Vivek Kaul
The year was 1983 and as a six year old on my way to school I saw posters of this movie called Hip Hip Hurray. The movie had a special connection with the city of Ranchi, where I was born and brought up in. A major part of the movie had been shot in schools in Ranchi (not my school though) and to my knowledge it remains the only Hindi film to be shot in the city till date.
The story of the movie was set around a school football team and its inspiring coach (played by Raj Kiran, who has since disappeared). The script and the lyrics for the movie were written by Gulzar, with the songs being set to tune by Vanraj Bhatia. (This song from the movie, sung by Bhupendra and Asha Bhonsle is an absolute gem and so is this lovely Yesudas number).
The movie also happened to be the first directorial venture of Prakash Jha. Jha made a couple of art films more and disappeared from the scene, concentrating on documentaries instead. He returned to the Hindi film industry with Madhuri Dixit starrer Mrityudand in 1997. Since then he has directed movies like Gangaajal, Apharan, Raajneeti and Aarakakshan. As their names suggest all these movies had a lot political content in them. Given this Jha has never been far from controversies. His latest film Chakravyuh is set around the problem of naxalism. And given that controversy couldn’t have been far behind.
The movie has a song with the line: “Tata, Birla, Ambani aur Bata, sab ne hai desh ko kaata”. The song is a reflection of the deep hatred and mistrust Indians have towards big businesses and people who run them (though Bata can hardly be called a big business anymore. But it still remains one of India’s most recognisable business brands).
It is safe to say this mistrust of businesses started during the late sixties and early seventies once businessmen started to get too close to politicians. This was necessary for them if they wanted to survive in the era of “license permit quota raj” that Jawahar Lal Nehru had initiated and Indira Gandhi spread.
As Dilip Chitre wrote in the May-June 1972 edition of The Quest magazine “Mrs Gandhi…has suppressed the industrial private sector in the cruelest fashion. The suppression is in the form of controls which place in the hands of bureaucracy the power of tools of permits and licenses.” (Source: The Best of Quest, Tranquebar)
This meant that businessmen needed to be close to the Congress(Indira) which ruled the nation as well as the bureaucrats. As Chitre wrote “Since in India, today political power is directly transferrable into economic power, manipulative entrepreneurs in every sphere of activity are drawn towards the ruling party. This may not prevent Mrs Gandhi from pursuing a misadventurous economic policy. It only means that her policies will continue to benefit those corrupt entrepreneurs who regard politics as the only industry which offers the best monetary gains in India today.”
Thus emerged the unholy nexus between big business and politics in India. The other thing that happened was that the income tax rates went through the roof. This ensured that businessmen did not declare a major portion of the profits they made leading to a swelling black money economy in India.
This benefitted politicians as well because this black money helped finance their election campaigns. “Even election funds come from the swelling reservoirs of black money. It is black money which is the grease that makes every wheel in Indian public life move. The higher the taxes, the greater will be the incentives to avoid or evade them…The new class is here to stay and it will co-operate with capitalist speculators, feudal chiefs controlling the rural co-operatives, millionaire smugglers and corrupt top executives. These are the only beneficiaries of the parallel economy and they comprise, by and large, the Establishment,” wrote Chitre.
Due to the “license permit quota raj” was born a deep distrust for big-business in the minds of Indians. C Rajagopalachari, India’s second and last governor general, was the first to use the phrase license permit quota raj to describe the socialist economy that Nehru had created and Indira Gandhi spread.
As Gurucharan Das writes inIndia Grows At Night “Rajaji (C Rajagopalachari)…was the first to describe Nehru’s socialist economy as a ‘license permit quota raj’ in the late 1950s. When a reporter suggested that corruption had increased because Indians, not the British, were ruling, Rajaji had quickly retorted that corruption was less matter of culture and more about economic incentives. Socialist controls sent out the wrong signals to human beings on how to behave. Yes, culture mattered but culture would quickly change if the incentives changed.”
Things finally started to change around in 1991 once the Indian economy started to be opened up and the license permit quota raj was gradually done away with. It unleashed big business from the web of socialist control and economic growth followed. But the reputation of big business other than the likes of the Infosys, Wipro and TCS, still remained shady in the minds of the average Indian. As big businesses benefitted, reforms came to be associated more with them. This made reforms a perpetual hard-sell to the average Indian.
As Pratap Bhanu Mehta recently wrote in theIndian Express “One reason reform does not have as large a social base is that reform has come to be associated with reform for the big boys. We can debate the merits of FDI in retail. Even if its net benefits are uncertain, the fears it ignites are highly exaggerated. Making that a priority over other reforms may send out sound signals to other investors. But it reinforces the idea that you have to be big and organised to get a hearing. Despite two decades of reform rhetoric, small and medium business in India still feels trapped in the clutches of the state.” (you can read the complete piece here)
This is something that Das backs up with examples in his book. As he writes “Here was another irony. While the speed of trucks had risen 50 per cent thanks to four and six-lane highways, truckers were still mired in the old inefficiencies…Many municipalities in India continued to levy octroi because this medieval tax was their only source of revenue.”
And wherever there is a government check post there is also an opportunity to demand a bribe. Das describes one such experience when he ran into a line of trucks. “There was an interminable line of unhappy trucks parked on one side of the road…I pulled across up alongside an idle truck driver, and asked him what was going on. He had been waiting at the revenue check naka for four hours, he said. He was afraid that the bribe on this occasion was going to be double because the Check Sahib’s daughter was getting married. There would be more than half a dozen check posts like this on his journey from Delhi to Mumbai. There would also be police posts to bribe, and a journey of twenty-four hour would take forty-four, half the time lost in queues and in negotiating bribes.”
