number fell to 6.87% for the month of July 2012, from 7.25% in June. But this experts believe is a short term phenomenon and inflation is expected to go up again in the months to come.
As Ruchir Sharma wrote in a column that appeared yesterday in The Times of India “For decades India’s place in the rankings of nations by inflation rates also held steady, somewhere between 78 and 98 out of 180. But over the past couple of years India’s inflation rate is so out of whack that its ranking has fallen to 151. No nation has ever managed to sustain rapid growth for several decades in the face of high inflation. It is no coincidence that India is increasingly an outlier on the fiscal front as well with the combined central and state government deficits now running four times higher than the emerging market average of 2%.” (You can read the complete column here).
So to get economic growth back on track India has to control inflation. The Reserve Bank of India (RBI) has been trying to control inflation by keeping the repo rate, or the rate at which it lends to banks, at a high level. One school of thought is that once the RBI starts cutting the repo rate, interest rates will fall and economic growth will bounce back.
That is specious argument at best. Interest rates are not high because RBI has been keeping the repo rate high. The repo rate at best acts as an indicator. Even if the RBI were to cut the repo rate the question is will it translate into interest rate on loans being cut by banks? I don’t see that happening unless the government clamps down on its borrowing. And that will only happen if it’s able to control the subsidies.
The fiscal deficit for the current financial year 2012-2013 has been estimated at Rs Rs Rs 5,13,590 crore. I wouldn’t be surprised if the number even touches Rs 600,000 crore. The oil subsidy for the year was set at Rs 43,580 crore. This has already been exhausted. Oil prices are on their way up and brent crude as I write this is around $115 per barrel. The government continues to force the oil marketing companies to sell diesel, LPG and kerosene at a loss. The diesel subsidy is likely to continue given that with the bad monsoon farmers are now likely to use diesel generators to pump water to irrigate their fields. With food inflation remaining high the food subsidy is also likely to go up.
The heart of India’s problem is the huge fiscal deficit of the government and its inability to control it. As Sharma points out in Breakout Nations “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.”
These details Manmohan Singh couldn’t have mentioned in his speech. But he tried to project a positive picture by talking about the planning commission laying down measures to ensure a 9% rate of growth. The one measure that the government needs to start with is to cut down the fiscal deficit. And the probability of that happening is as much as my writing having more readers than that of Chetan Bhagat. Hence India’s economic growth is at a level where it is meant to be irrespective for all the explanations that Manmohan Singh gave us and the hope he tried to project in his independence-day speech.
But then you can’t stop people from dreaming in broad daylight. Even Manmohan Singh! As the great Mirza Ghalib who had a couplet for almost every situation in life once said “hui muddat ke ghalib mar gaya par yaad aata hai wo har ek baat par kehna ke yun hota to kya hota?”
(The article originally appeared on www.firstpost.com on August 16,2012. http://www.firstpost.com/economy/of-9-economic-growth-and-manmohans-pipedreams-419371.html)
Vivek Kaul is a writer and can be reached at [email protected]