In a season of great jokes, Manmohan Singh cracked the best one yesterday

Manmohan-Singh_0Vivek Kaul 
Rhetoric, of any kind, needs to be delivered with a lot of passion.
When it is delivered in the deadpan style of our Prime Minister Manmohan Singh, it usually turns out to be a damp squib or comic (depends on how you look at it), like was the case with his speech in the Rajya Sabha yesterday.
In this speech, Singh, tried to explain why the rupee has been falling against the dollar, among other things. As Singh put it “we must realise that part of this depreciation was merely a needed adjustment. Inflation in India has been much higher than in the advanced countries. Therefore, it is natural that there has to be a correction in the exchange rate to account for this difference.”
That’s a valid explanation as far as the depreciation of the rupee goes. To be fair, you’d expect an Oxford educated economist to be able to do at least that. But what the explanation does not tell us, where did the inflation come from in the first place?
You and me did not create inflation. Singh’s government did. India has been battling high levels of consumer price inflation for sometime now. This has happened largely on account of the government increasing minimum support prices(MSPs) by a huge amount. 
As economist Surjit Bhalla writes in a column in The Indian Express As commented by me on several occasions over the last three years, this high food inflation was literally engineered by the UPA government via massive increases in procurement prices.”
Every year the Food Corporation of India (FCI), or a state agency acting on its behalf, purchases rice and wheat at MSPs set by the government. With the government offering increasing the MSPs, more and more of rice and wheat landed up at the godowns of the FCI and not the open market. A December 2012, report brought out by the Commission for Agricultural Costs and Prices, which comes under the Ministry of Agriculture points out “Since 2006-07, the procurement levels for rice and wheat have increased manifold…Currently, piling stocks of wheat with FCI has led to an artificial shortage of wheat in the market in the face of a bumper crop.”
This has led to a massive food inflation and in turn very high consumer price inflation because food constitutes nearly 50% of it. The irony is that no specific formula has been followed for deciding the minimum support prices. The Comptroller and Auditor General (CAG) of India in a recent report titled “Performance Audit of Storage Management and Movement of Food Grains in Food Corporation of India (FCI)
questioned the logic behind how the MSPs are being set.
The report was presented to the Parliament on May 7 ,2013. As the report points out “No specific norm was followed for fixing of the Minimum Support Price (MSP) over the cost of production. Resultantly, it was observed the margin of MSP fixed over the cost of production varied between 29 per cent and 66 per cent in case of wheat, and 14 per cent and 50 per cent in case of paddy during the period 2006-2007 to 2011-2012. Increase in MSP had a direct bearing on statutory charges levied on purchase of food grains by different State Government… All this resulted in rising of the acquisition cost of food grains.” To cut a long story short, inflation did not appear on its own, Singh’s government engineered it.
Singh also pointed out that the rupee was not the only currency falling against the dollar, but there were other currencies as well. As he said “However, foreign exchange markets have a notorious history of overshooting. Unfortunately this is what is happening not only in relation to the Rupee but also other currencies.”
Fair point. But the question Singh did not answer was why has the rupee fallen far more than these ‘other’ currencies that he is referring to? 
A report on the Reuters website published yesterday morning points out that “The rupee has tumbled 10.4 percent against the dollar so far this month, which would be its largest monthly depreciation ever if it ends around current levels, according to Thomson Reuters data.” In comparison “the rupiah has lost 5.9 percent so far in August, which would be its biggest monthly fall since November 2008.” The Philippine peso has fallen 2.7 percent. The Thai baht has slid 2.4 percent and the Malaysian ringgit has weakened 1.6 percent.
Our Oxford educated economist did not tell us why the Indian rupee has fallen much more against the dollar than other emerging market countries in Asia. The rupee crisis is largely a 
desi oneWe are paying the cost of running a high current account deficit over the last few years. (You can read a detailed argument here).
Singh also tried to set aside the concerns being raised about the ability of the government to meet its fiscal deficit target of 4.8% of GDP, that it had set for this financial year (i.e. the period between April 1, 2013 and March 31, 2014). Fiscal deficit is the difference between what a government earns and what it spends. As Singh said “There are questions about the size of the fiscal deficit. The government will do whatever is necessary to contain the fiscal deficit to 4.8% of GDP this year.”
Now the least one could expect from an Oxford educated economist is to explain what is this “whatever”? Does the Prime Minister plan to rein in the fiscal deficit by raising diesel prices? The latest available data on the under-recovery on diesel was published on August 16, 2013. The under-recovery on diesel was around Rs 10.22 per litre. At that point of time the price of crude oil was at Rs 6680.46 per barrel (around 159 litres). Since then the price of crude oil has gone up to Rs 7723.68 per barrel as on 29.08.2013. This means diesel under-recoveries must also have risen to roughly around Rs 12 per litre.
And if raising diesel prices is not an option, does the PM plan to raise fertilizer prices? Or does he plan to cut down on other planned expenditure? And if he cuts down the planned expenditure, will it not have an impact on economic growth? And if the economic growth slows down, how will the nation meet the economic growth target of 5.5%, of which Singh is so confident about?
The Prime Minster, like the minister of finance P Chidambaram has on occasions, blamed our fascination for buying gold for our problems. As he said “clearly we need to reduce our appetite for gold.” Our fetish for gold 
as this writer has explained on earlier occasions is not the problem. It is a symptom of the problem of high inflation.
High inflation has led to a situation where the purchasing power of the rupee has fallen dramatically over the last few years. And given that people have been moving their money into gold (though that may not be the case lately). As Dylan Grice writes in a newsletter titled 
On The Intrinsic Value Of Gold, And How Not To Be A TurkeyNow consider gold. In ten years’ time, gold bars will still be gold bars. In fifty years too. And in one hundred. In fact, gold bars held today will still be gold bars in a thousand years from now, and will have roughly the same purchasing power. Therefore, for the purpose of preserving real capital in the long run, gold has a property which is unique in comparison with everything else of which we know: the risk of a loss of purchasing power approaches zero as one goes further into the future. In other words, the risk of a permanent loss of purchasing power is negligible.”
The Prime Minister also went onto blame the high current account deficit on our coal imports. As he said “In 2010-11 and the years prior to it, our current account deficit was more modest and financing it was not difficult, even in the crisis year of 2008-09. Since then, there has been a deterioration, mainly on account of huge imports of gold, higher costs of crude oil imports and recently, of coal.”
The question is why does a country like India which has third largest coal reserves in the world, need to import coal? The Prime Minister who was also the coal minister between 2006 and 2009, should have had an answer for that.
The total geological reserves of coal blocks given away to private companies (excluding ultra mega power projects) for free between 1993 and 2009 amounted to 17397.22 million tonnes.  Of this, a total of 14060.34 million tonnes was allocated between 2006 and 2009, when the free giveaway of coal blocks was at its peak. Prime Minister Manmohan Singh was also the Coal Minister for a large part of this period. But the total production of coal from these mines was close to zero.
Guess the Prime Minister would have an explanation for that.
The Prime Minister went onto say several such other absurd things during the course of his speech. He asked the members of the parliament to “trust the ability of the government to tackle economic difficulties.” In a season of very good jokes on the Indian economy in general and the
Indian rupee in particular, this was by far the best joke.
If not for anything else, Manmohan Singh deserves kudos for being India’s best stand-up comedian with a deadpan expression.