Indeed, as Das writes, Transparency International reported that in 2005 India’s trucking industry had paid bribes amounting to Rs 22,000 crore. This was roughly equal to what the truck drivers earn annually by the way of salary.
Also the end of license quota permit raj has been replaced by the rise of the inspector raj. Das recounts the story of an entrepreneur friend Navin Parikh who runs a factory near Ajmer, which makes sophisticated parts and equipments for the suppliers to the world’s defence industries. This is how Das recounts Navin’s experience. “‘Not a week goes by,’ Navin said, without an inspector from some department or the other coming for his hafta vasooli, “weekly bribe”. Labour, excise, fire, police, octroi, sales tax, boilers and more – we have to keep all of them happy. Otherwise, they make life hell. More than 10 per cent of my costs are in “managing the system”.” Navin has to deal with on an average seventeen inspectors who have the power to close down his business on one pretext or another.
So reforms have come to be associated with the big boys of business simply because things haven’t changed at all at the lower levels. As per a World Bank study in 2011, India ranked 134 out of 180 countries when it came to the ease of doing business.
What has also not helped is the fact that the reputation of businessmen and politicians has taken a nose dive in the recent past as wave of scams with allegations of crony capitalism has come to light. “The corruption story has also become part of the reform story. Open loot at the top lends credence to the idea that anyone should grab anything from the state that they can,” writes Mehta.
Given these reasons any attempt at economic reform in India doesn’t go down well with the average Indian. This impression of reforms benefitting big business is unlikely to go away in a hurry. Whether the current UPA government is serious about the “few” reforms that it has initiated remains to be seen. Or is just a diversionary tactic to get the attention away from coal-gate.
The only way out is transparency. As Mehta puts it “But more importantly, the real intent behind reform will become more apparent if the state can go towards a rules-based working in its inner core. But as state institutions are being decimated one after the other, it is hard to inspire confidence that we are moving to a transparent rules-based system. This is still a system where, on everything from CBI investigations to company law cases, deals seem possible. When the government says things like environmental clearances will speed up, it is not clear what exactly that means. Is it a harbinger of a new transparent and effective regime or simply more deals? The idea that the state is fundamentally about negotiated quick-fixes has not disappeared.”}
Another reason for reforms being a difficult sell is what economist Vivek Dehejia calls the original sin of 1991. “What makes that more difficult now is what I call the original sin of 1991. I am not the only one who has observed this. What happened from 1991 and thereon was reform by stealth. Reform by the stroke of the pen reform and reform in a mode of crisis, where there was never an attempt made to sort of articulate to the Indian voter why are we doing this? What is the sort of the intellectual or the real rationale for this? Why is it that we must open up? It wasn’t good enough to say that look we are in a crisis,” he told me in an interview I did for the Daily News and Analysis (DNA) sometime back. (You read the complete interview here).
Manmohan Singh’s speech to the nation the other day tried to explain the few steps of economic reform the government has initiated over the last ten days. But what he was basically saying like he did in 1991 was that, look we are in a crisis and there is no way out.
Given these reasons, when it comes to serious economic reforms that will benefit India in the years to come, I remain pessimistic.
(The article originally appeared on www.firstpost.com on September 24, 2012. http://www.firstpost.com/business/why-reform-is-a-bad-word-in-india-466243.html)
(Vivek Kaul is a writer. He can be reached at [email protected])
Manmohan Singh
Mamata is only doing what Congress has always done
Vivek Kaul
Mamata Banerjee has been severely criticised for quitting the Congress led United Progressive Alliance (UPA) government. The major reason for the same is the fact that the government of West Bengal is in a financial mess. As on March 31, 2012, the debt burden of the government stood at Rs 2,08,382.58 crore. To repay this loan the government needs to pay interest and principal amounting to Rs 23,200 crore during the course of this financial year (i.e. between April 1, 2012 and March 31, 2012).
As an article in the Business Standard points out “West Bengal’s outstanding debt by the end of this financial year is slated to be about Rs 2,26,000 crore , making it the most indebted state in the country in terms of debt to gross state domestic product ratio at close to 39 per cent.” (You can read the complete article here)
This huge debt is a legacy of nearly three and a half decade of misrule by the Left Front. “The Left believed that the key to power was to co-opt every section of society – school and college teachers, bus drivers, municipal employees, healthcare workers and so on – into government. So, the Bengal government is one of the largest employers in the country today,” writes Abheek Barman in an editorial in the Times of India. (You can read the complete piece here).
Given this, the expenses of the government of West Bengal are higher than its revenues. The difference it has to meet by borrowing. The revenue that the government expects to earn this year stands at Rs 76,943 crore. The expenses are at Rs 83,801 crore, leaving a deficit of Rs 6,585 crore.
The government of West Bengal had been negotiating with the government of India for a debt relief package. “When President Pranab Mujkherjee was the Union finance minister, both Mitra(Amit Mitra, the finance minister of West Bengal) and chief minister Mamata Banerjee had lined up for countless meetings in the hope of a financial package. “During the last 11 months, I have met the Prime Minister ten times and finance minister 20 times,” Banerjee had earlier said,” the Business Standard points out.
The government of West Bengal was hoping that the government of India allows the state to skip interest payment and principal repayments amounting to around Rs 22,000 crore, for each of the next three years. It also wanted its debt restructured with the interest rate on the debt being lowered as well as the repayment tenure being extended.
