Why India needs more than one poverty line

Deputy-Chairman-Planning-Commission-Montek-Singh-AhluwaliaVivek Kaul 
Montek Singh Ahluwalia, the deputy chairman of the Planning Commission, has survived in the political and bureaucratic circles of Delhi for nearly three decades now. Given this it is safe to say that he has well honed survival instincts, which tell him when the tide is turning.
And when the tide is turning, it makes sense to change direction and flow with the tide rather than risk drowning. This is precisely what Ahluwalia did yesterday. 
As he remarked As the country becomes richer and the per capita income goes up, there is need to redefine the poverty line. The latest numbers that planning commission have released, based on the Tendulkar Committee report, are absolutely rock-bottom numbers and gives us the number of poor who are actually the weakest group and therefore, should be the priority of the government.”
This is like a father disowning his son. 
The statement came after the latest set of poverty numbers were slammed by leaders across the political spectrum. The Congress party tried defending the numbers initially, but then did a volte face and has since come out all guns blazing against the current poverty line, which decides who is poor and who is not. The opposition parties from the left to the right have slammed the poverty line as well.
The current poverty line was decided 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 report set the “the estimates of poverty…on private household consumer expenditure of Indian households.” The committee arrived at that numbers taking into account the expenditure on food, clothing, footwear, durables, education and health.
This line was an improvement on the earlier poverty line which only 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 changed this. “The expert group has also taken a conscious decision to move away from anchoring the 
poverty lines to a calorie intake norm,” its report said.
And there were reasons for doing so. There has been a long term trend of declining calorie consumption in both rural and urban areas. For urban India the consumption was at 1776 calories per day per person. And for rural India it stood at 1999 calories per day per person, observed the Tendulkar committee. In fact the calories being consumed in urban as well as rural area were higher than the revised calorie intake norm of 1770 calories per person per day specified by the Food and Agriculture Organisation(FAO) for India.
This specific point has come in for a lot of criticism, specially from those who lean towards the left. 
In a column in The Hindu, Utsa Patnaik of the Jawaharlal Nehru University writes “All official claims of low poverty level and poverty decline are quite spurious, solely the result of mistaken method. In reality, poverty is high and rising. By 2009-10, after meeting all essential non-food expenses (manufactured necessities, utilities, rent, transport, health, education), 75.5 per cent of rural persons could not consume enough food to give 2200 calories per day, while 73 per cent of all urban persons could not access 2100 calories per day. The comparable percentages for 2004-5 were 69.5 rural and 64.5 urban, so there has been a substantial poverty rise.”
But what this statement does not take into account is the fact that there is a long term trend of declining calorie consumption in both urban as well as rural India. This is something that Jagdish Bhagwati and Arvind Panagariya discuss in great detail in their book 
India’s Tryst with Destiny – Debunking Myths that Undermine Progress and Addressing New Challenges. “The long-term trend is one of declining calorie consumption in both rural and urban areas though the trend is steadier in rural rather than urban areas.”
And there are reasons for the declining trend in calorie consumption. As Bhagwati and Panagariya point out “For example, greater mechanization in agriculture, improved means of transportation and a shift away from physically challenging jobs may have reduced the need for physical activity. Likewise, better absorption of of food made possible by improved epidemiological environment (better child and adult health and better access to safe drinking water) may have lowered the needed calorie consumption to produce a given amount of energy.”
So saying that because the calorie consumption has gone down, hence India is poorer, is really not correct. Left leaning activists and economists have constantly pointed out that the decline in calorie consumption is an indication of increased hunger and malnutrition.
But there is enough evidence to prove the contrary. “When directly asked whether they had enough to eat everyday of the year, successive rounds of expenditure surveys of the NSSO (National Sample Survey Office) show increasing proportions of the respondents answering in the affirmative. In the 1983 expenditures survey, only 81.1 per cent of the respondents in the rural areas and 93.3 per cent in the urban areas stated that they had enough food everyday of the year. But by 2004-05, these percentages had risen to 97.4 per cent and 99.4 per cent,” write Bhagwati and Panagariya.