 The article originally appeared on www.firstpost.com on August 31, 2013 
(Vivek Kaul is a writer. He tweets @kaul_vivek) 
 

Needed: A new poverty line which shows 67% of the country is poor

congress-party-symbol1
Vivek Kaul
 
The Congress party after claiming that its social policies over the last nine years had helped bring down poverty in the country, now seems to have done a volte face.
Data released by the Planning Commission on July 22, 2013, suggested that poverty in India had declined from 37.2% in 2004-05 to 21.9% by 2011-12. Several spokespersons of the Congress party led United Progressive Alliance(UPA) were quick to claim credit, and attributed this to several social sector programmes that the party had launched during its tenure.
A poverty line separates the poor section of the population from the non poor section. Those below the poverty line are deemed to be poor and those who are above it are deemed to be not poor. And what exactly is a poverty line? As S Subramanian writes in The Poverty Line “A poverty line is identified in monetary units as the level of income or consumption expenditure required in order to avoid poverty.”
The consumption expenditure in order to avoid poverty is set at Rs 816 per person per month in the rural areas and Rs 1000 per person per month in the urban areas. For a family of five people, this amounts to Rs 4,080 per month in rural areas and Rs 5000 per month in urban areas.
These numbers were set by the report of the expert group to review methodology for estimation of poverty. The report was released in November 2009 (It is better known as the Tendulkar committee report).
The committee arrived at that numbers taking into account the expenditure on food,
clothing, footwear, durables, education and health.Actual private expenditures reported by households near the new poverty lines on these items were found to be adequate at the all‐India level in both the rural and the urban areas and for most of the states,” the report said.
Interestingly, the Tendulkar committee poverty line was an improvement on the earlier poverty line which only took into account the expenditure
required to consume an identified number of food calories. For rural India this number was 2,400 calories. For urban India this number was at 2,100 calories. Anyone consuming less than this was deemed to be poor.
The Tendulkar committee made the poverty line multidimensional, by considering several other expenditures other than just food. An immediate impact of this was that the poverty ratio for 2004-05, went up from 27.5% to 37.2% of the total population. From that level the poverty ratio has come down to 21.9% in 2011-12.
So prima facie this sounds good. The trouble crops up when Rs 816/Rs 1000 per month is converted into expenditure per day. Assuming 30 days in a month, this expenditure comes to Rs 27.5 per day for the rural areas and Rs 33.33 for urban areas. Hence, anyone whose expenditure per day is less than these amounts is categorised as poor.
Having already linked the reduction in poverty to the social sector schemes launched by the government, the Congress spokespersons had to defend the Rs 27-33 per day expenditure cut off for poverty.
Even today in Mumbai city, I can have a full meal at Rs 12. No no not vada paav. So much of rice, dal sambhar and with that some vegetables are also mixed ,” film star turned politician Raj Babbar told reporters.
Rasheed Masood, a Congress leader from Delhi, went a step further and said “You can eat a meal in Delhi in Rs 5 I don’t know about Mumbai. You can get a meal for Rs 5 near Jama Masjid.”
Farooq Abdullah of the National Congress, a constituent of the UPA, said that even Re 1 was enough to satisfy hunger. “If you want, you can fill your stomach for Re 1 or Rs 100, depending on what you want to eat,” Abdullah said.
Of course these gentlemen were trying to justify the unjustifiable. Rs 27-33 per day expenditure as a cut off for poverty is too low. But the argument is not as simple as that. As we saw the current poverty line is an improvement on the earlier line. There has been a lot of criticism of the late Suresh Tendulkar, who headed the committee that redefined the poverty line. As T N Ninan wrote in the Business Standard “The late Suresh Tendulkar, who redefined the line some years ago, has come in for unfair criticism – because he actually raised the poverty line substantially. The result was that what was 27 per cent poor in 2004-05 under the old definition became 37 per cent using Tendulkar’s definition.”