This relief programme would have helped the government of West Bengal to fix the state’s economy to some extent. It would have given them money to spend on the state’s infrastructure rather than just about being able to pay salaries to its employees. As Barman writes “People who voted for Mamata and her Trinamool Congress had hoped that she would fix Bengal’s broken economy, attract investment and jobs back to the state and repair its broken finances. A key component of the recovery plan was the debt-relief programme.”
Also with the withdrawal of support to UPA, Trinamool has had to give up the Railways Ministry which is one of the biggest job creators in the government. And it is a well known fact that Railway Ministers do influence jobs towards states they come from
With this background in mind the prevalent opinion is that Mamata has shot herself in the foot. Critics are also of the opinion that if she was so against foreign direct investment in multi-brand foreign retailing then she had the option of not allowing it in West Bengal. The Press Note allowing multi-brand foreign retailing clearly points out that “the State GovernmentslUnion Territories would be free to take their own decisions in regard to implementation of the policy.”
Also after all this any debt relief package for West Bengal, from the government of India, clearly won’t see the light of day. Nitish Kumar, the chief minister of Bihar, clearly saw an opportunity here and threw his hat into the ring. He said that his party (the Samta party) would support anyone who would come up with a package for Bihar.
Mamata Banerjee has had a very edgy relationship with the Congress since she quit the party and formed her own party, the Trinamool Congress on January 1, 1998. Given this her past behaviour with the grand old political party of India has appeared to be fairly whimsical.
She has often been accused of thinking with her heart and letting her emotions override her decisions rather than thinking with her head and making cold and calculated political decisions.
But what people forget very easily is that Mamata Banerjee is the only woman political leader of some standing in India who has risen on her own, without the support of any male or for that matter family.
As Monobina Gupta writes in Didi – A Political Biography “In fact, viewed through gender lens, Mamata’s story does indeed stand apart from the narratives of India’s most powerful contemporary women leaders. Says Krishna Bose “Mamata has not been the widow, the wife, daughter of companion of somebody.’ Just pick three top women leaders in Indian politics today – Sonia Gandhi, Mayawati, J.Jayalalithaa – each has had a prop, a male guardian of compelling power, or a lineage or redoubtable political growth.”
Mamata has clearly made it of her own and understands the games that people play in politics very well. As Gupta writes “Even when Rajiv Gandhi was alive, Mamata found herself in the company of Congressmen liaising with senior party leaders in Delhi, plotting to sabotage her career to crash her soaring political ambitions to the ground. In the void following Rajiv’s death, Mamata was left to defend herself against plots and counter-plots often real, sometimes imaginary, hatched by her own party leaders to pull her down.”
Mamata Banerjee may not understand economics. She may not be fit to govern. But she does understand what politics is all about. And given that the decision to withdraw support to the Congress led UPA government at the centre was nothing but a cold and a calculated chance that she is taking.
And how is that? Before I answer that let me deviate a little to discuss something that Gurucharan Das writes about in his new book India Grows At Night. As he writes “There are two spaces in the politics of India and one of them is largely empty. They reflect the classic division between those who look ahead and aspire versus those who look back and complain. India’s political parties still tend to cater to the second – to the victim in us – through their politics of grievance.”
Leading this list is the Congress party. “The Congress appeals to the victim in policies for the aam aadmi…with an ever expanding menu of job guarantees, food security and subsidy for gas diesel, kerosene, fertilizers and more…All this is about the politics of grievance…grievance admittedly can be a powerful motivator to action.”
This has put India in an economic mess and has forced the Congress led UPA to suddenly turn reformist. As Pratap Bhanu Mehta writes in the Indian Express “these reforms are coming after four years of colossal mismanagement is making the reform narrative problematic…politically it is not easy for the government, after running all fiscal responsibility into the ground for four years, and after stoking structural inflation, to turn back and accuse opponents of being populist.”
Given this Mamata is only doing what Congress has done all these years. She is practicing the politics of grievance and appealing to the victim in us i.e. the voters. She is trying to project herself on the national stage, as someone who cares about the poor and the not so well off. With the Congress talking reforms someone has to fill the space that has been left empty for the time being.
And how does that help Mamata and the Trinamool Congress? The panchayat polls in West Bengal slated for May next year could be advanced to the coming winter months. Mamata is appealing to the victim in the voters, by asking for a partial repeal in the diesel price hike and an increase in the number of subsidised cooking gas cylinders, which the government of India has limited to six.
She is also trying to influence the traders and the small shopkeepers by projecting FDI in multi-brand foreign retailing as a devil and asking for it to be squashed. A victory in the panchayat elections would really make Trinamool Congress stand true to its name.
The word Trinamool means grass-root. And currently the Trinamool Congress only controls two out of the seventeen zila parishads in the state. A victory here for the Trinamool Congress would be a further dent to the Left parties in West Bengal and would help consolidate Mamata’s position.
Also any instability in Delhi benefits Mamata and Trinamool. The party currently has 19 out of the 42 Lok Sabha seats in West Bengal. An early Lok Sabha election will clearly benefit Trinamool. Hence by withdrawing support Mamata is trying to destabilise the Congress led UPA government, and hoping that UPA loses its majority in the Lok Sabha.