A March 2013 report in The Mint also makes a similar point. “A February report of the National Sample Survey Office (NSSO) shows the proportion of people not getting two square meals a day dropped to about 1% in rural India and 0.4% in urban India in 2009-10.”
The malnutrition argument also doesn’t quite hold either. Interestingly, Bhagwati and Panagariya, cite research carried out by Angus Deaton and Jean Drèze. Drèze has been a long time collaborator of Amartya Sen. “Deaton and Drèze also analyse the data on the heights of different cohorts of men and women collected by the second and third rounds of National Family Health Survey and conclude that later-born adult men and women are taller. They calculate that the rate of increase of height is 0.56 centimetre per decade for men and 0.18 centimetre per decade for women. Thus, even if India continues to do poorly in international comparisons, all trends point to improving and not worsening adult nutrition,” write Bhagwati and Panagariya.
So there is enough evidence to suggest that calorie intake has been going down and it hasn’t led to greater malnutrition and hunger. Hence, criticism of the Tendulkar committee report on this point, doesn’t really hold.
Also it is important to remember that 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.
But that doesn’t mean that there are no problems with the poverty line set by the Tendulkar committee. The committee set the consumption expenditure in order to avoid poverty 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.
This of course translates into an expenditure of around Rs 27 per day for rural areas and Rs 33 per day for urban areas, two numbers that have caused a lot of outrage over the last one week. There is no denying that the numbers are very low. In fact, within this cut off expenditure, one of the assumptions is a healthcare expenditure of less than Re 1 per day. As Harsh Mander, a former member of the National Advisory Council, put it in The Mint
, this was “barely enough to buy an aspirin”.
Despite these points, the Tendulkar Committee poverty line is in line with the definition of poverty used by 189 members of the United Nations to set the first of eight Millennium Development Goals of halving global poverty between 1990 and 2015.
As T N Ninan wrote in the Business Standard “The definition of poverty used to set this goal is $1.25 per day. That would be about Rs 75 per day in a straight conversion to rupees at current exchange rates, but works out to about Rs 30 when you take purchasing power parity into account, as you are supposed to. As it happens, the Tendulkar line for rural areas in 2011-12 was Rs 27, and in urban areas Rs 33. So any criticism of the Tendulkar definition of extreme poverty runs smack into what is the internationally accepted definition.”
Also, the Congress party as well as the opposition parties which are criticising this formula now, could have first done so more than three years back in late 2009, when the report was first made public. But they chose to be quiet then.
Despite the problems that it has, what the Tendulkar committee poverty line measures is extreme poverty or what Ahluwalia refers to as “the weakest group” and which “should be the priority of the government”.
Raising this line would have its own set of problems, which this writer has pointed out in the past.
“For example, suppose we raise the rural poverty line to Rs 80 and the urban one to Rs 100 at 2009-10 prices. What would these lines imply?” ask Bhagwati and Panagariya.
This would designate 95% of the rural population and 85% of the urban population to be poor. And that does not help anybody, except those who repeatedly like to shout that “India is poor”. Yes, we all know India is a poor country, but then what’s new about that?
Increasing the cut off for poverty, would mean that scarce government resources will be spread over a larger set of population. As Bhagwati and Panagariya point out “With tax revenues still relatively modest, significant redistribution in favour of the destitute requires limiting such redistributions to the bottom 40 percent or so of the population. Spreading them thinly over a vast population will give too little to the destitute to make a major dent in poverty.”
So the more poor will lose out to the less poor.
Given this, it makes sense for India to have at least two poverty lines, one to tackle extreme poverty and one to measure ‘real’ poverty. The World Bank uses two poverty lines. One is the extreme poverty line, which is set at an expenditure of $1.25 per day. And another is a moderate poverty line which is set at $2 per day.
Economist Devinder Sharma in a column in the Rajasthan Patrika writes about the South African experience. South Africa has three poverty lines. The first is the food line with a cut off expenditure of Rs 1841 per month. Then comes the middle poverty line at Rs 2,445. And the upper poverty line at Rs 3484.
India needs something along these lines. Dumping the Tendulkar committee poverty line does not serve much purpose. It should continue to help target the “extreme poor”, whose number has gone down over the years.