The simple solution it seems is to increase the poverty line. But as this writer explained earlier, increasing the poverty line has its own serious repercussions.
Also, even if we were to increase the poverty line, the percentage of decline of in poverty will remain the same. As Pronab Sen, chairman of the National Stat­istical Commission, told Outlook “even if we double the norm from Rs 33 for urban poor and Rs 28 for rural poor, the percentage of people below poverty line may double but the percentage of decline in poverty will remain roughly the same.”
Economist Bhaskar Dutta wrote something along similar lines in a column in The Indian Express. “the dramatic reduction in poverty according to the Planning Commission estimate also guarantees that there would be a sizeable reduction even if the poverty line were set a higher level.”
And this fall in poverty, irrespective of where we set the poverty line at, has been substantial. As Swaminathan Aiyar wrote in The Times of India “India has just reduced its number of poor from 407 million to 269 million, a fall of 138 million in seven years between 2004-05 and 2011-12 . This is faster than China’s poverty reduction rate at a comparable stage of development, though for a much shorter period.”
Instead of trying to make these slightly nuanced points the Congress party got stuck with justifying the poverty line cut off. The trouble was that it couldn’t go on and on about the “poverty has come down message”, simply because through the food security ordinance the party plans to distribute heavily subsided(almost free) rice and wheat to nearly 82 crore people or around 67% of the country’s population.
If the poverty has actually come down then the
garibi hatao politics that the Congress party has been successfully peddling for nearly four decades, wouldn’t find any resonance any more. It would hit at the heart of the business model of the Congress party.
Hence, the party has done a quick volte face on the poverty line and is now vociferously criticising it. “If the Plan panel said those who live above Rs 5,000 a month are not at poverty line, obviously there is something wrong with the definition of poverty in this country. How can anybody live at Rs 5,000?” union minister Kapil Sibal asked at a public function.
The Congress general secretary, Digivijaya Singh, was also critical of the poverty line. “I have always failed to understand the Planning Commission criteria for fixing poverty line. It is too abstract can’t be same for all areas,” he tweeted.
Rajeev Shukla, Minister of State for Parliamentary Affairs, also joined his senior colleagues in criticising the poverty line. In fact, he went a step further and totally disowned it. “I want to demolish this myth that the poverty line has been fixed by the government. Government has not fixed any poverty line. This recommendation has been made by an expert panel headed by Mr. Tendulkar. This is a report of the Tendulkar Committee which has been put forward by the Planning Commission. Neither the Government has accepted it nor has it fixed it,” he said.
So, does Mr Shukla mean that the Planning Commission is different from the government and is not a part of the government? I guess some history is in order here. The website of the Planning Commission clearly points out that “The Planning Commission was set up by a Resolution of the Government of India in March 1950 in pursuance of declared objectives of the Government to promote a rapid rise in the standard of living of the people by efficient exploitation of the resources of the country, increasing production and offering opportunities to all for employment in the service of the community.”
Over and above this the Planning Commission is headed by the Prime Minister, who currently happens to be Manmohan Singh. So how can the Planning Commission be different from the government? Manmohan Singh as always has been made the scapegoat by the Congress party here as well.
Meanwhile, there is another committee at work with the brief to come up with a new better poverty line. This line will be needed to justify the massive food security scheme. If only 21.9% of India’s population is poor, then its difficult for the government to justify distributing heavily subsidised rice and wheat to nearly 67% of India’s population.
So what is needed is a new poverty line which shows that 67% of India’s population is actually poor. As Aiyar put it in his column “The government found it difficult to say this was good politics even if it was bad economics. Instead, it appointed the Rangarajan Committee to devise a higher poverty line.”

