Why Narendra Modi’s budget looks strangely familiar


The Narendra Modi led government in India presented its third budget today. The budget was presented by finance minister Arun Jaitley, in a nearly 100 minute long speech.

Before the budget was presented the fear was that the Narendra Modi government is gradually going back to the Congress party’s way of doing things, at least on the economic front. The Congress party has governed India in every decade after independence.

So what is the verdict after the budget? Modi seems to have titled the farm way. As the finance minister Jaitley said during the course of his speech: “We need to think beyond ‘food security’ and give back to our farmers a sense of ‘income security’. Government will, therefore, reorient its interventions in the farm and non-farm sectors to double the income of the farmers by 2022.”

This isn’t surprising given that agricultural growth has been very low at the rate of 0.5% per year, over the last two years, due to bad monsoons. Further, the agricultural growth is expected to be at 1.2% this year, much lower than the overall growth of 7.6%.

Initiatives allowing farmers a better access to the market have been planned. Plans have also been made around judicious use of fertilizers, to increase crop yields across land which does not have access to irrigation and so on.

The government has also planned to offer incentives around the production of pulses. In the recent past, price of the tur dal (pigeon pea) has touched Rs 200 per kg and given that India needs to produce more pulses.

But that was the good bit.

Before the Modi led Bhartiya Janata Party (BJP) came to power in the 2014 Lok Sabha elections, the Congress led United Progressive Alliance (UPA) with Manmohan Singh as prime minster, was in power for a decade.

Singh’s term as prime minster, especially the second term, was marked by an increasing amount of doles as well as corruption. Loans to farmers were written off. The Mahatma Gandhi National Rural Employee Guarantee Act (MGNREGA) was passed and so was the Food Security Act. In July 2014, Modi had slammed the UPA government’s food security scheme by saying: “The government in Delhi thinks that just by bringing in the Food Security Bill there will be food on your plate.”

Modi has also mocked the other big Congress scheme, the MGNREGA in the past. In February 2015, Modi had said: “I will ensure MGNREGA is never discontinued. It is proof of your failings. After so many years of being in power, all you were able to deliver is for a poor man to dig ditches a few days a month.”

The Modi government has done a u-turn on this front and allocated Rs 38,500 crore to the scheme for 2016-2017. This is the highest ever allocation to the scheme, the finance minister Jaitley proudly claimed during the course of his speech. Modi is now looking more and more similar to Manmohan Singh. He is a better marketer though than Singh and his regime isn’t corrupt. Not until now, at least.

MGNREGA aims at providing at least 100 days of guaranteed employment in a financial year to every household whose adults are willing to do unskilled manual work. The trouble is that MGNREGA essentially became another scheme where money is simply given away without any substantial assets being created.

Modi in the run up to the 2014 Lok Sabha elections had promised minimum government and maximum governance. But with the allocations to MGNREGA being at its highest ever level, looks like that promise has gone out of the window, at least for now.

The economist Surjeet Bhalla has called MGNREGA as the fourth most corrupt institution in the world after FIFA, the BCCI (the board that governs cricket in India) and the public distribution system used by the Indian government to distribute food grains as well as kerosene to the poor.

The food security scheme provides rice and wheat at Rs 3 and Rs 2 per kg to the poor. The Economic Survey of the government presented on February 26, points out that nearly 54% of the wheat, 48% of the sugar and 15% of rice, meant to be distributed through PDS is lost as a leakage.

The price at which the government sells the food grains and the price at which it buys is essentially the food subsidy that it provides. The allocation to food subsidy is at Rs 1,34,835 crore for 2016-2017. This has come down a little from the Rs 1,39,419 crore that was allocated last year.

Nevertheless, no effort has been made to tackle this leakage which costs the country a lot of money. The Report of the High Level Committee on Reinventing the Role and Restructuring of Food Corporation of India presented a report in January 2015 to tackle this issue. It has since been gathering dust.

Further, what India needs is the creation of huge number of jobs. The organised sector in this country continues to remain very small. In 1991-1992, the total number of people working in the organised sector had stood at around 27 million. Since then the number has jumped to around 29.6 million (as of 2011-12, the latest data available).

At the same time nearly 58% of India’s population continues to be dependent on agriculture which generates around 16-18% of India’s gross domestic product. What this tells us is that there is huge overemployment in the sector and jobs need to be created in other sector so that people can move away from agriculture. And that is clearly not happening.