But when it comes to measuring real “poverty” India does need a higher cut off. World bank’s moderate poverty line of $2 per day, adjusted for purchasing power parity, would be a good bet to start with. Of course the risk here is that the politicians can make the upper poverty line, the real poverty line, and start distributing “freebies” on the basis of that, making it a fiscally disastrous proposition for the government. Remember, the food security scheme?
The article originally appeared on www.firstpost.com on July 30, 2013 under a different headline 

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

Why does UPA want to feed 67% if only 21% of India is poor?

Vivek Kaul
Poverty in India has fallen between 2004-05 and 2011-12, or so suggests data recently released by the Planning Commission. The poverty ratio was 37.2% in 2004-05 and fell to 21.9% by 2011-12.
The Congress led United Progressive Alliance(UPA) has been quick to claim credit for this fall in poverty. The opposition parties from the left and the right have slammed the government, and questioned the numbers put out by the Planning Commission.
So who is right on this occasion? The government? Or the opposition? Before we get around to answering these questions, it is first important to understand how the Planning Commission decides who is poor and who is not.
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 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.”
So how is the level of income or consumption expenditure required in order to avoid poverty decided on? An essential criterion for avoiding poverty is the availability of adequate nutrition, writes Subramanian. Hence, a calorie norm is identified. The amount of money required to consume the identified number of food calories becomes the cut off point, or the poverty line. Those who consume less than that are deemed to be poor.
This criteria was first clearly addressed by the Indian planners in 1979 in a Planning Commission 
Report of the Task Force of Minimum Needs and Effective Consumption Demand. As Subramanian writes “In identifying consumption expenditure poverty norms for India, the Task Force employed a nutritional norm of 2,435 (rounded off to 2,400) kilocalories per person per day in rural areas, and a norm of 2,095 calories (rounded off to 2,100) kilocalories per person per day in the urban areas. These were average figures based on calorie allowances recommended by a Nutrition Expert Group in 1968…The Task Force was able to come up with an ‘average’ requirement of calories for what one might call a ‘representative’ Indian, in each of the rural and urban areas of the country.”
So what does this mean? It means that anyone in rural India consuming less than 2,400 kilocalories per day was deemed to be poor. For urban India this number was at 2,100 kilocalories. Through a statistical regression the total expenditure necessary to consume either 2,400 kilocalories or 2,100 kilocalories was estimated.
The Tendulkar Committee formula, a new formula to estimate the poverty line, came into effect in 2009. This formula, other than considering the expenditure on food, also took expenses on education, health and clothing into account.
When Professor Suresh Tendulkar changed the formula he argued that the old formula did not take into account the fact that calorie intake had dropped to 1770 kilocalories in urban areas. Despite this change the influence of the old calorie norm on the new formula is considerable, feel experts.
And how much is the expenditure as per the Tendulkar Committee formula ? 
As the Press Note on Poverty Estimates, 2011-12, released by the Planning Commission points out “for rural areas the national poverty line…is estimated at Rs. 816 per capita per month and Rs. 1,000 per capita per month in urban areas. Thus, for a family of five, the all India poverty line in terms of consumption expenditure would amount to about Rs. 4,080 per month in rural areas and Rs. 5,000 per month in urban areas.”
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.
How adequate is this poverty line of Rs 27.5-Rs 33.33 per day? If one were to believe film star turned Congress politician Raj Babbar, this amount is more than enough. “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 ,” 
he told reporters today (i.e. July 25, 2013).
Of course, this clearly proves that Mr Babbar has not stepped onto the streets of Mumbai for a very long time. His days of struggle in the film industry having been long over.
Even if we believe that one can get a meal for Rs 12 in Mumbai, eating is not the only expenditure that a man needs to incur in order to survive.
Given this, it is easy to prove that the poverty line in India has been set at a very low level. There have been a spate of comments criticising this. Shivraj Singh Chouhan, the Chief Minister of Madhya Pradesh 
called the Planning Commission figures a cruel joke on the poor. “I would like to ask the Prime Minister and Congress president whether they could have their meal in just Rs 32(if one divides Rs 1000 by 31 days, it comes to Rs 32.25),” Chouhan said.