If an early Lok Sabha poll does happen and the Trinamool Congress does get 30-35 seats, then Mamata Banerjee will clearly become an important player in the so called “fourth” or “federal” front that is now being talked about. It is a likely coalition of strong chief ministers like Nitish Kumar (who runs the Samta party), Naveen Patnaik (who runs the Biju Janta Dal), J Jayalalithaa(who runs the AIADMK) and Mamata.
This could mean that Mamata Banerjee could end up playing a very important role in the government of India. If the sleepy HD Deve Gowda could become the Prime Minister of India, why can’t Mamata Banerjee? That is the game at play.
And what about West Bengal? Well for a state that has gone through 35 years of mis-governance and is an economic mess, can surely wait for a few years more. In the meanwhile, their Didi is meant for bigger things.
(The piece originally appeared with a different headline on www.firstpost.com on September 22, 2012 http://www.firstpost.com/politics/mamata-may-be-trying-to-out-sonia-sonia-for-bigger-stakes-464467.html)
(Vivek Kaul is a writer and can be reached at [email protected])
Sonianomics will put India on the path to disaster
Vivek Kaul
Sonia Gandhi must be having the last laugh, at least when it comes to economic reforms and their salability among Indian politicians. “Maine kaha tha, Mamata nahi manegi(I had told you Mamata will not agree),” she must be telling the Prime Minister Manmohan Singh these days. “Par aap zidd par add gaye(But you became rather obstinate about the entire thing),” she must have added.
Whether this government survives or not remains to be seen but economic reforms will now be put on the backburner, that’s for sure. Also, the Congress party led United Progressive Alliance(UPA) will start preparing for elections (early or not that doesn’t really matter). And given that Sonia Gandhi’s form of “giveaway everything for free” economics will come to the forefront again now.
The various Congress led governments, since India attained independence from the British in 1947, have always followed this form of economics. As Sunil Khilnani writes in The Idea of India “The state was enlarged, its ambitions inflated, and it was transformed from a distant, alien object into one that aspired to infiltrate the everyday lives of Indians, proclaiming itself responsible for everything they could desire: jobs, ration cards, educational places, security, cultural recognition.”
When someone is responsible for everything, the way it usually turns out is that he is not responsible for anything. A major reason for the economic and social mess that India is in today is because of the various Congress led government trying to be responsible for everything.
This is going to increase in the days to come with Sonia Gandhi’s pet projects of the right to food and universal health insurance being initiated. It need not be said that the projects will help spruce up the chances of the Congress party in the next Lok Sabha election.
These are populist giveaways which have existed all through history. As Gurucharan Das writes in his new book India Grows at Night “Populist giveaways have always been a great temptation. Roman politicians devised a plan in 140BCE to win votes of the poor by offering cheap food and entertainment – they called it ‘bread and circuses.’”
But even with that, the idea of right to food and health for all, are very noble measures and difficult to oppose for anybody who has his heart in the right place. Nevertheless, the larger question is where will the government get the money to finance these schemes from? As P J O’Rourke, an American political satirist, writes in Don’t Vote! It Just Encourages the Bastards “We’re giving until it hurts. That is, we’re giving until it hurts other people, since we’re giving more than we’ve got.”
The fiscal deficit target of Rs 5,13,590 crore or 5.1% of the gross domestic product(GDP), for 2012-2013 will be breached by a huge amount. Fiscal deficit is the difference between what the government earns and what it spends. This will happen primarily because of the subsidy bill going through the roof (as the following table shows).
| Subsides | Apr-July 2012 | Apr-July 2011 | Increase over last year | budget estimate | % of budget estimate |
| Oil | 28,630 | 20760 | 37.91% | 43580 | 65.70% |
| Fertilizer | 32220 | 19250 | 67.38% | 60974 | 52.84% |
| Food | 46400 | 37540 | 23.60% | 75000 | 61.87% |
| Source: Controller General of Accounts, Deutsche Bank. In rupees crore | |||||
As is clear from the table the subsidies on oil, fertilizer and food for the first four months of this have been much higher than the previous year. Also four months into the year the subsidies are already more than 50% of the amount targeted for the year. Like the food subsidy for the year has been targeted at Rs 75,000 crore. During the first four months subsidies worth Rs 46,400 crore have already been offered. Unless the government controls this, the spending over the remaining eight months of the year will definitely cross the targeted Rs 75,000 crore. This will increase the overall spending of the government and thus the overall fiscal deficit, which is in the process of reaching dangerous proportions.
As I have stated in the past at the current rate the fiscal deficit of the Indian government could easily surpass Rs 700,000 crore or 7% of the GDP. (you can read the complete argument here). Now add the right to food and universal health insurance to it and just imagine where the fiscal deficit will go. And that means the scenario of high interest rates and high inflation will continue in the days to come.
But that’s just one part of the argument. Those in favour of subsidies and a welfare state have often given the example of the greatest western democracies (particularly in Europe) which have run huge welfare states with the government taking care of its citizens from cradle to grave. An extreme example of such a welfare state is Greece.
Greece categorises certain jobs as arduous. For such jobs the retirement age is 55 for men and 50 for women. “As this is also the moment when the state begins to shovel out generous pensions, more than 600 Greek professions somehow managed to get themselves classified as arduous: hairdressers, radio announcers, musicians…” write John Mauldin and Jonathan Tepper write in Endgame – The End of the Debt Supercycle and How it Changes Everything.
But the Western democracies became welfare states only after almost 100 years of economic growth. “Western democracies had taken more than a hundred years of economic growth and capacity building to achieve the welfare state,” writes Das. And given this India is indulging in “premature welfarism”. “A nation with a per capita income of $1500 cannot protect its people from life’s risks as a nation with a per capita income of $15,000 could. It came at a cost of investment in infrastructure, governance and longer-term prosperity,” adds Das.