Modi’s win in 2014 tapped into the aspiring class of India and promised to create jobs. In fact, in November 2013, Modi had said: “If BJP comes to power, it will provide one crore jobs which the UPA Government could not do despite announcing it before the last Lok Sabha polls.”

The government is betting on the creation of road and railway infrastructure for the creation semi-skilled and unskilled jobs required for moving people away from agriculture. The finance minister has allocated Rs 97,000 crore towards the road sector. Together with the capital expenditure of the Railways, this amounts to a good Rs 2,18,000 crore during the course of the year.

The question is will this be enough to move people away from agriculture by creating a substantial number of jobs? There are no easy answers for that.

(Vivek Kaul is the author of the Easy Money trilogy. He tweets @kaul_vivek)

A slightly different version of the column appeared on BBC.com on February 29, 2016

Why the helicopter economics of NREGA doesn't work

helicash Vivek Kaul 
The Down to Earth magazine has done an excellent expose of how village heads in Bihar have been siphoning off money from the various government run social scheme primarily MGNREGA (or Mahatma Gandhi National Rural Employment Guarantee Act). “More than 100 mukhiyas are learned to have become millionaires in the past five years. They have amassed wealth by siphoning off money from development projects related to MGNREGA, solar lights, rural roads, Indira Awas Yojana and the public distribution service (PDS),” the magazine points out.
The magazine gives the example of Sunil Verma, village head of Dakkin panchayat who has assets worth more than Rs 3.75 crore, investments over Rs 35 lakh in insurance policies and nearly 14 bank accounts. Village heads whose earn around Rs 8000 per month are purchasing guns, SUVs and appointing private guards for their security.
There are examples of village heads who were earlier construction labourers now driving around in SUVs. “We have discovered only the tip of the iceberg,” Director General of Police (DGP), Abhyanand, told the magazine. The MGNREGA scam is estimated to be around Rs 6,000 crore.
What is happening in Bihar and other parts of the country(which a simple Google search will reveal) as well is an excellent example of the “cantillon effect”. And to understand what it means we need to go back in history.
During the 16th century, the Spanish discovered gold and silver in huge amounts in the “New World,” the continent now known as South America. With all this silver/gold coming into Spain from the New World there was a sudden increase in money supply and that led to inflation in Spain.
Richard Cantillon, an Irish-French economist, who lived in the late 17th and early 18th century, studied this phenomenon and made some interesting observations.
What he said was that when money supply increased in the form of gold and silver it would first benefit the people associated with the process of money creation, the mining industry in general and the owners of the mines, the adventurers who went looking for gold and silver, the smelters, the refiners and the workers at the gold and silver mines, in particular. As Cantillon wrote “If the increase of actual money comes from mines of gold or silver… the owner of these mines, the adventurers, the smelters, refiners, and all the other workers will increase their expenditures in proportion to their gains.”
These individuals would end up with a greater amount of gold and silver i.e. money, before anyone else. This money they would spent and thus drive up the prices of meat, wine, wool, wheat etc. This new money would be chasing the same amount of goods and thus drive up prices.
This rise in prices would impact people not associated with the mining industry as well, even though there incomes hadn’t risen like the incomes of people associated with the mining industry had.
The situation that Cantillon talks about is very similar to what western central banks around the world have been up to over the past few years. They have been printing money and pumping it into their financial systems in the hope of keeping interest rates low, so as to encourage people to borrow and spend money, and in the process kick-start economic which has come to a standstill.
But this money printing has benefited those who are closest to the money creation. This basically means the financial sector and anyone who has access to cheap credit. Institutional investors have been able to raise money at close to zero percent interest rates and invest them in all kinds of assets all over the world, leading to huge bubbles. In the process, these investors have made a lot of money, while the overall economic growth continues to remain slow.
The modern terminology for this mode of operating is “helicopter money” i.e. the government and the central bank printing money and dropping it from a helicopter. So that people pick up the money that is being dropped, spend it, and thus help to revive economic growth.
But what this theory does not take into account is the fact that everybody can’t possibly be standing under the helicopter. Only a few people can. And those people who are standing under the helicopter are the ones who are likely to pick up the money being dropped and thus benefit from its purchasing power.
MGNREGA is no different from helicopter economics. The government has decided to spend a huge amount of money to guarantee jobs to citizens of this country. But there are very few checks and balances to figure out whether the money is actually being spent for what it is meant for. Turns out it is not and is being siphoned off in various ways.
Sanjay Dixit, a member of the Central Employment Guarantee Council (CEGC),
explained the modus operandi of the scam while claiming a Rs 10,000 crore MGNREGA scam had happened in Uttar Pradesh. As he told India Today This includes payment of wages against fake job card holders and fake construction works; creating fictitious purchase invoices, payment to ghost firms against the procurement of various items including hybrid seeds, calendars and publicity material; purchase of instruments used by labourers for construction works and purchase of photo copy machines and computers.”
The village heads in Bihar would have operated along similar lines. The people MGNREGA is benefiting the most, are the village heads and government officials, who are standing right under the helicopter from which the government is dropping money.