This is something that Praful Patel 
of the Nationalist Congress Party, which is a part of the UPA, agreed with. “The ceiling set by them (Planning Commission) is totally wrong. In today’s time, Commission should set a new ceiling keeping in mind inflation and high cost of living. We do not agree with this data,” Patel said. Brinda Karat of the CPI(M) said that the Planning Commission figures were “dubious” and “discredited” and added “salt to the wounds of the poor”. Similar reactions came in from other political parties as well.
So, the poverty line in India is at a very low level and hence needs to be increased is a conclusion that can be easily drawn from. As N.C. Saxena, member of the National Advisory Council, who headed a 
Planning Commission panel on poverty told The Hindu “the narrow definition of poverty we have been using, where the line is really what I call a ‘kutta-billi’ line; only cats and dogs can survive on it.”
But raising the poverty line is not simple and has serious implications. As Jagdish Bhagwati and Arvind Panagariya write in 
India’s Tryst with Destiny “While reasonable people may differ on whether it is reasonable to further raise the poverty line, the subject is far more complex than commonly appreciated.”
And why is that the case? “The dilemma in raising the poverty lines is best brought out by considering the implications of poverty lines that are significantly higher than those currently in use and are advocated by many of the current critics of the Planning Commission. Thus, for example, suppose we raise the rural poverty line to Rs 80 and the urban one to Rs 100 at 2009-10 prices. What would these lines imply?” ask Bhagwati and Panagariya.
This would designate 95% of the rural population and 85% of the urban population to be poor. The impact of this would be that the money that the government spends to tackle poverty would be spread over a much larger number of people and thus would have less impact in tackling poverty. As Bhagwati and Panagariya point out “With tax revenues still relatively modest, significant redistribution in favour of the destitute requires limiting such redistributions to the bottom 40 percent or so of the population. Spreading them thinly over a vast population will give too little to the destitute to make a major dent in poverty.”
Lets understand this through an example. Let us say there are 100 people. Of this 20 are deemed to be poor. The government decides to spend Rs 100 to help them. Hence, on an average each one of them benefits to the extent of Rs 5.
Now lets the definition of poverty is changed and 90 out of 100 people, are deemed to be poor. The government still spends Rs 100 on them. The benefit per person comes down to a much lower Rs 1.11 (Rs 100/90). Hence, the more poor lose out at the cost of the less poor.
In fact, this is not the first time such a situation has arisen. In 1962, the Perspective Planning Department (PPD) of the Planning Commission had discussed a similar dilemma. As Subramanian writes partly quoting a PPD document “’The balanced diet recommended by the Nutrition Advisory Committee together with a modest standard of consumption for other items would cost approximately Rs 35 per head (per month). But at present less than 20% of our population can afford it’…The implication is quite clear. A poverty line of Rs 35 per person per month would have plunged 80 per cent of the Indian population into poverty: wiser counsel advocated a more modest norm of Rs 20 per person per month.” This brought down the poverty rate to 60%.
Hence, there is no point in pushing up the poverty line without having the resources to tackle it. If resources are limited they should be deployed to help those who need it the most.
But the Congress led UPA government has done exactly the opposite by getting the President to sign on the Food Security Ordinance. The food security scheme aims at providing subsidised rice and wheat to nearly 82 crore Indians or 67% of the total population.
This effectively means that the government thinks that 67% of the Indian population is poor and cannot afford to buy rice and wheat at market rates. But as per the current poverty line only 21.9% of the population is not getting adequate nutrition. So which is the right number? 21.9% or 67%? The Congress led UPA government needs to answer that question.
It seems the government is working on a new poverty line to justify the massive expenditure that it will incur on the Food Security scheme. As The Hindu reports “economists advising the Ministry of Rural Development have told The Hindu that the exclusion criteria to be derived from the ongoing Socio-Economic and Caste Census are likely to leave out the top 35 per cent of the population while the bottom 65 per cent will be considered below poverty line.”
Meanwhile, it will claim that the poverty has come down on the basis of the current poverty line and numbers put out by the Planning Commission because of the social programmes it has launched over the last few years.
As the old saying goes “heads I win, tails you lose”.