That’s one part of the argument. In order to finance these programmes the government will have to run huge fiscal deficits. This means that the government will have to borrow. Once it does that it will crowd out borrowing by the private sector and thus bring down the investment in infrastructure and hence longer term prosperity.
There is no example of a premature welfare state in the history of mankind rising its way to economic prosperity. An excellent example of a country that tried and failed is Brazil. India is making the same mistakes now that Brazil did in the late 1970s.
As Ruchir Sharma writes in Breakout Nations “Inspired by the popularity of employment guarantees, the government now plans to spend the same amount extending food subsidies to the poor. If the government continues down this path, India might meet the same fate as Brazil in the late 1970s, when excessive government spending set off hyperinflation and crossed out private investment, ending the country’s economic boom…the hyperinflation that started in the early 1980s and peaked in 1994, at the vertiginous annual rate of 2,100 percent. Prices rose so fast that cheques would lose 30 percent of their value by the time businesses could deposit them, and so inconsistently that at one point a small bottle of sunscreen lotion cost as much as a luxury hotel.”
Inflation in such a scenario happens on two accounts. First it happens because people have more money in their hands. And with this they chase the same number of goods, thus driving up prices. The second level of inflation sets in once the government starts printing money to finance all their fancy welfare schemes.
As far inflation is concerned things have already started heating up in India. As Das writes “The Reserve Bank warned that wages, which were indexed against inflation in the employment scheme (the national rural employment guarantee scheme), had already pushed rural wage inflation by 15 per cent in 2011. As a result, India might not gain manufacturing jobs when China moves up the income ladder.”
Other than inflation, giving away things for free has other kinds of problems as well. With states giving away power for free or rock bottom rates, the state electricity boards are virtually bankrupt. As Abheek Barman wrote in a recent column in the Economic Times “Most of the power is bought by state governments, through state electricity boards (SEBs). These boards are bankrupt. In 2007, all SEBs put together made losses of Rs 26,000 crore; by March last year, this jumped to a staggering Rs 93,000 crore. Just two SEBs, Uttar Pradesh and Jammu & Kashmir, account for nearly half this amount. To cover power purchase costs, the SEBs borrow money. Today, the total short-term debt of all the SEBs has soared to a mind-boggling 2,00,000 crore. Many states would buy as little electricity as possible, to avoid going deeper into the red.” (You can read the compete piece here). So the farmer has free electricity but then there is no electricity available most of the time.
Das writes something similar in India Grows at Night. “Punjab’s politicians gave away free electricity and water to farmers, and destroyed state’s finances as well as the soil (as farmers overpumped water); hence, Haryana supplanted Punjab as the national’s leader in per capita income.”
Other than this a lot of things given away for free by the government are siphoned off and do not reach those they are intended to. It would be foolish on my part to assume the politicians in this country (including Sonia Gandhi and of course Manmohan Singh) do not understand these things. But as Das writes “But neither the ‘do-gooders’ nor the Congress party was deterred by the massive corruption in the supply of diesel, kerosene, electricity and cooking gas as well as in ‘make work’ schemes and food distribution. Politicians felt there were still plenty of votes there.”
But these votes will come at the cost of economic progress. No country in history has got its citizens out of poverty by giving away things for free. Countries have progressed when they have created enough jobs for its citizens. And that has only happened when the right investments have been made over the years to build infrastructure, industry and human skill.
So the votes for the Congress will come at the cost of economic prosperity for the country. In the end let me quote a couplet written by Allama Iqbal: “Na samjhoge to mit jaoge ae hindustan waalo, tumhari daastan bhi na hogi daastano main” ( “If you don’t wake up, O Indians, you will be ruined and razed, Your very name shall vanish from the chroniclers’ page” – Translation by K C Kanda in Masterpieces of Patriotic Urdu Poetry: Text, Translation, and Transliteration).
The Prime Minister Manmohan Singh’s love for urdu poetry is well known. It is time he went back to this couplet of Allama Iqbal and tried to understand it in the terms of all the problems that will come along with the premature welfare state that his party has created and is now trying to spread it further.
The article originally appeared on September 20, 2012 on www.firstpost.com. http://www.firstpost.com/politics/sonianomics-will-put-india-on-the-path-to-disaster-462163.html
(Vivek Kaul is a writer. He can be reached at [email protected])
How Mamata is denting the rupee and bloating the oil bill
Vivek Kaul
A major reason for announcing the so called economic reforms that the Manmohan Singh UPA government did over the last weekend was to get India’s burgeoning oil subsidy bill which was expected to cross Rs 1,90,000 crore during the course of the year, under some control.
One move was the increase in diesel price by Rs 5 per litre and limiting the number of cooking gas cylinders that one could get at the subsidisedprice to six per year. This was a direct step to reduce the loss that the oil marketing companies (OMCs) face every time they sell diesel and cooking gas to the end consumer.
The other part of the reform game was about expectations management. The announcement of reforms like allowing foreign direct investment in multi-brand foreign retailing or the airline sector was not expected to have any direct impact anytime soon. But what it was expected to do was shore up the image of the government and tell the world at large that this government is committed to economic reform.
Now how does that help in controlling the burgeoning oil bill?
Oil is sold internationally in dollars. The price of the Indian basket of crude oil is currently quoting at around $115.3 per barrel of oil (one barrel equals around 159litres).