The article originally appeared on www.firstpost.com on September 25, 2013
(Vivek Kaul is a writer. He tweets @kaul_vivek) 

What NREGA did: Rural women knocked out of real jobs

Over the last few years, data put out by the government seemed to be showing a strange phenomenon. The participation of women in the rural labour force was going down.
The 2005 round of the National Sample Survey Organisation (NSSO) showed that women made up around 33.3 percent of the rural labour force. By the time the 2010 round came, this number had fallen to 26.5 percent. The labour bureau survey for a period of one year ending on 30 June 2011 also seemed to suggest the same.
The explanations offered for this phenomenon were rather lame.

As Akhilesh Tilotia of Kotak Institutional Equities points out in his latest GameChanger Perspectives report, “Both the NSSO and the Labour Bureau surveys pointed out the low or declining labour force participation of women, especially in rural India…There was no clarity on why women were dropping out of the workforce: Some experts thought women may have started spending more time in education and skill development, or the data collection itself may have been faulty.”

The explanations offered for women moving out of the rural labour force have turned out to be incorrect. The women, it seems, have been moving to work under the National Rural Guarantee Employee Act (NREGA) rather than dropping out of the labour force totally.

With the government guaranteeing work under NREGA, rural wages have been on their way up for some time now TABLE1

The accompanying table shows us exactly that. In 2007, women took on around 40.6 percent of the total persondays of work offered under NREGA. By 2012, this number had gone up to 48.2 percent.
As Tilotia explains, “We note that women form a disproportionately large group in NREGA person-days as compared to their proportion in the rural labour force (see table). This leads us to believe that women who are increasingly being priced out of the agricultural labour market are taking shelter in NREGA work schemes.”
With the government guaranteeing work under NREGA, rural wages have been on their way up for some time now. Another impact because of this has been the narrowing of wages between men and women.

Table two and three
Table two and three

As Tilotia puts it, “Across many agricultural activities, the premium that men used to command over women in terms of per-day wage has shrunk significantly. This is seen most prominently in ploughing, but is also true for sowing, weeding, transplanting and winnowing (as can be seen in the two tables that follow)…Even as mechanisation of agriculture has taken place over the last decade, there is still significant physical labour involved: The labour productivity has not meaningfully increased in many of the occupations noted above. In such a case women, whose wages have gone up much more than men’s, become less profitable to employ for a farm-owner. We hypothesise that the implementation of a minimum wage has meant workers with low productivity have been priced out of the market.”
And as women have been priced out as farm workers, this has led to women moving to working for projects under NREGA.
This may not be a good sign though, given that working for projects under NREGA hardly means any meaningful upgrade of skills for women, something that would help them earn more beyond NREGA. “Ideally the focus should be on improving the productivity of the female workforce via skill development: This would enable them to move beyond the minimum-wage band and command an employment opportunity on merits,” writes Tilotia.
Farmers also seem to be moving towards more mechanisation. A possible explanation for this is that higher farm wages probably are now making mechanisation increasingly financially viable. (though Tilotia doesn’t make that conclusion in his report).
This is borne out by the increasing number of tractors that have been sold since 2007. AnICRA report points out that the number of tractors sold by Indian companies stood at 346,508 units in the year ending 31 March 2008. This was expected to go up to 605,192 units for the financial year ending March 2012.
And these factors have also contributed to an increasing amount of food inflation in the country. The number stood at 11.88 percent for the month of January 2013. These are the unintended consequences of the NREGA.
The article originally appeared on www.firstpost.com on March 2, 2013
Vivek Kaul is a writer. He tweets at @kaul_vivek