The article originally appeared on www.firstpost.com on July 29, 2013
(Vivek Kaul is a writer. He tweets @kaul_vivek)
 
 
 

Chidambaram and Sharma’s US visit is a waste of time

P-CHIDAMBARAMVivek Kaul 

The finance minister P Chidambaram is currently in the United States trying to solicit foreign direct investment(FDI) into India. This is one of the things that the government is trying to do in order to control the depreciation of the Indian rupee against the dollar.
Foreign investors wanting to start new industries and businesses in India bring in dollars through the FDI route. To do business in India the foreign investors need to exchange their dollars for Indian rupees. Hence they need to sell dollars and buy rupees. When this happens, there is a surfeit of dollars in the foreign exchange market, and this ensures that rupee gains value against the dollar.
At least, this is how it is supposed to work in theory. A big reason behind soliciting investment through the FDI route is that money brought in through this route cannot disappear overnight.
The question is will this work? Just inviting foreign investors to set up shop in India is not enough. The sales pitch needs to be followed up with a lot of serious background work. As Deepak Parekh, Chairman of HDFC, India’s biggest home finance company recently said “Look at our Foreign Direct Investment (FDI) policy. Ministers go all out to woo investors, but when investment proposals come, we cannot take decisions…Our policy on FDI is akin to inviting guests over to our house, but when they arrive, we refuse to open the door.”
The commerce minister Anand Sharma is also doing the rounds of foreign investors in the United States, along with Chidambaram. He cited some of the things that the Indian government had been doing to address complaints of foreign investors. One of the things that he talked about was the setting up of the Cabinet Committee on Investments (CCI) headed by the Prime Minister Manmohan Singh. The CCI was notified at the beginning of this year, on January 2, 2013, to ensure faster clearances for the implementation of major infrastructure projects.
But nothing of that sort seems to have happened. As 
The Economist points out in a recent article “a new committee headed by the prime minister, Manmohan Singh, has tried to push forward projects tangled in red tape…But the committee has not made a meaningful difference. On The Economist’s count, the fresh capital investment it has sanctioned (rather than discussed or delegated to other bodies) amounts to 0.4% of GDP, spread over several years.” The bottomline is that the ministers at least need to get their sales pitch right.
Foreign investors will not jump to set up shop in India just because a few ministers from India come calling. Any foreign investor will look at the ease of doing business along with the prospective returns that he can make, once he has got the business up and running.
Every year the World Bank puts out a ranking which measures the Ease of Doing Business across countries. In the 2013 ranking, India came in 132nd on the list. India’s ranking was the same in 2012 as well. When it comes to starting a business India is 173rd on the list. What this means is that foreign investors have an option of starting their business in a much easier way in 172 countries other than India.
When it comes to enforcement of contracts India is 184
th on the list. The broader point is that why will the investors come to India when they have better options available elsewhere? Also it is worth remembering that the Western world in general and the United States in particular is currently dealing with the aftermath of the financial crisis. There is great pressure on companies to set up new businesses or expand current ones in their home countries. In this scenario if they do decide to go abroad and set up new businesses, it needs to be a very good proposition for them.
Foreign investors can get money to set up businesses and industries in India, but some basic infrastructure like power, roads etc, needs to be provided to them. And that is missing in India. As 
Jean Drèze and Amartya Sen, who are seen as the intellectual gurus of the current Congress led UPA government, write in their new book An Uncertain Glory – India and Its Contradictions “There has been a sluggish response to the urgency of remedying India’s astonishingly underdeveloped social infrastructure and of building a functioning of accountability and collaboration for public services. To this can be added the neglect of physical infrastructure (power, water, roads, rails), which required both governmental and private initiatives. Large areas of what economists call ‘public goods’ have continued to be neglected.”
This is something that needs to be set right if the government wants foreign investors to set shop in India.
What also does not help Chidambram and Sharma’s sales pitch is the fact that Indian businessmen do not seem too keen to expand their businesses or set up new businesses in India. The investment by Indian businesses has fallen from 17% of GDP in 2008 to 13% in 2012.
As Ruchir Sharma points out in 
Breakout Nations “At a time when India needs its businessmen to reinvest more aggressively at home in order for the country to hit its growth target of 8 to 9 %, they are looking abroad. Overseas operations of Indian companies now account for more than 10% of overall corporate profitability, compared with 2% just five years ago. Given the potential of the Indian domestic market, Indian companies should not need to chase growth abroad.”
How will Messrs Chidambaram and Sharma ever be able to explain this dichotomy to the foreign investors?
Foreign investors are no fools and they have realised over the years that it is not easy to do business in India. The spate of scams from 2G to coalgate has also contributed to them staying away. FDI into India has fallen in the last three out of the four years. For 2012-2013(i.e. The period between April 1, 2012 and March 31,2013), FDI fell by 21% to $36.9 billion, as per government data. The United Nations Conference on Trade and Development (UNCTAD) in a recent release said that FDI inflows to India declined by 29 per cent to $26 billion in 2012.
In order to attract foreign investors to invest in India and set up new businesses, a lot needs to be set right. And that needs to be done in India. Ministers visiting the United States on junkets is no way to solve the issue.
The article originally appeared on www.firstpost.com on July 12, 2013.