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

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

Vivek Kaul
The Congress party led United Progressive Alliance(UPA) has been in the habit of shooting messengers who come with bad news. So here is some more bad news.
Almost half way through the financial year 2012-2013 (i.e. the period between April  1, 2012 and March 31, 2013), the fiscal deficit of the government is looking awful to say the least. Fiscal deficit is the difference between what the government earns and what it spends.
When the finance minister presents the annual budget there are a lot of assumptions that go into the projection of the fiscal deficit.
The overall fiscal deficit was projected to be at Rs 5,13,590 crore. The expenditure of the government for the year was expected to be at Rs 14,90,925 crore. In comparison the government expected to earn Rs 9,77,335 crore during the course of the year. The difference between the earnings of the government and its expenditure came to Rs 5,13,590 crore  and this is the projected fiscal deficit. Hence, the government was spending 55% (Rs 5,13,590 crore expressed as a percentage of Rs 9,77,335 crore) more than it earned.
The expenditure part of the calculation includes subsidies on oil, fertiliser and food. The subsidy on oil was assumed to be at Rs 43,580 crore.  This subsidy was to be used by the government to compensate oil marketing companies like Indian Oil, Bharat Petroleum and Hindustan Petroleum for selling diesel, kerosene and cooking gas, at a loss.
The government has more or less run out of the budgeted oil subsidies. It has already paid Rs 38,500 crore to OMCs, for selling diesel, kerosene and LPG at a loss during the last financial year. This amount was reimbursed only in the current financial year and hence has had to be adjusted against the oil subsidies budgeted for this year. This leaves only around Rs 5,080 crore with the government for compensating the OMCs for the losses this year.
And that’s just small change in comparison to the losses that OMCs are expected to face for selling diesel, kerosene and LPG. The oil minister Jaipal Reddy recently said that if the current situation continues the OMCs will end up with losses amounting to Rs 2,00,000 crore during the course of the year.
As economist Shankar Acharya wrote in the Business Standard on September 13“The real fiscal spoilsport is, of course, subsidies, especially those for diesel, LPG and kerosene, though those on fertiliser and foodgrain are also large. Data circulated by the petroleum ministry indicate under-recoveries by oil marketing companies (OMCs) of Rs 17/litre on diesel, Rs 33/litre on kerosene and Rs 347/cylinder on LPG.”
The OMCs need to be compensated for these losses by the government because if they are not compensated then they will go bankrupt. And if they go bankrupt then you, I and everybody else, won’t be able to buy petrol, diesel, kerosene and LPG, which would basically mean going back to the age of tongas and bullock carts. Clearly no one would want that.
So to deal with expected losses of Rs 2,00,000 crore the government has around Rs 5,080 crore of the budgeted amount remaining. This means that the government would have to come up with around Rs 1,95,000 crore from somewhere.
This is a large amount of money. The government has tried to curtail these losses by increasing the price of diesel by Rs 5 per litre and thus bringing down the loss on sale of diesel to Rs 12 per litre. This move is expected to save the government Rs 19,000 crore which means losses will now amount to Rs 1,76,000crore (Rs 1,95,000crore – Rs 19,000 crore)  in total.
Since 2003-2004, the government has had a formula for sharing these losses. The upstream oil companies like ONGC and Oil India Ltd, which produce oil, are forced to share one third of the losses. But there have been instances when the formula has not been followed and the upstream companies have been forced to chip in with more than their fair share. In 2011-2012, the last financial year the government forced the upstream companies to compensate around 40% of the total losses.
If the government follows the same formula this year as well, it would mean that the upstream companies would have to compensate the OMCs to the tune of Rs 70,400crore (40% of Rs 1,76,000 crore). Now that is a huge amount, whether the upstream companies have the capacity to come up with that kind of money remains to be seen. But assuming that they do, it still means that the government would have to come up with Rs 1,05,600 crore (60% of Rs 1,76,000 crore) from somewhere. This would mean that the fiscal deficit would be pushed up to Rs 6,19,190 crore (Rs 5,13,590 crore + Rs 1,05,600 crore). If the upstream companies cannot bear 40% of the total loses the government will have to bear a greater proportion of the total losses, pushing the fiscal deficit up further.