The murky motivations behind Cong’s love of cash transfers

Sixkku appuram seven da, Sivajikku appuram yevenda,” says Superstar Rajinikanth in the tremendously entertaining Sivaji – The Boss. The line basically means that “after six there is seven, after Sivaji there is no one.”
Like there is no one after Sivaji (or should we say the one and only Rajinikanth) similarly there is no one in the Congress party beyond the Gandhi family. And the party can go to any extent to keep the family going and at the centre of it all.
Take the recent decision of the Congress led United Progressive Alliance (UPA) government to implement the direct cash transfers scheme in a hurry.  
On the face of it one cannot really question the good logic behind the scheme. The idea is to make cash transfers directly into the accounts of the citizens of this country instead of offering them subsidies, as has been the case until now. This transfer will happen through Aadhar unique ID card enabled banks accounts.
As The Hindu reports quoting the finance minister P Chidambaram “Initially, 29 welfare programmes — largely related to scholarships and pensions for the old, disabled — operated by different ministries will be transferred through Aadhaar-enabled bank accounts in 51 districts spread over 16 States from January 1, and by the end of the next year it should cover the entire country, Mr. Chidambaram said. He added that only at a later stage would the government consider the feasibility of cash instead of food (under the Public Distribution System) and fertilizers, since it was more complicated.”
So far so good.
But the question is why is the government in such a hurry to implement the scheme? The scheme is to be implemented in 51 districts January 1, 2013 and eighteen states by April 1, 2013, the start of the next financial year. The government hopes to implement the scheme in the entire country by the end of 2013 or early 2014.
A scheme of such high ambition first needs to be properly tested and only then fully implemented. As has been explained in this earlier piece on this website there have been issues with the government’s other cash transfer programme, the National Rural Employment Guarantee Scheme (NREGS).
There have also been issues with pilot projects that have been carried on the cash transfers scheme till now. In one particular case people who got the subsidy had to spend a greater amount of money than the subsidy they received, in getting to the bank and collecting their subsidy.
The other big issue that might come up here is the opening of bank accounts. While the Aadhar Card does identify every person uniquely, India remains a terribly under-banked country. And that is something that needs to be set right in a very short period of time, if the direct cash transfers system needs to get anywhere.
The big selling point of the direct cash transfers scheme is that leakages which happen from the current system of subsidies will be eliminated. For example, currently a lot of kerosene sold through the subsidised route does not reach the end user and is sold in the open market where it is also used to adulterate petrol and diesel, among other things. Some of this kerosene also gets smuggled into the neighbouring countries where kerosene is not as cheap as it is in India and hence there is money to be made by buying kerosene cheaply in India and selling it at a higher price there.
Now people will buy kerosene at its market price and the subsidy will come directly into their bank accounts. So the subsidy will reach the people it is supposed to reach and will not enrich those people who run the current system.
While this sounds very good on paper, the reality might turn out to be completely different as an earlier piece on this website explains and the so called leakages might continue to take place.
Hence, its very important to run pilot tests in various parts of the country, solicit feedback, implement the necessary changes and then gradually go for a full fledged launch. A system of such gigantic proportion cannot be built overnight as the government is trying to.
So that brings us back to the question why is the government in such a hurry to implement direct cash transfers scheme? And in a way screw up what is inherently a good idea.
The answer probably lies in what Jairam Ramesh, the Union Rural Development Minister told The Hindu ““The Congress is a political party, not an NGO. We had promised cash transfer of benefits and subsidies in our election manifesto of 2009,” Mr. Ramesh said, asking “Where is the talk of elections?””
But as the great line from the great political satire Yes Minister produced by the BBC goes “The first rule of politics: never believe anything until it’s been officially denied.” So this hurry to get the scheme going is nothing but the Congress party getting ready for the 2014 Lok Sabha polls.
As an article in the India Today magazine points out “The government’s calculation is that just as the National Rural Guarantee Act and the farmer loan waiver had sealed its victory the 2009 Lok Sabha elections, the direct cash transfer of subsidies would do the same in the 2014.”