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

Dear PM, those who live in glass houses don't throw stones at others

Manmohan-Singh_0
The nation came to the realisation yesterday that the Prime Minister Manmohan Singh actually has a voice. And then we all came to the conclusion that just because he decided to speak, he spoke well. One commentator even went onto christen the event as “Manmohan on steroids”.
The part that the media loved the most was when Singh told the Parliament ‘
Jo garajte hain, woh baraste nahi(Thunderous clouds do not bring showers)’, a clichéd statement which was supposed to put the Bhartiya Janata Party (BJP), the main opposition party, in its place.
As far as clichés go, I would take this opportunity, to bring to your notice, dear readers, a dialogue written by Akhtar-Ul-Iman and delivered with great panache by Raj Kumar in the Yash Chopra directed Waqt. The line goes like this: “
Chinoi Seth…jinke apne ghar sheeshe ke hon, wo dusron par pathar nahi feka karte (Chinoi Seth…those who live in glass houses don’t throw stones at others).”
Now Singh may not have time to sit through a movie which runs into 206 minutes, given that he is the Prime Minister of the nation, and probably has decisions to make and things to do. But he would be well-advised to watch this 18-second YouTube clip and hopefully come to the realisation that those who live in glass houses, like Singh and his government, do not throw stones at others.
In fact, Singh’s speech to the Parliament yesterday was riddled with many inconsistent and wrong claims. It is a real surprise that the BJP has not caught onto rubbishing the arguments presented by Singh. Let us examine a few claims made by Singh:

Even BIMARU states have also done much better in UPA period than previous period: BIMARU is an acronym used for the states of Bihar, Madhya Pradesh, Rajasthan and Uttar Pradesh. These are states which have lagged in economic growth for a long period of time. There has been a recent spurt in their economic growth and this claims Singh has been because of the UPA government.
Three out of the four states (except Rajasthan) have had a non Congress-non UPA government for the entire duration of the UPA rule in Delhi. Rajasthan has had a Congress government since December 2008.
So trying to claim that the growth in these states has been only because of the UPA government is misleading to say the least. The argument is along similar lines where Congress politicians and some experts have tried to claim over and over again that Bihar has grown faster than Gujarat. Yes it has in percentage terms. But what they forget to tell us is that Gujarat is growing on a much higher base, meaning the absolute growth in Gujarat is higher. In fact, it is three times higher than that of Bihar (The entire argument is explained here).
If we look at the MSP across various commodities, they have increased by 50 to 200% since 2004-05: The government offers a minimum support price on various commodities including rice and wheat. At this price, the Food Corporation of India (FCI), or a state agency acting on its behalf, purchase primarily rice and wheat, grown by Indian farmers. The theory behind setting the MSP is that the farmer will have some idea the price he would get when he sells his produce after harvest. What it has led to is that more and more farmers are selling to the government because they have an assured buyer at an assured price. The government now has nearly Rs 60,000 crore of rice and wheat in excess of what it needs to maintain a buffer stock. While the government is hoarding onto more rice and wheat than it needs, there is a shortage of wheat and rice in the open market pushing up their prices and in turn food inflation and consumer price inflation. It has also pushed up food subsidies and fiscal deficit. Fiscal deficit is the difference between what the government earns and what it spends. And if the government continues with this policy there are likely to be other negative consequences as well. (The entire argument is explained here)
The current slowdown in industrial growth is a concern: This was the most tepid statement in the entire speech. Is it just a concern? Some of the biggest Indian industrialists have gone on record to say that they would rather invest abroad than in India. As Kumar Manglam Birla recently said in an interview “Country risk for India just now is pretty elevated and chances are that for deployment of capital, you would look to see if there is an asset overseas rather than in India…We are in 36 countries around the world. We haven’t seen such uncertainty and lack of transparency in policy anywhere.” The Birlas have known to be very close to the Congress party for a very long time.
And numbers bear this story. Indian corporates are investing abroad rather than India. In 2001-2002 this number was less than 1% of the gross domestic product (GDP) and currently it stands at 6% of the GDP (Source: This discussion featuring Morgan Stanley’s Ruchir Sharma and the Chief Economic Advisor to the government Raghuram Rajan on the news channel NDTV). So the situation is clearly more than just a concern. If Indian industrialists don’t want to invest in India who else will? Is it time to say good bye to industrial growth? Maybe the Prime Minister has an answer for that.
The economic growth has slowed down in 2012-13, because of the difficult global situation: This is something which the finance minister P Chidambaram also alluded to in his budget speech. What it tells us is that there is very little acknowledgement of mistakes that have been made by this government led by Manmohan Singh over the years.
When India was growing at growth rates of 8% and greater, there was a lot of chest thumping by various constituents of the government, that look we are growing at such a high rate. Now that we are not growing at the same speed its because of a difficult global situation.
Ruchir Sharma in a post budget discussion on the news channel NDTV made a very interesting point. India has consistently been at around 24-26
th position among 150 emerging market countries when it comes to economic growth over the last three decades.
We thought we were growing at a very fast rate over the last few years, but so was everyone else. As Sharma put it “The last decade we thought we had moved to a higher normal and it was all about us. Every single emerging market in the world boomed and the rising tide lifted all boats including us.”
But now that we are not growing as fast as we were it is because the global economy has slowed down. Sharma nicely summarised this disconnect when he said “When the downturn happens it is about the global economy. When we do well its about us.” India currently has fallen to the 40
th position when it comes to economic growth.
Will bring the country back to 8% growth rate: This is kite flying of the worst kind. As Sharma of Morgan Stanley told NDTV “I see people in government today including the Prime Minister talking about 8% GDP growth rate as if that is the level we should be. There is nothing to suggest that is our potential.”
Singh said that the government was committed to achieving a 8% growth rate for the period of the 12
th five year plan period of 2012-2017. In the first year of this plan i.e. the financial year 2012-2013 (the period between April 1, 2012 and March 31, 2013), the Indian economy is expected to grow at around 5%(numbers projected by the Central Statistical Organisation).
What that means is that if the 8% target is to be achieved, the economy has to consistently grow at 9% per year for the remaining four years of the plan. And India has never experienced such consistent high growth ever in the past.
Given that Singh’s statement needs to be taken with a pinch of salt. It is essentially rhetoric of the worst kind. As Nate Silver writes in The Signal and the Noise “Sometimes economic forecasts have expressively political purposes too. It turns out that economic forecasts produced by the White House , for instance, have historically been among the least accurate of all, regardless of whether it’s a Democrat or Republican in charge. When it comes to economic forecasting, however, the stakes are higher than for political punditry. As Robert Lucas pointed out, the line between economic forecasting and economic policy is very blurry: a bad forecast can make the real economy worse.” Singh’s 8% growth statement needs to be viewed along similar lines.
There were many things that Singh did not talk about. Among 150 emerging markets, the fiscal deficit of the Indian government is currently at the 148
th number. When it comes to inflation, India is currently at the 118-119th position. The current account deficit (which Singh did talk about) will touch an all time high during the course of the financial year 2012-2013. Interest rates have stubbornly refused to come down. And so on.
To conclude, Manmohan Singh was in poetic mood yesterday. “
Humko hai unse wafa ki umeed, jo nahi jaante wafa kya hai (We hope for loyalty from those who do not know the meaning of the word),” the prime minister said quoting the Urdu poet Mirza Ghalib, while taking pot-shots at the BJP.
It’s time the BJP got back to him with what are the most famous lines of the poet Akbar Allahabadi.
Hum aah bhi karte hain to ho jaate hain badnam,
wo qatl bhi karte hain to charcha nahi hota
.”
(badnam = infamous. Qatl = murder. Charcha = discussion)
This article originally appeared on www.firstpsost.com on March 7, 2013, with a different headline. 