Oil subsidies are not the only subsidies going around. The government is expected to overshoot its food subsidy target of Rs75,000 crore as well. The Economic Times had quoted a food ministry official on June 15, 2012, confirming that the food subsidy target will be overshot, after the government had approved the minimum support price (MSP) of rice to be increased by 16 per cent to Rs 1,250 per quintal to. “The under-provisioning of food subsidy in the current year is at Rs 31,750 crore. Now with increased MSP on paddy(i.e. rice), the total food subsidy deficit at the end of the current year will be about Rs 40,000 crore putting immense pressure on the food subsidy burden of the government,” said a food ministry official,” the Economic Times had reported.
If we add this Rs 40,000 crore to Rs 6,19,190 crore the deficit shoots up to Rs 6,59,190 crore. This is something that Acharya confirms in his column. “A few days back the Controller General of Accounts (CGA, not CAG!) informed us that the central government’s fiscal deficit for the first four months of 2012-13 had already exceeded half of the Budget’s target for the full year,” he writes.
What does this mean is that for the first four months of the year, the government’s fiscal deficit was greater than half of the fiscal deficit for the year. The targeted fiscal deficit for the year was Rs 5,13,590crore. Half of it would equal to Rs 2,56,795 crore. The government has already crossed this in the first four months. At the same rate it would end up with a fiscal deficit of Rs 7,70,385 crore (Rs 2,56,795 crore x 3) by the end of the year. This would work out to 50% more than the projected fiscal deficit of Rs 5,13,590 crore.
It would be preposterous on my part to project a fiscal deficit which is 50% more than the projected deficit. But as I had shown a little earlier a deficit of around Rs 6,60,000 crore is pretty much on the cards.
What does not help is the fact that things aren’t looking too good on the revenue side for the government. As Acharya puts it “More recently, there are ominous, if unsurprising, indications of a significant deceleration in direct tax collections up through August, especially from companies, with gross corporate tax revenues stagnant compared to April-August of the previous financial year. Despite finance ministry reassurances, tax collections for the year could fall significantly below Budget targets because of sluggish economic activity.”
So the government is not going to earn as much as it had expected to through taxes. The government also has set a disinvestment target of Rs30,000 crore. It hopes to earn this money by selling shares of public sector companies. But six months into the financial year there has been no activity on this front.
Taking these factors into account a fiscal deficit of Rs 7,00,000 crore can be expected. Fiscal deficit as we all know is expressed as a proportion of the gross domestic product (GDP). The projected fiscal deficit of Rs 5,13,590 crore works out to 5.1% of the GDP. The GDP in this case is assumed to be at Rs 101,59,884 crore.
With a fiscal deficit of Rs 7,00,000 crore, fiscal deficit as a proportion of GDP works out to 6.9% (Rs 7,00,000 crore expressed as a % of Rs 101,59,884 crore).
The GDP number of Rs 101,59,884 crore is also a projection. The assumption is that the GDP will grow by a nominal rate of 14% over the last financial year’s advance estimate of GDP at Rs 89,121,79 crore.  The trouble is that the economy is slowing down and it is highly unlikely to grow at a nominal rate of 14%. The current whole sale price inflation is around 7%. The real rate of growth for the first six months of the calendar year (i.e. the period between January 1, 2012 and June 30, 2012) has been around 5.4%. If we add that to the inflation we are talking of a nominal growth of around 12.5%. At that rate the expected GDP for the year is likely to be around Rs 100,26,201crore (1.125 x Rs 89,121,79 crore).
Hence the fiscal deficit as a percentage of GDP will be around 7% (Rs 700,000 crore expressed as a percentage of Rs 100,26,201crore). A 7% fiscal deficit would give the Prime Minister Manmohan Singh a sense of déjà vu. In his speech as the Finance Minister of India in 1991 he had said “The crisis of the fiscal system is a cause for serious concern. The fiscal deficit of the Central Government…is estimated at more than 8 per cent of GDP in 1990-91, as compared with 6 per cent at the beginning of the 1980s and 4 per cent in the mid-1970s.”