Or as Ramesh put it more aptly by getting into the poll mode “aapka paisa, aapke haath“. And this is being done to ensure that the Congress party does well in the next Lok Sabha elections and Rahul Gandhi becomes the prime minister of India.
There are several interesting points that arise here. The first point is that the launch of the cash transfers system will give the Congress politicians battling a string of corruption charges something new to talk about. And that is important.
Indira Gandhi established by winning the 1971 Lok Sabha with her Garibi Hatao slogan that it is important to talk about the right things in the run up to the elections irrespective of the fact whether anything concrete about it is done or not, in the days to come.
There is no one more cunning as a political strategist this country has had than Mrs Gandhi. And every Congressman worth his salt knows that. It is more important to make the right noises than come up with results.
The second point that comes out here is that the government is making all the right noises about this scheme being fiscally neutral. This means that the expenditure on
subsidies won’t go up. Only the current subsidies on offer will now be distributed through this route. This is something that I am unwilling to buy.
I wouldn’t be surprised if the right to food act is set in place in the days to come before the 2014 Lok Sabha elections. The excuse will be that now that we have a direct cash transfer set up in place we are well placed to launch the right to food act as there will be no leakages.
While the idea behind subsidies is a noble one, the government of India is not in a position to foot the mounting bills. The fiscal deficit for the year 2012-2013 has been targeted at Rs 5,13,590 crore or 5.1% of the gross domestic product. Fiscal deficit is the difference between what the government earns and what it spends.
As the Kelkar committee on fiscal consolidation recently pointed out “A careful analysis of the trends in the current year, 2012-13, suggests a likely fiscal deficit of around 6.1 percent which is far higher than the budget estimate of 5.1 percent of GDP, if immediate mid-year corrective actions are not taken.” The committee estimated if the government continued to function as it currently is it will end up with a fiscal deficit of Rs 6,15,717 crore. And I believe that the Kelkar committee’s estimates are fairly conservative. So we might very end up with a higher fiscal deficit if the direct cash transfers system is used to launch more subsidy programmes as I guess would be the case.
And that brings me to my third point. As the India Today magazine points out “The cash transfer of subsidies estimated to be worth Rs 3,20,000 crore will not be an easy task. Procedurally, one of the major obstacles would be the fact that many of the beneficiaries might not even have bank accounts. But more significantly, the scheme does nothing to address the main problem – bring down the subsidies to ease the pressure on the exchequer.”
High subsidies basically imply greater borrowing by the government. This in turn means lesser amount of money being available for others to borrow and hence higher interest rates. Higher subsidy also means more money in the hands of Indian citizens. This more money will chase the same number of goods and services and hence lead to higher inflation. Also be prepared for a higher food inflation in the years to come.
Higher interest rates will mean that the lower economic growth will continue in the time to come despite of what the politicians and the bureaucrats would like us to believe. Consumers will take on lesser debt to buy homes, cars and consumer goods. This will be bad for business, and in turn they will go slow on their expansion plans and thus impact economic growth further.
As Ruchir Sharma writes in his bestselling book Breakout Nations. “It was easy enough for India to increase spending in the midst of a global boom, but the spending has continued to rise in the post-crisis period…If the government continues down this path India, may meet the same fate as Brazil in the late 1970s, when excessive government spending set off hyperinflation and crowded out private investment, ending the country’s economic boom.”
And that’s the cost this country will have to take on a for one party’s love for a family. To conclude, let me quote something that Ramchandra Guha writes in the essay Verdicts on Nehru which is a part of his latest book Patriots and Partisans “Mrs (Indira) Gandhi converted the Indian National Congress into a family business. She first brought in her son Sanjay, and after his death, his brother Rajiv. In each case, it was made clear that the son would succeed Mrs Gandhi as head of Congress and head of government.”
The sudden hurry to implement the direct cash transfers system probably tells us that this generation’s Mrs Gandhi has also made it clear to Congressmen that her son is ready to take over the reins of this country.
Hence, the Congress government is now working towards making that possible. In the process India might get into huge trouble. But we will still have Rahul Gandhi as the Prime Minister.
And that is more important for Congressmen right now than anything else.

The article was originally published on www.firstpost.com on November 29,2012.
(Vivek Kaul is a writer. He can be reached at [email protected]