Before the reforms were announced one dollar was worth around Rs 55.4(on September 13, 2012 i.e.). So if an Indian OMC wanted to buy one barrel of oil it had to convert Rs 6387.2 into $115.3 dollars, and pay for the oil.
After the reforms were announced the rupee started increasing in value against the dollar. By September 17, one dollar was worth around Rs 53.7. Now if an Indian OMC wanted to buy one barrel of oil it had to convert Rs 6191.6 into $115.3 to pay for the oil.
Hence, as the rupee increases in value against the dollar, the Indian OMCs pay less for the oil the buy internationally. A major reason for the increase in value of the rupee was that on September 14 and September 17, the foreign institutional investors poured money into the stock market. They bought stocks worth Rs 5086 crore over the two day period. This meant dollars had to be sold and rupee had to be bought, thus increasing the demand for rupee and helping it gain in value against the dollar.
But this rupee rally was short lived and the dollar has gained some value against the rupee and is currently worth around Rs 54.
The question is why did this happen? Initially the market and the foreign investors bought the idea that the government was committed at ending the policy logjam and initiating various economic reforms. Hence the foreign investors invested money into the stock market, the stock market rallied and so did the rupee against the dollar.
But now the realisation is setting in that the reform process might be derailed even before it has been earnestly started. This was reflected in the amount of money the foreign investors brought into the stock market on September 18. The number was down to around Rs 1049.2 crore. In comparison they had invested more than Rs 5080 crore over the last two trading sessions.
Mamata Banerjee’s Trinamool Congress, a key constituent of the UPA government, has decided to withdraw support to the government. At the same time it has asked the government to withdraw a major part of the reforms it has already initiated by Friday. If the government does that the Trinamool Congress will reconsider its decision.
How the political scenario plays out remains to be seen. But if the government does bow to Mamata’s diktats then the economic repercussions of that decision will be huge. The government had hoped that the losses on account of selling, diesel, kerosene and cooking gas, could have been brought down to Rs 1,67,000 crore, from the earlier Rs 1,92,000 crore by increasing the price of diesel and limiting the consumption of subsidised cooking gas.
If the government goes back on these moves, the oil subsidy bill will go back to attaining a monstrous size. Also, what the calculation of Rs 1,67,000 crore did not take into account was the fact that rupee would gain in value against the dollar. And that would have further brought down the oil subsidy bill. In fact HSBC which had earlier forecast Rs 57 to a dollar by December 2012, revised its forecast to Rs 52 to a dollar on Monday. But by then the Mamata factor hadn’t come into play.
If the government bows to Mamata, the rupee will definitely start losing value against the dollar again. This will happen because the foreign investors will stay away from both the stock market as well as direct investment. In fact, the foreign direct investment during the period of April to June 2012 has been disastrous. It has fallen by 67% to $4.41billion in comparison to $13.44billion, during the same period in 2011. If the government goes back on the few reforms that it unleashed over the last weekend, foreign direct investment is likely to remain low.
One factor that can change things for India is the if the price of crude oil were to fall. But that looks unlikely. The immediate reason is the tension in the Middle East and the threat of war between Iran and Israel. Hillary Clinton, the US Secretary of State, recently said that the United States would not set any deadline for the ongoing negotiations with Iran. This hasn’t gone down terribly well with Israel. Reacting to this Benjamin Netanyahu, the Prime Minister of Israel said “the world tells Israel, wait, there’s still time, and I say, ‘Wait for what, wait until when? Those in the international community who refuse to put a red line before Iran don’t have the moral right to place a red light before Israel.” (Source: www.oilprice.com)
Iran does not recognise Israel as a nation. This has led to countries buying up more oil than they need and building stocks to take care of this geopolitical risk. “In the recent period, since the start of 2012, the increase in stocks has been substantial, i.e. 2 to 3 million barrels per day. These are probably precautionary stocks linked to geopolitical risks,” writes Patrick Artus of Flash Economics in a recent report titled Why is the oil price not falling?
At the same time the United States is pushing nations across the world to not source their oil from Iran, which is the second largest producer of oil within the Organisation of Petroleum Exporting Countries (Opec). This includes India as well.
With the rupee losing value against the dollar and the oil price remaining high the oil subsidy bill is likely to continue to remain high. And this means the trade deficit (the difference between exports and imports) is likely to remain high. The exports for the period between April and July 2012, stood at $97.64billion. The imports on the other hand were at $153.2billion. Of this, $53.81billion was spent on oil imports. If we take oil imports out of the equation the difference between India’s exports and imports is very low.
Now what does this impact the value of the rupee against the dollar? An exporter gets paid in dollars. When he brings those dollars back into the country he has to convert them into rupees. This means he has to buy rupees and sell dollars. This helps shore up the value of the rupee as the demand for rupee goes up.
In case of an importer the things work exactly the opposite way. An importer has to pay for the imports in terms of dollars. To do this, he has to buy dollars by paying in rupees. This increases the demand for the dollar and pushes up its value against the rupee.
As we see the difference between imports and exports for the first four months of the year has been around $55billion. This means that the demand for the dollar has been greater than the demand for the rupee.
One way to fill this gap would be if foreign investors would bring in money into the stock market as well as for direct investment. They would have had to convert the dollars they want to invest into rupees and that would have increased the demand for the rupee.
The foreign institutional investors have brought in around $3.86billion (at the current rate of $1 equals Rs 54) since the beginning of the year. The foreign direct investment for the first three months of the year has been at $4.41 billion.