One way out of this mess is to cut the losses due to the sales diesel, kerosene and on LPG. But that would mean a price increase of Rs 12/litre on diesel, Rs 33/litre on kerosene and Rs 347/cylinder on LPG. That of course is not going to happen. Also with the government having to borrow more to meet the increased fiscal deficit, the interest rates will continue to remain high.
India is staring at a huge economic problem. The question is whether the government is ready to recognise it. As Pratap Bhanu Mehta writes in The Indian Express “The central driver of good economics is recognising the problem.” The trouble is that the Congress led UPA government doesn’t want to recognise the problem, let alone tackle it.
(The article originally appeared on www.firstpost.com on September 14,2012. http://www.firstpost.com/economy/why-the-diesel-hike-will-not-even-dent-the-fiscal-deficit-455249.html)
(Vivek Kaul is a writer. He can be reached at [email protected])

Adi Godrej’s Marie Antoinette moment: Indian farmer should invest in stocks

Vivek Kaul

Qu’ils mangent de la brioche” is a French phrase which means “let them eat cake” in English. It is often attributed to the French Queen Marie Antoinette. She had apparently said this to peasants when she came to know that they had no bread to eat.
There is no record that the Marie Antoinette, wife of Louis XVI ever uttered these words. But the myth has held even after all these years. And the story does make a broader point about the rich often having no idea about the state of the poor in their country.
A good example of this is Adi Godrej, the current president of the Confederation of Indian Industry (CII), who recently had his Marie Antoinette moment. In a recent interview to the Tehelka magazine Godrej suggested that the Indian farmers should sell their land and invest the money they get in stocks and mutual funds.
If India has to become a developed country, you cannot have the livelihood of hundreds of millions of people depending on agriculture. They have to move on. They have to move into industry, into services. That’s how you develop a country. That has happened in every country,” Godrej said.
He further went onto add that the money that the farmers get by selling their land should be invested in stocks, so that it does not run out soon. “Why should it run out soon? It can be invested. It can be made into a much bigger value than land. Land has the lowest appreciation of all assets. The best investments are in stocks. Somebody should advise them to invest it in mutual funds so their wealth will rise faster,” Godrej said.
Let’s try and examine these statements in a little more detail. Agriculture contributes around 14% of India’s gross domestic product (GDP). This has fallen dramatically since 2004-2005, when it used to contribute around 19% of India’s GDP. At the same time it employs around 58.4% of India’s population. (Source: http://www.india.gov.in/sectors/agriculture/index.php).
So 58.4% of India’s population contributes around 14% of India’s GDP. It need not be said that this is a terribly inefficient way of working. Ruchir Sharma of Morgan Stanley calls this “a disturbing tendency of the farmer to stay on the farm” in his book Breakout Nations.
The contribution of agriculture to the overall GDP is expected to continue falling in the years to come. A calculation carried out by the Planning Commission shows that the contribution of agriculture to the total GDP would fall to as low as 7% by 2025-2026. This calculation assumes a fairly optimistic growth of 4% per year in agriculture GDP. At a growth rate of 2%, agriculture’s contribution to overall GDP by 2025-2026 is expected to be at 5.2%.
In making these calculations the Planning Commission assumes that the overall GDP will keep increasing by 8% every year, which is a very optimistic assumption to make given the current state of affairs. (You can see the calculations here).
But even assuming a 4% growth rate for agriculture and just 6% for overall GDP, the contribution of agriculture to the overall GDP can be expected to fall to around 9.8% (This is my calculation and not of the Planning Commission),from the current 14%.
So theoretically the contribution of agriculture to GDP will fall in the coming years. This can be said with utmost certainty. This means that other sectors of the economy like services and industry will grow at a much faster rate. Hence, it makes sense for farmers to sell their land, move on from farming and move onto other sectors of the economy.
And that’s what Godrej suggested in his interview to Tehelka. But even after that if the Indian farmer is unwilling to sell his land there must be some reason to it.
Akhilesh Tilotia of Kotak Institutional Equities has done some interesting analysis on this. As he points out in a recent report “a farmer makes about Rs30,000 per acre a year (assuming two crops a year) if he grows staples like wheat or paddy. One can argue that the price at which a farmer should be happy to sell the land would be at Rs 2-3 lakh an acre (or seven to ten times his annual income from the land).”