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

Why Chidu can’t do a Warren Buffett in the budget

P-CHIDAMBARAM
Vivek Kaul
The legendary investor Warren Buffett wrote an
editorial in the New York Times sometime in August 2011 where he made an interesting point. In 2010, his income and payroll taxes came to around $6.94million. While that might sound like a lot of money, but Buffett had paid tax at a rate of only 17.4%. This was lower than any of the 20 other people who worked in Buffett’s office in Omaha, Nebraska. The tax burdens of his 20 employees mounted to anywhere between 33-41% and it averaged around 36%.
So Buffett was paying $17.4 as tax for every $100 that he earned. On the other hand his employees were paying more than double tax of $36 for every $100 that they earned. Of course that was not right.
But why was this the case? This was primarily because Buffett’s employees were paying tax on the salary they earned by working for Buffett. Buffett was making money primarily as long term capital gains on selling shares and he was paying tax on that.
The tax rate on income from salary was much higher than the tax rate on income from long capital gains made on selling shares. This benefited the rich Americans like Buffett. The richest 10% of the Americans own 80% of the stocks listed on the New York Stock Exchange as well as the NASDAQ. Buffett wants this to be set right by making the rich pay higher taxes.
In India there has been talk about making the rich pay higher taxes as well. C Rangarajan, a former RBI governor, and an economist who is known to be close to both the prime minister Manmohan Singh and finance minister P Chidambaram, had remarked in January earlier this year “
We need to raise more revenues and the people with larger incomes must be willing to contribute more.”
Chidambaram himself has advocated this school of thought when he said “We should consider the argument whether the very rich should be asked to pay a little more on some occasions.”
So does taxing the rich make sense? It is not a simple yes or no answer. Allow me to explain. Like is the case in the United States, even in India different kinds of incomes are taxed at different rates.
Income from salary is taxed at the marginal rate of 10/20/30 percent whereas long term capital gains from selling shares/equity mutual funds is tax free. Short term capital gains from selling shares/equity mutual funds is taxed at 15%.
Interest earned on bank fixed deposits and savings accounts is taxed at the marginal rate of tax. So is the income earned from post office savings schemes and the senior citizens savings scheme. In comparison dividends received from shares is tax free in the hands of the investor.
Long term capital gains on debt mutual funds are taxed at 10% without indexation or 20% with indexation, whichever is lower. Indexation essentially takes inflation into account while calculating the cost of purchase. Let us say an investor buys a debt mutual fund unit at a price of Rs 100. A little over a year later he sells it at Rs 110. Let us say the inflation during the course of that year was 8%. Hence, his indexed cost of purchase will be Rs 108 (Rs 100 + 8% of Rs 100).
In this case the capital gains would be Rs 2 (Rs 110 – Rs 108) and he would end up paying a tax of 40 paisa (i.e. 20% of Rs 2). Hence, a 40 paisa tax is paid on capital gains or an income of Rs 10 (Rs 110 – Rs 100), meaning an effective income tax rate of 4% (40 paisa expressed as a percentage of Rs 10).
In case an individual had invested Rs 100 in a fixed deposit paying an interest of 10%, he would have earned Rs 10 at the end of the year as interest from it. On this he would have had to pay a minimum tax of 10%(assuming he earns enough to fall in a tax bracket) because interest earned from a fixed deposit is taxed at the marginal rate of income tax. Whereas as we saw in case of a debt mutual fund the effective rate of income tax came to around 4%.
Along similar lines long term capital gains from sale of property is taxed at 20% post indexation. So the effective rate of tax is much lower in case of capital gains made on selling property as well. In fact, even this tax need not be paid if one buys capital gains bonds or another property within a certain time frame. And given that a large portion of property transactions are in black, the effective rate of income tax comes out even lower.
The point I am trying to make is that the modes of income for the rich like share dividends, capital gains from selling shares, equity mutual funds, debt mutual funds or property for that matter, are taxed at lower effective income tax rates, in comparison to the modes of investment of the aam aadmi. 