So what this tells us that there is a huge gap between the demand for dollars and the supply of dollars. And precisely because of this the dollar has gained in value against the rupee. On April 2, 2012, at the beginning of the financial year, one dollar was worth around Rs 50.8. Now it’s worth Rs 54.
This situation is likely to continue. And I wouldn’t be surprised if rupee goes back to its earlier levels of Rs 56 to a dollar in the days to come. It might even cross those levels, if the government does bow to the diktats of Mamata.
This would mean that India would have to pay more for the oil that it buys in dollars. This in turn will push up the demand for dollars leading to a further fall in the value of the rupee against the dollar.
Since the government forces the OMCs to sell diesel, kerosene and cooking gas much below their cost to consumers, the losses will continue to mount. The current losses have been projected to be at Rs 1,67,000 crore. I won’t be surprised if they cross Rs 2,00,000 crore. The government has to compensate the OMCs for these losses in order to ensure that they don’t go bankrupt.
This also means that the government will cross its fiscal deficit target of Rs 5,13,590 crore. The fiscal deficit, which is the difference between what the government earns and what it spends, might well be on its way to touch Rs 7,00,000 crore or 7% of GDP. (For a detailed exposition of this argument click here). And that will be a disastrous situation to be in. Interest rates will continue to remain high. And so will inflation. To conclude, the traffic in Mumbai before the Ganesh Chaturthi festival gets really bad. Any five people can get together while taking the Ganesh statue to their homes, put on a loudspeaker, start dancing on the road and thus delay the entire traffic on the road for hours. Indian politics is getting more and more like that.
Reforms, like the traffic, may have to wait. Mamata’s revolt is single-handedly worsening the oil bill, thanks, in part, to the rupee’s worsening fortunes. By not raising prices now, the subsidy bill bloat further, and in due course we will be truly in the soup.
The article originally appeared on www.firstpost.com on September 20, 2012. http://www.firstpost.com/economy/how-mamata-is-denting-the-rupee-and-bloating-the-oil-bill-461919.html
Vivek Kaul is a writer and can be reached at [email protected]
How Manmohan’s omelette came out as scrambled egg
Vivek Kaul
Around half way through Manu Joseph’s new book The Illicit Happiness of Other People, Ousep Chacko, one of the main characters in the book, says “Don’t hate me, son. There are people in this world who set out to make an omelette but end up with scrambled eggs. I am one of them.”
I just couldn’t help comparing this statement to Manmohan Singh, the current Prime Minister of the country. When he started out in 2004 he had all the economic ingredients that could be used to make a good omelette but what he has given us instead is burnt bhurji (the closest Indian representation of scrambled eggs and with due apologies to all the vegetarians out there).
When Manmohan Singh took over as the Prime Minister on May 22, 2004, things were looking good on the economic front. Consumer price index (CPI) inflation was at a rather benign 2.83%(Source: http://www.tradingeconomics.com/india/inflation-cpi) in May 2004. Interest rates were low.
The fiscal deficit projected by the government for 2004-2005(or the period between April 1, 2004 and March 31, 2005) was at 4.4% of the gross domestic product (GDP). Fiscal deficit is the difference between what the government earns and what it spends.
The interest payments that the government had to make on previous debt formed around 94% of the fiscal deficit. Interest payments stood at Rs 1,29,500 crore whereas the fiscal deficit was at Rs 1,37,407 crore. Thus the primary deficit or the difference between expenditure and income, after leaving out the interest payments, came to just 0.3% of the GDP.
What this meant was that the government was more or less meeting its expenditure from the income that it was earning during the course of the year. Thus the deficit was on account of the past debt. It also meant that the government did not have to borrow much, which in turn kept the interest rates low, encouraging both businesses and consumers to borrow and spend, and thus helping the Indian economy grow at a fast rate.
The subsidy bill for the year stood at Rs 43,516 crore or a little over 9% of the total government expenditure.
Cut to now. The CPI inflation for July 2012 was at 9.86%. The interest rate on most retail loans is greater than 10%. And the fiscal deficit has gone through the roof. The projected fiscal deficit for the year is Rs 5,13,590 crore or around 5.1% of the GDP. The primary deficit is at 1.9% of the GDP.
Even these numbers, as I showed in a recent piece will turn out to be way off the mark. (You can read the piece here). As economist Shankar Acharya wrote in the Business Standard “A few days back the Controller General of Accounts (CGA, not CAG!) informed us that the central government’s fiscal deficit for the first four months of 2012-13 had already exceeded half of the Budget’s target for the full year.”
The way things are going currently, the fiscal deficit might touch 7% of the GDP or its roundabout by the end of this year. This is a situation which hasn’t been experienced since 1990-91, just before India liberalised and opened up the economy.
In his speech as the Finance Minister of India in July 1991 Manmohan Singh had said “The crisis of the fiscal system is a cause for serious concern. The fiscal deficit of the Central Government…is estimated at more than 8 per cent of GDP in 1990-91, as compared with 6 per cent at the beginning of the 1980s and 4 per cent in the mid-1970s.”
So the question that arises is what went wrong between 2004 and 2012? The answer is that the subsidy budget of the government went through the roof. Things started changing in 2007-2008. The projected subsidy bill for the year was Rs 54,330 crore. By the end of the year the government had spent Rs 69,742 crore or 28% more. This was in preparation for the 2009 Lok Sabha elections.