But then money is not the only issue at hand. As Tilotia writes “However, there is an element of sustainability and certainty for the farmer from agriculture and he suffers from a lack of skill to get him or his family employed elsewhere (either in the plant coming up or in the urban services industry): All this means the farmer is looking at farming as a means of livelihood and not from a pure ‘return on capital’ perspective.”
The average farmer does not want to sell out because he is not skilled enough to do anything else. A lot of them are still uneducated given that the effective literacy rate in India is around 74%.
Also the average land holding of an Indian farmer is around 1.4 hectares (one hectare equals around 2.5acres).This is very small and even if he sells, he is unlikely to make much money from it. The right to property is not a fundamental right in India. And over the years the government of India has acquired land forcibly from the citizens of this country at rock bottom prices. This is an impression that cannot be gotten rid off overnight. And hence the Indian farmer is unwilling to sell his land.
But things have gradually started to change as the government has started to offer reasonable prices for acquiring land. “National Highway Authority of India’s cost of acquisition of land was Rs 25lakh per acre in Financial year (FY) 2011…It acquired 8,533 hectares in FY2011, up from 3,120 hectares in FY2009. In FY2012, NHAI expects to acquire 12,000 hectares. The size of land acquisition is up 4 times over the past four years when the going narrative has been that land acquisition has been made impossible in India,” writes Tilotia.
So just saying that the Indian farmer needs to move is not enough. The conditions have to be right for him. He needs to have the skill-set to move on, which he currently doesn’t. Very little attempts are made by the government to rehabilitate those whose land is acquired. And more than that, the farmer needs to be offered the right price, which he wasn’t being offered till very recently.
The other suggestion that came from Godrej was that farmers should invest in stocks and mutual funds. It would be nice if he goes through a November 2011 presentation made by the
by the India Brand Equity Foundation (IBEF). This shouldn’t be difficult given that IBEF is a trust established by the Ministry of Commerce with the CII. As pointed out earlier Godrej is the President of the CII.
The presentation throws up some interesting facts: A few of them are listed below:
– Despite healthy growth over the past few years, the Indian banking sector is relatively underpenetrated.
– Limited banking penetration in India is also evident from low branch per 100,000 adults ratio – – Branch per 100,000 adults ratio in India stands at 747 compared to 1,065 for Brazil and 2,063 for Malaysia
– Of the 600,000 village habitations in India only 5 per cent have a commercial bank branch
– Only 40 per cent of the adult population has bank accounts.
Given this it is unlikely that many Indian farmers have banks accounts. How can those who don’t even have bank accounts be expected to invest in the stock market? Also the stock returns in India even over the long term haven’t been great. The BSE Sensex over a period of 20 years has given a return of 8.9% per year. And even these returns haven’t been guaranteed.
So the first thing that Indian farmers should be doing is opening bank accounts.
Also, how can farmers be expected buy stocks when even the Indian middle class, which makes much more money than the Indian farmer has stayed away from investing in stocks. And there are genuine reasons for it.
As Shankar Sharma of First Global told me in a recent interview I did for the Daily News and Analysis(DNA): “We see too much of risk in our day to day lives and so we want security when it comes to our financial investing. Investing in equity is a mindset. That when I am secure, I have got good visibility of my future, be it employment or business or taxes, when all those things are set, then I say okay, now I can take some risk in life. But look across emerging markets, look at Brazil’s history, look at Russia’s history, look at India’s history, look at China’s history, do you think citizens of any of these countries can say I have had a great time for years now? That life has been nice and peaceful? I have a good house with a good job with two kids playing in the lawn with a picket fence? Sorry boss, this has never happened.”
This statement is as valid for the Indian farmer as it is for the Indian middle class. And so it’s time Adi Godrej realised that things in the real India are a little different. Marie Antoinette
may not have said “let them eat cakes” but Adi Godrej surely did.
(The article originally appeared on www.firstpost.com on September 12,2012. http://www.firstpost.com/business/adi-godrejs-marie-antoinette-moment-indian-farmer-should-invest-in-stocks-452776.html)
(Vivek Kaul is a writer and can be reached at [email protected])