The purported logic at least in case of long term capital gains from shares being tax free is that it will encourage the so called retail investor/small investor to invest in the stock market and thus help entrepreneurs raise capital for their businesses. But that as we all know has not really happened. And essentially this regulation has been helping those who already have a lot of money. What I fail to understand further is why should investing in a debt mutual fund like a fixed maturity plan (which works precisely like a fixed deposit does and matures on a given day) be more beneficial tax wise vis a vis investing in a fixed deposit?
As we saw in the earlier example a fixed deposit investor pays minimum tax at the rate of 10% on the interest earned. He could even pay an income tax as high as 30% . On the other hand a debt mutual fund investor pays an effective tax at the rate of 4%, irrespective of which marginal rate of income tax he falls under. Why should that be the case?
I think we need to move towards a more equitable income tax structure where various modes of income, at least those earned through investing, should be taxed at the same rate. For starters indexation benefits which are currently available on debt mutual funds and sale of property should also be available when calculating the tax on interest earned on fixed deposits and savings accounts. Inflation doesn’t only impact those investing in debt mutual funds and property, it also impacts those who invest in bank fixed deposits and savings accounts.
Further long term capital gains on selling shares/equity mutual funds should be taxed at marginal rates with indexation benefits being taken into account. That would make the tax system more equitable than from what it currently is.
It would also amount to the rich paying more tax without introducing a higher tax rate or a surcharge of 10% on the highest marginal rate of 30%(which would mean an effective rate of 33%), as is being suggested currently.
Several experts are against this move and I partly agree with them. As an article in the India Today points out “Economist Surjit S. Bhalla argues that there is no real rationale for taxing the top income segment any further. Bhalla uses official data to show that the top 1.3 per cent of income taxpayers in India already account for 63 per cent of total personal tax revenue. In comparison, in the US, the top 1 per cent of taxpayers contribute just 37 per cent of total income taxes.”
That’s a fair point against higher taxes for the rich. But what we really need to know is what is the effective rate of income tax being paid by the rich? Is the situation similar to Buffett’s America, where Buffett pays an effective income tax of 17.4% whereas his employees pay an average tax of 36%? Only the Income Tax department can answer that.
Having said that, I don’t see India moving towards a more equitable income tax structure. In order to do that long term capital gains on selling stocks which is currently at zero percent would have to be done away with. And that would mean long term capital gains on stocks being taxed in a similar way as debt mutual funds/property currently are.
Hence, stock market investors would end up paying some income tax. And that as we have seen in the past, this is something they don’t like. Any attempt to tax them is met by mass selling and the stock market falling.
A falling stock market would mean that dollars being brought in by foreign investors will stop to come or slowdown. When foreign investors bring dollars, they sell those dollars to buy rupees, which they use to invest in the stock market in India. This perks up the demand for the rupee leading to its appreciation against the dollar.
A stronger rupee would mean a lower oil import bill. Oil is bought and sold internationally in dollars. If oil is worth $110 per barrel, and one dollar is worth Rs 55, it means India pays Rs 6050 per barrel ($110 x Rs 55) of oil. If one dollar is worth Rs 50, it means India pays a lower Rs 5500 per barrel ($110 x Rs 50) of oil.
Lower oil imports would help control our current account deficit which is at record levels. It would also help control our fiscal deficit as the government forces the oil marketing companies to sell products like kerosene, cooking gas and diesel at a loss and then compensates them for the loss. It would also help oil companies control their petrol losses.
This is a dynamic that Chidambaram cannot ignore. He will have to keep the foreigners and the stock market investors happy to ensure that the stock market keeps rising. Meanwhile, the rich will continued to be taxed at lower effective rates.
The article originally appeared on www.firstpost.com on February 21, 2013
(Vivek Kaul is a writer. He can be reached at [email protected])