The same thing happened the next year i.e. 2008-2009. The government budgeted Rs 71,431 crore as subsidies and ended up spending Rs 1,29,243 crore, a whopping 81% more. The subsidies were primarily on account of fertiliser, oil and food.
The budgeted subsidies for the current financial year (i.e. the period between April 1, 2012 and March 31, 2013) are at Rs 1,90,015 crore or around 12.7% of the total government expenditure. But as has been the case earlier the government will end up spending much more than this. Even after the Rs 5 increase in diesel price, the oil marketing companies (OMCs) will lose more than Rs 1 lakh crore on selling diesel this year. The total loss on account of selling diesel, kerosene and cooking gas at a loss is estimated to come to Rs 1,67,000 crore.
Just this will push up the subsidy bill close to Rs 3,00,000 crore. The government is expected to cross the budgeted amount for food and fertiliser subsidy as well. All in all it’s safe to say that subsidies will account for more than 20% of the government expenditure during the course of the year, leading to greater borrowing by the government and thus higher interest rates for everybody else.
The idea behind the subsidies (or inclusive growth as the government likes to call it) is to help the poor and ensure that they are not left out of the growth process. The question is where is the money to fund these subsidies going to come from? As Ila Patnaik writes in The Indian Express “Anyone looking at the rising subsidy bill, at the size of the welfare programmes, and contrasting it with the limited tax base, can only wonder why India will not have a fiscal crisis. A continuation of the present policies cannot but land the country into a huge problem. Either before a crisis or after it, there is little doubt that the current expenditure path has to change.”
The programme at the heart of the so called inclusive growth is the National Rural Employment Guarantee Act (NREGA), under which there is a legal guarantee of 100 days of employment during the course of the financial year to adults of any rural household. The daily wage is set at Rs 120 in 2009 prices, which means it is indexed for inflation. Now only if economic and social development was as easy as getting people to dig holes and fill them up.
Also as is usual with most such schemes in India there are huge leakages in this scheme as well. Estimates suggest that leakages are as high as 70%, which means only around Rs 30 of the Rs 100, reaches those it should, while the rest is being siphoned off. This is done by fudging muster rolls, which are essentially supposed to contain the number of days a labourer has worked and the wages he or she has been paid for it.
Also these subsidy and welfare programmes were initiated when the Indian economy was growing faster than 9%. Now the economic growth has slowed down to 5% levels. As Patnaik puts it “Implicit was also the argument that NREGA will be paid for by the high tax collection that the fast growing sectors of the economy would yield. Growth was to be made inclusive through a redistribution of incomes. This was the scenario when India was growing at 10 per cent and leaving some people behind. It was a scenario that might stand the test of time if India continued to grow at a long-run steady state of 10 per cent growth. This plan did not appear to evaluate the fiscal path of such a programme when growth halved.”
Slow growth also implies a slowdown in tax collections for the government, which might lead to the government needing to borrow more to finance the subsidies and welfare programmes.
A lot of the expenditure on account of subsidies could have been met if the government had been less corrupt and not sold off the assets of the nation at rock bottom prices. The loss on account of the telecom scandal was estimated to be at Rs 1.76 lakh crore. The loss on account of the coal blocks scandal was estimated to be at Rs 1.86lakh crore.
While these scams were happening all around him, Manmohan Singh chose to look the other way. As TN Ninan wrote in the Business Standard “Corruption silenced telecom, it froze orders for defence equipment, it flared up over gas, and now it might black out the mining and power sectors. Manmohan Singh’s fatal flaw — his willingness to tolerate corruption all around him while keeping his own hands clean — has led us into a cul de sac , with the country able to neither tolerate rampant corruption nor root it out.”
Singh has tried to re-establish his reformist credentials recently by announcing a spate of economic reforms over Friday and Saturday. But none of these reforms look to control the expenditure of the government and thus bring down the fiscal deficit. If the government continues down this path the future is doomed. As Ruchir Sharma writes in Breakout Nations “If the government continues down this path, India might meet the same path as Brazil in the late 1970s, when excessive government spending set off hyperinflation, ending the country’s economic boom.”
Higher expenditure also means inflation will continue to remain high. “NREGA pushed rural wage inflation up to 15% in 2011,” writes Sharma. The fear of high inflation continues, despite the reforms announced by the government. “The government undertook long anticipated measures towards fiscal consolidation by reducing fuel subsidies and selling stakes in public enterprises. Further, steps taken to increase foreign direct investment (FDI) should contribute to both greater capital inflows and, over the long run, higher productivity, particularly in the food supply chain. Importantly, however, for the moment, inflationary pressures, both at wholesale and retail levels, are still strong,” the Reserve Bank of India said in a statement today, keeping the repo rate (or the rate at which it lends to banks) constant at 8%. This despite the fact that there was great pressure on the central bank to cut the repo rate. It is unfair to expect the RBI to make up for the mistakes of the government.
The bottomline is that if the government has to get its act right it needs to reign in its expenditure. I started this piece with eggs let me end it with chickens. As economist Bibek Debroy wrote in the Economic Times “Since 2009, UPA-II has behaved like a headless chicken. It is still headless, but the chicken at least wants to cross the road. We still don’t know whether it will be run over or cross the road and lay an egg.”
And even if eggs are laid, we might still not end up with burnt bhurji rather than omelettes.
(The article originally appeared on www.firstpost.com. http://www.firstpost.com/politics/how-manmohans-omelette-came-out-as-scrambled-egg-458242.html)
(Vivek Kaul is a writer. He can be reached at [email protected])